<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1996
Commission File No.: 0-19985
WESTCO BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 36-3823760
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
2121 S. MANNHEIM ROAD, WESTCHESTER, ILLINOIS 60154-4363
(Address of principal executive offices)
Registrant's telephone number, including area code: (708) 865-1100
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 $0.01 PER SHARE
(Title of class)
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 is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. X
----
The aggregate market value of the voting stock held by non-affiliates of
the registrant (i.e., persons other than directors and executive officers of the
registrant) is $46,550,091 and is based upon the last sales price ($23.00) as
quoted on The Nasdaq Stock Market for March 11, 1997.
The Registrant had 2,571,353 shares outstanding as of March 12, 1997
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER
31, 1996 ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-K.
PORTIONS OF THE PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF
STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I PAGE
----
<S> <C>
Item 1. Business..................................................... 1
Additional Item. Executive Officers of the Registrant................ 32
Item 2. Properties................................................... 34
Item 3. Legal Proceedings............................................ 34
Item 4. Submission of Matters to a Vote of Security Holders.......... 34
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters......................................... 34
Item 6. Selected Financial Data...................................... 35
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 35
Item 8. Financial Statements and Supplementary Data.................. 35
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.......................... 35
PART III
Item 10. Directors and Executive Officers of the Registrant........... 35
Item 11. Executive Compensation....................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 35
Item 13. Certain Relationships and Related Transactions............... 36
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................................... 36
SIGNATURES............................................................... 38
</TABLE>
<PAGE>
PART I
ITEM I. BUSINESS
- -----------------
Westco Bancorp, Inc. (the "Company" or the "Registrant") was incorporated
under Delaware law on March 11, 1992. On June 26, 1992, the Registrant acquired
First Federal Savings and Loan Association of Westchester, Westchester, Illinois
(the "Association" or "First Federal") as a part of the Association's conversion
from a mutual to a stock federally chartered savings association. The
Registrant is a savings and loan holding company and is subject to regulation by
the Office of Thrift Supervision ("OTS"), the Federal Deposit Insurance
Corporation ("FDIC") and the Securities and Exchange Commission ("SEC").
Currently, the Registrant does not transact any material business other than
through its sole subsidiary, the Association, but the company may enter into
joint ventures for the purpose of developing residential properties. Such an
activity would not be significant.
The Association was founded in 1906 as an Illinois chartered savings and
loan association. In 1971, the institution converted to a federally chartered
and insured savings and loan association. The Association is a member of the
Federal Home Loan Bank (the "FHLB") System and its deposit accounts are insured
up to applicable limits by the FDIC. At December 31, 1996 the Association had
total assets of $305.0 million and stockholders' equity of $40.1 million (13.1%
of total assets). In 1996, the Association paid a dividend to the Company in
the amount of $4.0 million.
The Association's principal business has been and continues to be
attracting retail deposits from the general public and investing those deposits,
together with funds generated from operations primarily in one- to four-family,
owner-occupied, residential mortgage loans, and to a lesser extent, multi-family
residential mortgage loans, commercial real estate loans, construction and land
loans, consumer loans, and other short-term investments, including U.S.
Government and federal agency securities and other marketable securities. The
Association's revenues are derived principally from interest on its mortgage
loan portfolio and interest and dividends on its investment securities. The
Association's primary sources of funds are deposits and principal and interest
payments on investment securities and loans.
MARKET AREA
The Association has been, and continues to be, a community-oriented savings
institution offering a variety of financial products to meet the needs of the
communities it serves. The Association's deposit gathering area is concentrated
in the neighborhoods surrounding its home office and a limited service office,
both located in Westchester, Illinois. The Association's lending base primarily
covers western Cook County and DuPage County and extends, to a lesser extent, to
the remainder of Cook County, Lake, McHenry, Kane, Will, Kendall and Grundy
Counties in Illinois. Management believes that its offices are located in a
community that can generally be characterized as stable, residential
neighborhoods of predominately one- to four-family residences.
1
<PAGE>
LENDING ACTIVITIES
LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIO COMPOSITIONS. The
Association's loan portfolio composition consists primarily of conventional
first mortgage loans secured by one- to four-family residences. At December 31,
1996, the Association's total mortgage loans outstanding were $215.9 million, of
which $180.8 million were one- to four-family residential mortgage loans, or
79.6% of the Association's total loan portfolio. Of the one- to four-family
residential mortgage loans outstanding at that date, 67.3% were fixed-rate
loans, and 32.7% were adjustable-rate ("ARM") loans. At the same date, multi-
family residential mortgages totalled $19.0 million, or 8.4% of the
Association's total loan portfolio, of which 52.2% were fixed-rate loans either
fully amortizing or with a balloon payment and 47.8% were ARM loans. At
December 31, 1996, the Association had commercial real estate loans of $10.8
million, or 4.8% of the Association's total loan portfolio, and construction and
land loans of $5.3 million, or 2.3% of the Association's total loan portfolio.
At December 31, 1996, the Association had $505,000 in purchased loans and loan
participations with $468,000 of this total being a participation loan purchased
in 1996 from another bank in a neighboring community. Other loans held by the
Association, which principally consist of consumer loans and share loans,
totalled $11.2 million, or 4.9% of the Association's total loan portfolio.
2
<PAGE>
The following table sets forth the composition of the Association's loan
portfolio and mortgage-backed securities portfolio in dollar amounts and in
percentages of the respective portfolios at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- ------------------- ---------------------- ----------------- -------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family......... $180,815 79.61% $172,800 81.31% $169,608 81.14% $162,073 83.50% $165,797 85.83%
Multi-family................ 18,993 8.36 16,556 7.79 16,711 7.99 11,768 6.06 8,722 4.52
Commercial real estate...... 10,819 4.76 9,779 4.60 9,430 4.51 7,528 3.88 7,593 3.93
Construction................ 2,927 1.29 865 .41 1,035 .50 1,121 .58 258 .13
Land........................ 2,387 1.05 1,740 .82 1,008 .48 633 .33 313 .16
-------- ------ -------- ----- ------- ----- -------- ------ -------- ------
Total mortgage loans..... 215,941 95.07 201,740 94.93 197,792 94.62 183,123 94.35 182,683 94.57
Other loans: 11,197 4.93 10,784 5.07 11,237 5.38 10,975 5.65 10,484 5.43
-------- ------ -------- ------ ------- ------ -------- ------ -------- ------
Total loans receivable...... 227,138 100.00% 212,524 100.00% 209,029 100.00% 194,098 100.00% 193,167 100.00%
====== ====== ====== ====== ======
LESS:
Loans in process............ 198 117 188 222 285
Unearned discounts and
deferred loan fees......... 2,159 2,455 2,843 3,155 3,200
Allowance for loan losses..... 883 883 883 921 925
-------- -------- -------- -------- --------
Loans receivable, net... $223,898 $209,069 $205,115 $189,800 $188,757
======== ======== ======== ======== ========
MORTGAGE-BACKED SECURITIES NET:
FHLMC....................... -- -- -- -- -- -- -- -- -- --
GNMA........................ -- -- -- -- -- -- -- -- -- --
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage-backed
securities................ -- -- -- --% -- --% -- --% -- --%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net premiums and
discounts.............. -- -- -- -- -- --
-------- ------ -------- -------- -------- --------
Net mortgage-backed
securities................. $ -- -- $ -- $ -- $ -- $ --
======== ====== ======== ======== ======== ========
</TABLE>
3
<PAGE>
The following table sets forth the Association's loan originations and loan
and mortgage-backed securities purchases, sales and principal repayments for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
----------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE LOANS (GROSS):
At beginning of period........................... $201,740 $197,792 $183,123
Mortgage loans originated(1)
One-to four-family............................. 35,091 34,116 38,716
Multi-family................................... 5,494 1,249 5,828
Commercial real estate......................... 816 2,748 2,760
Construction................................... 7,850 3,368 2,252
Land........................................... 2,663 930 810
-------- -------- --------
Total mortgage loans originated......... 51,914 42,411 50,366
-------- -------- --------
Mortgage Loans Purchased
Commercial real estate......................... 500 -- --
Transfer of mortgage loans to foreclosed
real estate.................................... -- -- (447)
Principal repayments............................ (38,213) (38,463) (35,250)
-------- -------- --------
At end of period................................. $215,941 $201,740 $197,792
======== ======== ========
OTHER LOANS (GROSS):
At beginning of period........................... $ 10,784 $ 11,237 $ 10,975
Other loans originated(1)....................... 6,244 6,183 7,500
Principal repayments............................ (5,831) (6,636) (7,238)
-------- -------- --------
At end of period................................. $ 11,197 $ 10,784 $ 11,237
======== ======== ========
</TABLE>
_________________________
(1) Includes line of credit originations.
4
<PAGE>
LOAN MATURITY. The following table shows the maturity of the Association's
loan and mortgage-backed securities portfolio at December 31, 1996. The table
does not include prepayments or scheduled principal amortization. Prepayments
and scheduled principal amortization on the Association's loans totalled 44.0
million, $45.1 million, $42.4 million, $67.8 million, and $54.1 million for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
------------------------------------------------------------------
MORTGAGE LOANS TOTALS
------------------------ ------------------------
ONE-TO FOUR- TOTAL
FAMILY LOANS
ORIGINATED OTHER OTHER LOANS RECEIVABLE TOTAL
--------------- ----- ------------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
AMOUNTS DUE:
Within 1 year....................... $ 11,914 $ 4,649 $ 9,792 $ 26,355 26,355
-------- ------- ------- -------- --------
After 1 year
1 to 3 years..................... 21,145 2,965 315 24,425 24,425
3 to 5 years..................... 26,314 4,805 234 31,353 31,353
5 to 10 years.................... 30,371 4,012 422 34,805 34,805
10 to 20 years................... 54,567 8,951 30 63,548 63,548
Over 20 years.................... 44,809 1,514 403 46,726 46,726
-------- ------- ------- -------- --------
Total due after 1 year........... 177,206 22,247 1,404 200,857 200,857
-------- ------- ------- -------- --------
Total amounts due................ 189,120 26,896 11,196 227,212 227,212
-------- ------- ------- -------- --------
LESS:
Loan in process..................... 272 -- -- 272 272
Unearned discounts, premiums
and deferred loan fees, net...... 1,890 269 -- 2,159 2,159
Allowance for possible loan losses. 534 299 50 883 883
-------- ------- ------- -------- --------
Loans receivable, net............ $186,424 $26,328 $11,146 $223,898 $223,898
======== ======= ======= ======== ========
</TABLE>
5
<PAGE>
The following table sets forth at December 31, 1996, the dollar amount of
all loans due after December 31, 1997, and whether such loans have fixed
interest rates or adjustable interest rates. Loans that have adjustable rates
are shown as being due in the period during which the interest rates are next
subject to change.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1997
---------------------------------
FIXED ADJUSTABLE TOTAL
---------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family originated. $122,926 $54,280 $177,206
One- to four-family purchased.. -- -- --
Other originated............... 15,162 6,655 21,817
Other purchased................ 430 -- 430
Other loans...................... 1,404 -- 1,404
-------- ------- --------
Total loans receivable...... $139,922 $60,935 $200,857
======== ======= ========
</TABLE>
ONE- TO FOUR-FAMILY MORTGAGE LOANS. The Association offers first mortgage
loans secured by one- to four-family residences, including townhouse and
condominium units, in the Association's primary lending area. Typically, such
residences are single family homes that serve as the primary residence of the
owner. Loan originations are generally obtained from existing or past customers
and members of the local communities and, to a much lesser extent, local real
estate agent and builder/developer referrals within the Association's area.
During 1996, the Association originated through the use of mortgage brokers two
loans in amounts of $107,100 and $132,000.
The Association offers fixed-rate and ARM loans on one- to four-family
residential properties. At December 31, 1996, 32.4% of the Association's total
loan portfolio was on a bi-weekly payment basis. At December 31, 1996, $121.7
million, or 67.3% of the total one- to four-family mortgage loan portfolio, were
fixed-rate and $59.1 million, or 32.7%, were ARM loans. The Association's
fixed-rate mortgage loans are made for terms of 15 to 30 years. Interest rates
charged on fixed-rate loans are competitively priced based on market conditions
and the Association's cost of funds. Origination fees range from 0% to 2%
depending on the interest rate charged and other factors. The Association
offers one and three year ARM loans. The three year ARM loan has a maximum
periodic adjustment of 2.5% and a maximum adjustment of 5% over the life of the
loan. The most popular one year ARM loan has a fixed rate for five years, after
which there is an annual cap of 2% and a 5% lifetime cap. Generally, ARM loans
pose credit risks different from the risks inherent in fixed-rate loans,
primarily because as interest rates rise, the underlying payments of the
borrower rise, thereby increasing the potential for default.
6
<PAGE>
At the same time, the marketability of the underlying property may be adversely
affected by higher interest rates.
Each loan applicant is considered on an individual basis pursuant to the
Association's mortgage loan underwriting standards. The Association makes one-
to four-family residential loans in amounts up to 80% of the appraised value of
the secured property and will originate loans with loan-to-value ratios of up to
95%, generally, provided that private mortgage insurance on the amount in excess
of such 80% ratio is obtained. If a loan is originated in an amount over 80%
and no private mortgage insurance is obtained, the Association typically
requires additional collateral to be pledged. Originated mortgage loans in the
Association's portfolio include due-on-sale clauses which provide the
Association with the contractual right to deem the loan immediately due and
payable in the event that the borrower transfers ownership of the property
without the Association's consent. It is the Association's policy to enforce
due-on-sale provisions.
The Association also originates second mortgage loans secured by one- to
four-family residences in its primary market area. Most of these loans are
originated with an adjustable interest rate equal to the prime rate plus 1.0% to
1.5% with terms from five to 10 years. Second mortgage loans on owner-occupied
one- to four-family residences are subject to an 80% loan-to-value limitation,
including the first mortgage. During 1994, the Association began offering a
second mortgage loan program whereby the loan amount can equal 100% of the
homeowner's equity of an owner occupied residence up to a maximum loan amount of
$25,000.
MULTI-FAMILY LENDING. The Association offers fixed-rate, ARM and balloon
loans on multi-family residential properties. The Association originates fixed-
rate multi-family loans with terms of 15 to 25 years. These loans are amortized
over the term of the loan. Balloon loans are for terms of five to seven years
and amortize over a period of 15 to 25 years. These loans are generally made in
amounts up to 75% of the appraised value of the property securing the loan.
Most of the Association's multi-family loans are not owner-occupied. In making
such loans, the Association bases its underwriting decision primarily on the net
operating income generated by the real estate to support the debt service, the
financial resources and income level of the borrower, the borrower's experience
in owning or managing similar property, the marketability of the property and
the Association's lending experience with the borrower. An origination fee of
1% to 3% is usually charged on such loans. As of December 31, 1996, $19.0
million, or 8.4%, of the Association's total loan portfolio consisted of
originated multi-family residential loans all of which were secured by property
located in the Association's primary lending area. Of this, 52.2% were fixed-
rate fully amortizing loans or loans with a balloon payment, and 47.8% were ARM
loans. The typical multi-family property in the Association's multi-family
lending portfolio has between 5 and 12 dwellings units with an average loan
balance of approximately $209,000 at December 31, 1996. The largest multi-
family loan at December 31, 1996, had an outstanding balance of $946,389. This
loan is secured by 11 townhomes located in Downers Grove, Illinois. The loan
has been current since its origination in October of 1994.
7
<PAGE>
COMMERCIAL REAL ESTATE LENDING. Commercial real estate lending is not a
significant part of the Association's lending activities. At December 31, 1996,
the Association's commercial real estate loan portfolio totalled $10.8 million,
or 4.8% of the Association's total loan portfolio. All of the Association's
commercial real estate loans are secured by improved property such as office
buildings, small warehouses, small restaurants and other small businesses. The
largest commercial real estate loan at December 31, 1996, had an outstanding
balance of $1.21 million. This loan is secured by an office building located in
Oak Brook, Illinois and is current as of December 31, 1996. The underwriting
criteria for commercial real estate is substantially similar to the criteria for
multi-family residential properties. Loans secured by commercial real estate
properties involve a greater degree of risk than residential mortgage loans.
Because payments on loans secured by commercial real estate properties are often
dependent on successful operation or management of the properties, repayment of
such loans may be subject to a greater extent to adverse conditions in the real
estate market or the economy. The Association seeks to minimize these risks by
lending to established customers and generally restricting such loans to its
primary market area.
CONSTRUCTION AND LAND LENDING. Construction and land lending is not a
significant part of the Association's lending activities. The Association
generally originates loans to finance the construction of owner-occupied and
rental properties in its primary market area. At December 31, 1996, the
Association had one construction loan commitment in the amount of $260,000. The
outstanding balance of ten construction loans at such date was $2.9 million, or
1.3% of the Association's total loan portfolio. In addition, the Association
originates loans for the acquisition and development of vacant (and acquisition
of improved) lots to contractors and individuals in its primary market area. At
December 31, 1996, the Association had nine land loans, seven to developers and
two to homeowners with outstanding balances totalling $2.4 million, or 1.0% of
the Association's total loan portfolio. Land development loans typically are
short-term loans. Construction and land loans generally are made to customers
of the Association and developers and contractors with whom the Association has
had previous lending experience. The Association requires an independent
appraisal of the property and feasibility studies may be required to determine
the profit potential of the development. Payouts are made after an inspection
based on percentage of completion of the project.
OTHER LENDING. The Association also offers other loans, primarily consumer
loans and share loans secured by savings accounts. At December 31, 1996, $10.8
million, or 4.7% of the total loan portfolio, consisted of consumer loans and
$425,000, or 0.2% of the total loan portfolio, consisted of share loans.
Consumer loans primarily consist of motor vehicle loans directly made to
preexisting customers and home equity line of credit loans based on the credit
worthiness of the borrowers and are secured by a lien on the property.
Automobile loans typically are made for a term of five years or less with a
fixed interest rate. Home equity line of credit loans are based on the prime
rate plus 1.0% to 1.5% with terms of five to 10 years. Consumer loans also
include, to a much less extent, loans secured by marketable securities and
unsecured loans.
8
<PAGE>
LOAN APPROVAL PROCEDURES AND AUTHORITY. All loans must be approved by a
member of the Association's Loan Committee which consists of the President/Chief
Executive Officer and Executive Vice President/Chief Lending Officer. Any loan
over $500,000 requires approval by both members of the Loan Committee. The Loan
Committee meets on an as-needed basis. Real estate loans are reviewed monthly
and ratified by the Board of Directors which typically occur after a loan
commitment is issued or the loan is closed.
For all loans originated by the Association, upon receipt of a completed
loan application from a prospective borrower, a credit report is ordered, income
and certain other information is verified and, if necessary, additional
financial information is required. An appraisal of the real estate intended to
secure the proposed loan is required which currently is performed by an
independent appraiser designated and approved by the Association. The Board
annually approves the independent fee appraisers used by the Association and
reviews the Association's appraisal policy. One of the independent fee
appraisers, who appraises a small portion of the Association's residential
mortgage loan business, is a member of the Association's Board of Directors. It
is the Association's policy to obtain title insurance on all first mortgage
loans. Borrowers also are required to obtain hazard insurance prior to closing.
Borrowers generally are required to advance funds together with each payment of
principal and interest to a mortgage escrow account from which the Association
makes disbursements for items such as real estate taxes and hazard insurance
premiums.
At December 31, 1996, the largest aggregate amount of loans outstanding to
one borrower totalled $3.8 million and consisted of 14 loans on 2, 3 or 4 unit
apartment buildings. The largest single loan to this borrower is a $367,000
loan on a 4 unit apartment building. At December 31, 1996, all loans to this
borrower were current. The aggregate amount of loans to this borrower and his
affiliated parties does not exceed the Association's "loans to one borrower"
limitation established by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") which, at December 31, 1996, was $6.0
million.
