<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-19783
SUBURBFED FINANCIAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3796361
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3301 WEST VOLLMER ROAD, FLOSSMOOR, ILLINOIS 60422
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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 (ss. 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 20, 1998, there were issued and outstanding 1,270,239
shares of the Registrant's Common Stock (excluding 103,603 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 20, 1998 was approximately $60.7 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, 1997.
PART III of Form 10-K - Proxy Statement for the Annual Meeting of Stockholders
for the fiscal year ended December 31, 1997.
<PAGE> 2
The purpose of this amendment on Form 10-K/A to the Annual Report on Form
10-K for the fiscal year ended December 31, 1997 (the "Form 10-K") of SuburbFed
Financial Corp. is to revise Items 1, 7 and 8 of the Form 10-K.
<PAGE> 3
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.
2
<PAGE> 4
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 and benefit 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 $3.9 million at December 31, 1997. A broader
limitation is provided for loans secured by low-income housing. 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, 1997, the
Bank's largest loan-to-one borrower were a series of loans to this community
redevelopment program with current balances of $7.3 million, of which $5.8
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 $3.3
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.
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<PAGE> 5
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.
4
<PAGE> 6
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,
--------------------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- ------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans ...................
One- to four-family ................ $ 251,223 84.96% $ 201,110 82.58% $ 120,652 80.68%
Construction or development ........ 10,299 3.48 8,988 3.69 4,471 2.99
Commercial/non-residential ......... 3,499 1.18 3,559 1.46 2,579 1.72
Multi-family ....................... 13,596 4.60 13,463 5.53 6,799 4.55
--------- ------ --------- ------ --------- ------
Total real estate loans ........ 278,617 94.22 227,120 93.26 134,501 89.94
--------- ------ --------- ------ --------- ------
Other Loans:
Consumer Loans:
Second mortgages and home equity
lines of credit ................... 14,212 4.80 12,111 4.97 9,896 6.62
Credit Card ....................... 1,711 .58 1,918 0.79 2,093 1.40
Other ............................. 1,145 .39 1,167 0.48 1,324 .89
--------- ------ --------- ------ --------- ------
Total consumer loans ........... 17,068 5.77 15,196 6.24 13,313 8.91
Commercial warehouse line of credit 17 .01 1,229 0.50 1,724 1.15
--------- ------ --------- ------ --------- ------
Total other loans .............. 17,085 5.78 16,425 6.74 15,037 10.06
--------- ------ --------- ------ --------- ------
Total loans receivable ......... 295,702 100.00 % 243,545 100.00% 149,538 100.00%
====== ====== ======
Less:
Loans in process ................... 3,042 2,158 1,155
Net deferred yield adjustments ..... (1,703) (1,288) (237)
Allowance for losses ............... 731 860 712
--------- --------- ---------
Total loans receivables, net ....... $ 293,632 $ 241,815 $ 147,908
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1994 1993
-------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans
One- to four-family ................ $ 88,116 81.03% $74,179 82.11%
Construction or development ........ 4,543 4.18 4,407 4.88
Commercial/non-residential ......... 1,361 1.25 1,591 1.76
Multi-family ....................... 4,688 4.31 2,706 3.00
.................................... -------- ------ ------- ------
Total real estate loans ........ 98,708 90.77 82,883 91.75
-------- ------ ------- ------
Other Loans:
Consumer Loans:
Second mortgages and home equity
lines of credit ................... 5,678 5.22 4,397 4.87
Credit Card ....................... 2,107 1.94 2,037 2.26
Other ............................. 744 .68 815 .90
-------- ------ ------- ------
Total consumer loans ........... 8,529 7.84 7,249 8.03
Commercial warehouse line of credit 1,507 1.39 202 .22
-------- ------ ------- ------
Total other loans .............. 10,036 9.23 7,451 8.25
-------- ------ ------- ------
Total loans receivable ......... 108,744 100.00% 90,334 100.00%
====== ======
Less:
Loans in process ................... 2,123 1,512
Net deferred yield adjustments ..... 293 558
Allowance for losses ............... 698 612
-------- -------
Total loans receivables, net ....... $105,630 $87,652
======== =======
</TABLE>
5
<PAGE> 7
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,
-------------------------------------------------------------------------------
1997 1996 1995
---------------------- --------------------- -----------------------
Amount Percent Amount Percent Amount Percent
--------- ------ --------- ------ --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans:
Real estate:
One- to four-family ....................... $ 35,211 11.91% $ 40,570 16.66% $ 46,538 31.12%
Construction or development ............... 361 .12 893 .37 555 .37
Commercial/non-residential ................ 2,527 .86 2,536 1.04 443 .30
Multi-family .............................. 8,543 2.89 9,617 3.95 5,796 3.87
--------- ------ --------- ------ --------- ------
Total real estate loans ............... 46,642 15.78 53,616 22.02 53,332 35.66
Consumer and other ......................... 4,884 1.65 6,117 2.51 5,364 3.59
--------- ------ --------- ------ --------- ------
Total fixed-rate loans ................ 51,526 17.43 59,733 24.53 58,696 39.25
--------- ------ --------- ------ --------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family (1) ................... $ 216,012 73.05% $ 160,540 65.92% $ 74,114 49.56%
Construction or development ............... 9,938 3.36 8,095 3.32 3,916 2.62
Commercial/non-residential ................ 972 .32 1,023 .42 2,136 1.43
Multi-family .............................. 5,053 1.71 3,846 1.58 1,003 .67
--------- ------ --------- ------ --------- ------
Total adjustable-rate real estate loans 231,975 78.44 173,504 71.24 81,169 54.28
Consumer and other ......................... 12,201 4.13 10,308 4.23 9,673 6.47
--------- ------ --------- ------ --------- ------
Total adjustable-rate loans ........... 244,176 82.57 183,812 75.47 90,842 60.75
--------- ------ --------- ------ --------- ------
Total loans ........................... 295,702 100.00% $ 243,545 100.00% 149,538 100.00%
====== ====== ======
Less:
Loans in process .......................... 3,042 2,158 1,155
Net deferred yield adjustments ............ (1,703) (1,288) (237)
Allowance for loan losses ................. 731 860 712
--------- --------- ---------
Total loans receivable, net ............ $ 293,632 $ 241,815 $ 147,908
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1994 1993
------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed Rate Loans:
Real estate:
One- to four-family ....................... $ 51,271 47.15% $59,463 65.82%
Construction or development ............... 679 .62 1,427 1.58
Commercial/non-residential ................ 497 .46 949 1.05
Multi-family .............................. 4,352 4.00 2,350 2.60
-------- ------ ------- ------
Total real estate loans ............... 56,799 52.23 64,189 71.05
Consumer and other ......................... 3,218 2.96 4,054 4.49
-------- ------ ------- ------
Total fixed-rate loans ................ 60,017 55.19 68,243 75.54
-------- ------ ------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family (1) ................... $ 36,845 33.88% $14,716 16.29%
Construction or development ............... 3,864 3.56 2,980 3.30
Commercial/non-residential ................ 859 .79 642 .71
Multi-family .............................. 341 .31 356 .40
-------- ------ ------- ------
Total adjustable-rate real estate loans 41,909 38.54 18,694 20.70
Consumer and other ......................... 6,818 6.27 3,397 3.76
-------- ------ ------- ------
Total adjustable-rate loans ........... 48,727 44.81 22,091 24.46
-------- ------ ------- ------
Total loans ........................... 108,744 100.00% 90,334 100.00%
====== ======
Less:
Loans in process .......................... 2,123 1,512
Net deferred yield adjustments ............ 293 558
Allowance for loan losses ................. 698 612
-------- -------
Total loans receivable, net ............ $105,630 $87,652
======== =======
</TABLE>
- --------------
(1) Includes $195.3 million, $152.1 million and $59.7 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 1997, 1996
and 1995, respectively. See "-- One- to Four-Family Residential Real
Estate Lending."
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<PAGE> 8
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolios at December 31, 1997. 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
One- to Four-Family Non-Residential or Development
----------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- -------- ------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Three months or less ................... $ 528 9.33% $ -- --% $ 789 10.00%
More than three months through
six months ............................ 448 8.00 -- -- 782 9.82
More than six months through one year(1) 197 8.79 -- -- 4,476 9.70
More than one year through three years . 657 7.95 14 9.00 814 10.12
More than three years through five years 4,559 8.09 2,739 9.04 550 9.50
More than five years through ten years . 12,741 7.76 727 8.27 361 9.50
More than ten years through twenty years 13,355 7.94 8,376 8.23 -- --
More than twenty years ................. 218,738 7.78 5,239 8.34 2,527 7.81
-------- ------- -------
Total ............................ $251,223 $17,095 $10,299
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Consumer
and Other Total
------------------------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Three months or less ................... $ 470 13.33% $ 1,787 9.89%
More than three months through
six months ............................ 91 11.93 1,321 9.35
More than six months through one year(1) 1,142 9.24 5,815 9.58
More than one year through three years . 5,747 10.98 7,232 10.61
More than three years through five years 6,606 9.21 14,454 8.84
More than five years through ten years . 2,245 10.12 16,074 8.15
More than ten years through twenty years 784 9.58 22,515 8.11
More than twenty years ................. -- -- 226,504 7.79
------- --------
Total ............................ $17,085 $295,702
======= ========
</TABLE>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
As of December 31, 1997, the total amount of loans due after December
31, 1998 which had predetermined interest rates was $50.3 million while the
total amount of loans due after such dates which had floating or adjustable
interest rates was $236.5 million.
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<PAGE> 9
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, 1997, $251.2 million, or 84.92% 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 residential loans including
fixed and adjustable rate mortgage loans ("ARMs") primarily with 15 to 30 year
maturities. In order to reduce the effective term to maturity of its residential
loan portfolio, two approaches have been taken. The Bank offers mortgage loans
having a fixed rate for an initial 3, 5, or 10 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 term. In 1997, $76.4 million of these types of
loans were made. At December 31, 1997, these loans accounted for $200.9 million,
representing 67.91% of the Bank's loan portfolio. The Bank also originates fixed
rate loans, most of which are sold to a federal agency or to other financial
institutions with servicing retained. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation - 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, 1997, the Bank had $6.1 million of
National ARMs, representing 2.06% of its loan portfolio, and $8.8 million of One
Year CMT ARMS (not including ARMs with interest rates which are fixed for the
initial term), representing 2.98% 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. Decreases or increases in
the interest rate on the Bank's One Year CMT ARMs are generally limited to 2%
annually and 6% over the life of the loan, though lower limits to the life of
the loan adjustment have been negotiated on some 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. In deciding whether to
offer a loan to a particular borrower, on a particular property, the Bank
evaluates the borrower's ability to make all payments related to the property,
other debt for which the borrower is obligated, other assets which the borrower
has available, the borrower's past payment history, and the value of the
property that will secure the loan. Suburban Federal originates residential
mortgage loans with loan-to-value ratios of generally up to 95%. The evaluation
noted above determines what the Bank will require
8
<PAGE> 10
in the form of private mortgage insurance, additional collateral, or further
guarantees. The Bank's delinquency experience on higher loan-to-value ratio
loans has generally been similar to its experience on loans with loan-to value
ratios below 80%.
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 and 1994, the
Bank securitized $1.6 million and $7.7 million, respectively, of its residential
loans. No loans were securitized in 1997 or 1995. See "-- Mortgage-Backed
Securities."
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, 1997, the
Bank had an aggregate of $7.3 million in loans to New Cities which were secured
by first mortgages on 155 properties. Loans totaling $5.8 million have been sold
to FNMA and other participants. All of these loans were performing in accordance
with their terms at December 31, 1997.
The Bank has 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 1995, 1996 and 1997, $2.2 million, $2.0 million and $661,000,
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, 1997, $10.3 million, or 3.48% of
the Bank's loan portfolio, consisted of construction and development loans.
9
<PAGE> 11
Construction loans to individuals for their residences are generally
structured to be converted to permanent loans at the end of the construction
phase, which typically runs six to twelve months. These construction loans
generally 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, 1997, approximately $3.1 million or 30.04% 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 generally 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 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).
The table below sets forth by type of security property, the Bank's
construction and development loans at December 31, 1997.
<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...................... 33 $ 9,938 $ --
Vacant lots.............................. 7 361 --
-- ------- -----
Total.................................. 40 $10,299 $ --
== ======= =====
</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
10
<PAGE> 12
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, 1997,
$17.1 million or 5.78% 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 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, 1997, the Bank had one non-residential real estate loan
with a net carrying value of $2.3 million consisting of a three story office
property and an adjacent commercial lot of comparable size located in Mattison,
Illinois that was two payments past due. The loan was made in January 1996, and
the current delinquency was precipitated by the loss of a major and several
minor tenants in December 1996. The vacant space is being re-rented, however,
cash flow is not yet sufficient to service the loans. In addition, at December
31, 1997 there were seventeen other multi-family and commercial real estate
loans with net carrying values over $300,000, all of which were performing in
accordance with their terms.
11
<PAGE> 13
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,
1997.
<TABLE>
<CAPTION>
Number of Outstanding Principal
Loans Balance
--------- ---------------------
(Dollars in Thousands)
<S> <C> <C>
Multi-family(1)..................................... 59 $13,596
Commercial/non-residential:
Small business facilities and office buildings.... 16 3,133
Church............................................ 5 366
-- -------
Total............................................... 80 $17,095
== =======
</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. Consistent with the Bank's asset/liability
policy, the Bank purchases mortgage-backed securities which primarily 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 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, 1997, the Bank had $36.4 million of adjustable rate
mortgage-backed securities, (including CMOs and REMICs) and $75.7 million of
fixed rate CMOs and REMICs with estimated average lives of less than five years.
12
<PAGE> 14
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 1997, repayments of mortgage-based securities totaling
$22.1 million and sales of $4.0 million exceeded purchases of $7.0 million, 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.
13
<PAGE> 15
The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities (including CMO's and REMIC's) and excludes
investments in adjustable rate mortgage mutual funds of $2.4 million at December
31, 1997. 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
Average Average Average
1 to 3 Interest 3 to 5 Interest 5 to 10 Interest
Years Rate Years Rate Years Rate
----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation ........ $ -- ---% $ -- ---% $ 183 9.00% $
Federal National Mortgage
Association ................. -- -- -- -- -- --
Real Estate Mortgage
Investment Conduits ......... 2,976 6.94 -- -- 316 7.50
Government National Mortgage
Association ................. -- -- -- -- --
Privately issued participation
certificates and CMO's ...... -- -- 1,703 6.99 3,143 7.31
------ ----- -----
Total ........................ $2,976 $1,703 $3,642
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Due In
------------------------------------------
Weighted Weighted December 31, Weighted
Average Average 1997 Average
10 to 20 Interest Over 20 Interest Balance Interest
Years Rate Years Rate Outstanding Rate
------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation ........ -- ---% $ 4,115 7.14% $ 4,298 7.22%
Federal National Mortgage
Association ................. 628 7.68 4,222 7.47 4,850 7.50
Real Estate Mortgage
Investment Conduits ......... 2,098 8.23 8,212 6.21 13,602 6.71
Government National Mortgage
Association ................. -- -- 1,184 6.97 1,184 6.97
Privately issued participation
certificates and CMO's ...... 8,602 7.48 74,775 7.15 88,223 7.19
------- ------- --------
Total ........................ $11,328 $92,508 $112,157
======= ======= ========
</TABLE>
14
<PAGE> 16
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, 1997, the Bank's consumer
loan balances totaled $17.1 million, or 5.78% of its loan portfolio.
During 1997 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. During 1997, the Bank began offering second mortgage amounts up to
125% of the appraised value to borrowers with excellent credit. 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 Bank's second mortgage loans and home equity lines of credit
outstanding at December 31, 1997 totaled $14.2 million or 4.80% 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,
1997, approximately 3,800 credit cards had been issued, with an aggregate
outstanding balance of $1.8 million and a maximum available line of credit of
$10.9 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
15
<PAGE> 17
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, 1997, $310,000, or approximately 1.80% 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, 1997, 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, 1997, the mortgage origination companies had drawn $17,000 of their
lines of credit.
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 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, 1997, Suburban Federal serviced $44.0
million of loans for others (including $490,000) of loans backing
mortgage-backed securities still owned by Suburban Federal). During 1997, the
Bank began servicing $7.6 million of loans to moderate and low income borrowers
made by New Cities.
16
<PAGE> 18
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 1997, the Company sold mortgage loans to FNMA while retaining
servicing, realizing proceeds of $4.3 million, gross gains of $19,000 and gross
losses of $8,000. In addition, the Company recorded an additional gain of
$31,000 on these sales, from the establishment of a mortgage servicing right
asset in accordance with SFAS 122. During the year ended December 31, 1997, the
Company amortized $24,000 of this type of 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. During 1997, the Bank began using
business development officers, primarily to solicit loans within its market area
and in areas of growth in surrounding communities.
17
<PAGE> 19
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,
--------------------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate
- one- to four-family ......... $ 81,694(1) $ 99,723(1) $ 42,929
- multi-family ................ 702 3,951 825
- non-residential ............. 375 363 1,673
- construction ................ 4,658 7,324 3,918
Consumer(2) ........................ 8,390 13,615 10,394
Commercial warehouse line of credit 8,953 24,677 25,647
-------- -------- --------
Total adjustable-rate 104,772 149,653 85,386
-------- -------- --------
Fixed rate:
Real estate
- one- to four-family ......... 6,060 12,934 8,437
- multi-family ................ 809 4,407 1,707
- non-residential ............. 34 2,340 --
- construction ................ 185 548 --
Consumer ............................ 4,490 2,933 3,360
-------- -------- --------
Total fixed-rate ..... 11,578 23,162 13,504
-------- -------- --------
Total loans originated 116,350 172,815 98,890
-------- -------- --------
Purchases:
Mortgage-backed securities(3) ......... 7,022 13,885 11,414
-------- -------- --------
Total additions ...... 123,372 186,700 110,304
-------- -------- --------
Sales:
Real estate: one- to four-family ..... 5,001 8,488 5,989
Mortgage-backed securities ............ 4,000 44,312 3,097
-------- -------- --------
Total sales .......... 9,001 52,800 9,086
Principal repayments ................... 82,504 92,526 66,289
-------- -------- --------
Total reductions ..... 91,505 145,326 75,375
-------- -------- --------
Net increase .................. $ 31,867 $ 41,374(4) $ 34,929
======== ======== ========
</TABLE>
(1) Includes $74.4 million and $95.6 million for fiscal 1997 and 1996,
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 of adjustable rate mortgage-backed
securities with the balance consisting of CMOs and REMICs with short
and intermediate average lives.
(4) Net unrealized gains were recorded under SFAS 115 of $508,000 and $4.4
million during 1997 and 1995, respectively which increased
mortgage-backed securities available for sale. During 1996, a net
unrealized loss recorded under SFAS 115 of $750,000 reduced
mortgage-backed securities available for sale. See Notes 1 and 6 of the
Notes to Consolidated Financial Statements in the Company's Annual
Report filed as Exhibit 13 hereto.
18
<PAGE> 20
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 mail. 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.
19
<PAGE> 21
The following table sets forth information concerning delinquent
mortgage and other loans at December 31, 1997 and 1996. 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, 1997
Real Estate:
One- to four-family 11 $1,184 .40% 10 $1,234 .42% 21 $2,418 .82%
Construction or
development ..... -- -- -- -- -- -- -- -- --
Non Residential .... 1 2,315 .79 1 39 .01 2 2,354 .80
Consumer ........... 9 98 .03 12 86 .03 21 184 .06
-- ------ ---- -- ------ ---- --- ------ ----
Total ......... 21 $3,597 1.22% 23 $1,359 .46% 44 $4,956 1.68 %
== ====== ==== == ====== ==== === ====== ====
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
Nonresidential .... -- -- -- 1 41 .02 1 41 .02
Consumer ........... 13 53 .02 13 53 .02 26 106 .04
-- ------ ---- -- ------ ---- --- ------ ----
Total ......... 24 $1,607 .66% 21 $1,157 .47% 45 $2,764 1.13 %
== ====== ==== == ====== ==== === ====== ====
</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 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.
20
<PAGE> 22
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, 1997, the Bank had
designated $3.5 million of its assets as Special Mention, and classified $1.2
million as Substandard, $125,000 as Doubtful. The Bank's assets designated as
special mention includes the $2.3 million office property discussed in data
under the heading Commercial/Non-Residential and Multi-Formation Real Estate
Lending and other residential and consumer loans. 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,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
One- to four-family ............... $1,235 $ 333 $ 78 $ 83 $ 13
Construction or development ....... -- 498(1) 494(1) 546(1) 879(1)
Commercial ........................ 39 41 -- -- --
Consumer and other ................ 71 18 11 11 10
------ ------ ---- ---- ----
Total .......................... 1,345 890 583 640 902
------ ------ ---- ---- ----
Foreclosed assets:
One- to four-family ............... 135 14 14 -- 74
------ ------ ---- ---- ----
Total .......................... 135 14 14 -- 74
------ ------ ---- ---- ----
Total non-performing assets ......... $1,480 $ 904 $597 $640 $976
====== ====== ==== ==== ====
Total as a percentage of total assets 0.34% 0.22% 0.16% 0.20% 0.35%
====== ====== ==== ==== ====
</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, 1997, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $94,000. No interest income on such loans was
included for the year ended December 31, 1997.
21
<PAGE> 23
OTHER ASSETS OF CONCERN. As of December 31, 1997 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, 1997, the Bank had an allowance for loan losses of
$731,000 or 49.39% of total non-performing assets, compared to an allowance of
$860,000 or 95.13% of total non-performing assets, at December 31, 1996. This
adjustment was a result of the Bank's ongoing evaluation of its loan portfolio.
The Recondev loan, resolved during 1997, resulted in a charge-off of $182,000.
Non-performing assets at December 31, 1997 represent primarily first mortgages
on single family properties which management believes are adequately secured by
the underlying real estate.
22
<PAGE> 24
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----- ---- ----- ----- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period .............. $ 860 $712 $ 698 $ 612 $438
Provision for loan losses:
Real estate ................................ 69 94 14 (49) 91
Consumer ................................... 111 99 63 107 50
----- ---- ----- ----- ----
180 193 77 58 141
----- ---- ----- ----- ----
Loans charged off:
Real estate ............................... 182 5 -- -- --
Consumer .................................. 138 110 63 47 37
----- ---- ----- ----- ----
Total loans charged off ................. 320 115 63 47 37
----- ---- ----- ----- ----
Recoveries .................................. 11 70 -- 75 70
----- ---- ----- ----- ----
Net charge offs ........................... (309) (45) (63) 28 33
----- ---- ----- ----- ----
Balance at end of period .................... $ 731 $860 $ 712 $ 698 $612
===== ==== ===== ===== ====
Ratio of net charge-offs during the period to
average loans outstanding during the period .12% .02% .05% --% --%
===== ===== ====== ===== ====
Ratio of allowance for loan losses to total
non-performing assets at the end of period 49.39% 95.13% 119.26% 109.06% 62.70%
===== ===== ====== ====== =====
Ratio of allowance for loan losses to non-
performing loans at end of period ......... 54.35% 96.63% 122.13% 109.06% 67.85%
===== ===== ====== ====== =====
</TABLE>
23
<PAGE> 25
The distribution of the Bank's allowance for loan losses on loans at
the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
Construction........ $ -- 3.48% $ 403 3.69% $ 403 2.99%
Other............... 591 90.74 293 89.57 157 86.95
------- ------ ----- ------ ------- ------
Total Real Estate. 591 94.22 696 93.26 560 89.94
Consumer and other.... 140 5.78 164 6.74 152 10.06
------- ------ ----- ------- ------- ------
Total............ $ 731 100.00% $ 860 100.00% $ 712 100.00%
======= ====== ----- ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1994 1993
--------------------------------------------------------
Percent Percent
of Loans of Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
--------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Real Estate:
Construction........ $ 403 4.18% $ 347 4.88%
Other............... 143 86.59 173 86.87
------ ----- ----- -----
Total Real Estate. 546 90.77 520 91.75
Consumer and other.... 152 9.23 92 8.25
------ ------ ----- ------
Total............ $ 698 100.00% $ 612 100.00%
====== ====== ===== ======
</TABLE>
24
<PAGE> 26
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, 1997, the Bank's
liquidity ratio (liquid assets as a percentage of net withdrawable savings and
current borrowings) was 5.00% as compared to the current OTS requirement of
4.00%. See "Regulation - Liquidity."
25
<PAGE> 27
The following table sets forth the composition of the Company's
investment securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------------
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 ............. $ 3,911 25.33% $ 5,307 33.15% $ 8,911 46.28%
Investment securities:
U.S. government and
agency securities ................ $ 4,968 32.17% $ 3,974 24.82% $ 5,954 30.92%
FHLMC and FNMA preferred stock .... 1,674 10.84 2,625 16.39 1,553 8.07
Corporate securities:
Equity securities ............... 994 6.44 703 4.39 692 3.59
Fixed rate ...................... 49 .32 102 .64 100 .52
------- ------ ------- ------ ------- ------
Subtotal ............................ 7,685 49.77 7,404 46.24 8,299 43.10
------- ------ ------- ------ ------- ------
FHLB stock .......................... 3,845 24.90 3,300 20.61 2,045 10.62
------- ------ ------- ------ ------- ------
Total cash equivalents, investment
securities and FHLB stock ..... $15,441 100.00% $16,011 100.00% $19,255 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term to
repricing, excluding FHLB stock,
FHLMC and FNMA preferred stock
and corporate securities................ 0.57 years 0.52 years 1.10 years
</TABLE>
26
<PAGE> 28
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, 1997
----------------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over 10 Total Investment
1 Year Years Years Years Securities
------ ----- ----- ----- ---------------------------
Book Value Book Value Book Value Book Value Book Value Fair Value
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government and
agency securities.............. $3,989 $979 $ -- $ -- $4,968 $4,974
------ ---- ----- ----- ------ ------
Total investment securities..... $3,989 $979 $ -- $ -- $4,968 $4,974
====== ==== ===== ===== ====== ======
Weighted average yield.......... 4.98% 6.85% -- % -- % 5.34 %
==== ==== ===== ===== =====
</TABLE>
The Company's investment securities at December 31, 1997 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 no brokered deposits and has no present intention to solicit additional such
deposits.