DELINQUENCIES AND CLASSIFIED ASSETS.
DELINQUENT LOANS. The Association attempts to contact a borrower when a
loan is more than 20 days past due by sending a late notice. If payment is not
received, a phone call to the borrower typically is made within an additional
five days. In the event that payment still is not received, additional letters
may be sent and/or phone calls made to the borrower. When contact is made with
the borrower at any time prior to foreclosure, the Association will attempt to
obtain full payment or work out a repayment schedule with the borrower. Once a
loan is 90 days past due, the Association's collection department reports to the
Loan Committee and a liquidation plan or foreclosure action is recommended. The
Loan Committee then determines the Association's course of action. Interest
income is reduced by the full amount of accrued and uncollected interest on all
loans once they become 90 days delinquent. Property acquired by the Association
as a result of a foreclosure on a mortgage loan is classified as real estate
owned.
9
<PAGE>
CLASSIFIED ASSETS. Federal regulations and the Association's
Classification of Assets Policy provide for the classification of loans and
other assets such as debt and equity securities considered by the OTS to be of
lesser quality as "substandard," "doubtful" or "loss" assets. See "Regulation
and Supervision - Federal Savings Institution Regulations - Classified Assets."
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which can order the establishment of additional general or specific loss
allowances. The OTS has an interagency policy statement on the allowance for
loan and lease losses. The policy statement provides guidance for financial
institutions on both the responsibilities of management for the assessment and
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of general valuation allowances. Generally,
the policy statement requires that institutions have effective systems and
controls to identify, monitor and address asset quality problems; have analyzed
all significant factors that affect the collectibility of the portfolio in a
reasonable manner; and have established acceptable allowance evaluation
processes that meet the objectives set forth in the policy statement.
At December 31, 1996, the Association had ten loans classified as
substandard totalling $1.5 million. Eight of the loans are on one- to four-
family residences, one of the loans is on multi-family residential properties,
and one loan is on a combination commercial/residential property. The largest
classified asset is the combination commercial/residential property with a
balance of $385,000 outstanding at December 31, 1996. At December 31, 1996, the
Association had 14 loans classified as special mention totalling $1.3 million.
Thirteen are on one- to four-family residences and had an average balance at
such date of $79,000; the remaining loan is on a multi-family residential
property with an outstanding balance of $312,000. At December 31, 1996, none of
the Association's loans were classified as loss or doubtful.
10
<PAGE>
At December 31, 1996, 1995 and 1994, respectively, delinquencies in the
Association's portfolio were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-------------------------------------------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS
---------------------------- ----------------------------- ------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
----------- ------------- --------- ---------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family........ 8 $667 8 $ 862 13 $1,237
Multi-family............... 1 320 -- -- -- --
Commercial................. -- -- 1 385 -- --
------ ------ ------ --------- ------ ---------
Total mortgage loans..... 9 987 9 1,247 13 1,237
Other loans................ -- -- -- -- -- --
Total all loans.......... 9 $987 9 $1,247 13 $1,237
====== ====== ====== ========= ====== =========
Delinquent loans to
total loans.............. .43% .56% .59%
====== ====== ===
<CAPTION>
AT DECEMBER 31, 1995
------------------------
90 DAYS OR MORE
------------------------
NUMBER PRINCIPAL
OF BALANCE
LOANS OF LOANS
------------------------
<S> <C> <C>
One- to four-family........ 9 $ 473
Multi-family............... 1 235
Commercial................. 1 397
------ ------
Total mortgage loans..... 11 1,105
Other loans................ 1 36
Total all loans.......... 12 $1,141
====== ======
Delinquent loans to .55%
total loans.............. ====
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
-----------------------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------------------- -------------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS
-------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family........ 8 $346 4 $290
Multi-Family............... -- -- -- --
Commercial................. 1 236 -- --
------ --------- ------ ---------
Total mortgage loans..... 9 582 4 290
Other loans................ 1 12 1 18
Total all loans.......... 10 $594 5 $308
====== ========= ====== =========
Delinquent loans to
total loans............. .28% .15%
========= =========
</TABLE>
11
<PAGE>
The following table sets forth information regarding non-accrual loans
delinquent 90 days or more. At December 31, 1996, there were no restructured
loans within the meaning of SFAS No. 15 and no other potential problem loans
except as described above or included in the table below.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loans delinquent
90 days or more........................... $1,247 $1,105 $ 290 $729 $801
Other loans delinquent 90 days or more...... 320 36 18 41 --
------- ------ ------ ------ ------
Total non-performing loans................. 1,141 308 770 801
Total foreclosed real estate, net of
related allowance for losses................ -- -- 447 98 226
------- ------ ------ ------ ------
Total nonperforming assets............... $1,567 $1,141 $ 755 $ 868 $1,027
====== ====== ====== ====== ======
Non-performing loans to total loans.......... 0.70% 0.55% 0.15% 0.40% 0.41%
Total non-performing assets to total assets.. 0.50% 0.37% 0.25% 0.29% 0.33%
</TABLE>
__________________________
(1) For the year ended December 31, 1996 gross interest income which would have
been recorded had the non-accruing loans been current in accordance with
their original terms amounted to approximately $56,000.
The balance of non-performing assets, amounting to $1.6 million at December
31, 1996, increased from $1.1 at December 31, 1995. The largest single
delinquency was a mortgage loan secured by a multi-family apartment building in
the amount of $385,000 at December 31, 1996.
ALLOWANCE FOR LOAN LOSSES. Notwithstanding the Association's limited
historical loss experience, in 1990 management decided that it was advisable to
establish an allowance to provide for future loan losses. The allowance for
loan losses was established and maintained through a provision for loan losses
based on management's evaluation of the risk inherent in its loan portfolio and
the general economy. Such evaluation, which includes a review of all loans on
which full collectibility may not be reasonably assured, considers among other
matters, the estimated net realizable value of the underlying collateral,
economic conditions, and other factors that warrant recognition in providing for
an adequate loan loss allowance. For classified assets or certain other
circumstances recognized as potential problems, a specific reserve is
established. If an asset is classified, an estimated value of the property
securing the loan is determined and if the unpaid balance of the loan is greater
than such estimated value, the difference is established as a specific reserve.
At December 31, 1996, the Association had a specific reserve in the amount of
$175,000 against the loan mentioned in the prior paragraph.
12
<PAGE>
The following table sets forth the Association's allowance for possible
loan losses at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year...................... $ 883 $ 883 $ 921 $ 925 $ 449
Provision for loan losses......................... -- -- -- -- 449
Charge-offs: One- to four-family mortgage
loans......................................... -- -- (38) (15) (48)
Recoveries: One- to four-family mortgage
loans........................................... -- -- -- 11 --
Allowance transferred from loss on assets......... -- -- -- -- 75
------ ------ ------- ------- -------
Balance at end of year............................ $ 883 $ 883 $ 883 $ 921 $ 925
====== ====== ======= ======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period..... --% --% .02% .01% .03%
Ratio of allowance for loan losses to net
loans receivable at the end of period......... .39 .42 .43 .49 .49
Ratio of allowance for loan losses to total
non- performing assets at the end of period.. 56.34 77.37 116.88 106.11 90.07
Ratio of allowance for loan losses to non-
performing loans at the end of the period....... 56.34 77.37 286.51 119.61 115.48
</TABLE>
13
<PAGE>
The following table sets forth the Association's allowance for possible
loan losses by type of loan for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- --------------------------- -------------------------
AMOUNT PERCENTAGE(1) AMOUNT PERCENTAGE(1) AMOUNT PERCENTAGE(1)
---------- ----------------- ----------- ------------- --------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SPECIFIC ALLOWANCE:
MORTGAGE LOANS:
Residential...................... $ 175 87.97 $ -- 89.10% $ 35 89.13%
Commercial....................... -- 4.76 -- 4.60 -- 4.51
Construction..................... -- 1.29 -- .41 -- .50
Land............................. -- 1.05 -- .82 -- .48
OTHER LOANS:
Equity lines of credit........... -- 4.55 -- 4.64 -- 4.95
Consumer......................... -- .38 -- .43 -- .43
---- ------ ---- ------ ---- ------
Total Specific Allowances........... 175 100.00% -- 100.00% 35 100.00%
---- ====== ---- ====== ---- ======
GENERAL ALLOWANCES:
MORTGAGE LOANS:
Residential...................... 585 87.97% 747 89.10% 718 89.13%
Commercial....................... 59 4.76 71 4.60 73 4.51
Construction..................... 6 1.29 7 .41 3 .50
Land............................. 8 1.05 8 .82 4 .48
OTHER LOANS:
Equity lines of credit........... 50 4.55 47 4.64 43 4.95
Consumer......................... -- .38 3 .43 7 .43
---- ------ ---- ------ ---- ------
Total General Allowances............ 708 100.00% 883 100.00% 848 100.00%
---- ====== ---- ====== ---- ======
Total allowances for loan losses.. $883 $883 $883
==== ==== ====
</TABLE>
__________________________
(1) Percent of loans in each category to total loans receivable at the date
indicated.
14
<PAGE>
INVESTMENT ACTIVITIES
The investment policy of the Company, which is established by the Board of
Directors and implemented by the Company's Chief Financial Officer, is designed
primarily to provide and maintain liquidity, to generate a favorable return on
investments without incurring undue interest rate and credit risk, and to
complement the Company's lending activities. Federally chartered savings
institutions have the authority to invest in various types of liquid assets,
including United States Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and savings
institutions, certain bankers acceptances, repurchase agreements and loans on
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest a portion of their assets in commercial paper,
corporate debt securities and asset-backed securities. Investments generally
are made with the intent of holding them to maturity although some investments
are occasionally acquired for trading purposes. From time to time, in order to
enhance the Company's liquidity or to obtain a higher yield, securities of a
longer duration than the typical investment security in the Company's portfolio
may be acquired for the available for sale portfolio. At December 31, 1996,
the Company had investment securities in the aggregate amount of $68.7 million.
The portion of the investment portfolio which is held with the intent to hold to
maturity is accounted for on an amortized cost basis due to the low interest
rate environment. Investment securities which are categorized as held for trade
are carried at the fair value with any unrealized holding gains and losses
included in income. An Investment Committee consisting of the Company's
President/Chief Executive Officer, Executive Vice President/Chief Financial
Officer and Executive Vice President/Chief Lending Officer meets on an as-needed
basis to make material investment decisions. The Chief Financial Officer
reports on a monthly basis the Company's investment activities to the Board of
Directors.
The following table sets forth certain information regarding the carrying
and fair values of the Company's investment securities portfolio at the dates
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING DEPOSITS:
Term Federal funds............................. $ 5,700 $ 5,700 $ 3,150 $ 3,150 $ 200 $ 200
Money Market funds............................. 2,021 2,021 756 756 374 374
FHLB daily investments......................... 157 157 65 65 71 71
------- ------- ------- ------- ------- -------
Total interest-bearing deposits............ $ 7,878 $ 7,878 $ 3,971 $ 3,971 $ 645 $ 645
======= ======= ======= ======= ======= =======
INVESTMENT SECURITIES HELD WITH INTENT TO HOLD
TO MATURITY:
U.S. Government securities and agency
obligations.................................. $68,737 $68,638 $82,111 $82,359 $80,981 $79,368
Other......................................... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total investment securities held with
intent to hold to maturity................. $68,737 $68,638 $82,111 $82,359 $80,981 $79,368
======= ======= ======= ======= ======= =======
INVESTMENT SECURITIES HELD FOR TRADE:
Equity securities.............................. $ 827 $ 827 $ 501 $ 501 $ 835 $ 835
======= ======= ======= ======= ======= =======
</TABLE>
15
<PAGE>
GOVERNMENT SECURITIES CARRYING/FAIR VALUE. The table below sets forth
certain information regarding the carrying value, weighted average yields and
maturities of the Company's held to maturity investment securities at December
31, 1996.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996,
--------------------------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO 10 YEARS MORE THAN 10 YEARS
-------------------- ------------------- ------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Government and agency
securities............... $41,785 5.80% $26,952 5.59% $ -- -- % $ -- -- %
-------- -------- -------- --------
Total............. $41,785 $26,952 $ -- $ --
======== ======== ======== ========
<CAPTION>
AT DECEMBER 31, 1996,
------------------------------------------
TOTAL INVESTMENT SECURITIES
------------------------------------------
AVERAGE
REMAINING APPROXIMATE WEIGHTED
YEARS TO CARRYING FAIR AVERAGE
MATURITY VALUE VALUE YIELD
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
U.S. Government and agency
securities............... .83 $68,737 $68,638 5.72%
------- -------
Total............. $68,737 $68,638
======= =======
</TABLE>
There were no investment securities (exclusive of the U.S. government
securities and federal agencies' obligations) issued by any one entity with a
total carrying value in excess of 10% of stockholders' equity at December 31,
1996.
16
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and cash flows generated from
operations are the primary sources of the Association's funds for use in
lending, investing and other general purposes.
DEPOSITS. The Association offers a variety of deposit accounts having a
range of interest rates and terms. The Association's deposits consist of
passbook savings, NOW, money market and certificate accounts. The flow of
deposits is influenced significantly by general economic conditions, changes in
money market and prevailing interest rates and competition. The Association's
deposits primarily are obtained from the areas surrounding its main office. The
Association relies primarily on customer service and long-standing relationships
with customers to attract and retain these deposits. Certificate accounts in
excess of $100,000 are not actively solicited by the Association nor does the
Association use brokers to obtain deposits.
When management determines the levels of its deposit rates, consideration
is given to local competition and Treasury offerings. As part of its interest
rate management strategy, the Association maintains a significant percentage of
assets in short term Treasury and agency securities which permits the
Association to accept limited deposit disintermediation when the marginal cost
of new or renewing deposits exceeds profitable investment opportunities. The
consolidation of banking institutions has not had a significant impact locally
on the Association's operation to date, but management is unsure of the effect
as consolidation continues. At December 31, 1996, passbook savings and NOW
checking accounts amounted to 30.8% of total deposits.
The following table presents the deposit activity of the Association for
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits................................. $246,689 $260,972 $247,092
Withdrawals.............................. 253,374 266,096 260,999
-------- -------- --------
Deposit net of withdrawals............... (6,685) (5,124) (13,907)
Interest credited on deposits............ 11,195 10,445 9,626
-------- -------- --------
Total increase (decrease) in deposits.. $ 4,510 $ 5,321 $ (4,281)
======== ======== ========
</TABLE>
17
<PAGE>
At December 31, 1996, the Association had outstanding $37.6 million in
deposit accounts in amounts of $100,000 or more ("Jumbo Accounts") maturing as
follows:
<TABLE>
<CAPTION>
AMOUNT
---------------
MATURITY PERIOD (IN THOUSANDS)
---------------
<S> <C>
Three months or less........... $12,312
Over three through six months.. 5,018
Over six through 12 months..... 9,239
Over 12 months................. 11,052
-------
Total..................... $37,621
=======
TYPE OF JUMBO ACCOUNTS
----------------------
Negotiated..................... $15,306
Core........................... 22,315
-------
Total..................... $37,621
=======
</TABLE>
The following table sets forth the distribution of the Association's
deposit accounts at the dates indicated and the weighted average nominal
interest rates on each category of deposits presented. Management does not
believe that the use of year end balances instead of average balances resulted
in any material difference in the information presented.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ---------------------------- -------------------------------
WEIGHTED WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
-------- --------- --------- -------- --------- --------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TRANSACTION ACCOUNTS:
NOW.................. $ 15,816 6.20% 2.00% $ 14,630 5.84% 2.01% $ 13,997 5.70% 2.01%
Money Market......... 9,271 3.63 2.88 10,960 4.37 2.88 14,701 5.99 2.88
Passbook savings.... 62,743 24.59 3.04 62,927 25.11 3.04 71,140 29.00 3.04
-------- ------ -------- ------ -------- ------
Total................ 87,830 34.42 88,517 35.32 99,818 40.69
-------- ------ -------- ------ -------- ------
CERTIFICATE ACCOUNTS:
Six month............ 23,619 9.26 5.45 21,667 8.64 5.80 20,977 8.55 4.64
Twelve month......... 17,082 6.69 5.65 15,698 6.26 5.68 12,625 5.15 4.34
Eighteen month....... 21,198 8.31 5.53 20,340 8.12 5.41 24,515 9.99 4.11
Two to five years.... 59,770 23.43 6.44 60,286 24.05 6.24 45,451 18.53 5.71
IRA and Keogh........ 45,655 17.89 6.27 44,136 17.61 6.28 41,936 17.09 5.98
-------- ------ -------- ------ -------- ------
Total................ 167,324 65.58 162,127 64.68 145,504 59.31
-------- ------ -------- ------ -------- ------
Total deposits......... $255,154 100.00% 4.95% $250,644 100.00% 4.85% $245,322 100.00% 4.28%
======== ====== ======== ====== ======== ======
</TABLE>
18
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at December 31, 1996, 1995, and 1994 and the
periods to maturity of the certificate accounts outstanding at December 31,
1996.
<TABLE>
<CAPTION>
PERIOD TO MATURITY
FROM DECEMBER 31, 1996
-----------------------------------------
AT DECEMBER 31,
------------------------------ WITHIN ONE TO
1996 1995 1994 ONE YEAR THREE YEARS THEREAFTER TOTAL
-------- -------- -------- -------- ----------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.99% or less........ $ $ 1,668 $ 32,329 $ $ -- $ -- $
-- -- --
4.00% to 4.99%....... 394 10,476 37,540 350 44 -- 394
5.00% to 5.99%....... 100,077 80,353 35,992 61,990 32,745 5,342 100,077
6.00% to 6.99%....... 41,776 41,371 22,715 17,206 17,768 6,802 41,776
7.00% to 7.99%....... 16,934 20,616 4.378 1,299 1,372 14,263 16,934
8.00% to 8.99%....... 8,143 7,643 12,261 18 7 8,118 8,143
9.00% to 9.99%....... -- -- 289 -- -- -- --
-------- -------- -------- ------- ------- ------- --------
$167,324 $162,127 $145,504 $80,863 $51,936 $34,525 $167,324
======== ======== ======== ======= ======= ======= ========
</TABLE>
BORROWED FUNDS
In connection with its initial public offering, the Association established
an Employee Stock Ownership Plan and Trust ("ESOP"). The ESOP was funded by the
proceeds from a $1.8 million loan from an unaffiliated third party lender. The
loan is currently held by the Company. The loan carries an interest rate of
one-eighth of one percent under the prime rate, and matures in the year 1999.
The loan is secured by shares of the Common Stock purchased with loan proceeds
in the initial public offering. The Association has committed to make
contributions to the ESOP sufficient to allow the ESOP to fund the debt service
requirements of the loan. In consolidation of financial statements the debt is
eliminated.
SUBSIDIARY ACTIVITIES
Westco, Inc., an Illinois corporation and a wholly-owned subsidiary of the
Association, is engaged in insurance activities and securities brokerage
services. For the year ended December 31, 1996, Westco, Inc. had a net loss of
$3,000 and net income of $21,000, respectively, from its insurance activities
and securities brokerage services.
Westco, Inc. operates as a full service insurance agency which offers a
variety of insurance products and annuities. Westco, Inc. also has entered into
an agreement with a registered broker-dealer to provide certain securities
brokerage insurance products and investment advisory securities to the general
public. Through this program and a licensed dual employee, these services are
offered to the Association's customers and members of the local community.
Revenues generated from the sales of these products are apportioned between the
registered broker-dealer and Westco, Inc.