27
<PAGE> 29
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance . $ 309,581 $ 288,955 $ 256,669
Deposits ........ 942,469 941,499 900,441
Withdrawals ..... (948,164) (932,673) (877,920)
Interest credited 12,770 11,800 9,765
--------- --------- ---------
Ending balance .. $ 316,656 $ 309,581 $ 288,955
========= ========= =========
Net increase .... $ 7,075 $ 20,626 $ 32,286
========= ========= =========
Percent increase 2.29% 7.14% 12.58%
========= ========= =========
</TABLE>
See also Note 10 of the Notes to Consolidated Financial Statements in
the Company's Annual Report filed as Exhibit 13 hereto.
28
<PAGE> 30
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,
------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
-------- ------ -------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Checking and Passbook Accounts:
Passbook accounts ........... $ 52,180 16.48% $ 54,552 17.62% $ 55,361 19.16%
Money market ................ 12,652 4.00 14,630 4.73 13,188 4.57
NOW and checking accounts ... 40,444 12.77 40,851 13.19 39,858 13.79
Non-interest bearing deposits 9,545 3.01 9,615 3.11 9,589 3.32
-------- ------ -------- ------ -------- ------
Total Non-Certificates .. 114,821 36.26 119,648 38.65 117,996 40.84
-------- ------ -------- ------ -------- ------
Certificates:
2.00 - 3.99% ............... 255 .08 514 .16 561 .19
4.00 - 5.99% ............... 150,843 47.64 129,932 41.97 85,724 29.67
6.00 - 7.99% ............... 50,261 15.87 59,029 19.07 84,385 29.20
8.00 - 9.99% ............... 476 .15 458 .15 289 .10
-------- ------ -------- ------ -------- ------
Total Certificates ...... 201,835 63.74 189,933 61.35 170,959 59.16
-------- ------ -------- ------ -------- ------
Total Deposits .......... $316,656 100.00% $309,581 100.00% $288,955 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
29
<PAGE> 31
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1997.
<TABLE>
<CAPTION>
2.00- 4.00- 6.00- 8.00- Percent
3.99% 5.99% 7.99% 9.99% Total of Total
---- -------- ------- ----- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts
maturing in quarter
ending:
March 31, 1998 ...... $171 $ 20,358 $ 8,262 $ 78 $ 28,869 14.30%
June 30, 1998 ....... 8 14,960 373 98 15,439 7.65
September 30, 1998 .. 7 22,841 1,041 111 24,000 11.89
December 31, 1998 ... -- 13,285 11,429 -- 24,714 12.24
March 31, 1999 ...... 69 22,061 770 -- 22,900 11.35
June 30, 1999 ....... -- 21,279 697 -- 21,976 10.89
September, 30, 1999 . -- 10,088 2,625 17 12,730 6.31
December 31, 1999 ... -- 8,737 2,669 172 11,578 5.74
March 31, 2000 ...... -- 6,532 8,759 -- 15,291 7.58
June 30, 2000 ....... -- 4,611 4,591 -- 9,202 4.56
September 30, 2000 .. -- 777 2,968 -- 3,745 1.85
December 31, 2000 ... -- 1,956 1,702 -- 3,658 1.81
Thereafter .......... -- 3,358 4,375 -- 7,733 3.83
---- -------- ------- ---- -------- ------
Total .......... $255 $150,843 $50,261 $476 $201,835 100.00%
==== ======== ======= ==== ======== ======
Percent of Total 0.13% 74.74% 24.90% 0.23%
==== ======== ======= ====
</TABLE>
30
<PAGE> 32
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of December 31, 1997.
<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...................... $25,235 $13,908 $44,019 $ 94,794 $177,956
Certificates of deposit
of $100,000 or more..................... 3,634 1,531 4,695 14,019 23,879
-------- -------- -------- -------- ----------
Total certificates of deposit........ $28,869 $15,439 $48,714 $108,813 $201,835
======= ======= ======= ======== ========
</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 make
contributions to the ESOP sufficient to allow the ESOP to fund the debt service
requirements of the loan. At December 31, 1997, the balance of the ESOP loan was
$81,000.
During 1996 and 1997, 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.
31
<PAGE> 33
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,
--------------------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances.......................................... $76,900 $58,600 $34,200
Securities sold under agreements to repurchase......... 7,389 7,895 12,420
Other borrowings....................................... 5,000 --- ---
Average Balance:
FHLB advances.......................................... $59,339 $53,137 $27,001
Securities sold under agreements to repurchase......... 6,352 7,043 10,885
Other borrowings....................................... 3,263 --- ---
</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,
---------------------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
FHLB advances ................................ $76,200 $55,500 $34,200
Securities sold under agreements to repurchase 3,844 7,438 9,227
Other borrowings ............................. 5,000 -- --
------- ------- -------
Total borrowings ........................... $85,044 $62,938 $43,427
======= ======= =======
Weighted average interest rate of borrowings . 6.03% 5.89% 5.82%
</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 $8.7 million at December
31, 1997, 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 $374,000. 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, 1997, the Bank had an
equity deficit of $6,000 in SSSC. In addition, SSSC markets property, casualty,
liability and whole life insurance products, tax-deferred annuities and
financial
32
<PAGE> 34
services on an agency basis to the Bank's customers through its wholly owned
subsidiary, Suburban Insurance Resources Agency, Inc. ("SIRA"). At December 31,
1997, SSSC had an equity deficit of $31,000 in SIRA. For the year ended December
31, 1997, SSSC had a net profit of $64,000.
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, 1997, 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 March 31, 1997 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, 1997 was $96,000.
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.
33
<PAGE> 35
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, 1997, the Bank's lending limit under this restriction was $3.9
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.
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
34
<PAGE> 36
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 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.
35
<PAGE> 37
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, 1997, the Bank had $87,000 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, 1997, the Bank had approximately
$74,000 in investments in and advances to subsidiaries that were excluded from
capital.
At December 31, 1997, the Bank had tangible capital of $26.1 million,
or 5.99% of adjusted total assets, which is approximately $19.6 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, 1997, the
Bank had $15,000 of intangibles which were allowed to be added to tangible
capital in computing core capital.
At December 31, 1997, the Bank had core capital equal to $26.1 million,
or 5.99% of adjusted total assets, which is approximately $13.0 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
36
<PAGE> 38
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, 1997, the Bank had no capital instruments that qualified as
supplementary capital and $708,000 of general loss reserves, which was less than
0.36% of risk-weighted assets.
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, 1997.
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, 1997, Suburban Federal had total capital of $26.8
million (including $26.1 million in core capital and $708,000 in qualifying
supplementary capital) and risk-weighted assets of $196.4 million; or total
capital of 13.65% of risk-weighted assets. This amount was approximately $11.1
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
37
<PAGE> 39
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 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
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<PAGE> 40
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 4%.
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, 1997, the Bank was in compliance with the
requirement, with an overall liquid asset ratio of 5.00%.
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
39
<PAGE> 41
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, 1997, 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
40
<PAGE> 42
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 1997 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
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.
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<PAGE> 43
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, 1997, 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.
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, 1997, the Bank had $3.8 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 6.41% and were 6.81% for calendar year 1997.
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
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<PAGE> 44
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, 1997, dividends paid by the FHLB of
Chicago to the Bank totaled $234,000, which constitute a $64,000 increase over
the amount of dividends received in calendar year 1996. The $66,000 dividend
received for the quarter ended December 31, 1997, reflects an annualized rate of
7.00%, or .24% above the average rate for calendar 1996.
FEDERAL AND STATE TAXATION. Prior to 1997, 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" equaled the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year.
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<PAGE> 45
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, 1997, the Bank's Excess for tax purposes totaled
approximately $5.3 million.
The Company and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. In the
past, savings associations, such as the Bank, that file federal income tax
returns as part of a consolidated group were 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 Company and its consolidated subsidiaries have not been audited by
the IRS with respect to consolidated federal income tax returns for the last
five years. In the opinion of management, any examination of still open returns
(including returns of subsidiaries and predecessors of, or entities merged into,
the Company) would not result in a deficiency which could have a material
adverse effect on the financial condition of the Company and its consolidated
subsidiaries.
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<PAGE> 46
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.
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%.
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<PAGE> 47
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
Ronald LeClaire Senior Vice President - Customer Service
</TABLE>
DANIEL P. RYAN. Mr. Ryan, age 57, 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 Chairman of the
Board of Directors of the Company and the Bank in 1996.
BYRON G. THOREN. Mr. Thoren, age 50, 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 48, 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 52, 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.
LESTER J. WOLF. Mr. Wolf, age 62, 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.
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<PAGE> 48
RONALD LECLAIRE. Mr. LeClaire, age 41, is Senior Vice President of
Customer Service of the Company, the Bank, SSSC and SIRA. He has held this
position since May of 1997. Mr. LeClaire joined the Bank in 1978.
EMPLOYEES
At December 31, 1997, the Bank and its subsidiaries had a total of 140
full-time and 157 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, 1997 was $5.0 million.
<TABLE>
<CAPTION>
Date Net Book Value at
Location Owned or Leased Acquired/Leased December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Home Office:
3301 West Vollmer Road Leased - expires 2007 1984 $ 183,000
Flossmoor, Illinois
Branch Offices:
154th at Broadway(1) Owned 1965 799,000
Harvey, Illinois
13323 S. Baltimore Avenue Owned 1973 280,000
Chicago, Illinois
162nd & School Streets Owned 1977 254,000
South Holland, Illinois
7101 W. 127th Street Owned 1977 312,000
Palos Heights, Illinois
170th at South Park Avenue Owned 1987 380,000
South Holland, Illinois
16145 S. State Street Leased - expires 2003 1991(2) 79,000
South Holland, Illinois
16039 S. Harlem Leased - expires 2003 1991(2) 74,000
Tinley Park, Illinois
2345 W. 183rd Street Leased - expires 2003 1991(2) 77,000
Homewood, Illinois
1111 E. Exchange Road Leased - expires 2003 1991(2) 72,000
Crete, Illinois
</TABLE>
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<TABLE>
<CAPTION>
Date Net Book Value at
Location Owned or Leased Acquired/Leased December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1218 Sheffield Avenue Leased - expires 2002 1993(2) 133,000
Dyer, Indiana
10S660 State Route 83 Owned 1995 852,000
Hinsdale, Illinois
Other Property:
197th and Governor's Highway Owned 1974-1977 409,000
Flossmoor, Illinois
</TABLE>
(1) Also the Bank's administrative office.
(2) Full service branch facilities located in a local grocery store chain.
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, 1997
was approximately $160,000.
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,
1997.
48
<PAGE> 50
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 44 of the attached 1997 Annual Report to Stockholders is herein
incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Pages 6 through 8 of the attached 1997 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 19 of the attached 1997 Annual Report to Stockholders
is herein incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 20 through 42 of the attached 1997 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.
49
<PAGE> 51
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 1997, 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."
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 1998, 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 1998, 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 1998, 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.
50
<PAGE> 52
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, 1997, is incorporated by reference
in this Annual Report on Form 10-K as Exhibit 13.
<TABLE>
<CAPTION>
Pages in
Annual
Annual Report Section Report
--------------------- ------
<S> <C>
Independent Auditors' Report............................................................................... 20
Consolidated Statements of Financial Condition
at December 31, 1997 and 1996............................................................................ 21
Consolidated Statements of Earnings for the Years Ended
December 31, 1997, 1996 and 1997......................................................................... 22
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995..................................................... 23
Consolidated Statements of Cash Flows for Years Ended
December 31, 1997, 1996 and 1995......................................................................... 24
Notes to Consolidated Financial Statements................................................................. 25-42
</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.
51
<PAGE> 53
(a)(3) EXHIBITS
<TABLE>
<CAPTION>
REFERENCE TO PRIOR
REGULATION FILING OR EXHIBIT
S-K EXHIBIT NUMBER
NUMBER DOCUMENT ATTACHED HERETO
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, liquidation or None
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 security None
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.
52
<PAGE> 54
***** 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
A report on Form 8-K was filed on January 8, 1998 for the press release
issued by the Company on December 29, 1997 announcing the execution of a
definitive agreement pursuant to which SuburbFed will merge with and into
Citizens Financial Services, FSB.
53
<PAGE> 55
SIGNATURES
Pursuant to the requirements 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.
Date: May 11, 1998 By: /s/ Steven E. Stock
-----------------------
Steven E. Stock
Senior Vice President,
Chief Financial Officer
and Treasurer
54
<PAGE> 1
Exhibit 13
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.
On December 29, 1997, the Company announced the execution of a definitive
agreement pursuant to which it will merge with and into Citizens Financial
Services, FSB of Munster, Indiana, subject to the approval of shareholders and
regulatory agencies. See Note 21 in the audited financial statements following
for more information.
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 three years
has been controlled profitable growth. The growth in the loans receivable
portfolio of $51.8, $93.9 and $42.3 million, or 21.43%, 63.49% and 40.02% and
for 1997, 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 $ 76.4, $101.6 and $41.1 million of these types of
loans originated in 1997, 1996 and 1995, respectively.
The Bank has also attempted over the last six 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 2.29% for 1997 was in
accordance with management's plan to obtain new funds at the lowest possible
cost for the desired term. In many instances during 1997, funds could be
borrowed from the Federal Home Loan Bank of Chicago or other sources 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 $114.8 million or approximately
36% of total deposits at December 31, 1997. As a result of this level of core
deposits, the Company has consistently maintained a cost of funds lower than the
10
<PAGE> 2
comparable average for the Office of Thrift Supervision's ("OTS") Chicago
District. For the year ended December 31, 1997, the weighted average cost of
deposits for the Company was 4.54%.
The Bank's challenge for 1998 remains to continue to expand mortgage and
consumer loan originations and to develop funding sources that provide the
maximum interest rate spread within the Bank's interest rate risk guidelines.