19
<PAGE>
COMPETITION
The Chicago metropolitan area has a high density of financial institutions,
many of which are significantly larger and have greater financial resources than
the Association, and all of which are competitors of the Association to varying
degrees. The Association's competition for loans comes principally from savings
and loan associations, savings banks, mortgage banking companies, insurance
companies, and commercial banks. Its most direct competition for savings has
historically come from savings and loan associations, savings banks, commercial
banks, and credit unions. The Association faces additional competition for
savings from short-term money market funds and other corporate and government
securities funds. The Association also faces increased competition from other
financial institutions such as brokerage firms and insurance companies for
deposits. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions.
The Association serves its market area with a wide selection of residential
loans and retail financial services. Management considers the Association's
reputation for financial strength and customer service as its major competitive
advantage in attracting and retaining customers in its market area. The
Association also believes it benefits from its community orientation as well as
its relatively high core deposit base.
PERSONNEL
As of December 31, 1996, the Association had 49 full-time employees and 11
part-time employees. The employees are not represented by a collective
bargaining unit, and the Association considers its relationship with its
employees to be excellent.
REGULATION AND SUPERVISION
GENERAL
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Office of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended
(the "HOLA"). In addition, the activities of savings institutions, such as the
Association, are governed by the HOLA and the Federal Deposit Insurance Act
("FDI Act").
The Association is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Association is a member of the Federal Home Loan Bank
("FHLB") System and its deposit accounts are insured up to applicable limits by
the Savings Association Insurance Fund ("SAIF") managed by the FDIC. The
Association must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other savings institutions. The OTS and/or
20
<PAGE>
the FDIC conduct periodic examinations to test the Association's safety and
soundness and compliance with various regulatory requirements. This regulation
and supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulatory
requirements and policies, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on the Company, the Association and their
operations. Certain of the regulatory requirements applicable to the
Association and to the Company are referred to below or elsewhere herein. The
description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth in this Form 10-K does not
purport to be a complete description of such statutes and regulations and their
effects on the Association and the Company.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that the Association
continues to be a qualified thrift lender ("QTL"). See "Federal Savings
Institution Regulation - QTL Test." Upon any non-supervisory acquisition by the
Company of another savings institution or savings bank that meets the QTL test
and is deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"),
subject to the prior approval of the OTS, and certain activities authorized by
OTS regulation.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5% of a nonsubsidiary company engaged in activities other
than those permitted by the HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject
21
<PAGE>
to two exceptions: (i) the approval of interstate supervisory acquisitions by
savings and loan holding companies and (ii) the acquisition of a savings
institution in another state if the laws of the state of the target savings
institution specifically permit such acquisitions. The states vary in the
extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Association must notify the OTS 30
days before declaring any dividend to the Company. In addition, the financial
impact of a holding company on its subsidiary institution is a matter that is
evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
FEDERAL SAVINGS INSTITUTION REGULATION
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio.
In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
(core) capital ratio (3% for institutions receiving the highest rating on the
CAMEL financial institution rating system), and, together with the risk-based
capital standard itself, a 4% Tier I risk-based capital standard. Core capital
is defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus, and minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain purchased mortgage servicing rights and credit card relationships.
The OTS regulations also require that, in meeting the tangible, leverage (core)
and risk-based capital standards, institutions must generally deduct investments
in and loans to subsidiaries engaged in activities not permissible for a
national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%,
as assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings
22
<PAGE>
institution's interest rate risk is measured by the decline in the net portfolio
value of its assets (i.e., the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts)
that would result from a hypothetical 200 basis point increase or decrease in
market interest rates divided by the estimated economic value of the
institution's assets. In calculating its total capital under the risk-based
capital rule, a savings institution whose measured interest rate risk exposure
exceeds 2% must deduct an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the institution's assets. The Director of the OTS may waive
or defer a savings institution's interest rate risk component on a case-by-case
basis. A savings institution with assets of less than $300 million and risk-
based capital ratios in excess of 12% is not subject to the interest rate risk
component, unless the OTS determines otherwise. For the present time, the OTS
has deferred implementation of the interest rate risk component. At December
31, 1996, the Association met each of its capital requirements, in each case on
a fully phased-in basis and it is anticipated that the Association will not be
subject to the interest rate risk component.
The following table presents the Association's capital position at December
31, 1996 relative to fully phased-in regulatory requirements.
<TABLE>
<CAPTION>
EXCESS CAPITAL
---------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
---------- ---------- ------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Tangible..... $39,751 $ 4,565 $35,186 13.06% 1.50%
Core
(Leverage).. 39,751 9,130 30,621 13.06 3.00%
Risk-based... 40,459 10,608 29,851 30.51 8.00%
</TABLE>
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution
is considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has
a ratio of total capital to risk weighted assets of less than 8%, a ratio of
Tier I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
23
<PAGE>
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date a
savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS. Deposits of the Association are presently
insured by the SAIF. Both the SAIF and the Bank Insurance Fund ("BIF"), (the
deposit insurance fund that covers most commercial bank deposits), are
statutorily required to be recapitalized to a 1.25% of insured reserve deposits
ratio. Until recently, members of the SAIF and BIF were paying average deposit
insurance premiums of between 24 and 25 basis points. The BIF met the required
reserve in 1995, whereas the SAIF was not expected to meet or exceed the
required level until 2002 at the earliest. This situation was primarily due to
the statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor
to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Association were placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on SAIF member institutions, including the Association, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF
Special Assessment was recognized by the Association as an expense in the
quarter ended September 30, 1996 and is generally tax deductible. The SAIF
Special Assessment recorded by the Association amounted to $1.6 million on a
pre-tax basis and $1.1 million on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits
will be assessed for FICO
24
<PAGE>
payment of 1.3 basis points, while SAIF deposits will pay 6.48 basis points.
Full pro rata sharing of the FICO payments between BIF and SAIF members will
occur on the earlier of January 1, 2000 or the date the BIF and SAIF are merged.
The Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999,
provided no savings associations remain as of that time.
As a result of the Funds Act, the FDIC recently voted to effectively lower
SAIF assessments to 0 to 27 basis points as of January 1, 1997, a range
comparable to that of BIF members. SAIF members will also continue to make the
FICO payments described above. The FDIC also lowered the SAIF assessment
schedule for the fourth quarter of 1996 to 18 to 27 basis points. Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated or whether the BIF
and SAIF will eventually be merged.
The Association's quarterly annualized assessment rate for fiscal 1996
ranged from 18 to 23 basis points and the premium paid for this period was $2.2
million. A significant increase in SAIF insurance premiums would likely have an
adverse effect on the operating expenses and results of operations of the
Association.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Association does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
THRIFT RECHARTERING LEGISLATION. The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date. That legislation also requires that the Department of Treasury
submit a report to Congress by March 31, 1997 that makes recommendations
regarding a common financial institutions charter, including whether the
separate charters for thrifts and banks should be abolished. Various proposals
to eliminate the federal thrift charter, create a uniform financial institutions
charter and abolish the OTS have been introduced in Congress. The bills would
require federal savings institutions to convert to a national bank or some type
of state charter by a specified date (January 1, 1998 in one bill, June 30, 1998
in the other) or they would automatically become national banks. Converted
federal thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. Holding companies for savings institutions
would become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for unitary savings and
loan holding company activities. The Bank is unable to predict whether such
legislation would be enacted, the extent to which the legislation would restrict
or disrupt its operations or whether the BIF and SAIF funds will eventually
merge.
25
<PAGE>
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At December 31,
1996, the Association's limit on loans to one borrower was $6.0 million. At
December 31, 1996, the Association's largest aggregate outstanding balance of
loans to one borrower consisted of fourteen loans totalling $3.8 million. All
loans to this borrower were current.
QTL TEST. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings and loan association is required to maintain at
least 65% of its "portfolio assets" (total assets less: (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain mortgage-backed securities) in at least 9 months out of each
12 month period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
December 31, 1996, the Association maintained 86.4% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. In the event the Association's capital fell below its
regulatory requirements or the OTS notified it that it was in need of more than
normal supervision, the Association's ability to make capital distributions
could be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice. In December 1994, the OTS proposed amendments to
its capital distribution regulation that would generally authorize the payment
of capital distributions without OTS approval provided that the payment does not
cause the institution to be undercapitalized within the meaning of the prompt
corrective action regulation. However, institutions in a holding company
structure would still have a prior notice requirement. At December 31, 1996,
the Association was a Tier 1 Bank.
26
<PAGE>
LIQUIDITY. The Association is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 5% but may be changed from
time to time by the OTS to any amount within the range of 4% to 10% depending
upon economic conditions and the savings flows of member institutions. OTS
regulations also require each member savings institution to maintain an average
daily balance of short-term liquid assets at a specified percentage (currently
1%) of the total of its net withdrawable deposit accounts and borrowings payable
in one year or less. Monetary penalties may be imposed for failure to meet
these liquidity requirements. The Association's liquidity and short-term
liquidity ratios for December 31, 1996 were 30.1% and 20.5% respectively, which
exceeded the applicable requirements. The Association has never been subject to
monetary penalties for failure to meet its liquidity requirements.
ASSESSMENTS. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a semi-
annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Association's latest
quarterly thrift financial report. The assessments paid by the Association for
the fiscal year ended December 31, 1996 totalled $78,000.
BRANCHING. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
TRANSACTIONS WITH RELATED PARTIES. The Association's authority to engage
in transactions with related parties or "affiliates" (e.g.., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O
thereunder. Among other things, such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and to not
27
<PAGE>
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. Regulation O also places
individual and aggregate limits on the amount of loans the Association may make
to insiders based, in part, on the Association's capital position and requires
certain board approval procedures to be followed.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality; earnings and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $49.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts aggregating greater than $49.3 million, the reserve
requirement is $1.48 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $49.3 million. The first $4.4 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) were
28
<PAGE>
exempted from the reserve requirements. The Association is in compliance with
the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
FEDERAL SECURITIES LAWS
The Company's Common Stock is registered with the Securities and Exchange
Commission under Section 12(g) of 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 under the
Exchange Act.
The registration under the Securities Act of 1933 (the "Securities Act") of
shares of the Common Stock issued in the Conversion does not cover the resale of
such shares. Shares of the Common Stock purchased by persons who are not
affiliates of the Company may be resold without registration. Shares purchased
by an affiliate of the Company will be subject to the resale restrictions of
Rule 144 under the Securities Act. If the Company meets the current public
information requirements of Rule 144 under the Securities Act, each affiliate of
the Company who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the outstanding shares of the Company or (ii) the average weekly volume of
trading in such shares during the preceding four calendar weeks. Shares
acquired through the Company's option plans have been registered under the
Securities Act and, therefore, are not subject to resale restrictions.
Provision may be made in the future by the Company to permit affiliates to have
their shares registered for sale under the Securities Act under certain
circumstances.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Association report their income on a
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Company. The Association has not been
audited by the IRS since 1987, which covered the tax years through 1983. For its
1996 taxable year, the Association is subject to a maximum federal income tax
rate of 34%.
BAD DEBT RESERVES. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A
29
<PAGE>
reserve could be established for bad debts on qualifying real property loans
(generally secured by interests in real property improved or to be improved)
under (i) the Percentage of Taxable Income Method (the "PTI Method") or (ii)
the Experience Method. The reserve for nonqualifying loans was computed using
the Experience Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves. The
1996 Act repeals the reserve method of accounting for bad debts effective for
tax years beginning after 1995. Thrift institutions that would be treated as
small banks are allowed to utilize the Experience Method applicable to such
institutions, while thrift institutions that are treated as large banks (those
generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS.
Any Section 481(a) adjustment required to be taken into income with respect to
such change generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject to
the residential loan requirement.
Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Association's current taxable year, in which the Association
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Association during its six taxable
years preceding its current taxable year.
Under the 1996 Act, for its current and future taxable years, the
Association is not permitted to make additions to its tax bad debt reserves. In
addition, the Association is required to recapture (i.e., take into income) over
a six year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 other than its supplemental reserve for losses on loans, if
any over the balance of such reserves as of December 31, 1987. As a result of
such recapture, the Association will not incur an additional tax liability
because the liability has been set up on the books in accordance with SFAS No.
109 as of December 31, 1996.
DISTRIBUTIONS. Under the 1996 Act, if the Association makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Association's unrecaptured tax bad debt reserves (including
the balance of its reserves as of December 31, 1987) to the extent thereof, and
then from the Association's supplemental reserve for losses on loans, to the
extent thereof, and an amount based on the amount distributed (but not in excess
of the amount of such reserves) will be included in the Association's income.
Non-dividend distributions include distributions in excess of the Association's
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of the Association's current or
accumulated earnings and profits will not be so included in the Association's
income.
30
<PAGE>
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Association makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 34% federal
corporate income tax rate. The Association does not intend to pay dividends
that would result in a recapture of any portion of its bad debt reserves.
SAIF RECAPITALIZATION ASSESSMENT. The Funds Act levied a 65.7-cent fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the bad debt
reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI. Only 90% of AMTI can
be offset by net operating loss carryovers. AMTI is increased by an amount
equal to 75% of the amount by which a corporation's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses). The Company and the Association do not
expect to be subject to the AMTI.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Association as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company or the Association own more
than 20% of the stock of a corporation distributing a dividend, 80% of any
dividends received may be deducted. The Association was audited by the IRS in
1987 for its tax years through 1983.
ILLINOIS TAXATION. The Company and the Association file a combined
Illinois income tax return. For Illinois income tax purposes, savings
institutions are presently taxed at an effective rate equal to 7.18% of income.
For these purposes, "net 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 significantly the Illinois taxable income
of savings institutions. The Company was audited by the Illinois Department of
Revenue in 1996 for its tax years through 1994.
31
<PAGE>
IMPACT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. In June 1996, the FASB issued Statement of
Financial Accounting Standards No. 125 ("SFAS 125"), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." This
statement, among other things, applies a "financial-components approach" that
focuses on control, whereby an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes assets when
control has been surrendered, and derecognizes liabilities when extinguished.
SFAS 125 provides consistent standards for distinguishing transfers of financial
assets that are sales form transfers that are secured borrowings. SFAS 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. The Company does not anticipate
that this pronouncement will have a significant impact on its consolidated
financial condition or results of operations.
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Company keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------------------------------------------------------
The following table sets forth certain information regarding the executive
officers of the Company and/or the Association who are not also Directors.
<TABLE>
<CAPTION>
Name Age(1) Positions Held
---- ------ --------------
<S> <C> <C>
Richard A. Brechlin 48 Executive Vice President and Treasurer of the
Company and the Association
Gregg P. Goossens 48 Executive Vice President of the Company and the
Association
Kenneth J. Kaczmarek 47 Vice President and Controller of the Company; Senior
Vice President and Controller of the Association
Mary S. Suffi 56 Vice President and Secretary of the Company and the
Association
Roberta Sramek 72 Vice President of the Association
</TABLE>
32
<PAGE>
Richard A. Brechlin joined the Association in 1983 and has been Executive
Vice President and Treasurer since 1990. Prior to that, Mr. Brechlin was Vice
President and Controller. Mr. Brechlin also is Executive Vice President and
Treasurer of the Company and is Treasurer of Westco, Inc. He has worked in the
savings and loan industry since 1970 in various capacities. Mr. Brechlin has a
B.S.B.A. degree from Roosevelt University.
Gregg P. Goossens joined the Association in 1977 and is the Executive Vice
President in charge of lending. Mr. Goossens also is Executive Vice President
and Secretary of the Company and is Secretary of Westco, Inc. Mr. Goossens has
a B.S. degree from the University of Illinois and an M.S.B.A. degree from DePaul
University.
Kenneth J. Kaczmarek joined the Association in 1986 and was appointed Vice
President and Controller of the Company in 1995. He also serves as Senior Vice
President & Controller of the Association and is the Association's Compliance
Officer and Security Officer. Mr. Kaczmarek has a B.S. degree from Elmhurst
College.
Mary S. Suffi joined the Association in 1978 and was appointed Vice
President and Secretary in 1992. Ms. Suffi also serves as the Vice President
and Secretary of the Company.
Roberta Sramek joined the Association in 1958 and has been a Vice President
since 1990. Mrs. Sramek serves as the Association's Teller Manager.
____________________
(1) As of December 31, 1996.
33
<PAGE>
ITEM 2. PROPERTIES
- -------------------
The Association conducts its business through its main office and a limited
service branch office, both of which are located in Westchester, Illinois. The
Company believes that the Association's current facilities are adequate to meet
the present and immediately foreseeable needs of the Association and the
Company.
<TABLE>
<CAPTION>
NET LEASED
DATE BOOK VALUE AT OR
LOCATION ACQUIRED DECEMBER 31, 1996 OWNED
-------- -------- ----------------- ------
<S> <C> <C> <C>
Main Office (1) 1963 $ 937,000 Owned
2121 S. Mannheim Road
Westchester, Illinois 60154
Limited Service Office 1978 527,000 Owned
10551 W. Cermak Road ----------
Westchester, Illinois 60154
Total net book value $1,464,000
==========
</TABLE>
____________________
(1) The Association also owns property at 2103 S. Mannheim Road,
Westchester, Illinois 60154, with a net book value of $175,000, which
is leased to a fast food franchise until November 1998.
ITEM 3. LEGAL PROCEEDINGS.
- ---------------------------
The Association is involved in various legal actions arising in the normal
course of its business. In the opinion of management, the resolutions of these
legal actions are not expected to have a material adverse effect on the
Association's results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------------------------------------------------------------------------------
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Corporate Information" on page 34 in
the Registrant's 1996 Annual Report to Stockholders and is incorporated herein
by reference.
34
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
- ---------------------------------
The above-captioned information appears under "Selected Consolidated
Financial Data and Other Data of the Company" in the Registrant's 1996 Annual
Report to Stockholders on page 4 and 5 and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS.
- ----------------------
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1996 Annual Report to Stockholders on pages 6 through 13 and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -----------------------------------------------------
The Consolidated Financial Statements of Westco Bancorp, Inc. and its
subsidiaries, together with the report thereon by Cobitz, VandenBerg & Fennessy
appears in the Registrant's 1996 Annual Report to Stockholders on pages 14
through 33 and are incorporated herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- --------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------------------------------------------------------------
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 15, 1997,
at pages 6 through 7. Information concerning Executive Officers who are not
directors is contained in Part I of this report pursuant to paragraph (b) of
Item 401 of Regulation S-K in reliance on Instruction G.
ITEM 11. EXECUTIVE COMPENSATION.
- --------------------------------
The information relating to executive compensation and directors'
compensation (excluding the Compensation Committee Report and Stock Performance
Graph) is incorporated herein by reference to the Registrant's Proxy Statement
for the Annual Meeting of Stockholders to be held on April 15, 1997, at pages 8
and 9 and pages 15 through 19.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------------------------------------------------------------------------
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 15, 1997,
at pages 4 and 6 and 7.
35
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 15, 1997, at page 20.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ---------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1996 Annual Report to
Stockholders.
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report................................ 14
Consolidated Statements of Financial Condition,
December 31, 1996 and 1995................................ 15
Consolidated Statements of Income for the
Years Ended December 31, 1996, 1995 and 1994.............. 16
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994...... 17
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994.............. 18
Notes to Consolidated Financial Statements.................. 19-33
</TABLE>
The remaining information appearing in the 1996 Annual Report to Stockholders
is not deemed to be filed as part of this report, except as expressly provided
herein.