The second part of the challenge is to improve the deposit growth, primarily in
core deposit accounts, 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.
Management believes that pursuit of these goals is consistent with its
preparation for the planned merger with Citizens Financial and will be
beneficial to the combined organization.
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 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
increase 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 takes a number of steps to
maintain the proper relationship between its assets and liabilities. First, the
Company focuses 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. $76.4 million of these types of loans
were originated in 1997 and $208.0 million remain outstanding at December 31,
1997. In addition, the Company had $24.0 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 at time of purchase. 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, 1997 the Company had $114.8 million
of these types of accounts. Fourth, as of December 31, 1997 the Company had
borrowed $54.7 million with fixed rates and remaining terms of 1 to 5 years.
Presented below, as of December 31, 1997, 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
11
<PAGE> 3
Management's Discussion and Analysis of
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------------------
high rates. The value of the Bank's deposits and borrowings change in
approximately the same proportion in rising or falling rate scenarios.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE
ASSUMED CHANGE ------------------------------
IN INTEREST RATES $ AMOUNT $ CHANGE % CHANGE
- --------------------------------------------------
(BASIS POINTS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
+ 400 $12,576 $(22,803) (64)%
+ 300 19,585 (15,794) (45)
+ 200 26,147 (9,232) (26)
+ 100 31,649 (3,730) (11)
0 35,379
- 100 37,326 1,947 6
- 200 38,436 3,057 9
- 300 40,183 4,804 14
- 400 42,906 7,527 21
</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 $9.2 million or 26%. The remaining NPV
after the effect of the 200 basis point increase is still greater than 6% 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, 1997,
mortgage loans and mortgage-backed securities accounted for 89% of the Company's
total assets.
Consumer and other loans outstanding increased $700,000 during 1997 to
$17.2 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 4%. The Bank's liquidity ratios were 5.0% and 5.3% at the years ended
December 31, 1997 and 1996, 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, 1997 and 1996,
cash and cash equivalents totaled $8.2 million and $8.9 million, respectively.
The level of net cash and cash equivalent amounts is indicative of management's
efforts to invest funds, as well as the
12
<PAGE> 4
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 fund loans. At December 31, 1997, the Company had $7.7
million in outstanding commitments to originate mortgage loans and $17.4 million
of unused home equity and credit card lines of credit.
Certificates of deposit scheduled to mature in one year or less at December
31, 1997, totaled $93.0 million. Management believes, based on past experience,
that a significant portion of these deposits will remain with the Company.
At December 31, 1997, the Bank had advances totaling $76.2 million
outstanding from the FHLB of Chicago. Advances from the FHLB of Chicago
increased by $20.7 million during 1997 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, 1997, the Bank exceeded all current regulatory capital
standards. At such date, the Bank's tangible capital, core capital, and risk
based capital of $26.1 million, $26.1 million, and $26.8 million, respectively,
exceeded the applicable minimum requirements by $19.6 million, $13.1 million,
and $11.1 million, respectively.
FINANCIAL CONDITION
During the year ended December 31, 1997, total assets of SuburbFed
increased by $34.4 million. This increase is primarily attributable to the
Company's loan growth. The Company's asset growth was funded primarily by an
increase of $22.1 million in borrowed money and a $7.1 million net increase in
savings deposits.
During the year ending December 31, 1997, net loans receivable increased
$51.8 million as a result of increased loan originations. Loan production for
1997 from internal sources was $61.8 million while $54.6 million was received
from independent outside originators. Both figures represent decreases from 1996
as fewer mortgage-backed securities were sold to provide funding. 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 until the last two months of 1997.
Principal payments to loans during 1997 amounted to $59.6 million as compared to
$69.8 million in 1996. During the year ended December 31, 1997, the Company
disbursed $116.4 million in loans as compared to $172.8 million disbursed in
1996. Both amounts include draws on revolving lines of credit.
During 1997, repayments of mortgage-backed securities totaling $22.1
million and sales of $4.0 million exceeded purchases of $7.0 million, with the
net proceeds of $18.9 million being used to fund loans.
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 $7.1 million from $309.6 million on December 31, 1996, to
$316.7 million on December 31, 1997. Interest credited during the year totaled
$12.8 million.
Stockholders' equity increased $3.3 million, due primarily to earnings of
$2.8 million and an increase in the unrealized gain on securities available for
sale, net of taxes, of $507,000 partially offset by dividends declared of
$404,000. In March 1992, the Bank borrowed $624,000 to fund the acquisition of
stock for the Employee Stock Ownership Plan. As of December 31, 1997, $81,000 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
was reflected as a reduction of stockholders' equity. The portion of the Bank
Incentive Plans expensed during 1997 was $9,000.
13
<PAGE> 5
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
1997 1996 1995 1994 1993
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted average yield on:
Loans receivable............. 7.88% 7.93% 8.15% 8.01% 7.90%
Mortgage-backed securities:
Held to maturity........... 7.22 7.23 7.13 7.02 6.95
Available/held for sale.... 6.89 7.00 6.94 6.93 7.81
Investment securities:
Held to maturity........... 4.98 4.99 5.19 5.31 4.62
Available/held for sale.... 6.41 6.79 7.13 6.62 6.04
Interest-bearing
deposits................... 5.39 5.40 5.57 5.90 2.94
FHLB stock................... 7.00 7.00 7.00 6.50 5.87
Combined weighted average
yield on interest-earning
assets................... 7.60 7.59 7.44 7.27 7.31
Weighted average rate paid on:
Passbook..................... 2.50 2.50 2.51 2.50 2.50
Demand deposits.............. 2.00 1.96 1.81 1.89 1.93
Certificates................. 5.86 5.83 5.92 4.74 4.69
Total deposits........... 4.54 4.43 4.38 3.47 3.43
Borrowings................... 6.03 5.89 5.82 6.23 3.45
Combined weighted average
rate paid on interest-
bearing liabilities...... 4.85 4.68 4.57 3.85 3.43
Spread......................... 2.75% 2.91% 2.87% 3.42% 3.88%
</TABLE>
14
<PAGE> 6
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
---------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------- -------------------------------
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 $268,007 $20,750 7.74% $191,587 $14,955 7.81% $123,724 $ 9,944 8.04%
Mortgage-backed securities 124,192 8,484 6.83 159,147 10,725 6.74 187,487 12,789 6.82
Investment securities 9,894 536 5.42 8,675 482 5.56 10,279 583 5.67
Interest-bearing deposits 2,352 116 4.93 2,422 125 5.16 2,104 101 4.80
FHLB stock 3,448 234 6.79 2,515 170 6.76 1,970 131 6.65
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 407,993 30,120 7.38 364,346 26,457 7.26 325,564 23,548 7.23
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities:
Passbook 52,379 1,304 2.49 54,700 1,362 2.49 56,457 1,406 2.49
Demand deposits 62,466 1,190 1.91 61,996 1,162 1.87 61,719 1,192 1.93
Certificates 203,014 11,796 5.81 183,435 10,762 5.87 152,077 8,405 5.53
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 317,859 14,290 4.50 300,131 13,286 4.43 270,253 11,003 4.07
- ---------------------------------------------------------------------------------------------------------------------------------
Borrowings 68,954 4,191 6.08 44,492 2,630 5.91 37,886 2,317 6.12
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 386,813 18,481 4.78 344,623 15,916 4.62 308,139 13,320 4.32
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income/interest
rate spread $11,639 2.60% $10,541 2.64% $10,228 2.91%
- ---------------------------------------------------------------------------------------------------------------------------------
Net earning assets/net yield
on average
interest-earning assets $ 21,180 2.85% $ 19,723 2.89% $ 17,425 3.14%
- ---------------------------------------------------------------------------------------------------------------------------------
Average interest-earning
assets to average
interest-bearing
liabilities 105.48% 105.72% 105.65%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 7
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
------------------------------------------------------------------------------------------
1996 V. 1997 1995 V. 1996 1994 V. 1995
---------------------------- ---------------------------- ----------------------------
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 $5,928 $(133) $ 5,795 $5,456 $(446) $ 5,011 $2,481 $ 128 $2,609
Mortgage-backed securities (2,386) 145 (2,241) (1,933) (131) (2,064) (175) 1,142 967
Investment securities 66 (12) 54 (91) (10) (101) 80 31 111
Interest-bearing deposits (3) (6) (9) 15 9 24 (2) 26 24
FHLB stock 63 1 64 36 3 39 5 14 19
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 3,668 (5) 3,663 3,483 (575) 2,909 2,389 1,341 3,730
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Passbook (58) -- (58) (44) -- (44) (96) -- (96)
Demand deposits 7 21 28 5 (35) (30) (19) 24 5
Certificates 1,144 (110) 1,034 1,734 623 2,357 987 1,450 2,437
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,093 (89) 1,004 1,695 588 2,283 872 1,474 2,346
- ---------------------------------------------------------------------------------------------------------------------------------
Borrowings 1,484 77 1,561 404 (91) 313 610 414 1,024
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 2,577 (12) 2,565 2,099 497 2,596 1,482 1,888 3,370
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,098 $ 313 $ 360
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, AND DECEMBER 31, 1996
GENERAL
The Company had net income of $2.8 million in 1997, as compared with $1.1
million in 1996. The primary reason for the increase in net income was the
one-time special assessment of $1.7 million charged to recapitalize the Savings
Association Insurance Fund ("SAIF") during 1996.
INTEREST INCOME
Interest income increased from $26.5 million in 1996 to $30.1 million for
1997. The increase was due to the growth in average interest-earning assets of
$43.6 million and, to a lesser extent by an increase in the average yield of 12
basis points.
INTEREST EXPENSE
Interest expense increased from $15.9 million in 1996 to $18.5 million in
1997. This increase was due primarily to an increase of $42.2 million in the
average deposits and borrowed money outstanding and, to a lesser extent, by an
increase of 16 basis points in the average cost of funds. Rates on
interest-bearing passbook and checking accounts remained relatively constant
during 1997 while the average rate on certificates of deposit decreased by 6
basis points. The average rate on borrowings
16
<PAGE> 8
increased by 17 basis points as the average maturity was extended.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans decreased from $193,000 in the 1996
period to $180,000 in the 1997 period. The decrease reflects the resolution of a
construction loan with a balance of $498,000 which resulted in a charge-off of
$182,000. The remaining non-performing assets are primarily first mortgages on
single family properties which historically have resulted in a lower level of
charge-offs than construction loans. Net charge-offs for the 1997 period,
primarily due to the resolution noted above, were $309,000, compared to $45,000
in 1996. In connection with its periodic loan reviews, the Company continued to
add to the loan loss reserve during 1997 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 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 $3.3 million in the 1996 period to $3.7
million in the 1997 period. The increase was due primarily to an increase in
realized and unrealized gains on sale of loans and securities of $402,000.
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 decreased from $12.0 million in the 1996 period
to $10.8 million in the 1997 period. This decrease was primarily the result of
the $1.7 million SAIF special assessment in 1996. Staffing costs increased
$692,000 due primarily to additional incentive compensation based upon earnings
and stock price improvement and the addition of several business development
officers.
INCOME TAXES
Regular provisions for income taxes increased in 1997 primarily as a result
of increased income before income taxes.
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 $45,000,
compared to $63,000 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 development loans and other non-mortgage loans.
While the Company has not experienced any additional delinquencies to date,
there can be no
17
<PAGE> 9
Management's Discussion and Analysis of
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------------------
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.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "Year
2000" is pervasive and complex as virtually every computer operation will be
affected in some way by the roll-over of the two digit year value to 00. The
issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system
failure.
The bulk of the Company's records are maintained by a third-party data
center. Management is closely monitoring the data center's progress in making
their programs Year 2000 compliant. The current status indicates that the
reprogramming will be completed with sufficient lead time to allow adequate
testing to be sure that they will function appropriately in the year 2000. In
addition, Management is confirming that plans have developed internally or by
other primary vendors that will facilitate systems functioning properly in the
year 2000. The additional cost of these efforts is not considered to be
significant.
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 December 1996, the FASB issued Statement of
Financial Accounting Standards No. 127 ("SFAS No. 127"), "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125". The statement
delays for one year the implementation of SFAS No. 125, as it relates to (1)
secured borrowings and collateral, and (2) for the transfers of financial assets
that are part of repurchase agreements, dollar-rolls, securities lending and
similar transactions. The Company has adopted portions of SFAS No. 125 (those
not deferred by SFAS No. 127) effective January 1, 1997. Adoption of these
portions did not have a significant effect on the Company's financial condition
or results of operations. Based on its review of SFAS No. 125, management does
not believe that adoption of the portions of SFAS No. 125 which have been
deferred by SFAS No. 127 will have a material effect on the Company.
Reporting Comprehensive Income. In June 1997, the FASB issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
18
<PAGE> 10
Income" ("SFAS No. 130"). This statement establishes standards for reporting and
the display of comprehensive income and its components (revenues, expenses,
gains, losses) in a full set of general-purpose financial statements. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. The Company
has not yet determined the impact of adopting this statement.
Disclosures about Segments of an Enterprise and Related Information. In
June 1997, the FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") which becomes effective for fiscal years beginning after December 15,
1997. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments and requires enterprises
to report selected information about operating segments in interim financial
reports. The Company has not yet determined the impact of adopting this
statement.
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.
19
<PAGE> 11
Independent
AUDITORS' REPORT
- ---------------------------
COBITZ, VANDENBERG LETTERHEAD
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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ending
December 31, 1997 in conformity with generally accepted accounting principles.
COBITZ SIG
February 6, 1998
Palos Hills, Illinois
20
<PAGE> 12
SuburbFed Financial Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- -----------------------------------------------------------------------------------------
Cash and amounts due from depository institutions $ 4,265,615 3,545,166
- -----------------------------------------------------------------------------------------
Interest-bearing deposits 3,911,510 5,307,070
- -----------------------------------------------------------------------------------------
Total cash and cash equivalents 8,177,125 8,852,236
- -----------------------------------------------------------------------------------------
Investment securities, held to maturity (fair value:
1997--$3,994,688; 1996--$3,918,125) (note 2) 3,988,542 3,974,167
- -----------------------------------------------------------------------------------------
Investment securities available for sale, at fair value
(note 3) 3,696,349 3,430,277
- -----------------------------------------------------------------------------------------
Trading securities (note 4) 1,740,883 1,361,638
- -----------------------------------------------------------------------------------------
Mortgage-backed securities, held to maturity (fair value:
1997--$77,201,169; 1996--$93,408,866) (note 5) 77,161,513 93,562,881
- -----------------------------------------------------------------------------------------
Mortgage-backed securities available for sale, at fair value
(note 6) 37,426,637 39,923,032
- -----------------------------------------------------------------------------------------
Loans receivable (net of allowance for loan losses:
1997--$731,683; 1996--$859,922) (note 7) 293,631,549 241,815,183
- -----------------------------------------------------------------------------------------
Real estate owned--net 135,361 14,076
- -----------------------------------------------------------------------------------------
Stock in Federal Home Loan Bank of Chicago 3,845,000 3,300,000
- -----------------------------------------------------------------------------------------
Office properties and equipment--net (note 8) 5,043,797 4,699,195
- -----------------------------------------------------------------------------------------
Accrued interest receivable (note 9) 2,597,917 2,319,523
- -----------------------------------------------------------------------------------------
Prepaid expenses and other assets 929,911 713,523
- -----------------------------------------------------------------------------------------
Deposit base intangible 87,448 126,263
- -----------------------------------------------------------------------------------------
Total assets 438,462,032 404,091,994
- -----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------
Liabilities:
- -----------------------------------------------------------------------------------------
Deposits (note 10) 316,655,755 309,581,005
- -----------------------------------------------------------------------------------------
Borrowed money (note 11) 85,044,000 62,938,000
- -----------------------------------------------------------------------------------------
Advance payments by borrowers for taxes and insurance 3,052,895 2,799,782
- -----------------------------------------------------------------------------------------
Other liabilities 4,202,269 2,519,525
- -----------------------------------------------------------------------------------------
Total liabilities 408,954,919 377,838,312
- -----------------------------------------------------------------------------------------
Stockholders' Equity:
- -----------------------------------------------------------------------------------------
Preferred stock, $.01 par value: authorized 500,000
shares; none outstanding -- --
- -----------------------------------------------------------------------------------------
Common stock, $.01 par value: authorized 2,000,000 shares;
1,371,162 shares issued and 1,265,681 shares
outstanding at December 31, 1997 and 1,365,263 shares
issued and 1,254,763 shares outstanding at December 31,
1996 13,712 13,653
- -----------------------------------------------------------------------------------------
Additional paid-in capital 8,605,578 8,420,472
- -----------------------------------------------------------------------------------------
Retained earnings, substantially restricted 22,407,548 20,021,403
- -----------------------------------------------------------------------------------------
Unrealized gain (loss) on securities available for sale,
net of income taxes 166,865 (340,285)
- -----------------------------------------------------------------------------------------
Treasury stock, at cost (105,481 and 110,500 shares at
December 31, 1997 and 1996) (1,605,185) (1,681,562)
- -----------------------------------------------------------------------------------------
Common stock acquired by Employee Stock Ownership Plan (81,405) (170,530)
- -----------------------------------------------------------------------------------------
Common stock awarded by Bank Incentive Plan -- (9,469)
- -----------------------------------------------------------------------------------------
Total stockholders' equity (notes 15 and 16) 29,507,113 26,253,682
- -----------------------------------------------------------------------------------------
Commitments and contingencies (notes 17 and 18)
- -----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $438,462,032 404,091,994
- -----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 13
SuburbFed Financial Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
- -------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
- ---------------------------------------------------------------------------------------------------
Interest on loans $20,749,795 14,954,462 9,944,300
- ---------------------------------------------------------------------------------------------------
Interest on mortgage-backed securities 8,484,022 10,725,406 12,788,580
- ---------------------------------------------------------------------------------------------------
Interest on investment securities 536,353 482,379 583,461
- ---------------------------------------------------------------------------------------------------
Interest on other financial assets 116,427 124,955 101,031
- ---------------------------------------------------------------------------------------------------
Dividends on FHLB stock 233,633 169,687 130,495
- ---------------------------------------------------------------------------------------------------
Total interest income 30,120,230 26,456,889 23,547,867
- ---------------------------------------------------------------------------------------------------
Interest expense:
- ---------------------------------------------------------------------------------------------------
Interest on deposits 14,290,172 13,286,399 11,002,531
- ---------------------------------------------------------------------------------------------------
Interest on borrowed money 4,190,989 2,630,050 2,317,527
- ---------------------------------------------------------------------------------------------------
Total interest expense 18,481,161 15,916,449 13,320,058
- ---------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 11,639,069 10,540,440 10,227,809
- ---------------------------------------------------------------------------------------------------
Provision for loan losses 180,000 192,680 76,700
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 11,459,069 10,347,760 10,151,109
- ---------------------------------------------------------------------------------------------------
Non-interest income:
- ---------------------------------------------------------------------------------------------------
Loan fees and service charges 774,806 884,899 648,880
- ---------------------------------------------------------------------------------------------------
Commission income 554,173 459,970 396,045
- ---------------------------------------------------------------------------------------------------
Gain on sale of trading securities 308,765 108,343 123,784
- ---------------------------------------------------------------------------------------------------
Gain on sale of loans and securities--net 50,648 112,158 82,554
- ---------------------------------------------------------------------------------------------------
Unrealized gain on trading securities 459,972 197,292 230,310
- ---------------------------------------------------------------------------------------------------
Loss on sale of real estate owned (6,282) -- --
- ---------------------------------------------------------------------------------------------------
Deposit related fees and other income 1,514,050 1,519,077 1,341,012
- ---------------------------------------------------------------------------------------------------
Total non-interest income 3,656,132 3,281,739 2,822,585
- ---------------------------------------------------------------------------------------------------
Non-interest expense:
- ---------------------------------------------------------------------------------------------------
General and administrative:
- ---------------------------------------------------------------------------------------------------
Staffing costs (notes 12 and 13) 6,282,357 5,590,311 5,120,646
- ---------------------------------------------------------------------------------------------------
Advertising 246,416 258,371 348,644
- ---------------------------------------------------------------------------------------------------
Occupancy and equipment expenses (note 8) 1,969,717 1,860,120 1,993,398
- ---------------------------------------------------------------------------------------------------
Data processing 336,182 306,663 291,016
- ---------------------------------------------------------------------------------------------------
Federal deposit insurance premiums 199,402 631,790 598,155
- ---------------------------------------------------------------------------------------------------
SAIF special assessment (note 20) -- 1,690,863 1,690,863
- ---------------------------------------------------------------------------------------------------
Other 1,752,096 1,627,963 1,676,107
- ---------------------------------------------------------------------------------------------------
Total general and administrative expense 10,786,170 11,966,081 10,027,966
- ---------------------------------------------------------------------------------------------------
Amortization of deposit base intangible 38,815 47,021 56,281
- ---------------------------------------------------------------------------------------------------
Total non-interest expense 10,824,985 12,013,102 10,084,247
- ---------------------------------------------------------------------------------------------------
Income before income taxes 4,290,216 1,616,397 2,889,447
- ---------------------------------------------------------------------------------------------------
Federal and state income taxes (note 14) 1,499,900 564,300 1,071,000
- ---------------------------------------------------------------------------------------------------
Net income $ 2,790,316 1,052,097 1,818,447
- ---------------------------------------------------------------------------------------------------
Earnings per share--
- ---------------------------------------------------------------------------------------------------
Basic $2.21 $.84 $1.40
- ---------------------------------------------------------------------------------------------------
Diluted $2.08 $.80 $1.35
- ---------------------------------------------------------------------------------------------------
Dividends declared per common share $.32 $.32 $.32
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 14
SuburbFed Financial Corp. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
---------------------------------------
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------------------------
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, 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
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 2,790,316 2,790,316
- ---------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchased by
employee benefit plan (5,019
shares) 41,953 76,377 118,330
- ---------------------------------------------------------------------------------------------------------------------------------
Adjustment of securities
available for sale to fair
value, net of tax effect 507,150 507,150
- ---------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 59 82,909 82,968
- ---------------------------------------------------------------------------------------------------------------------------------
Tax benefit related to stock
options exercised 12,836 12,836
- ---------------------------------------------------------------------------------------------------------------------------------
Tax benefit related to vested
BIP's stock 47,408 47,408
- ---------------------------------------------------------------------------------------------------------------------------------
Amortization of award of BIP's
stock 9,469 9,469
- ---------------------------------------------------------------------------------------------------------------------------------
Contribution to fund ESOP loan 89,125 89,125
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends declared on common
stock (404,171) (404,171)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $13,712 8,605,578 22,407,548 166,865 (1,605,185) (81,405) -- 29,507,113
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 15
SuburbFed Financial Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -----------------------------------------------------------------------------------------------------------
Net income $ 2,790,316 1,052,097 1,818,447
- -----------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash from
operating activities:
- -----------------------------------------------------------------------------------------------------------
Depreciation 687,051 667,979 705,785
- -----------------------------------------------------------------------------------------------------------
Amortization of premiums and discounts 325,015 667,078 669,749
- -----------------------------------------------------------------------------------------------------------
Amortization of intangible 38,815 47,021 56,281
- -----------------------------------------------------------------------------------------------------------
Amortization of cost of stock benefit plans 98,594 145,941 145,940
- -----------------------------------------------------------------------------------------------------------
Provision for loan losses 180,000 192,680 76,700
- -----------------------------------------------------------------------------------------------------------
Proceeds from sale of loans held for sale 5,011,874 8,487,647 5,988,885
- -----------------------------------------------------------------------------------------------------------
Origination of loans held for sale (5,171,874) (8,010,647) (6,725,885)
- -----------------------------------------------------------------------------------------------------------
Gain on sale of trading securities (308,765) (108,343) (123,784)
- -----------------------------------------------------------------------------------------------------------
Net gain on sale of loans and securities (50,648) (112,158) (82,554)
- -----------------------------------------------------------------------------------------------------------
Unrealized gain on trading securities (459,972) (197,292) (230,310)
- -----------------------------------------------------------------------------------------------------------
Proceeds from sales of trading account securities 1,375,345 756,646 752,934
- -----------------------------------------------------------------------------------------------------------
Purchase of trading account securities (887,978) (497,995) (602,040)
- -----------------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock dividend -- -- (29,100)
- -----------------------------------------------------------------------------------------------------------
Net changes in:
- -----------------------------------------------------------------------------------------------------------
Accrued interest receivable (278,394) (204,560) (347,563)
- -----------------------------------------------------------------------------------------------------------
Accrued interest payable 98,917 70,002 82,044
- -----------------------------------------------------------------------------------------------------------
Deferred income on loans (414,983) (1,036,521) (560,320)
- -----------------------------------------------------------------------------------------------------------
Deferred and accrued federal and state income taxes 479,541 189,069 226,945
- -----------------------------------------------------------------------------------------------------------
Other, net 677,837 (59,434) (144,893)
- -----------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 4,190,691 2,049,210 1,677,261
- -----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
- -----------------------------------------------------------------------------------------------------------
Proceeds from sale of investment securities,
available for sale 1,293,249 200,000 1,162,527
- -----------------------------------------------------------------------------------------------------------
Proceeds from maturities of investment securities:
- -----------------------------------------------------------------------------------------------------------
Held to maturity 1,000,000 2,000,000 1,000,000
- -----------------------------------------------------------------------------------------------------------
Available for sale 4,388 10,418 2,016
- -----------------------------------------------------------------------------------------------------------
Purchase of investment securities:
- -----------------------------------------------------------------------------------------------------------
Held to maturity (1,000,000) - (1,000,000)
- -----------------------------------------------------------------------------------------------------------
Available for sale (1,335,312) (1,374,995) (150,000)
- -----------------------------------------------------------------------------------------------------------
Proceeds from sales of mortgage-backed securities, available
for sale 3,991,671 44,311,609 3,097,490
- -----------------------------------------------------------------------------------------------------------
Proceeds from repayments of mortgage-backed securities:
- -----------------------------------------------------------------------------------------------------------
Held to maturity 16,171,550 16,108,474 12,362,696
- -----------------------------------------------------------------------------------------------------------
Available for sale 5,917,884 6,105,202 2,081,680
- -----------------------------------------------------------------------------------------------------------
Purchase of mortgage-backed securities:
- -----------------------------------------------------------------------------------------------------------
Held to maturity - (1,722,484) (6,534,278)
- -----------------------------------------------------------------------------------------------------------
Available for sale (7,021,872) (12,162,564) (4,880,138)
- -----------------------------------------------------------------------------------------------------------
Purchase of Federal Home Loan Bank stock (545,000) (1,255,000) (127,100)
- -----------------------------------------------------------------------------------------------------------
Proceeds from sale of loans 5,011,874 8,487,647 5,988,885
- -----------------------------------------------------------------------------------------------------------
Disbursements for loans (111,178,464) (164,804,074) (92,163,780)
- -----------------------------------------------------------------------------------------------------------
Loan repayments 59,635,796 69,780,479 51,137,360
- -----------------------------------------------------------------------------------------------------------
Property and equipment expenditures (1,031,653) (531,727) (1,322,875)
- -----------------------------------------------------------------------------------------------------------
Net cash flows provided for investing activities (34,097,763) (43,334,662) (35,334,402)
- -----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
- -----------------------------------------------------------------------------------------------------------
Proceeds from exercise of stock options 82,968 122,644 --
- -----------------------------------------------------------------------------------------------------------
Dividends paid on common stock (403,200) (404,046) (418,673)
- -----------------------------------------------------------------------------------------------------------
Proceeds from issuance of treasury stock 118,330 -- --
- -----------------------------------------------------------------------------------------------------------
Purchase of treasury stock -- (648,937) (1,032,625)
- -----------------------------------------------------------------------------------------------------------
Net increase in deposits 7,074,750 20,625,539 32,286,795
- -----------------------------------------------------------------------------------------------------------
Proceeds from borrowed money 266,368,000 247,748,000 235,076,155
- -----------------------------------------------------------------------------------------------------------
Repayment of borrowed money (244,262,000) (228,237,000) (231,272,155)
- -----------------------------------------------------------------------------------------------------------
Net increase in advance payments by borrowers for taxes
and insurance 253,113 412,024 89,522
- -----------------------------------------------------------------------------------------------------------
Net cash flow provided by financing activities 29,231,961 39,618,224 34,729,019
- -----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (675,111) (1,667,228) 1,071,878
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 8,852,236 10,519,464 9,447,586
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8,177,125 8,852,236 10,519,464
- -----------------------------------------------------------------------------------------------------------
Cash paid during period for:
- -----------------------------------------------------------------------------------------------------------
Interest $ 18,382,244 15,846,447 13,238,014
- -----------------------------------------------------------------------------------------------------------
Income taxes 1,211,600 375,204 823,846
- -----------------------------------------------------------------------------------------------------------
NON CASH INVESTING ACTIVITIES:
- -----------------------------------------------------------------------------------------------------------
Transfer of loans to real estate owned 152,361 18,926 13,597
- -----------------------------------------------------------------------------------------------------------
Loans securitized into mortgage-backed securities $ -- 1,596,500 --
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 16
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 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.