(2) All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements
or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of Westco Bancorp, Inc.*
3.2 Bylaws of Westco Bancorp, Inc.*
4.0 Stock Certificate of Westco Bancorp, Inc.*
10.1 First Federal Savings and Loan Association of Westchester Employee
Stock Ownership Plan and Trust*
36
<PAGE>
10.2 First Federal Savings and Loan Association of Westchester
Recognition and Retention Plans and Trusts**
10.3 Westco Bancorp, Inc. 1992 Incentive Stock Option Plan**
10.4 Westco Bancorp, Inc. 1992 Stock Option Plan for Outside
Directors**
10.5 First Federal Savings and Loan Association of Westchester
Employee Severance Compensation Plan*
10.6 (a) Form of Employment Agreements between First Federal Savings
and Loan Association of Westchester and David C. Burba,
Richard A. Brechlin and Gregg P. Goossens*
(b) Form of Employment Agreements between Westco Bancorp, Inc.
and David C. Burba, Richard A. Brechlin and Gregg P.
Goossens*
10.7 (a) Form of Special Termination Agreements between First Federal
Savings and Loan Association of Westchester and Rosalyn M.
Lesak, Kenneth J. Kaczmarek, Roberta Sramek and Mary S.
Suffi*
(b) Form of Special Termination Agreements between Westco
Bancorp, Inc. and Rosalyn M. Lesak, Kenneth J. Kaczmarek,
Roberta Sramek and Mary S. Suffi*
10.8 Amended First Federal Savings of Westchester Profit Sharing Plan*
10.9 Amendment to the First Federal Savings and Loan Association of
Westchester Supplemental Executives' Retirement Plan ***
10.10 (a) Executive Salary Continuation Plan between First Federal
Savings and Loan Association of Westchester and David C.
Burba (filed herewith)
(b) Executive Salary Continuation Plan between First Federal
Savings and Loan Association of Westchester and Richard A.
Brechlin and Gregg P. Goossens (filed herewith)
11.0 Computation of earnings per share (filed herewith)
13.0 Portions of the 1996 Annual Report to Stockholders (filed
herewith)
21.0 Subsidiary information is incorporated herein by reference to
"Part I -Subsidiaries"
23.0 Consent of Cobitz, VandenBerg and Fennessy (filed herewith)
27.0 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
None
________________
* Incorporated herein by reference into this document from the
Exhibits to Form S-1, Registration Statement, filed on March 23,
1992 and any amendments thereto, Registration No. 33-46441.
** Incorporated herein by reference into this document from the
Exhibits to the Proxy Statement for the Special Meeting of
Stockholders held on September 27, 1992 and filed on August 31,
1992.
*** Incorporated herein by reference into this document from the
Exhibits to Form 10-K for the fiscal year ended December 31,
1995, filed with the SEC on March 25, 1996.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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.
Date: March 21, 1997 By: /s/ David C. Burba
-----------------------------------
David C. Burba
Chief Executive Officer, President
and Chairman of the Board
Date: March 21, 1997 By: /s/ Richard A. Brechlin
----------------------------------
Richard A. Brechlin
Chief Financial Officer, Executive
Vice President and Treasurer
Date: March 21, 1997 By: /s/ Kenneth J. Kaczmarek
--------------------------------
Kenneth J. Kaczmarek
Chief Accounting Officer,
Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
/s/ David C. Burba Chief Executive Officer, March 21, 1997
- -------------------------
David C. Burba President and
Chairman of the Board
/s/ Rosalyn M. Lesak Director March 21, 1997
- -------------------------
Rosalyn M. Lesak
/s/ James E. Dick Director March 21, 1997
- -------------------------
James E. Dick
/s/ Edward A. Matuga Director March 21, 1997
- -------------------------
Edward A. Matuga
/s/ Edward C. Moticka Director March 21, 1997
- -------------------------
Edward C. Moticka
/s/ Thomas J. Nowicki Director March 21, 1997
- -------------------------
Thomas J. Nowicki
/s/ Robert E. Vorel, Jr. Director March 21, 1997
- -------------------------
Robert E. Vorel, Jr.
<PAGE>
Exhibit 10.10
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WESTCHESTER
EXECUTIVE SALARY CONTINUATION PLAN
EFFECTIVE AUGUST 1, 1996
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WESTCHESTER
EXECUTIVE SALARY CONTINUATION PLAN
1. PURPOSE
II. DEFINITIONS
III. PARTICIPATION; DETERMINATION AND PAYMENT OF BENEFITS
IV. CLAIM FOR BENEFITS PROCEDURE
V. ADMINISTRATION
VI. AMENDMENT AND TERMINATION
VII. MISCELLANEOUS
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WESTCHESTER
EXECUTIVE SALARY CONTINUATION PLAN
I PURPOSE
-------
The purpose of the First Federal Savings and Loan Association of Westchester
Executive Salary Continuation Plan is to provide a means whereby the First
Federal may afford certain senior executives with retirement or other
postemployment benefits, supplementing other Association-sponsored retirement,
death, and disability benefits, in order to assure their continued employment
with the First Federal Savings and Loan Association.
The Plan replaces agreements in effect prior to the Plan Effective Date which
provided substantially similar benefits to participating First Federal
executives. Executives who have an agreement dated September 26, 1988 are
eligible to participate in the Plan. Upon an executive's participation in the
Plan, the agreement previously in effect with an executive, and any and all
amendments thereto, are terminated as of the Plan Effective Date.
II DEFINITIONS
-----------
2.1 "Administrative Committee" and "Committee" mean the Plan Committee
appointed pursuant to Article V to manage and administer the Plan.
2.2 "Affiliate" means any affiliated subsidiary of Westco Bancorp, Inc.
2.3 "Annual Death Benefit" means the amount, As indexed, specified as a
death benefit payable on behalf of a Participant annually for a fixed period of
years in the Participant and Benefit Eligibility Schedule (substantially in the
form attached to the Plan as Exhibit I), in the event of a Participant's death
during employment with the Association.
2.4 "Annual Retirement Benefit" means the amount specified as payable
annually for a fixed period of years to a Participant as a retirement benefit in
the Participant and Benefit Eligibility schedule (substantially in the form
attached to the Plan as Exhibit I), in effect on the date of his or her
Termination of Service.
2.5 "As Indexed" and "Indexed", as applied to the Annual Death Benefit
amount, mean the prior year's Annual Death Benefit Amount increased by three (3)
percentage points at the beginning of each calendar year.
2.6 "Association" means the First Federal Savings and Loan Association of
Westchester, a stock chartered federal thrift institution, of Westchester,
Illinois, and any Affiliate which grants participation hereunder to an employee
of the Affiliate with the Association's consent.
2.7 "Beneficiary" means the person or persons entitled to receive benefits
upon the death of a Participant in accordance with Article III of the Plan.
2.8 "Change of Control" means a change of control of the Association or of
the Company of a nature that
(a) would be required to be reported in response to Item I (a) of the
current report on Form 8-K, as in effect on the date thereof, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"), even if the Association or the Company (as the case may be) is not then
subject to the Exchange Act; or
(b) results in a Change of Control of the Association within the
meaning of the Home Owners' Loan Act of 1933 and the Rules and Regulations
promulgated by the Office of Thrift Supervision (or
<PAGE>
its predecessor agency)("OTS"), as in effect on the dated hereof, provided that
-------- ----
(1) in applying the definition of change of control or presumptive
change of control or acting in concert or presumptive acting in concert as
set forth under the Rules and Regulations of the OTS, ownership be a person
or group, including a presumptive group, of at least 15% of the voting
stock of the Association or of the Company (as the case may be) shall be
required, and provided further that
-------- -------
(2) ownership of stock by a tax qualified employee benefit plan of the
Company or of the Association (as the case may be) shall not be subject to
presumptions of control or acting in concert; or
(c) without limitation, such a Change of Control shall be deemed to have
occurred at such time as
(1) any "person" (as the term is used in Section 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Association or of the Company representing 20% or more of the Association's or
the Company's (as the case may be) outstanding securities except for any
securities of the Association purchased by the Company in connection with the
conversion of the Association to the stock form and any securities purchased by
any Company-sponsored employee stock ownership plan and trust; or
(2) individuals who constitute the Board of the Association or of the
Company on the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election was approved by a vote of
at least three-quarters of the directors comprising the Incumbent Board, or
whose nomination for election by the Association's or the Company's (as the case
may be) stockholders was approved by the same Nominating Committee serving under
an Incumbent Board, shall be, for purposes of this clause (2), considered as
though he or she were member of the incumbent Board; or
(3) a plan of reorganization, merger, consolidation, or sale of all or
substantially all the assets of the Association or the Company or similar
transaction occurs in which the Association or the Company (as the case may be)
is not the resulting entity.
2.9 "Company" means Westco Bancorp, Inc., a Delaware corporation, its
successors and assigns.
2.10 "Compensation" means cash remuneration paid pursuant to this Plan for
services rendered prior to the date paid.
2.11 "Disability" shall have the same meaning and be determined in the
same manner as in the First Federal Savings and Loan Association of
Westchester's group long-term disability income plan. In the absence of such a
plan, "Disability" or "Disabled" shall mean a permanent impairment of the
physical or mental condition of a Participant, determined in the sole discretion
of the Committee, which prevents a Participant from performing the usual duties
of the Participant's employment with the Association. The determination as to a
Disability shall be made on the basis of such medical and other competent
evidence as the Committee shall deem relevant, and shall be binding on
Participant. In the case of a Retired Participant, Disability shall mean an
incapacity as a result of bodily injury or disease so as to prevent the
Participant from performing the postemployment consulting services required by
Section 3.14.
2.12 "Early Retirement Date" means the date of a Participant's
Termination of Service on or
-2-
<PAGE>
after his or her attainment of age 55 and fifteen (15) Years of Service.
2.13 "ERISA Funded" means that the Plan does not meet the "unfunded"
criterion of the exceptions to the application of Parts 2 through 4 of Subtitle
B of Title I of the Employee Retirement Income Security Act of 1974 (ERISA).
2.14 "Normal Retirement Date" and "Normal Retirement" mean the date of
Termination of Service of the Participant on or after his or her attainment of
age 65.
2.15 "Participant" means an employee of the Association who is eligible to
participate in the Plan in accordance with to Section 3.1, and who enters into a
Participation Agreement.
2.16 "Participation Agreement" and "Agreement" mean the First Federal
Savings and Loan of Westchester Executive Salary Continuation Plan
Participation Agreement, substantially in the form attached to this Plan
document as Exhibit II, executed between a Participant and the Association,
whereby a Participant agrees to the terms and provisions of the Plan and
designates his or her Beneficiary, and the Association agrees to pay the
Retirement Benefit in accordance with the provisions of the Plan and Agreement.
2.17 "Plan" means the First Federal Savings and Loan Association Executive
Salary Continuation Plan, as amended from time to time.
2.18 "Plan Effective Date" means August 1, 1996.
2.19 "Present Value" means the lump sum economic equivalent of a series of
payments, measured using the interest rate which could be achieved on the most
recently issued 5-year United States Treasury Note, if held to maturity, based
on price quotations published in the Wall Street Journal on the day immediately
preceding the date the lump sum payment is to be made.
2.20 "Retirement Date" means the date of a Participant's Termination of
Service on or after his or her Early Retirement Date or Normal Retirement Date,
as the case may be.
2.21 "Tax Funded" means that the interest of a Participant in this Plan
will be includable in the gross income of the Participant for Federal income tax
purposes prior to actual receipt of Plan benefits by the Participant.
2.22 "Termination for Cause" means the Participant's termination of
employment by the Association for conduct which constitutes a termination "for
cause" under the Participant's employment agreement.
2.23 "Termination of Service" means the cessation of Participant's
employment with the Association for any reason whatsoever, whether voluntarily
or involuntarily, including by reason of retirement, Disability, or death, but
excluding Termination for Cause.
2.24 "Years of Service" means years of service credited to a Participant in
the same manner as under the Association's tax qualified retirement plan, and
including years of service with any Affiliate. In its sole discretion, the
Committee may award additional Years of Service to a Participant or provide for
an alternative method for determining a Participant's Years of Service, at any
time prior to his or her Retirement Date.
III PARTICIPATION; DETERMINATION AND PAYMENT OF BENEFITS
----------------------------------------------------
3.1 Plan Participation. Eligibility to participate in the Plan shall be
------------------
limited to employees of the Association who are designated by the Administrative
Committee as eligible to participate in the
-3-
<PAGE>
Plan. The name of each eligible Participant and the Annual Retirement Benefit
payable as provided herein, shall be specified in the Participant and Benefit
Eligibility schedule in effect from time to time under the Plan, as shown in the
Exhibit I attached to the Plan. Each eligible employee must file and deliver a
Participation Agreement to the Association as a condition to becoming a
Participant in the Plan. Upon participation in the Plan, a Participant shall
cease to be eligible for any benefit previously in effect with respect to the
Participant in the agreement previously in effect, as described in his or her
Participation Agreement.
3.2 Retirement Benefit. Upon a Participant's Termination of Service on or
------------------
after his or her Retirement Date, the Association shall pay to the Participant,
in ten (10) annual installments, as Compensation earned prior to his or her
Retirement Date, the Annual Retirement Benefit applicable to the Participant,
vested in accordance with Section 3.7, specified in Exhibit I in effect on his
or her Retirement Date. The benefit shall be adjusted as provided in Section
3.9, and commence and be payable as provided in Sections 3.8 and 3.10,
respectively.
3.3 Death Benefit Upon Death Prior to Termination of Service. In the event
--------------------------------------------------------
a Participant dies prior to his or her Termination of Service, the Association
shall pay the Participant's Beneficiary, as Compensation for services rendered
by the Participant prior to his or her death, the Annual Death Benefit Amount
determined as follows:
(a) Amount Payable. The Annual Death Benefit Amount applicable to a
--------------
Participant shall be the amount, As Indexed, specified in the Exhibit I in
effect on the date of the Participant's death and applicable to the
Participant. Prior to a Participant's death, the Annual Death Benefit
Amount shall be Indexed on the first day of each calendar year. The first
Index adjustment shall be made on January 1, 1997.
(b) Upon a Participant's Death. The Annual Death Benefit Amount,
--------------------------
determined under Section 3.3(a), immediately above, shall be payable in ten
(10) annual installments, and shall commence and be payable as provided in
Sections 3.8 and 3.10. The provisions of Section 3.9 shall not apply to the
Annual Death Benefit amount.
3.4 Disability Benefit. In the event of a Participant's Disability prior
------------------
to his or her Retirement Date, the Association shall pay to the Disabled
Participant, as compensation earned prior to his Disability, the Annual
Retirement Benefit, vested in accordance with Section 3.5, applicable to the
Participant, specified in the Exhibit I in effect of the date of his or her
Disability. The benefit shall be adjusted and commence as provided in Sections
3.8 and 3.9, and be payable as provided in Section 3.10, or until the earliest
of the following events:
(a) The Participant ceases to be Disabled and resumes employment with
the Association;
(b) The Participant ceases to be Disabled and does not resume employment
with the Company. If the Participant has attained his Retirement Date, he
shall be entitled to the installments, if any, unpaid;
(c) The Participant dies. Any annual installment(s) remaining unpaid
shall be paid to the Participant's Beneficiary.
In its sole discretion, the Committee may determine to pay the Present Value of
a Disabled Participant's Annual Retirement Benefit in a lump sum, or in fewer
than ten (10) annual installments. In the event a previously Disabled
Participant does not resume employment with the Company, as provided in Section
3.4(b), such previously Disabled Participant shall not be required to return any
benefit amount paid in accordance with the immediately preceding sentence.
3.5 Termination for Cause. Notwithstanding any provision of this Plan to
---------------------
the contrary, if a
-4-
<PAGE>
Participant's Termination of Service is a Termination for Cause, the Participant
shall forfeit all rights and benefits under the Plan.
3.6 Benefit Payment in the Event of a Change of Control. Notwithstanding
---------------------------------------------------
the provisions of Section 3.7 to the contrary, in the event of a Change of
Control, the Association shall pay to the Participant, as Compensation earned
prior the Change of Control, a lump sum benefit equal to the Present Value of
the Annual Retirement Benefit payable at the Participant's Early Retirement
Date. For purposes of this Section, the date of the Change of Control shall be
the Participant's Retirement Date. Payment under this Section shall be made as
soon as practicable, but in no event later than ninety (90) days following the
Change of Control.
3.7 Vesting. A Participant's right to receive an Annual Retirement
-------
Benefit, adjusted in accordance with the provisions of Section 3.9, shall be one
hundred percent (100%) vested upon the earliest of the following events:
(a) the date the Participant attains age fifty-five (55) and has
attained fifteen (15) Years of Service with the Association; or
(b) the date a Participant is Disabled under the Plan; or.
(c) the date of death of the Participant.
Unless a Participant terminates employment under any one of the circumstances
described in (a)-(c) immediately above, he or she shall forfeit all rights and
benefits under the Plan.
3.8 Commencement of Payments. Unless otherwise provided, payments under
------------------------
this Plan shall commence on the first day of the month following the
Participant's Termination of Service, but in no event later than ninety (90)
days following receipt of notice by the Committee of an event which entitles a
Participant (or a Beneficiary) to payments under the Plan. The date of each
subsequent annual installment shall be on the same date each year.
3.9 Adjustment of Retirement Benefit Payment. Any amount payable to or on
----------------------------------------
behalf of a Participant prior to his or her Normal Retirement Date shall be
adjusted in accordance with this Section. The Annual Retirement Benefit payable
to a Participant whose Retirement Date is prior to his or her Normal Retirement
Date shall be reduced to a fraction of the Annual Retirement Benefit specified
in the Exhibit I. The numerator of the fraction shall be the Participant's Years
of Service and the denominator of the fraction shall be 30. In no event shall
the fraction so determined be greater than one (1).
3.10 Form of Benefit Payment. The amount of any benefit payable to or on
-----------------------
behalf of a Participant shall be paid in ten (10) equal annual installments.
Upon the death of a Participant after the commencement of payment of benefits in
accordance with this Section, Annual Retirement Benefit installment amounts
remaining unpaid shall be paid to the Participant's Beneficiary. Upon a written
request of a Participant (or his or her Beneficiary), delivered to the Committee
prior to the date a benefit payment is to commence or be made, the Committee
may, in its sole discretion, elect to pay a lump sum benefit equal to the
Present Value of all benefit payments remaining unpaid.
3.11 Recipients of Payments; Designation of Beneficiary. All payments to be
--------------------------------------------------
made by the Association under the Plan shall be made to the Participant during
his or her lifetime, provided that if the Participant dies prior to the
commencement or completion of such payments, then all subsequent payments under
the Plan shall be made by the Association to the Beneficiary or Beneficiaries
determined in accordance with this Section. The Participant shall designate a
Beneficiary by filing a written notice of such designation with the Committee in
such form as the Committee requires, and may change such designation without the
consent of such Beneficiary or
-5-
<PAGE>
Beneficiaries by filing a new designation in writing with the Committee. (In
community property states, the spouse of a married Participant shall join in any
designation of a Beneficiary other than the spouse.) If no designation shall be
in effect at the time when any benefits payable under this Plan shall become
due, the Beneficiary shall be the executor(s) or administrator(s) of the
deceased Participant's estate.
3.12 WITHHOLDING; EMPLOYMENT TAXES. To the extent required by the law in
-----------------------------
effect at the time payments are made, the Association shall withhold any taxes
required to be withheld by the federal, or any state or local, government.
3.13 FACILITY OF PAYMENT. Any benefit payable hereunder to any person under
-------------------
a legal disability, or to any person who, in the judgment of the Administrative
Committee, is unable to properly administer his or her financial affairs, may be
paid to the legal representative of such person, or may be applied for the
benefit of such person in a manner which the Committee may select.
3.14 POSTEMPLOYMENT CONSULTING SERVICES. Payment of an Annual Retirement
----------------------------------
Benefit to a Participant who retires from employment with the Association on or
after his or her Retirement Date under the Plan is contingent upon such
Participant providing postemployment consulting services to the Association
after his or her Retirement Date, for the thirty-six (36) consecutive calendar
months following such date; provided, however, that
-------- --------
(a) unless and except to the extent the Participant and the Committee
agree otherwise,
(1) such services shall not be less than ten (10) hours in any
twelve month period and shall total no more than seventy-five
(75) hours over the thirty-six (36) month consulting period.
Onsite services provided to the Association in each consecutive
twelve (12) month period must be at least ten (10) hours over a
period of two consecutive days; and
(2) such services shall be provided at times mutually acceptable
and convenient to the Association and the Participant; and
(3) the Participant shall be entitled to expense reimbursement
for reasonable costs incurred in connection with travel and
transportation incurred in connection with onsite services
provided to the Association, and
(4) the Participant shall not be obligated to provide any
services while he or she is ill or Disabled; and provided
--------
further, that
-------
(b) postemployment consulting services requested by the Association
shall be limited to services consistent with the individual's prior role
and position with the Association, and may include:
(1) review of the Association's strategic and business plans,
and of proposed acquisitions and mergers;
(2) review of the Association's facilities' development plan,
facilities' improvements, and architectural drawings;
(3) human resource planning and employee relations;
(4) review of the Association's finances and its long-term
financial plan; and provided further, that
-------- --------
(c) unless a Participant is ill or has a Disability, if a Participant
should refuse to provide any
-6-
<PAGE>
postemployment consulting services that he or she is required to perform
pursuant to this Section 3.14, any and all unpaid benefits under the Plan
that may be due or are to become due to such Participant (or to his or her
Beneficiary) shall be forfeited, unless the Participant remedies such
failure within a period of ten (10) days of receipt of written demand
therefor from the Committee. A Participant who is ready, willing, and able
to perform the services required by this Section and has so notified the
Committee shall be deemed to have fulfilled his or her duties if the
Association fails to assign duties to the Participant.
IV CLAIM FOR BENEFITS PROCEDURE
----------------------------
4.1 Claim for Benefits. Any claim for benefits under the Plan shall be
------------------
made in writing to the Committee. If such claim for benefits is wholly or
partially denied by the Committee, the Committee shall, within a reasonable
period of time, but not later than thirty (30) days after receipt of the claim,
notify the claimant of the denial of the claim. Such notice of denial shall be
in writing and shall contain:
(a) the specific reason or reasons for the denial of the claim;
(b) a reference to the relevant Plan provisions upon which the denial
is based;
(c) a description of any additional material or information necessary
for the claimant to perfect the claim, together with an explanation of why
such material or information is necessary; and
(d) an explanation of the Plan's claim review procedure.
4.2 Request for Review of a Denial of a Claim for Benefits. Upon the
------------------------------------------------------
receipt by the claimant of written notice of denial of the claim, the claimant
may within sixty (60) days file a written request to the Committee, requesting a
review of the denial of the claim, which review shall include a hearing if
deemed necessary by the Committee. In connection with the claimant's appeal of
the denial of his or her claim, he or she may review relevant documents and may
submit issues and comments in writing.
4.3 Decision Upon Review of Denial of Claim for Benefits. The Committee
----------------------------------------------------
shall render a decision on the claim promptly, but no more than thirty (30)days
after the receipt of the claimant's request for review, unless special
circumstances (such as the need to hold a hearing) require an extension of time,
in which case the thirty (30) day period shall be extended to sixty (60) days.
Such decision shall:
(a) include specific reasons for the decision;
(b) be written in a manner calculated to be understood by the
claimant; and
(c) contain specific references to the relevant Plan provisions upon
which the decision is based
Subject to a timely request for arbitration of a dispute under Section 7.5,
the decision of the Committee shall be final and binding in all respects on both
the Association and the claimant.
V ADMINISTRATION
--------------
5.1 Plan Administrative Committee. The Plan shall be administered by the
-----------------------------
Compensation Committee of the Board of Directors of the Company, which shall be
the Administrative Committee of the Plan. The Administrative Committee may
assign duties to an officer or other employees of the
-7-
<PAGE>
Association, and delegate such duties as it sees fit. The Administrative
Committee shall be responsible for the management, operation and administration
of the Plan.
5.2 General Rights, Powers and Duties of Administrative Committee. In
-------------------------------------------------------------
addition to any powers, rights, and duties set forth elsewhere in the Plan, it
shall have the following powers and duties to:
(a) adopt, alter, and repeal such rules, regulations, guidelines, and
practices consistent with the provisions of the Plan as it deems necessary for
the proper and efficient administration of the Plan;
(b) administer the Plan in accordance with its terms and any rules and
regulations it establishes;
(c) maintain records concerning the Plan sufficient to prepare reports,
returns and other information required by the Plan or by law;
(d) construe and interpret the Plan, to correct any defect, omission, or
inconsistency in the Plan, and to resolve all questions arising under the Plan;
(e) direct the Association to pay benefits under the Plan, and to give
such other directions and instructions as may be necessary for the proper
administration of the Plan;
(f) employ or retain agents, attorneys, actuaries, accountants or other
persons who may also be employed by or represent the Association; and
(g) be responsible for the preparation, filing and disclosure on behalf of
the Plan of such documents and reports as are required by any applicable federal
or state law.
5.3 Information to be Furnished to Administrative Committee. The records
-------------------------------------------------------
of the Association shall be determinative of each Participant's period of
employment, Retirement Date, Termination of Service and the reason therefor,
leave of absence, Years of Service, and personal data. The Participant and his
or her Surviving Spouse shall furnish to the Committee such evidence, data or
information, and execute such documents as the Committee requests.
5.4 Responsibility. No member of the Committee shall be liable to any
--------------
person for any action taken or omitted in connection with the administration of
this Plan unless attributable to his or her own fraud or willfull misconduct;
nor shall the Association be liable to any person for any such action unless
attributable to fraud or willful misconduct on the part of a trustee, officer,
or employee of the Association. Further, the Association shall hold harmless and
defend any individual in the employment of the Association and any trustee of
the Association against any claim, action, or liability asserted against him or
her in connection with any action or failure to act regarding the Plan, except
as and to the extent such liability may be based upon the individual's own
willful misconduct or fraud. This indemnification shall not duplicate, but may
supplement, any coverage available under any applicable insurance coverage.
VI AMENDMENT AND TERMINATION
-------------------------
6.1 Association's Right to Terminate or Amend. The Plan may be
-----------------------------------------
terminated or amended in whole or in part by the Association at any time. Notice
of termination or of any material amendment shall be given in writing to the
Administrative Committee and to each Participant and each Beneficiary of a
deceased Participant. Without the consent of the Participant, no termination or
amendment shall decrease the value or adversely affect a Participant's rights
with respect to a Participant's vested Annual Retirement Benefit, or its Present
Value equivalent, determined as of
-8-
<PAGE>
the amendment or termination date, and based on the Participant's eligibility
for a benefit as of such date.
6.2 Termination in the Event of a Change of Control. In the event of a
-----------------------------------------------
Change of Control, the Plan shall terminate upon payment to each Participant of
the benefit amount provided for in accordance with Section 3.6.
6.3 Special Termination. Any other provision of the Plan to the contrary
-------------------
notwithstanding, the Plan shall terminate if the Plan is held to be ERISA Funded
or Tax Funded by a federal court, and appeals from that holding are no longer
timely or have been exhausted. The Association may terminate the Plan if it
determines, based on a legal opinion which is satisfactory to the Association,
that either judicial authority or the opinion of the U.S. Department of Labor,
Treasury Department or Internal Revenue Service (as expressed in proposed or
final regulations, advisory opinions or rulings, or similar administrative
announcements) creates a significant risk that the Plan will be held to be ERISA
Funded or Tax Funded, and failure to so terminate the Plan could subject the
Company or the Participants to material penalties. Upon any such termination,
the Association may:
(a) transfer the rights and obligations of the Participants and the
Association to a new plan established by the Association, which is not
deemed to be ERISA Funded or Tax Funded, but which is similar in all other
respect to this Plan, if the Association determines that it is possible to
establish such a Plan;
(b) If the Association, in its sole discretion, determines that it is not
possible to establish the Plan in (a) above, the Association shall pay to
each Participant, as Compensation for services rendered prior to the
termination of the Plan, a lump sum benefit equal to the Present Value of
the Annual Retirement Benefit payable to the Participant at his or her
Normal Retirement Date, but without adjustment otherwise provided for in
Section 3.7.
(c) pay a lump sum benefit equal to the Present Value equivalent of a
Participant's vested accrued Annual Retirement Benefit, adjusted as
provided for in Section 3.7 based on years of Service credited as of that
date, to the extent that a federal court has held that the interest of the
Participant in the Plan is includable in the gross income of the
Participant for federal income tax purposes prior to actual payment of Plan
benefits. The Present Value equivalent of any remaining accrued benefit
shall remain as an obligation of the Association, to be paid to the
Participant as provided in the Plan;
(d) pay to a Participant a lump sum benefit equal to the Present Value
equivalent of a Participant's vested accrued Annual Retirement Benefit,
adjusted as provided for in Section 3.7 based on Years of Service credited
as of that date, if, based on a legal opinion satisfactory to the
Association, there is a significant risk that the Plan is covered by ERISA
and such Participant will be determined not to be part of a "select group
of management or highly compensated employees" for purposes of ERISA.
Notwithstanding the preceding provisions of this Section, in the event a
Participant receives from the Internal Revenue Service an assessment of income
taxes based on treatment of amounts payable under the Plan being includable in
gross income prior to actual payment of Plan benefits, the Association shall pay
to the Participant the amount of a Participant's benefit, but in no event an
amount greater than an amount equal to the Present Value equivalent of a
Participant's vested accrued Annual Retirement Benefit, adjusted as provided for
in Sections 3.7, 3.8, and 3.9, based on Years of Service credited as of that
date, that has been treated as includable in gross income by the Internal
Revenue Service. The Participant's remaining accrued benefit under the Plan
shall be determined under Article III reduced by the equivalent Present Value of
the amount(s) previously paid to the Participant under the preceding sentence.
-9-
<PAGE>
VII MISCELLANEOUS
------------
7.1 Separation of Plan: No Implied Rights. The Plan shall not operate to
-------------------------------------
increase or decrease any benefit payable to or on behalf of a Participant (or
his or her Beneficiary) from any other plan maintained by the Association.
Neither the establishment of the Plan nor any amendment thereof shall be
construed as giving any Participant, his or her Beneficiary, or any other person
any legal or equitable right unless such right shall be specifically provided
for in the Plan or conferred by specific action of the Association in accordance
with the terms and provisions of the Plan. Except as expressly provided in the
Plan, the Association shall not be required or be liable to make any payment
under the Plan.
7.2 No Right to Association Assets. Neither the Participant nor any other
------------------------------
person shall acquire by reason of the Plan any right in or title to any assets,
funds or property of the Association whatsoever, including, without limiting the
generality of the foregoing, any specific funds, assets or other property which
the Association, in its sole discretion, may set aside in anticipation of a
liability hereunder. Any benefits which become payable hereunder shall be paid
from the general assets of the Association. The Participant shall have only a
contractual right to the amounts, if any, payable hereunder, unsecured by any
asset of the Association. Nothing contained in the Plan constitutes a guarantee
by the Company that the assets of the Association shall be sufficient to pay any
benefits to any person.
7.3 No Employment Rights. Nothing herein shall constitute a contract of
--------------------
employment or of continuing service or in any manner obligate the Association to
continue the services of the Participant, or, except as hereinbefore provided in
Section 3.13, obligate the Participant to continue in the service of the
Association, or as a limitation of the right of the Association to discharge any
of its employees, with or without cause. Nothing herein shall be construed as
fixing or regulating the compensation or other remuneration payable to the
Participant.
7.4 Offset. If, at the time payments or installments of payments are to be
------
made hereunder, the Participant or his or her Beneficiary, or both, are indebted
or obligated to the Association, then the payments remaining to be made to the
Participant or his or her Beneficiary, or both, may, at the discretion of the
Association, be reduced by the amount of such indebtedness or obligation,
provided, however, that an election by the Association not to reduce any such
payment or payments shall not constitute a waiver of its claim for such
indebtedness or obligation.
7.5 Arbitration. The denial of a benefit shall be final and binding on a
-----------
Participant, unless the Participant provides to the Association a written
request for arbitration within one (1) year of the date the Committee issues a
final denial of such benefit. Any dispute or controversy with respect to the
Plan between a Participant (or his or her Beneficiary) and the Association shall
be resolved exclusively by arbitration, conducted in the City of Chicago,
Illinois, in accordance with the rules governing commercial arbitration
established by the American Arbitration Association, and a judgment upon the
award may be entered in any court having jurisdiction thereof. The arbitrator's
review of a denied benefit shall be de novo. The arbitrator(s) shall have no
power to add to, subtract from, or modify in any other way, the terms of the
Plan. Except as otherwise provided in sentence immediately following, the costs
of such arbitration shall be borne equally by the parties in arbitration, and
neither party shall be entitled to attorneys' fees expended in the course of
such arbitration or the enforcement of any award rendered thereunder.
Notwithstanding the preceding sentence, the costs of arbitration allocated to a
party, and the reasonable attorneys' and experts' fees expended in the course of
such arbitration, shall be paid by the Association if such costs or attorneys'
and experts' fees are allocated to or incurred in any action involving the
Association's payment of or refusal to pay any amount to a participant in
accordance with the Plan.
7.6 Protective Provisions. In order to facilitate the payment of benefits
---------------------
hereunder, each employee designated eligible shall cooperate with the
Association by furnishing any and all
-10-
<PAGE>
information requested by the Association, and performing such other actions as
may be reasonably requested by the Association. If the employee refuses to
cooperate, he or she shall not become a Participant in the Plan and the
Association shall have no further obligation to him or her under the Plan. In
such event, no benefit shall be payable to the Participant or his or her
Beneficiary.
7.7 Non-assignability. Neither the Participant nor any other person shall
-----------------
have any voluntary or involuntary right to commute, sell, assign, pledge,
anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in
advance of actual receipt the amounts, if any, payable hereunder, or any part
thereof, which are expressly declared to be unassignable and non-transferrable.
No part of the amounts payable shall be, prior to actual payment, subject to
seizure or sequestration for the payment of any debts, judgments, alimony or
separate maintenance owed by the Participant or any other person, or be
transferrable by operation of law in the event of the Participant's or any
other person's bankruptcy or insolvency.
7.8 Notice. Any notice required or permitted to be given under the Plan
------
shall be sufficient if in writing and hand delivered, or sent by registered or
certified mail to the last known address of the Participant if to the
Participant, or, if given to the Association, to the principal office of the
Association, directed to the attention of the Administrative Committee. Such
notice shall be deemed given as of the date of delivery, or, if delivery is made
by mail, as of the date shown on the postmark or the receipt for registration or
certification.
7.9 Governing Laws. The Plan shall be construed and administered according
--------------
to the laws of the State of Illinois.
IN WITNESS WHEREOF, the Board of Directors of the Association has adopted the
First Federal Savings and Loan Association of Westchester EXECUTIVE SALARY
CONTINUATION PLAN effective August 1, 1996.
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF WESTCHESTER
By /s/ Roslyn M. Lesak
--------------------------
Date September 5, 1996 Its Chairman of the Board
--------------------------- -----------------------------
-11-
<PAGE>
EXHIBIT NO. 11.0 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
-----------------
<S> <C>
Net income 3,288,101
Weighted average shares outstanding 2,631,287
Common stock equivalents due to dilutive 207,100
effect on stock options
Total weighted average common shares 2,838,387
and equivalents outstanding
Primary earnings per share $ 1.16
Total weighted average common shares 2,838,387
and equivalents outstanding
Additional dilutive shares using the end of period 5,153
market value versus the average market value
when applying the treasury stock method
Total weighted average common shares and 2,843,540
equivalents outstanding for fully diluted
computation
Fully diluted earnings per share $ 1.16
</TABLE>
<PAGE>
Exhibit 13
CORPORATE PROFILE
- --------------------------------------------------------------------------------
Westco Bancorp, Inc. is the parent company of First Federal Savings of
Westchester, headquartered in Westchester, Illinois. First Federal Savings of
Westchester was founded in 1906 with the goal of providing savings and home loan
financial services to the communities it served. It continues to fulfill that
primary goal today with full service operations in a primary market that
includes the western suburban area of Chicago. The common stock of Westco
Bancorp, Inc. trades under the symbol of WCBI on the NASDAQ National Market
System. Stock subscriptions in Westco Bancorp, Inc. were first offered to the
public on June 26, 1992.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<S> <C>
Selected Financial Highlights.............................................. 1
Letter to Shareholders..................................................... 2-3
FINANCIAL SECTION
Selected Financial Data.................................................... 4-5
Management's Discussion and Analysis....................................... 6-13
Independent Auditors' Report............................................... 14
Consolidated Statement of Financial Condition.............................. 15
Consolidated Statement of Income........................................... 16
Consolidated Statement of Changes in Stockholders' Equity.................. 17
Consolidated Statement of Cash Flows....................................... 18
Notes to Consolidated Financial Statements.................................19-33
Officers and Directors..................................................... 34
Corporate Information...................................................... 34
</TABLE>
<PAGE>
1
- --------------------------------------------------------------------------------
SELECTED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(Dollars in Thousands) AT DECEMBER 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets $310,992 $306,143 $299,571
Loans receivable, net 223,898 209,069 205,115
Deposits 255,154 250,644 245,323
Increase (decrease) in deposits 4,510 5,321 (4,280)
Stockholders' equity 47,833 47,917 46,388
Equity to total assets 15.38% 15.65% 15.48%
Net interest income $ 11,010 $ 10,982 $ 10,413
Net income 3,288 4,167 3,961
Loans originated 58,158 48,594 57,866
Interest rate spread during period 2.88% 3.06% 2.90%
Fully-diluted earnings per share $1.16 $1.42 $1.27
Book value per share at end of period $18.63 $17.78 $16.41
</TABLE>
<PAGE>
4
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA AND
OTHER DATA OF THE COMPANY
<TABLE>
<CAPTION>
AT DECEMBER 31
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets $310,992 306,143 299,571 301,806 310,699
Loans receivable, net 223,898 209,069 205,115 189,800 188,757
Investment securities 69,564 82,612 81,816 94,995 106,051
Deposits 255,154 250,644 245,323 249,603 257,720
Stockholders' equity 47,833 47,917 46,388 45,033 44,243
- ------------------------------------------------------------------------------------------------------------
SELECTED OPERATING DATA:
Interest income $ 23,384 22,414 20,818 21,675 22,843
Interest expense 12,374 11,432 10,405 11,236 14,056
- ------------------------------------------------------------------------------------------------------------
Net interest income 11,010 10,982 10,413 10,439 8,787
Less provision for loan losses -- -- -- -- 449
- ------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 11,010 10,982 10,413 10,439 8,338
- ------------------------------------------------------------------------------------------------------------
Non-interest income:
Loan fees and service charges 274 187 199 284 288
Commission income 250 245 306 297 350
Unrealized gain on trading
securities - net 7 34 10 54 --
Gain (loss) on sale of securities 80 145 (10) 13 (11)
Gain on sale of real estate owned -- -- 30 33 9
Other income 252 233 298 325 292
- ------------------------------------------------------------------------------------------------------------
Total non-interest income 863 844 833 1,006 928
- ------------------------------------------------------------------------------------------------------------
Non-interest expense:
Staffing costs 3,199 3,184 3,030 3,149 2,914
Office occupancy and equipment 468 543 498 462 451
Federal deposit
insurance premiums 557 571 583 559 562
SAIF special assessment 1,602 -- -- -- --
Other 1,050 1,046 986 1,080 1,029
- ------------------------------------------------------------------------------------------------------------
Total non-interest expense 6,876 5,344 5,097 5,250 4,956
- ------------------------------------------------------------------------------------------------------------
Income before income tax expenses 4,997 6,482 6,149 6,195 4,310
Income tax expenses 1,709 2,315 2,188 2,086 1,413
Income before cumulative effect of
change in accounting principles 3,288 4,167 3,961 4,109 2,897
Cumulative effect of change in
accounting for income tax (1) -- -- -- -- 254
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,288 4,167 3,961 4,109 2,643
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects adoption of Statement of Financial Accounting Standards No. 109
(SFAS 109)
<PAGE>
5
- --------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS AND OTHER DATA
<TABLE>
<CAPTION>
AT DECEMBER 31
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets 1.06% 1.38% 1.30% 1.35% .90%
Return on average
stockholders' equity 6.83 8.86 8.54 9.08 7.66
Average stockholders' equity to
average assets 15.56 15.61 15.24 14.90 11.79
Stockholders' equity to total assets 15.38 15.65 15.48 14.92 14.24
Interest rate spread during period 2.88 3.06 2.90 2.90 2.45
Net interest margin (1) 3.65 3.77 3.52 3.55 3.08
Operating expenses to
average assets 2.22 1.77 1.67 1.73 1.69
Net interest income to operating
expenses 1.60x 2.05x 2.04x l.99x 1.77x
Average interest-earning assets to
average interest-bearing liabilities 1.19x 1.18x 1.18x 1.17x 1.11x
ASSET QUALITY RATIOS:
Non-performing loans to
total loans (2) .70% .55% .15% .40% .41%
Non-performing assets to
total assets (3) .50 .37 .25 .29 .33
Allowance for loan losses
to total loans .39 .42 .43 .49 .49
Allowance for loan losses
to non-performing loans 56.34 77.37 286.51 119.68 115.48
Allowance for loan losses to
non-performing assets 56.34 77.37 116.88 106.19 90.07
REGULATORY CAPITAL RATIOS: (4)
Tangible 13.06% 13.28% 13.45% 13.18% 11.52%
Core 13.06 13.28 13.45 13.18 11.52
Risk-based 30.51 33.14 34.05 36.14 32.51
OTHER DATA:
Loan originations $58,158 $48,594 $57,866 $69,374 $67,969
Number of deposit accounts 18,635 18,992 19,043 19,166 20,304
Book value per share outstanding(6) $18.63 $17.78 $16.41 $15.22 $13.50
Earnings per share: (5)(6)
Primary $1.16 $1.43 $1.27 $1.24 $.76
Fully-diluted $1.16 $1.42 $1.27 $1.23 $.76
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculation is based upon net interest income before provision for loan
losses divided by average interest-earning assets.