TRADING SECURITIES
Trading account securities are carried at fair value, and net unrealized
gains and losses are reflected in the consolidated statements of earnings.
Recognized but unrealized net gains at December 31, 1997 amounted to $902,200.
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
25
<PAGE> 17
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------
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 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 over the contractual life of the loan.
The Bank has adopted the provisions of 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, 1997 and no loans to be evaluated for impairment at
December 31, 1997.
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. Estimated
lives are 25 to 40 years for office buildings, 5 to 10 years for parking lot
improvements, and 3 to 10 years for furniture, fixtures and equipment. The
cost of Leasehold improvements is being amortized using the straight-line
method over the Lesser of the life of the Leasehold improvement or the term of
the related Lease.
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 is being amortized over a fifteen year period
using the straight line method.
MORTGAGE SERVICING RIGHTS
The Company has adopted the provisions of SFAS No. 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
26
<PAGE> 18
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.
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
The Company computes its earnings per share (EPS) in accordance with SFAS
No. 128 "Earnings per Share". This statement simplifies the standards for
computing EPS previously found in Accounting Principles Board Opinion No. 5
"Earnings per Share" and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation of basic EPS and
fully diluted EPS with diluted EPS.
Basic EPS, unlike primary EPS, excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
The following presentation illustrates basic and diluted EPS in accordance
with the provisions of SFAS 128:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average number of
common shares outstanding
used in basic EPS
calculation.................. 1,260,900 1,258,174 1,296,695
Add common stock equivalents
for shares issuable under
Stock Option Plans........... 79,982 52,400 53,152
---------- --------- ---------
Weighted average number of
shares outstanding adjusted
for common stock
equivalents.................. 1,340,882 1,310,574 1,349,847
========== ========= =========
Net income..................... $2,790,316 1,052,097 1,818,447
Basic earnings per share....... $2.21 .84 1.40
Diluted earnings per share..... $2.08 .80 1.35
- -------------------------------------------------------------------
</TABLE>
EPS for prior periods has been restated to comply with the provisions of
SFAS 128.
RECLASSIFICATIONS
Certain 1995 and 1996 amounts have been reclassified to conform with the
1997 presentation.
27
<PAGE> 19
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------
2) INVESTMENT SECURITIES HELD TO MATURITY
Investment securities, held to maturity, are summarized as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
FNMA debenture............................................ $2,000,000 -- 4,062 1,995,938
FHLB note................................................. 1,988,542 10,208 -- 1,998,750
---------- ------ ------ ---------
$3,988,542 10,208 4,062 3,994,688
========== ====== ====== =========
Weighted average interest rate.............................. 4.98%
==========
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%
==========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The contractual maturity of investment securities held to maturity are
summarized as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
AMORTIZED FAIR AMORTIZED FAIR
TERM TO MATURITY COST VALUE COST VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less..................................... $3,988,542 3,994,688 -- --
Due after one year through five years....................... -- -- 3,974,167 3,918,125
---------- --------- --------- ---------
$3,988,542 3,994,688 3,974,167 3,918,125
========== ========= ========= =========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1997
FHLB note................................................. $1,000,000 -- 20,729 979,271
Corporate debt securities................................. 50,000 -- 1,000 49,000
Equity securities:
Preferred stocks........................................ 1,942,164 69,573 9,790 2,001,947
Financial Institution common stock mutual funds......... 292,723 373,408 -- 666,131
---------- ------- ------ ---------
$3,284,887 442,981 31,519 3,696,349
========== ======= ====== =========
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
========== ======= ====== =========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 20
During the current year, the Company sold securities realizing gross
proceeds of $1,293,249, with gross gains of $18,249 and gross losses of $1,271
realized on those sales. Proceeds from the sale of investment securities
available for sale during the years ended December 31, 1996 and 1995 were
$200,000 and $1,162,527 with gross gains of $-0- and $90,819 and gross losses of
$-0- and $21,875 realized on those sales. The change in net unrealized gains and
losses during the current year of $309,607, net of the tax effect of $117,651,
resulted in a $191,956 credit to stockholders' equity.
4) TRADING SECURITIES
Investment securities held for trade at December 31, 1997 consists of
common stock equity securities with a carrying value of $1,740,883. The
investment securities held for trade at December 31, 1996 consisted 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 adjustment of these securities to their current fair values has
resulted in a net unrealized gain of $902,200 as of December 31, 1997 and a net
unrealized gain of $442,228 as of December 31, 1996. Proceeds from sales of
investment securities held for trade during the years ended December 31, 1997,
1996 and 1995 were $1,375,345, $756,646 and $752,934 with gross gains of
$308,765, $108,343 and $123,784 realized on those sales.
5) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities, held to maturity, are summarized as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Participation certificates:
FHLMC--adjustable rate (a).............................. $ 3,608,949 41,853 30,244 3,620,558
FNMA--adjustable rate (a)............................... 3,495,170 4,875 6,825 3,493,220
GNMA--adjustable rate (a)............................... 1,183,562 25,792 -- 1,209,354
Privately issued participation certificates: (b)
Fixed rate.............................................. 40,239,281 150,982 115,521 40,274,742
Adjustable rate......................................... 18,592,693 235,116 22,896 18,804,913
Investment in real estate mortgage investment conduits:
FHLMC--fixed rate (c)................................... 2,162,768 9,625 -- 2,172,393
FHLMC--adjustable rate (c).............................. 5,000,000 -- 265,625 4,734,375
FNMA--fixed rate........................................ 2,879,090 13,561 1,037 2,891,614
----------- ------- ------- ----------
$77,161,513 481,804 442,148 77,201,169
=========== ======= ======= ==========
Weighted average interest rate.............................. 7.22%
===========
DECEMBER 31, 1996
Participation certificates:
FHLMC--adjustable rate.................................. $ 4,226,031 6,661 39,420 4,193,272
FNMA--adjustable rate................................... 4,211,922 41,981 25,534 4,228,369
GNMA--adjustable rate................................... 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%
===========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Mortgage-backed securities with an amortized cost basis of $2,768,464 and a
fair value of $2,798,576 are collateral for repurchase agreements totaling
$2,607,000 (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 at date of purchase. All securities have a AAA rating due
to credit enhancements.
29
<PAGE> 21
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------
(c) A fixed rate FHLMC real estate mortgage investment conduit (REMIC) with an
amortized cost basis of $1,171,327 and a fair value of $1,175,719 and an
adjustable rate FHLMC REMIC with an amortized cost basis of $5,000,000 and a
fair value of $4,734,375 are collateral for a line of credit advance
totaling $5,000,000 (see note 11).
At December 31, 1997, the Bank has pledged as collateral approximately
$910,000 of FHLMC participation certificates and $2,570,000 of a FNMA REMIC
security to depositors with large deposit accounts at the Bank.
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, 1997
Participation certificates:
FHLMC--fixed rate....................................... $ 643,088 46,328 -- 689,416
FNMA--fixed rate (a).................................... 1,361,500.. -- 6,862 1,354,638
Privately issued participation certificates: (b)
Fixed rate.............................................. 24,951,215 23,360 131,022 24,843,553
Adjustable rate......................................... 4,567,065 -- 19,132 4,547,933
Investment in real estate mortgage investment conduits:
FHLMC--fixed rate....................................... 645,039 3,695 -- 648,734
FNMA--fixed rate........................................ 2,905,660 12,572 6,777 2,911,455
Mutual Funds:
Adjustable Rate Mortgage Funds.......................... 2,495,395 -- 64,487 2,430,908
----------- ------ ------- ----------
$37,568,962.. 85,955 228,280 37,426,637
=========== ====== ======= ==========
Weighted average interest rate.............................. 6.89%
===========
DECEMBER 31, 1996
Participation certificates:
FHLMC--fixed rate....................................... $ 880,499 58,631 -- 939,130
FNMA--fixed rate........................................ 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%
===========
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Mortgage-backed securities with an amortized cost basis of $1,361,500 and a
fair value of $1,354,638 are collateral for repurchase agreements totaling
$1,237,000 (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
three to seven years at date of purchase. 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, 1997, 1996 and 1995 were $3,991,671, $44,311,609
and $3,097,490 with gross gains of $10,628, $301,538 and $2,978 and gross losses
of $18,459, $185,619 and $18,905 realized on those sales. The change in net
unrealized gains and losses during the current year of $508,378, net of the tax
effect of $193,184 resulted in a $315,194 credit to stockholders' equity.
30
<PAGE> 22
7) LOANS RECEIVABLE
Loans receivable are summarized as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
Mortgage loans:
One- to four-family.............. $251,223,467 201,110,161
Multi-family..................... 13,595,803 13,462,720
Commercial....................... 3,499,322 3,559,006
Construction and development..... 10,298,859 8,987,778
------------ -----------
Total mortgage loans............... 278,617,451 227,119,665
------------ -----------
Other loans:
Commercial warehouse line of
credit......................... 17,269 1,229,234
Credit card...................... 1,711,537 1,917,809
Second mortgages and home equity
lines of credit................ 14,211,633 12,110,511
Other............................ 1,144,608 1,167,323
------------ -----------
Total other loans.................. 17,085,047 16,242,877
------------ -----------
Total loans receivable............. 295,702,498 243,544,542
------------ -----------
Less:
Loans in process................. 3,042,566 2,157,754
Net deferred yield adjustments... (1,703,300) (1,288,317)
Allowance for loan losses........ 731,683 859,922
------------ -----------
Loans receivable, net.............. $293,631,549 241,815,183
============ ===========
Weighted average interest rate..... 7.88% 7.93%
============ ===========
- ---------------------------------------------------------------
</TABLE>
During the current year, the Company sold mortgage loans to the Federal
National Mortgage Association, while retaining servicing, realizing proceeds of
$4,269,793, gross gains of $18,982 and gross losses of $8,427. The Company
recorded an additional gain of $30,946 on these sales, from the establishment of
a mortgage servicing right asset in accordance with SFAS No. 122. During the
years ended December 31, 1997, 1996 and 1995, the Company amortized $23,577,
$14,925 and $3,324 of mortgage servicing rights against current servicing fee
income. In addition, the Company sold a participating interest in mortgage loans
to third party investors, realizing proceeds of $742,081 at no gain or loss.
At December 31, 1997, 1996 and 1995, loans serviced for others amounted to
$43,988,489, $41,269,040 and $36,935,216 respectively.
Activity in the allowance for loan losses is summarized as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
- ------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year......... $ 859,922 711,787 697,519
Provision for loan losses.......... 180,000 192,680 76,700
Charge-offs........................ (319,418) (115,199) (62,744)
Recoveries......................... 11,179 70,654 312
--------- ------- -------
Balance, end of year............... $ 731,683 859,922 711,787
========= ======= =======
- ------------------------------------------------------------------
</TABLE>
During the year ended December 31, 1997, the Bank was able to resolve an
ongoing matter relating to a bankruptcy filing on a construction loan with a
balance of $498,000. Net proceeds received from the bankruptcy trustee amounted
to $316,000 resulting in a charge-off of $182,000 during the current year. The
amount charged-off had been specifically reserved by the Bank in preceding
periods and the loan balance had been carried as a nonaccrual loan. The
remaining balance of charge-offs for the year ended December 31, 1997, as well
as the prior two year periods, resulted primarily from credit card loans.