(2) Non-performing loans consists of loans 90 days or more delinquent.
(3) Non-performing assets consists of non-performing loans and real estate
owned.
(4) OTS capital ratio requirements to total assets consists of a tangible
capital ratio of 1.5%, a core capital ratio of 3.0% and a risk-based capital
ratio of 8.0%.
(5) Earnings per share for 1992 stated after effect of accounting change for
income taxes which resulted in an $.11 per share reduction.
(6) Per share data has been adjusted to reflect the 3 for 2 stock split in 1996.
<PAGE>
6
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
Westco Bancorp, Inc. (the "Company") was organized on March 11, 1992 in Delaware
as the holding company for First Federal Savings and Loan Association of
Westchester, (the "Association") in connection with the Association's conversion
from a federally chartered mutual savings and loan to a stock savings and loan
association. Primarily as a result of buy backs and a three for two stock split
in May, 1996, outstanding shares at December 31, 1996 totalled 2,567,053. Westco
Bancorp, Inc. stock is listed on the Nasdaq National Market and trades under the
symbol "WCBI".
The Company's consolidated results of operations are primarily dependent upon
the difference between the interest income earned on investments and the
interest paid on deposits and borrowings and to a lesser degree, non-interest
income and non-interest expense. Non-interest expense includes operating
expenses consisting primarily of employee compensation and benefits, federal
deposit insurance premiums, occupancy related expenses and other general and
administrative expenses.
Furthermore, these results are also dependent upon the general economic
environment resulting from the federal government's fiscal and monetary
policies, especially those affecting interest rates. Regulations also affect the
results of operations.
Assets of the Company totalled $311.0 million at December 31, 1996 with net
loans outstanding and total deposits amounting to $223.9 million and $255.2
million respectively. Stockholders' equity in the Company totalled $47.8
million, and the Company is considered "well capitalized" under OTS regulations.
The Company continues to primarily focus lending on one-to four-family
owner-occupied dwellings.
MANAGEMENT STRATEGY
The Company has been profitable for the past 15 years and has historically
focused its lending activities on traditional one-to four-family loans. The
Company's interest income is primarily derived from mortgage loans secured by
one-to four-family residential real estate, which totalled $180.8 million or
79.6% of the total loan portfolio at December 31, 1996. Because of this focus,
and as a result of the Company's underwriting standards, the Company has
experienced minimal losses on its loans. This asset structure does, however,
increase the Company's portfolio concentration risk by making the value of the
portfolio more susceptible to declines in real estate values in its market area.
The Company's management's strategy is to maintain profitability and a strong
capital position by growing at a rate that does not exceed its ability to
generate earnings. Although capital does not eliminate the exposure of the
Company's net interest income to fluctuations in interest rates, it does allow
the Company greater protection and flexibility when net interest income
decreases as a result of increases in the cost of funds. This strategy is
accomplished by (i) maintaining high asset quality, (ii) originating primarily
one-to four-family residential mortgages for the Company's portfolio, (iii)
managing deposit pricing at affordable levels, (iv) controlling interest rate
risk with a relatively high ratio of liquidity made up of short and intermediate
term government securities, (v) controlling operating expenses, and (vi)
controlling growth. The Company attempts to offset the effects of a narrowing
interest rate spread by improving non-interest income.
As a result of the Company's long-standing policy of originating mortgage loans
secured principally by one-to four-family, owner-occupied, primary residences
that meet the Company's underwriting standards, the Company has maintained high
asset quality. Approximately 67% of these mortgage loans have fixed rates and
33% have adjustable rates. The Company's ratio of non-performing loans to total
loans receivable was .70% at December 31, 1996 up from .55% at December 31,
1995. Although closely monitored, there can be no assurance that the Company
will not experience increased loan losses in the future.
The Company continues to aggressively promote bi-weekly payment loans. Bi-weekly
payment plans accelerate the loan's amortization and improve the Company's cash
flow, thereby reducing long-term interest rate risk and more rapidly increasing
borrowers' equity positions. At December 31, 1996, 32.4% of the Company's total
loan portfolio was on a bi-weekly payment basis.
The Company controls expenses primarily through a reporting process which
requires the comparison of monthly and annual expenses to budgeted amounts.
These reports are submitted monthly to the Board of Directors, and the cause of
any major discrepancy must be determined. The $1.6 million one-time special
assessment by the FDIC to recapitalize the Savings Association Insurance Fund in
1996 had a negative impact on the Company's historically low expense ratio.
Without the SAIF assessment, the expense ratio would have been 1.71%, or 3.4%
lower than in 1995.
The Company has taken steps to reduce or control its interest rate risk by
maintaining a significant portfolio of U.S. Treasury investments with short and
intermediate terms to maturity. In addition to potentially lower borrowing costs
which would be available using these securities as collateral, this portfolio
provides for the periodic reinvestment of funds at actual market rates without
future repayment risk. Additional current period earnings from higher yielding
assets such as loans or mortgage-backed securities have been foregone for these
reinvestment advantages. Although all of these securities are currently held for
investment, the Company may determine to purchase and hold securities for sale
in the future. Most assets of the Company are invested in short term U.S.
Treasury and agency securities until other investment opportunities are
identified.
<PAGE>
7
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
(continued)
Under SFAS No. 115, sales of securities within three months of maturity are
considered to have been held to maturity. All equity securities are classified
as held for trading.
The Company prices deposit accounts based upon the availability of investment
opportunities. Management believes that ideally, because of the security
provided customers by federal deposit insurance, U.S. Treasury yields should be
the primary guideline for pricing accounts minus an allowance for depositor
convenience. By maintaining "laddered" maturities in the liquidity portfolio,
the Company should be able to absorb deposit outflows when deposit interest
rates become unaffordable. In addition, the Company does not pursue an
aggressive growth strategy which would force the Company to focus exclusively on
competitors' rates rather than affordability.
The Company intends to continue to increase shareholder value. As of
December 31, 1996, the Company had completed six stock repurchase programs. The
Company's directors approved a seventh in February. The Company's Board of
Directors raised its quarterly dividend to $0.15 per share to stockholders of
record as of December 30, 1996. The dividend permits shareholders to share
directly in the success of the operations.
NET PORTFOLIO VALUE ANALYSIS
Net Portfolio Value analysis provides a quantification of interest rate risk.
This approach calculates the difference between the present value of
liabilities, expected cash flows from assets and cash flows from off-balance
sheet contracts. Under OTS regulations, an institution's normal level of
interest rate risk in the event of an immediate and sustained 200 basis point
change in interest rates is a decrease in the institution's Net Portfolio Value
in an amount not exceeding 2% of the Net Portfolio Value under present
conditions. Such regulation would require most thrift institutions with greater
than the normal interest rate exposure to take a deduction from their total
capital available to meet their risk-based capital requirement. The amount of
the deduction is one-half of the difference between the institution's actual
calculated exposure to the 200 basis point rate change and the 2% of the Net
Portfolio Value under present conditions considered normal. Savings institutions
with less than $300 million in assets and a total capital ratio in excess of 12%
would be exempt from this requirement unless otherwise determined by the OTS.
The OTS has delayed implementation of this regulation.
At December 31, 1996, 2% of the Association's Net Portfolio Value was $950,000,
and the maximum decrease in the Net Portfolio Value for a 200 basis point change
in interest rates, as calculated by the OTS, is $6.5 million. As a result, if
the rule were in effect, the Association would have been required to make a $2.8
million deduction from total capital in calculating its risk-based capital
requirement. This deduction, however, would have left the institution's
risk-based capital level $27 million in excess of the risk-based capital
requirement.
The following table presents the OTS analysis of the Association's estimated
interest rate risk as measured by changes in the Net Portfolio Value for
instantaneous and sustained parallel shifts in interest rates, both up and down
400 basis points in increments of 100 basis points, at December 31, 1996.
<TABLE>
<CAPTION>
Net Portfolio Value
Assumed Change --------------------------------------
in Interest Rates $ Amount $ Change % Change
- ------------------------------------------------------------------
(Basis Points) (In Thousands of Dollars)
<S> <C> <C> <C>
+400 $33,495 $(13,840) -29%
+300 37,117 (10,218) -22
+200 40,812 (6,524) -14
+100 44,359 (2,976) -6
0 47,335
-100 49,271 1,709 4
-200 49,271 1,936 4
-300 49,286 1,951 4
-400 50,224 2,889 6
</TABLE>
As indicated above, the Net Portfolio Value of the Association is expected to
decline $6.5 million in the event of a 200 basis point immediate and sustained
increase in interest rates. However, a similar decrease in interest rates would
not result in an expected increase in the Net Portfolio Value.
Certain assumptions were used by OTS in calculating the changes presented,
including those regarding the range of current interest rates, loan prepayment
speeds, deposit decay rates, the slope of the Treasury yield curve and the
market values of certain assets under the various rate scenarios. Also, no
allowance is made for expected changes in delinquency patterns under the various
rate scenarios. Management can give no assurance that the Association's assets
and liabilities would perform in the manner set forth above.
The Board of Directors has established parameters for monitoring the
Association's interest rate risk in this manner, and it reviews the analysis on
a quarterly basis. The level of interest rate risk indicated in the above
presentation falls within the parameters established as of December 31, 1996.
<PAGE>
8
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
(continued)
RATE/VOLUME ANALYSIS
The table on the bottom presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), (iii) changes attributable to the combined
impact of volume and rate (changes in the rate multiplied by the changes in the
volume), and (iv) the net change. The changes attributable to the combined
impact of volume and rate have been allocated proportionately to the changes due
to volume and the changes due to rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 COMPARED TO 1995 1995 COMPARED TO 1994
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
- -----------------------------------------------------------------------------------------------------------------------------------
RATE/ RATE/
RATE VOLUME VOLUME NET RATE VOLUME VOLUME NET
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net 145 920 8 1,073 177 854 9 1,040
Interest-bearing deposits (85) 116 (25) 6 136 48 37 221
Investment securities (115) (115) 1,211 (687) (206) 318
FHLB Stock 3 3 6 12 5 17
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL 63 924 (17) 970 1,536 220 (160) 1,596
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Passbook accounts 20 (90) (1) (71) 7 (252) (245)
NOW accounts (9) 24 15 3 2 5
Money market accounts (57) (57) (133) (133)
Certificate accounts 400 624 30 1,054 895 452 54 1,401
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL 411 501 29 941 905 69 54 1,028
- -----------------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN NET
INTEREST INCOME 29 568
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
9
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
(continued)
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
upon the volume of interest-earning assets, interest-bearing liabilities and the
interest rate earned or paid on them.
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the period indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods shown. Average balances are derived from average
monthly balances except for accounts with high balance fluctuations during the
month, then average daily balances are used. Management does not believe that
the use of average monthly balances has caused any material differences in the
information presented. The average balances of loans receivable include loans on
which the Company has discontinued accruing interest. Total interest-earning
assets are net of discounts and premiums and accrued interest payable, which are
non-interest bearing. The yields and costs include fees which are considered
adjustments to yield.
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
- ---------------------------------------------------------------------------------------------------------------
ASSETS: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net $216,166 $18,612 8.61% $205,407 $17,539 8.54%
Interest-bearing deposits 7,774 404 5.20 6,025 398 6.61
Investment securities 75,580 4,241 5.61 77,692 4,356 5.61
Federal Home Loan Bank
("FHLB") Stock 1.873 127 6.78 1,821 121 6.64
- ---------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $301,393 $23,384 7.76 $290,945 $22,414 7.70
- ---------------------------------------------------------------------------------------------------------------
NON-INTEREST EARNING ASSETS 7,900 10,262
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $309,293 $301,207
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
DEPOSITS:
Passbook accounts $ 62,508 $ 1,884 3.01% $ 65,519 $ 1,955 2.98%
NOW accounts 16,040 297 1.85 14,791 282 1.91
Money market accounts 10,228 292 2.85 12,264 349 2.85
Certificate accounts 164,697 9,901 6.01 153,860 8,847 5.75
- ---------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $253,473 $12,374 4.88 $246,434 $11,433 4.64
- ---------------------------------------------------------------------------------------------------------------
NON-INTEREST BEARING LIABILITIES 7,683 7,750
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $261,156 $254,184
STOCKHOLDERS' EQUITY 48,137 47,023
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $309,293 $301,207
- ---------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME/INTEREST RATE
SPREAD (1) $11,010 2.88% $10,981 3.06%
- ---------------------------------------------------------------------------------------------------------------
NET EARNINGS ASSETS/NET INTEREST
MARGIN (2) $ 47,920 3.65% $ 44,511 3.77%
- ---------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS TO
INTEREST-BEARING LIABILITIES 1.19X 1.18X
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
1994
- -------------------------------------------------------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
- -------------------------------------------------------------------------------------
ASSETS: (Dollars in Thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net $195,306 $16,499 8.45%
Interest-bearing deposits 4,745 177 3.73
Investment securities 93,624 4,038 4.31
Federal Home Loan Bank
("FHLB") Stock 1,742 104 5.94
- -------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $295,417 $20,818 7.05
- -------------------------------------------------------------------------------------
NON-INTEREST EARNING ASSETS 8,996
- -------------------------------------------------------------------------------------
TOTAL ASSETS $304,413
- -------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
DEPOSITS:
Passbook accounts $ 73,994 $ 2,200 2.97%
NOW accounts 14,680 277 1.89
Money market accounts 16,910 482 2.85
Certificate accounts 145,053 7,446 5.13
- -------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES $250,637 $10,405 4.15
- -------------------------------------------------------------------------------------
NON-INTEREST BEARING LIABILITIES 7,380
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES $258,017
STOCKHOLDERS' EQUITY 46,396
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $304,413
- -------------------------------------------------------------------------------------
NET INTEREST INCOME/INTEREST RATE
SPREAD (1) $10,413 2.90%
- -------------------------------------------------------------------------------------
NET EARNINGS ASSETS/NET INTEREST
MARGIN (2) $ 44,780 3.52%
- -------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS TO
INTEREST-BEARING LIABILITIES 1.18X
- -------------------------------------------------------------------------------------
</TABLE>
(1) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income before the provision for
loan losses divided by average interest-earning assets.
<PAGE>
10
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
(continued)
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995.
GENERAL. Net income for the year ended December 31, 1996, totalled $3.3 million,
a decrease of $879,000 or 21.1%, from $4.2 million in 1995. The reasons for this
decrease was a $1.6 million one-time special assessment made by the FDIC to
recapitalize the Savings Association Insurance Fund pursuant to legislation
signed into law in September, 1996. This assessment was partially offset by an
increase of $28,000 in net interest income, and increase of $18,000 in
non-interest income, a decrease of $69,000 in other non-interest expenses and a
$606,000 decrease in income taxes.
INTEREST INCOME. Interest income increased $970,000, or 4.3%, to $23.4 million
in 1996 from $22.4 million for 1995. The increase was the result of a $10.5
million increase, or 3.6%, in average earning assets and a slight increase in
the average asset yield to 7.76% in 1996 from 7.70% in 1995. Total interest
income on loans increased $1.1 million, or 6.1%, to $18.6 million in 1996 from
$17.5 million in 1995. Interest on investments decreased $109,000 to $4.6
million in 1996 from $4.7 million in 1995. These changes resulted primarily from
the Company's redeployment of approximately $9.0 million in treasury securities
into lending programs.
INTEREST EXPENSE. For the year ended December 31, 1996, interest expense
increased $1.0 million, or 9.9%, to $12.4 million as compared to $11.4 million
for the year ended December 31, 1995. The primary reasons for the increase was
an increase in the average cost of liabilities to 4.88% in 1996 from 4.64% in
1995 and an increase in the average balance of interest-bearing liabilities of
$7.0 million, or 2.9%. The increase in the average cost of liabilities was
primarily due to certificates of deposits being renewed at interest rates which
were higher than the interest rates at maturity, an increase in the average
balance of certificates of deposit and a decrease in the average balance of
passbook and money market accounts. Certificate accounts also increased as a
result of interest credited.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income before
provision for loan losses essentially remained the same in 1996 and 1995 at
$11.0 million, but the interest rate spread decreased 18 basis points to 2.88%
in 1996 from 3.06% in 1995.
PROVISION FOR LOAN LOSSES. The Company did not make any provision for loan
losses in 1996 or 1995 nor were there any charge-offs. The total allowance for
loan losses amounted to $882,800 at December 31, 1996 and 1995, or 56.3% and
77.4% of non-performing assets at year end in 1996 and 1995 respectively. Based
upon management's assessment of the inherent risk in the Company's mortgage
portfolio as well as current and prospective economic and regulatory conditions,
the Company believes its allowance for loan losses is at a level which it
considers to be adequate to provide for potential losses. Nevertheless, the
Company can make no assurance that such losses will not exceed the estimated
amounts.
NON-INTEREST INCOME. Non-interest income for 1996 amounted to $863,000 as
compared to $844,000 for the year ended December 31, 1995, an increase of
$19,000 or 2.3%. This increase was due primarily to increases in loan fees and
service charges, commission income received from the sale of various insurance
and financial products through the Association's wholly-owned subsidiary,
Westco, Inc. and other operating income, partially offset by a $92,000 decrease
in realized and unrealized gains on trading securities.
NON-INTEREST EXPENSE. Non-interest expense for 1996 totalled $6.9 million, an
increase of $1.5 million, or 28.7%, from $5.3 million for the year ended
December 31, 1995. The increase was due to the FDIC's one-time special
assessment. This $1.6 million amount was partially offset by a $75,000 decrease
in office occupancy and equipment costs. Small increases in staffing and
advertising costs were offset by decreases in the Company's regular deposit
insurance premiums and data processing costs.
INCOME TAX EXPENSE. Federal and state income taxes decreased $606,000, or 26.2%,
to $1.7 million in 1996 from $2.3 million in 1995. Income taxes decreased in
1996 due to the decrease in net income.
<PAGE>
11
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
(continued)
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1995 AND DECEMBER 31, 1994
GENERAL. Net income for the year ended December 31, 1995, totalled $4.2 million,
an increase of $206,000 or 5.2%, from $4.0 million in 1994. The reasons for this
increase was a $569,000 increase in net interest income from operations and an
$11,000 increase in non-interest income which were partially offset by increases
in non-interest expense of $247,000 and income taxes of $127,000. Fully diluted
Earnings per Share increased to $2.13 in 1995 from $1.91 in 1994.
INTEREST INCOME. Interest income increased $1.6 million, or 7.7%, to $22.4
million in 1995 from $20.8 million for 1994. The increase was the result of an
increase in the average asset yield to 7.70% from 7.05%. This increase was
offset by a slight decrease in the average balance of interest-earning assets.
Interest income on loans increased 6.3% to $17.5 million for 1995 and interest
income earned on investment securities and interest bearing deposits increased
12.9% to $4.7 million for 1995.
INTEREST EXPENSE. For the year ended December 31, 1995, interest expense
increased $1.0 million, or 9.9%, to $11.4 million as compared to $10.4 million
for the year ended December 31, 1994. The primary reasons for the increase was
an increase in the average cost of liabilities to 4.64% in 1995 from 4.15% in
1994 offset by a decrease in the average balance of interest-bearing liabilities
of $4.2 million, or 1.7%. The increase in the average cost of liabilities was
primarily due to most certificate of deposits being renewed at interest rates
which were higher than the interest rates at maturity. The decrease in the
average balance of interest-bearing liabilities was primarily due to a decrease
in the average balance of passbook and money market accounts, partially offset
by an increase in the average balance of certificate. Certificate accounts
increased primarily as a result of interest credited.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income before
provision for loan losses increased $569,000, or 5.5%, in 1995 to $11.0 million
from $10.4 million for 1994. During 1995, the Company's interest rate spread
averaged 3.06% compared to 2.90% during 1994.
PROVISION FOR LOAN LOSSES. The Company did not make any provision for loan
losses in 1995 or 1994 nor were there any charge-offs. The total allowance for
loan losses amounted to $882,800 at December 31, 1995 and 1994.
NON-INTEREST INCOME. Non-interest income for 1995 amounted to $844,000 as
compared to $833,000 for the year ended December 31, 1994, an increase of
$11,000 or 1.4%. This increase was due primarily to increases in realized and
unrealized gains on trading securities partially offset by decreased loan fees
and service charges and a decrease in commission income received from the sale
of various insurance and financial products through the Association's
wholly-owned subsidiary, Westco, Inc. Non-interest income in 1994 also included
a non-recurring gain on the sale of real estate acquired through foreclosure.
NON-INTEREST EXPENSE. Non-interest expense for 1995 totalled $5.3 million, an
increase of $247,000, or 4.9%, from $5.1 million for the year ended December 31,
1994. The increase was primarily due to a increase in compensation and benefits
of $154,000 resulting from normal salary increases and the establishment of a
Supplemental Executive Retirement Plan, increases in office occupancy and
equipment costs of $45,000 and an increase in general operating expenses of
$61,000, all of which were partially offset by a slight decrease in Federal
deposit insurance premiums.
INCOME TAX EXPENSE. Federal and state income taxes increased $127,000, or 5.2%,
to $2.3 million in 1995 from $2.2 million in 1994. Income taxes increased in
1995 due an increase in net income.
<PAGE>
12
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
(continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, proceeds from principal and
interest payments on loans and proceeds from the maturing of investment
securities. While maturities and scheduled amortization of loans and investment
securities are a predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The Association is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which may be varied at the
direction of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings. The required
ratio is currently 5.0%. The Association's liquidity ratios were 30.1% and 34.2%
at December 31, 1996 and 1995, respectively.
The Company's most liquid assets are cash and cash equivalents. The levels of
these assets are dependent on the Company's operating, financing, lending and
investing activities during any given period. At December 31, 1996 and 1995 cash
and cash equivalents totalled $11.4 million and $8.4 million, respectively.
The primary investing activity of the Company is the origination of mortgage
loans. During the years ended December 31, 1996 and 1995, the Company originated
mortgage loans in the amounts of $56.5 million and $39.4 million, respectively.
Liquid assets are the Company's primary tool in managing interest rate risk.
Liquid assets consist of cash, cash equivalents, short-and intermediate-term
U.S. government and government agency securities. Management believes that high
levels of liquid assets partially offset the interest rate effect of slow
repricing mortgage loans due to the ability of the Company to invest such funds
at market interest rates. In addition, the maintenance of liquid assets allows
for disintermediation when interest rates rise. During periods when the
Company's loan demand is limited, longer-term investment securities may be
purchased to reduce the Company's liquidity and to obtain a higher yield on the
Company's portfolio than otherwise available. Although the Company has not
purchased mortgage backed securities since 1987, it may purchase such securities
in the future which would reduce liquidity.
The Company's cash flows are comprised of three classifications: cash flows from
operating activities, cash flows from investing activities, and cash flows from
financing activities. Cash flows provided by operating activities, consisting
primarily of interest and dividends received less interest paid on deposits,
were $3.5 million and $4.5 million for the years ending December 31, 1996 and
1995, respectively. Net cash provided by (for) investing activities, consisting
primarily of disbursements for loan originations and investments purchased,
offset by principal collections on loans and proceeds from the sale or maturity
of investment securities, were $(1.3) million and $(3.7) million for the years
ending December 31, 1996 and 1995, respectively. Net cash provided by (for)
financing activities, consisting primarily of net activity in deposit and escrow
accounts were $754,000 and $1.5 million for the years ending December 31, 1996
and 1995, respectively.
The Company has other sources of liquidity if a need for additional funds
arises. Additional sources of funds include FHLB-Chicago advances. The Company
has not borrowed from the FHLB-Chicago since 1980.
At December 31, 1996, the Company had outstanding loan commitments to originate
$4.0 million of loans. A commitment to purchase a $1.0 million agency note
maturing April 1, 1997. At that same date, there were no commitments to purchase
loans. The Company anticipates that it will have sufficient funds available to
meet its current loan commitments. Certificates of deposit which are scheduled
to mature in one year or less from December 31, 1996 totalled $41.8 million.
Management believes that a significant portion of such deposits will remain with
the Company.
Stockholders' equity totalled $47.8 million at December 31, 1996, with 2,567,053
common shares outstanding. The book value per common share outstanding was
$18.63. The Association's Tangible, Core and Risk-based capital ratios were
13.1%, 13.1% and 30.5% respectively, which substantially exceed the respective
regulatory requirements of 1.5%, 3.0% and 8.0%. The Association's tangible and
core capital at December 31, 1996 stood at $39.8 million.
IMPACT OF REGULATORY CHANGES
Currently, the Federal Deposit Insurance Corporation ("FDIC") assesses banks and
thrifts for deposit insurance premiums. Bank assessments are placed in the Bank
Insurance Fund ("BIF"), and thrift assessments are placed in the Savings
Association Insurance Fund ("SAIF"). Both BIF and SAIF have a statutory
requirement to have reserves equal to 1.25% of the deposits insured by the
respective fund. BIF reached this requirement in 1995, and
<PAGE>
13
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
(continued)
legislation was passed in 1996, which authorized the FDIC to make a special
one-time assessment to thrifts to bring SAIF to this required level. This
legislation also provided for a reduction in future FDIC premiums, sharing FICO
bond interest obligations, the merger of BIF and SAIF and the modernization of
financial institution charters. Although the Company's premiums will be reduced
in the future, management cannot predict the impact other changes may have on
the Company's or its operations.
THRIFT RECHARTERING LEGISLATION
The Deposit Insurance Funds Act provides that the BIF and SAIF will merge on
January 1, 1999 if there are no more savings associations as of that date. That
legislation also requires that the Department of Treasury submit a report to
Congress by March 31, 1997 that makes recommendations regarding a common
financial institutions charter, including whether the separate charters for
thrifts and banks should be abolished. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The bills would require
federal savings institutions to convert to a national bank or some type of state
charter by a specified date (January 1, 1998 in one bill, June 30, 1998 in the
other) or they would automatically become national banks. Converted federal
thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. Holding companies for savings institutions
would become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for unitary savings and
loan holding company activities. The Company is unable to predict whether such
legislation would be enacted, the extent to which the legislation would restrict
or disrupt its operations or whether the BIF and SAIF funds will eventually
merge.
IMPACT OF INFLATION AND CHANGING PRICES
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.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125 ("SFAS 125"), "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." This statement, among other things, applies
a "financial-components approach" that focuses on control, whereby an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes assets when control has been surrendered, and
derecognizes liabilities when extinguished. SFAS 125 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996. The Company does not anticipate that this pronouncement will
have significant impact on its consolidated financial condition or results of
operations.
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Company keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.
<PAGE>
14
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Westco Bancorp, Inc.
Westchester, Illinois
We have audited the accompanying consolidated statements of financial condition
of Westco Bancorp, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the three years in the period ending December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Westco Bancorp, Inc.
and subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ending
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Cobitz, VandenBerg & Fennessy
January 17, 1997
Hickory Hills, Illinois
<PAGE>
15
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and amounts due from depository institutions $ 3,511,480 $ 4,418,600
Interest-bearing deposits 7,877,846 3,971,471
- -------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 11,389,326 8,390,071
Investment securities
(Par value: 1996 - $68,638,354; 1995 - $882,359,066) (note 2) 68,737,012 82,110,883
Investment securities held for trade (note 3) 826,875 501,150
Loans receivable (net of allowance for loan losses:
1996 - $882,800; 1995 - $882,800 (note 4) 223,898,424 209,069,248
Stock in Federal Home Loan Bank of Chicago 1,876,000 1,861,400
Office properties and equipment - net (note 5) 1,909,043 1,868,567
Accrued interest receivable (note 6) 1,504,690 1,563,668
Prepaid expenses and other assets (note 7) 850,677 777,665
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 310,992,047 306,142,652
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Deposits (note 8) 255,153,961 250,643,639
Borrowed money (note 9) -- --
Advance payments by borrowers for taxes and insurance 3,077,294 2,873,411
Other liabilities (note 10) 4,928,016 4,708,983
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 263,159,271 258,226,033
- -------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value: authorized 1,000,000 shares;
none outstanding -- --
Common stock, $.01 par value: authorized 5,000,000 shares; 3,484,310 shares issued
and 2,567,053 shares outstanding at December 31, 1996 and 3,476,810 shares issued
and 2,694,553 shares outstanding at December 31, 1995 34,843 34,768
Additional paid-in capital 22,518,095 22,298,822
Retained earnings, substantially restricted 38,420,579 36,450,398
Treasury stock, at cost (917,257 and 782,257 shares at December 31, 1996 and 1995) (12,393,283) (9,620,374)
Common stock acquired by Employee Stock Ownership Plan (622,143) (871,000)
Common stock awarded by Association Recognition and Retention Plan (125,315) (375,995)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (NOTES 14 AND 15) 47,832,776 47,916,619
- -------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 17 and 18)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 310,992,047 $ 306,142,652
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
16
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans $18,612,355 17,538,749 16,499,289
Interest on investment securities 4,231,295 4,349,280 4,027,672
Interest on interest-bearing deposits 404,141 398,496 177,033
Dividends on investment securities
held for trade 9,214 6,692 10,506
Dividends on FHLB stock 126,782 121,035 103,445
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 23,383,787 22,414,252 20,817,945
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 12,374,093 11,432,540 10,405,312
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 12,374,093 11,432,540 10,405,312
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 11,009,694 10,981,712 10,412,633
- ----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Loan fees and service charges 273,950 186,799 198,543
Commission income 250,409 245,102 306,541
Unrealized gain on trading securities - net 7,120 34,200 10,358
Gain (loss) on sale of trading securities 79,992 145,575 (7,391)
Loss on sale of investment securities -- -- (2,969)
Gain on sale of real estate owned -- -- 29,728
Other income 251,456 232,801 298,175
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 862,927 844,477 832,985
- ----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Staffing costs (notes 11 and 12) 3,199,578 3,183,657 3,029,638
Advertising 162,637 152,073 132,655
Occupancy and equipment expenses (note 5) 467,838 542,514 497,580
Data processing 212,317 219,400 205,377
Federal deposit insurance premiums 556,594 571,191 582,841
SAIF special assessment (note 16) 1,601,961 -- --
Other 675,012 675,123 648,485
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 6,875,937 5,343,958 5,096,576
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,996,684 6,482,231 6,149,042
Provision for income taxes (note 13) 1,708,583 2,315,073 2,188,265
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME $3,288,101 4,167,158 3,960,777
- ----------------------------------------------------------------------------------------------------------------------------
Earnings per share
Primary $ 1.16 $ 1.43 $ 1.27
Fully diluted $ 1.16 $ 1.42 $ 1.27
Dividends declared on common stock $ .50 $ .41 $ .43
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
17
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1996 COMMON COMMON
ADDITIONAL STOCK STOCK
COMMON PAID-IN RETAINED TREASURY ACQUIRED AWARDED
STOCK CAPITAL EARNINGS STOCK BY ESOP BY ARP TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 $ 23,010 21,937,477 30,722,127 (5,403,810) (1,368,714) (877,345) 45,032,745
3 for 2 stock split on May 17, 1996 11,505 (11,505)
- ------------------------------------------------------------------------------------------------------------------------------------
RESTATED BALANCE AT
DECEMBER 31, 1993 34,515 21,925,972 30,722,127 (5,403,810) (1,368,714) (877,345) 45,032,745
Net income 3,960,777 3,960,777
Purchase of treasury stock
(148,785 shares) (2,045,794) (2,045,794)
Exercise of stock options 163 108,837 109,000
Tax benefit related to
employee stock plan 65,465 65,465
Tax benefit related to
stock options exercised 39,790 39,790
Amortization of award
of ARP's stock 250,670 250,670
Contribution to fund
ESOP loan 248,857 248,857
Dividend declared on common stock (1,273,115) (1,273,115)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 34,678 22,140,064 33,409,789 (7,449,604) (1,119,857) (626,675) 46,388,395
Net income 4,167,158 4,167,158
Purchase of treasury stock
(141,345 shares) (2,170,770) (2,170,770)
Exercise of stock options 90 59,910 60,000
Tax benefit related to
employee stock plan 90,420 90,420
Tax benefit related to
stock options exercised 8,428 8,428
Amortization of award
of ARP's stock 250,680 250,680
Contribution to fund
ESOP loan 248,857 248,857
Dividend declared on common stock (1,126,549) (1,126,549)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 34,768 22,298,822 36,450,398 (9,620,374) (871,000) (375,995) 47,916,619
Net income 3,288,101 3,288,101
Purchase of treasury stock
(135,000 shares) (2,772,909) (2,772,909)
Exercise of stock options 75 49,925 50,000
Tax benefit related to
employee stock plan 155,882 155,882
Tax benefit related to
stock options exercised 13,466 13,466
Amortization of award
of ARP's stock 250,680 250,680
Contribution to fund
ESOP loan 248,857 248,857
Dividend declared on common stock (1,317,159) (1,317,159)
3 for 2 stock split related to fractional shares (761) (761)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $ 34,843 22,518,095 38,420,579 (12,393,283) (622,143) (125,315) 47,832,776
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
18
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,288,101 4,167,158 3,960,777
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 190,905 204,625 200,620
Amortization of premiums and discounts on
investment securities - net (152,927) (755,619) 59,606
Amortization of cost of stock benefit plans 499,537 499,537 499,527
Loss on sale of investment securities -- -- 2,969
Gain on sale of real estate owned -- -- (29,728)
(Gain) loss on sale of trading accounting securities (76,130) (149,363) 750
Unrealized gain on trading account securities - net (7,120) (34,200) (10,358)
Federal Home Loan Bank stock dividend -- (26,800) --
Proceeds from sales of trading account securities 4,294,663 11,297,280 226,750
Proceeds from redemption of trading account securities -- -- 10,063
Purchase of trading account securities (4,537,138) (10,779,664) (460,256)
Decrease in deferred income on loans (296,348) (387,676) (311,836)
Increase in current and deferred income tax 117,862 305,825 586,340
(Increase) decrease in interest receivable 58,978 (350,878) (50,020)
Increase in interest payable 2,546 5,337 4,287
Change in other prepaid and accrued items, net 119,469 509,153 24,484
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,502,398 4,504,715 4,713,975
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities -- -- 6,997,031
Proceeds from maturities of investment securities 62,899,546 83,300,000 58,400,000
Purchases of investment securities (49,372,748) (83,674,494) (52,047,103)
Proceeds from sale of real estate owned -- 447,180 132,815
Proceeds from redemption of Federal Home Loan Bank stock -- -- 5,200
Purchase of Federal Home Loan Bank stock (14,600) (94,200) --
Purchase of loans (500,000) -- --
Disbursements for loans (58,076,870) (48,665,770) (57,900,396)
Loan repayments 44,044,042 45,099,365 42,449,908
Property and equipment expenditures (236,321) (143,538) (170,991)
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED FOR INVESTING ACTIVITIES (1,256,951) (3,731,457) (2,133,536)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 50,000 60,000 109,000
Deposit account receipts 246,689,651 260,972,193 247,092,362
Deposit account withdrawals (253,374,173) (266,096,524) (260,999,540)
Interest credited to deposit accounts 11,194,844 10,445,350 9,626,326
Increase (decrease) in advance payments by
borrowers for taxes and insurance 203,883 (635,646) 201,756
Payment of dividends (1,237,488) (1,103,856) (990,421)
Purchase of treasury stock (2,772,909) (2,170,770) (2,045,794)
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (FOR) FINANCING ACTIVITIES 753,808 1,470,747 (7,006,311)
- --------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 2,999,255 2,244,005 (4,425,872)
Cash and cash equivalents at beginning of year 8,390,071 6,146,066 10,571,938
- --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,389,326 8,390,071 6,146,066
- --------------------------------------------------------------------------------------------------------------------------
CASH PAID DURING THE YEAR FOR:
Interest $ 12,386,747 11,366,403 10,401,025
Income taxes 1,587,722 2,009,248 1,636,300
NON-CASH INVESTING ACTIVITIES:
Transfer of loans to real estate owned -- -- 447,180
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
19
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Westco Bancorp, Inc. (the "Company") is a Delaware corporation incorporated on
March 11, 1992 for the purpose of becoming the savings and loan holding company
for First Federal Savings and Loan Association of Westchester (the
"Association"). On June 26, 1992 the Association 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 stock of the Association.
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 revenues 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, First Federal Savings and Loan
Association of Westchester, and the Association's wholly owned subsidiary,
Westco, Inc. Significant intercompany balances and transactions have been
eliminated in consolidation.
INVESTMENT SECURITIES
Investment securities 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 held 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 holding gains and
losses for trading securities are included in income. Unrealized holding gains
and losses for available for sale securities are excluded from income and
reported as a net amount as a separate component of stockholders' equity.
All investment securities other than securities designated as held for trade are
carried at cost, and adjusted for amortization of premium and accretion of
discount over the term of the security using a method which approximates the
interest method. These securities are carried at cost because the Company has
the positive intent and the ability to hold these investment securities
to maturity.