The balance of nonaccrual loans at December 31, 1997 and 1996 was
approximately $1,345,000 and $890,000 respectively.
For the years ended December 31, 1997 and 1996, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to approximately $118,500 and $75,200
respectively.
Loans to directors and executive officers aggregated $1,489,000 at December
31, 1997 and $1,132,000 at December 31, 1996. 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, 1997 is summarized as follows:
<TABLE>
<S> <C>
Balance, beginning of year $ 1,132,000
Loans disbursed 708,000
Principal repayments (351,000)
-----------
Balance, end of year $ 1,489,000
===========
</TABLE>
31
<PAGE> 23
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------
8) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
Land.................................. $ 954,935 954,935
Buildings............................. 4,738,117 4,649,279
Parking lot improvements.............. 80,359 80,359
Property held for future expansion.... 408,871 408,871
Furniture, fixtures and equipment..... 4,081,499 3,380,069
Leasehold improvements................ 1,478,315 1,303,909
Automobiles........................... 131,803 119,753
---------- ----------
11,873,899 10,897,175
Less accumulated depreciation......... 6,830,102 6,197,980
---------- ----------
$5,043,797 4,699,195
========== ==========
- ---------------------------------------------------------------
</TABLE>
Depreciation of office properties and equipment for the years ended
December 31, 1997, 1996 and 1995 amounted to $687,051, $667,979 and $705,785
respectively.
At December 31, 1997, the Bank was leasing one branch office facility under
an operating lease which expires in 2007 and five operating leases relating to
branch facilities in a local grocery chain. These five leases carry terms which
expire between December, 2002 and October, 2003.
Rent expense for the years ending December 31, 1997, 1996 and 1995 amounted
to $269,095, $259,776 and $258,617 respectively.
Minimum long-term operating lease commitments are as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- -------------------------------------------------------------
<S> <C>
1998............................................... $276,988
1999............................................... 277,198
2000............................................... 278,248
2001............................................... 278,464
2002............................................... 279,544
Thereafter......................................... 367,603
- -------------------------------------------------------------
</TABLE>
9) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
Investment securities................... $ 138,094 104,575
Mortgage-backed securities.............. 683,043 808,621
Loans receivable........................ 1,912,086 1,801,636
Allowance for uncollected interest...... (124,387) (388,327)
Interest collected in advance........... (10,919) (6,982)
---------- ----------
$2,597,917 2,319,523
========== ==========
- -----------------------------------------------------------------
</TABLE>
10) DEPOSITS
Deposit accounts are summarized as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NOMINAL NOMINAL
RATE BALANCE RATE BALANCE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Passbook accounts.............. 2.50% $ 52,180,172 2.50% $ 54,551,829
Demand deposit and NOW
accounts...................... 1.71 49,988,507 1.63 50,465,958
Money market accounts.......... 3.15 12,651,802 3.11 14,629,882
------------ ------------
114,820,481 119,647,669
Certificates of deposit:
7-91 days..................... 2.75 159,502 2.75 271,155
6-11 months................... 5.73 42,098,431 5.58 32,973,057
12-29 months.................. 5.82 108,603,704 5.91 107,286,879
30 months and over............ 6.05 38,395,439 5.78 29,351,814
Prime advantage
certificate (a)............. 6.09 693,916 5.88 1,754,575
IRA and Keogh................. 6.13 9,995,280 6.06 16,067,664
Other......................... 5.65 1,889,002 5.76 2,228,192
------------ ------------
4.54% $316,655,755 4.43% $309,581,005
============ ============
- ---------------------------------------------------------------------------------
</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,
1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
Within 12 months................... $ 93,022,144 111,433,122
13 months to 24 months............. 69,184,216 42,197,182
25 months to 36 months............. 31,895,933 26,502,094
37 months to 48 months............. 3,264,983 5,952,572
Over 48 months..................... 4,467,998 3,848,366
------------ -----------
Total.......................... $201,835,274 189,933,336
============ ===========
- ---------------------------------------------------------------
</TABLE>
Interest expense on deposits consists of the following:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Passbook and Certificate
accounts............... $13,099,911 12,129,386 9,817,401
NOW and Money market
accounts............... 1,190,261 1,157,013 1,185,130
----------- ---------- ----------
Total................ $14,290,172 13,286,399 11,002,531
=========== ========== ==========
- ----------------------------------------------------------------
</TABLE>
The aggregate amount of deposit accounts with a balance of $100,000 or
greater was approximately $30,858,000 and $34,400,000 at December 31, 1997 and
1996, respectively. Deposits in excess of $100,000 are not insured by the
Federal Deposit Insurance Corporation.
32
<PAGE> 24
11) BORROWED MONEY
Borrowed money is summarized as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Secured advances from the
FHLB--Chicago:
Open line--variable rate........ 5.83% $ 3,500,000 --% $ --
Maturing in 1997--fixed rate.... -- -- 5.67 27,500,000
Maturing in 1998--fixed rate.... 5.92 18,000,000 5.87 15,000,000
Maturing in 1999--fixed rate.... 6.04 12,000,000 6.28 7,000,000
Maturing in 2000--fixed rate.... 6.28 16,000,000 -- --
Maturing in 2001--fixed rate.... 6.40 11,000,000 6.65 6,000,000
Maturing in 2002--fixed rate.... 5.80 15,700,000 -- --
Secured advance from American
National Bank:
Line of credit.................. 5.65 5,000,000 -- --
Securities sold under agreements
to repurchase:
Maturing in January, 1997....... 5.80 -- 5.80 7,438,000
Maturing in January, 1998....... 6.05 3,844,000 -- --
----------- -----------
$85,044,000 $62,938,000
=========== ===========
Weighted average interest rate... 6.03% 5.89%
=========== ===========
- ---------------------------------------------------------------------------------
</TABLE>
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 borrowing agreement with American National Bank (ANB) is for a maximum
$5,000,000 fed funds borrowing line of credit at a rate quoted as the market
rate by ANB for the purchase of fed funds at the time the purchase of fed funds
is requested. The advance is secured by certain mortgage-backed securities which
are held in safekeeping at ANB (see note 5).
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>
1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Average balance during the year........ $6,292,769 7,043,154
Average interest rate during the
year................................. 5.69% 5.59%
Maximum month-end balance during the
year................................. 7,389,000 7,895,000
Mortgage-backed securities underlying
the agreements at year end:
Carrying value....................... 4,130,000 8,251,000
Estimated fair value................. $4,153,000 8,267,000
- ----------------------------------------------------------------
</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. At December 31, 1997, the balance of this loan
amounted to $81,405.
Interest expense on borrowed money is summarized as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
Advances from the FHLB....... $3,639,173 2,236,495 1,629,202
American National Bank line
of credit.................. 180,818 -- --
Securities sold under
agreements to repurchase... 370,998 393,555 688,325
---------- --------- ---------
$4,190,989 2,630,050 2,317,527
========== ========= =========
- -----------------------------------------------------------------
</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.
33
<PAGE> 25
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------
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>
1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Projected benefits obligation (actuarial
present value of projected benefits
attributed to employee service to date
based on future compensation
levels)............................... $2,570,567 2,329,550
Plan assets at fair value............... 2,110,043 1,765,552
---------- ---------
Plan assets less than projected benefit
obligation............................ (460,524) (563,998)
Unrecognized net loss................... 321,671 261,471
Unrecognized transition amount amortized
over 29 years......................... 20,155 21,163
---------- ---------
Net pension liability included in
accrued expenses...................... $ (118,698) (281,364)
========== =========
- ----------------------------------------------------------------
</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, 1997, the accumulated benefit
obligation was $1,732,753. The vested portion was $1,632,479.
Net pension expense for the years ended December 31, 1997, 1996 and 1995 is
being accounted for per SFAS No. 87 "Employers' Accounting for Pensions" and
include the following components:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned
during the year............... $ 237,918 220,098 166,226
Interest cost on projected
benefit obligation............ 171,561 155,687 135,837
Actual return on plan assets.... (127,338) (98,871) (105,419)
Net amortization and deferral... (28,378) (44,527) (17,105)
--------- ------- --------
Net pension expense........... $ 253,763 232,387 179,539
========= ======= ========
- ----------------------------------------------------------------
</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 1997, 1996 and 1995 was 6.75%. The expected long-term
rate of return on assets was 8.0% during 1997, 1996 and 1995, and the rate of
increase in future compensation was 5.0% in 1997, 1996 and 1995.
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 $61,803, $31,740 and $29,282 for the years ended
December 31, 1997, 1996 and 1995 respectively.
13) OFFICER, DIRECTOR AND EMPLOYEE PLANS
STOCK OPTION PLAN. The Company and its shareholders have adopted three
stock option and incentive plans (the "1991 Stock Option and Incentive Plan",
the "1995 Stock Option and Incentive Plan" and the "1997 Stock Option and
Incentive Plan", respectively) reserving 133,687, 135,000 and 80,000 options on
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, 1997 and the stock
34
<PAGE> 26
options outstanding at the end of the respective periods.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE
OPTIONS OF SHARES PER SHARE TOTAL
- -----------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at January 1,
1995.................... 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
Granted................... 44,255 23.00-49.81 1,675,514
Exercised................. (5,899) 6.67-20.50 (82,968)
Forfeited................. (337) 21.20 (7,144)
------- ------------ ----------
Outstanding at December
31, 1997................ 264,159 $ 6.67-49.81 $4,769,683
======= ============ ==========
Exercisable at December
31, 1997................ 159,309 $ 6.67-49.81 $2,138,253
======= ============ ==========
Options available for
future grants at
December 1997........... 50,152
=======
- -----------------------------------------------------------------
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1997, 1996 and 1995 was $37.86, $19.77 and $17.92, respectively.
As of December 31, 1997, the weighted average exercise price for options
outstanding was $18.06 with a weighted average remaining contractual life of 6.7
years.
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.
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,
1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Net income (as reported)....... $2,790,316 1,052,097 1,818,447
Pro forma net income........... 2,522,427 976,800 1,779,340
Diluted earnings per share (as
reported).................... $2.08 .80 1.35
Pro forma diluted earnings per
share........................ 1.88 .75 1.34
- -------------------------------------------------------------------
</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, 1997,
1996 and 1995 was estimated on the date of grant using the Black Scholes option
value model, with the following assumptions: dividend yield of approximately
1.5% for 1997 and approximately 2.0% for 1996 and 1995, expected volatility of
6.5% for all periods, risk free interest rate of 5.30%, 6.69% and 6.27%
respectively, and an expected life of approximately 10 years during all 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
$101,494, $109,251, and $118,931 for the years ended December 31, 1997, 1996 and
1995, 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
35
<PAGE> 27
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------
were purchased for $283,830 with funds contributed to the BIP's from the Bank.
As of December 31, 1997, all shares were awarded and vested. The $283,830
contributed to the BIPs was amortized to compensation expense as the plan
participants became vested in those shares. As of December 31, 1997, the entire
amount of deferred compensation expense has been recognized.
14) INCOME TAXES
The Company has adopted SFAS No. 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,
1997 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,
1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Current....................... $1,445,240 108,470 780,390
Deferred...................... 54,660 455,830 290,610
---------- ------- ---------
$1,499,900 564,300 1,071,000
========== ======= =========
- ----------------------------------------------------------------
</TABLE>
A reconciliation of the statutory federal income tax rate to effective
income tax rate is as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory federal income tax
rate............................ 34.0% 34.0% 34.0%
State income taxes................ 4.5 4.7 4.7
Dividends received exclusion...... (2.1) (3.8) (1.6)
Other items....................... (1.4) -- --
---- ---- ----
Effective income tax rate......... 35.0% 34.9% 37.1%
==== ==== ====
- ------------------------------------------------------------------
</TABLE>
Deferred federal income tax expense consists of the following tax effects
of timing differences:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Loan fees........................ $ 180,720 470,160 219,500
Depreciation..................... 8,700 (32,035) (48,400)
Compensation related expenses.... (5,545) (10,600) 9,100
Book loan loss provision (in
excess of) less than tax
deduction...................... (132,015) (23,825) 45,700
Mortgage servicing rights........ 2,800 36,880 15,200
Other............................ -- 15,250 49,510
--------- ------- -------
$ 54,660 455,830 290,610
========= ======= =======
- ----------------------------------------------------------------
</TABLE>
The approximate tax effect of temporary differences that give rise to the
Company's net deferred tax liability at December 31, 1997 and 1996 under SFAS
109 is as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1997 ASSETS LIABILITIES NET
- ------------------------------------------------------------------
<S> <C> <C> <C>
Loan fees deferred for
financial reporting purposes,
net of costs................. $ -- (718,820) (718,820)
Nondeductible incentive and
retirement plan expense...... 56,035 -- 56,035
Nondeductible deferred
directors fees............... 64,670 -- 64,670
Accelerated book
depreciation................. 52,505 -- 52,505
Bad debt reserves established
for financial reporting
purposes..................... 269,200 -- 269,200
Increases to tax bad debt
reserves since January 1,
1988......................... -- (556,130) (556,130)
Unrealized gain on securities
available for sale........... -- (102,273) (102,273)
Other.......................... -- (39,680) (39,680)
-------- ---------- --------
Total........................ $442,410 (1,416,903) (974,493)
======== ========== ========
- ------------------------------------------------------------------
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>
36
<PAGE> 28
15) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum total
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices.
To be categorized as adequately capitalized, the Bank must maintain a
minimum regulatory tangible capital ratio equal to 1.5% of total adjusted
assets, a minimum 3.0% core capital ratio and an 8.0% risk-based capital ratio.
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 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.
The Bank, according to federal regulatory standards, is well-capitalized
under the regulatory framework for prompt corrective action.
At December 31, 1997 and 1996, the Bank's regulatory equity capital was as
follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
DECEMBER 31, 1997 CAPITAL CAPITAL
- ----------------------------------------------------------------
<S> <C> <C> <C>
Stockholders' equity..... $26,234,637 26,234,637 26,234,637
Investment in and
advances to
nonincludable
subsidiary............. (73,957) (73,957) (73,957)
Deposit base
intangible............. (87,448) (72,858) (72,858)
Unrealized loss on
securities available
for sale, net of
taxes.................. 24,264 24,264 24,264
General loss
allowances............. -- -- 708,428
----------- ---------- ----------
Regulatory capital
computed............... 26,097,496 26,112,086 26,820,514
Minimum capital
requirement for capital
adequacy purposes...... 6,530,220 13,060,440 15,715,360
----------- ---------- ----------
Minimum capital
requirement to be well-
capitalized under prompt
corrective action
provisions............. 10,883,700 21,767,400 19,644,200
=========== ========== ==========
Computed capital ratio... 5.99% 5.99% 13.65%
Minimum capital ratio
for capital adequacy
purposes............... 1.50% 3.00% 8.00%
----------- ---------- ----------
Minimum capital ratio
to be well-capitalized
under prompt corrective
action provisions...... 2.50% 5.00% 10.00%
=========== ========== ==========
At December 31, 1997, adjusted total assets were $435,300,000 and
risk-weighted assets were $196,442,000.
- ----------------------------------------------------------------
</TABLE>
A reconciliation of the Bank's equity capital at December 31, 1997 is as
follows:
- ------------------------------------------------------------
<TABLE>
<S> <C>
Stockholders' equity.............................. $29,507,113
Less Company stockholders' equity not available
for regulatory capital.......................... (3,272,476)
-----------
Stockholders' equity of the Bank.................. $26,234,637
===========
- ---------------------------------------------------------------
</TABLE>
37
<PAGE> 29
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
DECEMBER 31, 1996 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 for capital
adequacy purposes...... 6,026,745 12,054,900 15,457,040
=========== ========== ==========
Minimum capital requirement
to be well-capitalized
under prompt corrective
action provisions...... 10,044,575 20,091,500 19,321,300
=========== ========== ==========
Computed capital ratio... 5.80% 5.82% 12.28%
Minimum capital for capital
adequacy purposes...... 1.50 3.00 8.00
----------- ---------- ----------
Minimum capital ratio
to be well-capitalized
under prompt corrective
action provisions 2.50% 5.00% 10.00%
=========== ========== ==========
At December 31, 1996, adjusted total assets were $401,800,000 and risk-weighted
assets were $193,213,000.
- ----------------------------------------------------------------
</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.
In addition, the Bank may not declare or pay cash dividends on or
repurchase any of its shares of common stock if the effect thereof would cause
stockholders' equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements.
On October 24, 1995, the Board of Directors of the Company authorized
management to purchase up to 62,925 shares of its outstanding stock in a
repurchase program. Under the authorization, repurchases are to be made from
time to time through open market purchases or unsolicited negotiated
transactions. Shares purchased under this authorization will be held in treasury
and will be available for various corporate purposes. As of December 31, 1997,
39,500 shares were repurchased at an average price of $16.43 per share while
23,425 shares remain to be purchased.
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 $7,723,000 and other loans of
$21,000 at December 31, 1997 represent amounts which the Bank plans to fund
within the normal commitment period of 60 to 90 days. Of this amount, $1,707,000
are in fixed rate commitments with rates ranging from 7.125% to 9.00%, and
$6,037,000 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 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.
38
<PAGE> 30
The Bank has approved, but unused, home equity lines of credit of
approximately $8,300,000 at December 31, 1997. 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, 1997, had approved but
unused lines of credit of approximately $5,000,000. The Bank also has approved
but unused credit card lines of credit of approximately $9,100,000. The Bank is
also committed to fund an additional investment of approximately $1,630,000,
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, 1997, the Bank had committed to sell mortgage loans to the
Federal National Mortgage Association in the amount of $418,600. In addition, at
December 31, 1997, the Bank had committed to sell participating interests in
mortgage loans to private investors in the amount of $34,000.
The Bank has 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.
The fair value of the Company's off-balance-sheet is nominal. The
estimated fair value of the Company's financial instruments at December 31,
1997 and 1996 are as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1997
CARRYING FAIR
AMOUNT VALUE
- ----------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents......... $ 8,177,125 8,177,125
Investment securities............. 3,988,542 3,994,688
Investment securities available
for sale........................ 3,696,349 3,696,349
Investment securities held for
trade........................... 1,740,883 1,740,883
Mortgage-backed securities........ 77,161,513 77,201,169
Mortgage-backed securities
available for sale.............. 37,426,637 37,426,637
Loans receivable.................. 293,631,549 294,428,000
Financial liabilities:
Deposits.......................... 316,655,755 316,580,000
Borrowed money.................... $ 85,044,000 84,984,000
- ----------------------------------------------------------------
</TABLE>
39
<PAGE> 31
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------
<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
for 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
- ----------------------------------------------------------------
</TABLE>
20) SAIF SPECIAL ASSESSMENT AND ITS IMPACT ON SAIF INSURANCE PREMIUMS
The deposits of 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 were experiencing substantially lower
deposit insurance premiums because the BIF had achieved its required level of
reserves while the SAIF had 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 required 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 was intended to
fully recapitalize the SAIF fund so that commercial bank and thrift deposits
would 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, have been 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 1.52 cents per $100 of deposits until
the year 2000 when the assessment will be imposed at the same rate on all FDIC
insured institutions.
21) PROPOSED MERGER
On December 29, 1997, the Board of Directors announced the execution of a
definitive agreement pursuant to which the Company will merge with and into
Citizens Financial Services, FSB of Munster, Indiana. In connection with the
merger, Citizens Financial will undertake to convert from a mutual to a stock
institution and form a holding company. Under the terms of the agreement, each
share of the Company will be exchanged for shares of Citizens' common stock with
an initial conversion offering price equivalent to $36.00, based on the initial
public offering price of Citizens' common stock. Consummation of the merger is
subject to the approval of the Company's stockholders, the conversion of
Citizens and all required regulatory approvals. The transaction is expected to
close in the third quarter of 1998.
40
<PAGE> 32
22) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statement of financial condition, as of December
31, 1997 and 1996 and condensed statements of earnings and cash flows for the
years ended December 31, 1997, 1996 and 1995 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 1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.............. $ 490,455 185,267
Investment securities available for
sale................................. 1,125,273 1,299,473
Trading securities..................... 1,740,883 1,361,638
Loans receivable....................... 165,524 262,888
Equity investment in the Bank.......... 26,245,454 23,687,529
Accrued interest receivable............ 16,021 17,209
Prepaid expenses and other assets...... 61,741 91,211
----------- ----------
29,845,351 26,905,215
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accrued taxes and other liabilities.... 327,421 154,552
----------- ----------
STOCKHOLDERS' EQUITY:
Common stock........................... 13,712 13,653
Additional paid-in capital............. 8,470,409 8,332,710
Retained earnings...................... 22,407,548 20,021,403
Unrealized gain on securities available
for sale............................. 231,446 64,459
Treasury stock......................... (1,605,185) (1,681,562)
----------- ----------
Total stockholders' equity........... 29,517,930 26,750,663
----------- ----------
$29,845,351 26,905,215
=========== ==========
- -----------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
STATEMENTS OF EARNINGS 1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Interest income................ $ 128,036 158,148 212,204
Gain on sale of investment
securities, net.............. 325,743 108,343 130,778
Unrealized gain on trading
securities................... 459,972 197,292 230,310
Non-interest income............ 7 -- 953
Non-interest expense........... (580,067) (397,313) (351,032)
---------- --------- ---------
Net income before income taxes
and equity in earnings of
subsidiaries................. 333,691 66,470 223,213
Benefit from (provision for)
income taxes................. (101,300) 4,700 (56,000)
---------- --------- ---------
Net income before equity in
earnings of subsidiaries..... 232,391 71,170 167,213
Equity in earnings of
subsidiaries................. 2,557,925 980,927 1,651,234
---------- --------- ---------
Net income................... $2,790,316 1,052,097 1,818,447
========== ========= =========
- -------------------------------------------------------------------
</TABLE>
41
<PAGE> 33
SuburbFed Financial Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
STATEMENTS OF CASH FLOWS 1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income................................................ $ 2,790,316 1,052,097 1,818,447
Equity in earnings of the Bank............................ (2,557,925) (980,927) (1,651,234)
Unrealized gain on trading securities..................... (459,972) (197,292) (230,310)
Gain on sale of investment and mortgage-backed
securities............................................. (16,978) -- (6,994)
Gain on sale of trading securities........................ (308,765) (108,343) (123,784)
Proceeds from sales of trading account securities......... 1,375,345 756,646 752,934
Purchase of trading account securities.................... (887,978) (497,995) (602,040)
Decrease in accrued interest receivable................... 1,188 7,455 14,954
(Increase) decrease in prepaid expenses and other
assets................................................. 68,978 (19,465) (26,925)
Increase (decrease) in accrued taxes and other
liabilities............................................ 42,880 (3,384) 48,727
----------- --------- ----------
Net cash provided by (for) operating activities............. 47,089 8,792 (6,225)
----------- --------- ----------
Investing activities:
Proceeds from sales of investment securities,
available for sale....................................... 693,249 200,000 1,110,538
Proceeds from redemption of investment securities,
available for sale....................................... 4,388 10,418 2,016
Purchase of investment securities, available for sale..... (335,000) (149,995) (150,000)
Proceeds from sales of mortgage-backed securities,
available for sale....................................... -- -- 188,582
Purchase of mortgage-backed securities,
available for sale....................................... -- -- (1,299)
Loan repayments........................................... 97,364 96,705 96,118
----------- --------- ----------
Net cash provided by investing activities................... 460,001 157,128 1,245,955
----------- --------- ----------
Financing activities:
Proceeds from sale of treasury stock...................... 118,330 -- --
Purchase of treasury stock................................ -- (648,937) (1,032,625)
Proceeds from exercise of stock options................... 82,968 122,644 --
Payment in lieu of issuing fractional shares.............. -- -- (1,518)
Dividends received from Bank.............................. -- -- 600,000
Dividends paid on common stock............................ (403,200) (404,046) (418,673)
----------- --------- ----------
Net cash provided for financing activities.................. (201,902) (930,339) (852,816)
----------- --------- ----------
Net change in cash and cash equivalents..................... 305,188 (764,419) 386,914
Cash and cash equivalents at beginning of year.............. 185,267 949,686 562,772
----------- --------- ----------
Cash and cash equivalents at end of year.................... $ 490,455 185,267 949,686
=========== ========= ==========
- --------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
on Form S-8 (Nos. 33-58256 and 33-68538) of SuburbFed Financial Corp. of our
report dated February 6, 1998 contained in this Amendment on Form 10-K/A to the
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 of
SuburbFed Financial Corp.
Cobitz, VandenBerg & Fennessy
May 11, 1998
Palos Hills, Illinois
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from the annual
report on Form 10-K for the fiscal year ended December 31, 1997 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,265,615
<INT-BEARING-DEPOSITS> 3,911,510
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 1,740,883
<INVESTMENTS-HELD-FOR-SALE> 41,122,986
<INVESTMENTS-CARRYING> 81,150,055
<INVESTMENTS-MARKET> 81,195,857
<LOANS> 294,489,126
<ALLOWANCE> 857,577
<TOTAL-ASSETS> 438,462,032
<DEPOSITS> 316,655,755
<SHORT-TERM> 30,344,000
<LIABILITIES-OTHER> 7,255,164
<LONG-TERM> 54,700,000
0
0
<COMMON> 13,712
<OTHER-SE> 29,493,401
<TOTAL-LIABILITIES-AND-EQUITY> 438,462,032
<INTEREST-LOAN> 20,749,795
<INTEREST-INVEST> 9,370,435
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 30,120,230
<INTEREST-DEPOSIT> 14,290,172
<INTEREST-EXPENSE> 4,190,989
<INTEREST-INCOME-NET> 11,639,069
<LOAN-LOSSES> 180,000
<SECURITIES-GAINS> 819,385
<EXPENSE-OTHER> 10,824,985
<INCOME-PRETAX> 4,290,216
<INCOME-PRE-EXTRAORDINARY> 2,790,316
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,790,316
<EPS-PRIMARY> 2.21
<EPS-DILUTED> 2.08
<YIELD-ACTUAL> 2.85
<LOANS-NON> 1,606,000
<LOANS-PAST> 434,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 859,922
<CHARGE-OFFS> 319,418
<RECOVERIES> 11,179
<ALLOWANCE-CLOSE> 731,683
<ALLOWANCE-DOMESTIC> 40,247
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 691,436
</TABLE>