INVESTMENT SECURITIES HELD FOR TRADE
Trading account securities are carried at market value, and net unrealized gains
and losses are reflected in the consolidated statements of income.
LOANS RECEIVABLE AND RELATED FEES
Loans are stated at the principal amount outstanding, net of loans in process,
deferred fees 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 and interest payments become 90 days past due or
earlier if conditions warrant. When a loan is placed on nonaccrual status,
previously accrued but unpaid interest is charged against current income.
Loan origination fees are being deferred in accordance with SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases". This statement requires
that loan origination fees and direct loan origination costs for a completed
loan be netted and then deferred and amortized into interest income as an
adjustment of yield.
On January 1, 1995, the Association 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. Such loans include, all mortgage loans secured by 1-4
family residential property, all consumer loans and certain multi-family and
non-residential real estate loans. Substantially all of the Association's
lending is excluded from the provisions of SFAS 114 and SFAS 118.
Under these statements, of the remaining loans which are evaluated for
impairment (a loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement), there were no
material amounts of loans which met the definition of an impaired loan during
the year ended December 31, 1996 and no loan was evaluated for impairment at
December 31, 1996.
ALLOWANCE FOR LOAN LOSSES
The determination of the allowance for loan losses involves material estimates
that are susceptible to significant change in the near term. The allowance for
loan losses is maintained at a level adequate to provide for losses through
charges to operating expense. The allowance is
<PAGE>
20
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(CONTINUED)
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. 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 is accumulated on the straight
line basis over the estimated lives of the various assets.
INCOME TAXES
The Company files a consolidated federal income tax return with the Association.
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
enacted taxes rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the purposes of reporting cash flows, the Company has defined cash and cash
equivalents to include cash on hand, amounts due from depository institutions,
interest-bearing deposits in other financial institutions and federal funds
sold.
EARNINGS PER SHARE
Earnings per share for the year ended December 31, 1996 was determined by
dividing net income for the year by 2,838,387 and 2,843,540, the weighted
average number of primary and fully diluted shares of common stock and common
stock equivalents outstanding. Stock options are regarded as common stock
equivalents and are therefore considered in both primary and fully diluted
earnings per share calculations. Common stock equivalents are computed using the
treasury stock method.
STOCKHOLDERS' EQUITY
On April 16,1996, the Board of Directors of Westco Bancorp, Inc. approved a 3
for 2 stock split, effected in the form of a stock dividend which was payable on
May 17, 1996 to stockholders of record on April 30, 1996. Accordingly,
stockholders of record received 1 additional share for each 2 shares owned as of
April 30, 1996. All prior share related information has been restated to reflect
the stock split effect, including earnings per share data.
<PAGE>
21
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(continued)
2) INVESTMENT SECURITIES
<TABLE>
<CAPTION>
INVESTMENT SECURITIES ARE SUMMARIZED AS FOLLOWS:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
U.S. Government and agency securities $ 68,737,012 53,336 151,994 68,638,354
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 5.72%
- ------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995
U.S. Government and agency securities $ 82,110,883 311,735 63,552 82,359,066
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 5.56%
- ------------------------------------------------------------------------------------------------------------------------------
THE CONTRACTUAL MATURITY OF INVESTMENT SECURITIES ARE SUMMARIZED AS FOLLOWS:
DECEMBER 31, 1996 DECEMBER 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
TERM TO MATURITY VALUE VALUE VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------------
Due in one year or less $ 41,785,220 41,780,542 54,117,202 54,275,627
Due after one year through two years 26,951,792 26,857,812 19,021,539 19,158,126
Due after two years through five years -- -- 8,972,142 8,925,313
- ------------------------------------------------------------------------------------------------------------------------------
$ 68,737,012 68,638,354 82,110,883 82,359,066
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
There were no sales of investment securities during the years ended December 31,
1996 and 1995. During the year ended December 31, 1994, the Company sold
investment securities realizing gross proceeds of $6,997,031, and gross losses
of $2,969. These securities were sold so near the maturity date (within three
months) that they had been considered "in-substance" held-to-maturity.
3) INVESTMENT SECURITIES HELD FOR TRADE
Investment securities held for trade are accounted for at their current fair
values. Investment securities held for trade at December 31, 1996 and 1995
consists of common stock equity securities. The adjustment of these securities
to their current fair values has resulted in a net unrealized gain of $78,562 as
of December 31, 1996 and a net unrealized gain of $56,700 as of December 31,
1995. Proceeds from sales of investment securities held for trade during the
year ended December 31, 1996 were $4,294,663 with gross gains of $124,194 and
gross losses of $48,064 realized on those sales. For the years ended December
31, 1995 and 1994, proceeds from the sales of investment securities held for
trade were $11,297,280 and $226,750, respectively, with gross gains of $161,238
and gross losses of $11,875 realized on those sales for the year ended December
31, 1995 and gross gains of $15,000 and gross losses of $17,750 were realized on
those sales for the year ended December 31, 1994.
In addition, during the year ended December 31, 1996, the Company was involved
in several pair-off transactions involving U.S. Treasury securities with a par
value of $7,900,000. Gross gains of $4,062 and gross losses of $200 were
realized on these transactions. For the years ended December 31, 1995 and 1994,
the Company was involved in pair off transactions involving U.S. Treasury
securities with a par value of $23,000,000 and $10,000,000, respectively. Gross
gains of $7,814 and gross losses of $11,601 were realized on these transactions
during the year ended December 31, 1995 and gross gains of $3,203 and gross
losses of $9,844 were realized on these transactions during the year ended
December 31, 1994.
<PAGE>
22
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(continued)
4) LOANS RECEIVABLE
<TABLE>
<CAPTION>
LOANS RECEIVABLE ARE SUMMARIZED AS FOLLOWS: DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE LOANS:
One-to-four-family $ 183,741,738 173,664,331
Multi-family 18,992,971 16,556,483
Nonresidential 10,819,413 9,778,943
Land 2,386,664 1,740,367
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL MORTGAGE LOANS 215,940,786 201,740,124
- --------------------------------------------------------------------------------------------------------------------------------
OTHER LOANS:
Loans on deposits 425,442 437,646
Equity lines of credit 10,331,226 9,866,177
Other 440,175 479,708
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER LOANS 11,196,843 10,783,531
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS RECEIVABLE 227,137,629 212,523,655
- --------------------------------------------------------------------------------------------------------------------------------
LESS:
Loans in process 197,506 116,360
Deferred loan fees and discounts 2,158,899 2,455,247
Allowance for loan losses 882,800 882,800
- --------------------------------------------------------------------------------------------------------------------------------
LOANS RECEIVABLE, NET $ 223,898,424 209,069,248
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 8.08% 8.14%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES IS SUMMARIZED AS FOLLOWS: YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 882,800 882,800 921,300
Provision for loan losses -- -- --
Charge - offs -- -- (38,500)
Recoveries -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 882,800 882,800 882,800
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
There were ten loans delinquent three months or more and non-accruing totaling
approximately $1,567,000, or .70% of net loans in force at December 31, 1996.
Comparable figures for 1995 were twelve loans totaling approximately $1,141,000
or .55% of net loans in force. As of December 31, 1996, the total investment in
impaired loans was $320,000. The impaired loan at this date was subject to an
allowance for credit losses of $175,000, which is included in the above loan
loss allowance.
For the years ended December 31, 1996 and 1995, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to approximately $56,000 and $56,000,
respectively.
<PAGE>
23
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(continued)
5) OFFICE PROPERTIES AND EQUIPMENT
<TABLE>
<CAPTION>
OFFICE PROPERTIES AND EQUIPMENT ARE SUMMARIZED AS FOLLOWS: DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COST:
Land $ 366,578 366,578
Buildings 2,289,423 2,189,680
Investment property (a) 332,150 332,150
Furniture and equipment 547,836 534,799
Automobiles 23,605 59,260
- -------------------------------------------------------------------------------------------------------------------
3,559,592 3,482,467
LESS ACCUMULATED DEPRECIATION 1,650,549 1,613,900
- -------------------------------------------------------------------------------------------------------------------
$1,909,043 1,868,567
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation of office properties and equipment for the years ended December 31,
1996, 1995 and 1994 amounted to $190,905, $204,625 and $209,620, respectively.
(a) In February, 1981, the Association leased the premises located at Mannheim
and Balmoral, Westchester, Illinois, to Brown and Portillo, Inc. The term
of the lease was twenty years. In November, 1985, the original lease was
amended for a ten year period with two 5 year options to renew. Annual
base rent was $48,000 per annum for the remaining term.
In December, 1994, the lease was amended for a term of three years and ten
months commencing January 1, 1995. Monthly base rent for the first ten
months of the lease is $3,333 escalating every November 1, for a twelve
month period up to $3,859 per month during the last twelve months of the
lease. In addition to base rent, tenant is liable for a percentage rent
which is equal to 6% of the excess of gross sales exceeding $500,000
annually.
6) ACCRUED INTEREST RECEIVABLE
<TABLE>
<CAPTION>
ACCRUED INTEREST RECEIVABLE IS SUMMARIZED AS FOLLOWS: DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment securities $ 869,061 1,316,736
Loans receivable 719,155 306,332
Allowance for uncollected interest (83,526) (59,400)
- ----------------------------------------------------------------------------------------------------------------
$1,504,690 1,563,668
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
24
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(continued)
7) PREPAID EXPENSES AND OTHER ASSETS
<TABLE>
<CAPTION>
PREPAID EXPENSES AND OTHER ASSETS CONSIST OF THE FOLLOWING: DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Prepaid insurance $ 66,433 51,227
Prepaid federal and state income taxes 156,461 --
Other prepaid expenses 41,035 41,896
Accounts receivable 20,309 14,650
Cash surrender value of Key Man insurance (a) 430,814 408,992
Deferred income tax benefit - net (b) 135,625 260,900
- -------------------------------------------------------------------------------------------------------------------------
$850,677 777,665
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Board of Directors has approved an Executive Salary Continuation
Agreement for the Association's key employees. The agreement will provide
ten annual payouts to the employee or their beneficiary at the time of
disability, retirement or death. An insurance policy on each of the key
employees has been purchased to offset potential future liabilities.
(b) The approximate tax effect of temporary differences that give rise to the
Company's net deferred tax asset at December 31, 1996 and 1995 under SFAS
109 is as follows:
<TABLE>
<CAPTION>
ASSETS LIABILITIES NET
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1996
Loan fees deferred for financial reporting purposes $ 626,500 -- 626,500
Nondeductible deferred directors' fees 223,640 -- 223,640
Nondeductible incentive and retirement plan expense 269,280 -- 269,280
Accelerated depreciation for tax purposes -- (18,630) (18,630)
Unrealized gain on trading account securities -- (32,350) (32,350)
Bad debt reserves established for financial reporting purposes 342,085 -- 342,085
Increases to tax bad debt reserves since January 1, 1988 -- (1,300,320) (1,300,320)
Other items 25,420 -- 25,420
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $1,486,925 (1,351,300) 135,625
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ASSETS LIABILITIES NET
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1995
Loan fees deferred for financial reporting purposes $ 856,490 -- 856,490
Nondeductible deferred directors' fees 192,015 -- 192,015
Nondeductible incentive plan expense 181,550 -- 181,550
Accelerated depreciation for tax purposes -- (26,000) (26,000)
Unrealized gain on trading account securities -- (23,350) (23,350)
Bad debt reserves established for financial reporting purposes 342,085 -- 342,085
Increases to tax bad debt reserves since January 1, 1988 -- (1,293,200) (1,293,200)
Other items 31,310 -- 31,310
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $1,603,450 (1,342,550) 260,900
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
25
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(continued)
8) DEPOSITS
<TABLE>
<CAPTION>
DEPOSIT ACCOUNTS ARE SUMMARIZED AS FOLLOWS: DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Passbook accounts $ 62,742,795 62,926,698
NOW accounts 15,815,922 14,630,124
Money market accounts 9,271,728 10,960,279
- ------------------------------------------------------------------------------------------------------------------------------
87,830,445 88,517,101
Certificates of deposit:
6 months 23,619,204 21,666,263
12 months 17,082,010 15,697,977
18 months 21,197,855 20,340,107
30 months and over 59,769,980 60,286,058
IRA and Keogh 45,654,467 44,136,133
- ------------------------------------------------------------------------------------------------------------------------------
$255,153,961 250,643,639
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 4.92% 4.85%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
A SUMMARY OF CERTIFICATES OF DEPOSIT BY MATURITY IS AS FOLLOWS: DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Within 12 months $ 80,863,169 71,520,204
12 months to 23 months 29,153,388 28,828,062
24 months to 35 months 22,782,642 13,897,748
36 months to 48 months 29,575,854 19,895,627
Over 48 months 4,948,463 27,984,897
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 167,323,516 162,126,538
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTEREST EXPENSE ON DEPOSITS CONSISTS OF THE FOLLOWING: YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Passbook accounts $ 1,884,283 1,954,816 2,200,121
NOW accounts 297,459 281,706 276,629
Money market accounts 291,818 348,771 482,686
Certificates of deposit 9,900,533 8,847,247 7,445,876
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL $12,374,093 11,432,540 10,405,312
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The aggregate amount of deposit accounts with a balance of $100,000 or greater
was approximately $41,141,000 and $31,561,000 at December 31, 1996 and 1995,
respectively. Deposits in excess of $100,000 are not insured by the Federal
Deposit Insurance Corporation.
9) BORROWED MONEY
In connection with the initial public offering, the Association established an
Employee Stock Ownership Plan (ESOP). The ESOP was funded by the proceeds from a
$1,840,000 loan which is currently held by the Company. The loan carries an
interest rate of one-eighth of one percent under 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 Association has committed to make contributions to the
ESOP sufficient to allow the ESOP to fund the debt service requirements of the
loan.
<PAGE>
26
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(continued)
10) OTHER LIABILITIES
<TABLE>
<CAPTION>
OTHER LIABILITIES INCLUDE THE FOLLOWING: DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued interest on deposits $ 49,236 46,690
Accrued real estate taxes 119,700 119,500
Accrued income taxes -- 20,300
Accrued franchise tax payable 6,028 6,028
Accrued retirement and benefit plans 569,577 343,173
Other accrued expenses 152,587 161,050
Deferred directors' fees 577,133 495,523
Dividends payable 385,058 305,387
Accounts payable 536,030 30,318
Official checks payable 2,532,667 3,181,014
- ------------------------------------------------------------------------------------------------------------------------
$4,928,016 4,708,983
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
11) RETIREMENT PLAN
The Association has a defined benefit pension plan which covers full-time
employees with one year or more of service, and who are at least 21 years of
age. The Association's funding policy is to generally make the minimum annual
contribution required by applicable regulations.
The following table sets forth the plan's funded status and amounts recognized
in the Company's consolidated financial statements at December 31.
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation (actuarial present value of projected benefits
attributed to employee service to date based
on future compensation levels) $ 2,563,874 2,245,269
Plan assets at fair value 2,289,209 2,195,529
- -----------------------------------------------------------------------------------------------------------------------------------
Unfunded projected benefit obligation (274,665) (49,740)
Unrecognized net actuarial (gain) loss (2,806) (117,156)
Unrecognized prior service cost 9,458 11,823
- -----------------------------------------------------------------------------------------------------------------------------------
Net pension liability included in accrued expenses $ (268,013) (155,073)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in the projected benefit obligation is an amount called the accumulated
benefit obligation. The accumulated benefit obligation represents the actuarial
present value of benefits attributed to employee service and compensation levels
to date. At December 31, 1996, the accumulated benefit obligation was
$1,639,940. The vested portion was $1,615,362
Net pension expense for the years ended December 31, 1996, 1995 and 1994 is
being accounted for per Financial Accounting Standards Board Statement No. 87,
"Employers' Accounting for Pensions" and include the following components:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 140,042 150,937 147,042
Interest cost on projected benefit obligation 145,942 137,488 144,823
Actual return on plan assets (175,409) (326,583) (117,412)
Net amortization and deferral 2,365 176,218 (21,049)
- -----------------------------------------------------------------------------------------------------------------------------------
Net pension expense $ 112,940 138,060 153,404
- -----------------------------------------------------------------------------------------------------------------------------------
</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 was 6.5% during 1996, 1995 and 1994. The expected long-term
rate of return on assets was 8.0% during 1996, 1995 and 1994, and the rate of
increase in future compensation was 6.0% in 1996, 1995 and 1994.
<PAGE>
27
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(continued)
12) OFFICER, DIRECTOR AND EMPLOYEE PLANS
STOCK OPTION PLANS. In conjunction with the Conversion, the Company adopted an
incentive stock option plan for the benefit of the officers and key employees of
the Company and its affiliates and a director's stock option plan for the
benefit of outside directors of the Company. The number of shares of common
stock authorized under the Employees' Plan after restatement for the 3 for 2
stock split, is 276,000. All of the shares in the Employees' Plan have been
granted at $6.67 per share. Options granted under the Incentive Plan become
exercisable at a rate of 20% per year commencing one year from the date of
grant. During the year ended December 31, 1996, 4,500 options granted under the
Employees' Plan were exercised and issued from authorized shares. As of December
31, 1996, stock options to purchase 250,650 shares remain outstanding in the
Employees' Plan. The number of shares of common stock authorized under the
Directors' Plan after restatement for the 3 for 2 stock split, is 69,000. For
the year ended December 31, 1996, 3,000 options granted under the Directors'
Plan were exercised and issued from authorized shares. As of December 31, 1996,
stock options to purchase 60,000 shares remain outstanding in the Directors'
Plan. The term of the options issued under both Plans expires ten years from the
date of grant.
EMPLOYEE STOCK OWNERSHIP PLAN. In conjunction with the Conversion, the
Association 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 $1,840,000 from an unaffiliated
third-party lender and purchased, after restatement for the 3 for 2 stock split,
276,000 common shares issued in the Conversion. The debt was assumed by the
Company in 1993. 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 by the Association to the ESOP which were used to fund principal
and interest payments on the ESOP debt totaled $251,044, $268,261 and $266,695
for the years ended December 31, 1996, 1995 and 1994 respectively. The
Association has committed to make cash contributions to the ESOP sufficient to
service the requirements of the loan.
ASSOCIATION RECOGNITION AND RETENTION PLANS. In conjunction with the Conversion,
the Company formed several Association Recognition and Retention Plans ("ARPs"),
which purchased, after restatement for the 3 for 2 stock split, 138,000 shares
or 4% of the shares of common stock issued in the Conversion. The shares were
purchased for $1,253,556 with funds contributed to the ARP's from the
Association. As of December 31, 1996, 27,600 shares were outstanding to be
awarded, with such awards to be earned by employees in key management positions
in equal installments over a five year period from date of grant.
The $1,253,356 contributed to the ARPs is being amortized to compensation
expense as the plan participants become vested in those shares. As of December
31, 1996, $1,128,041 of deferred compensation expense has been recognized since
inception. The unamortized cost, which is comparable to deferred compensation,
is reflected as a reduction of stockholders' equity.
13) INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No. 109
(SFAS 109) which requires a change from the deferred method to the liability
method of accounting for income taxes. Under the liability method, deferred
income taxes are recognized for the tax consequences of "temporary differences"
by applying statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and tax bases of existing
assets and liabilities.
Among the provisions of SFAS 109 which impact the Association is the tax
treatment of bad debt reserves. SFAS 109 provides that a deferred tax asset is
to be recognized for the bad debt reserve established for financial reporting
purposes and requires a deferred tax liability to be recorded for increases in
the tax bad debt reserve since January 1, 1988, the effective date of certain
changes made by the Tax Reform Act of 1986 to the calculation of savings
institutions' bad debt deduction. Accordingly, retained earnings at December 31,
1996 includes approximately $5,500,000 for which no deferred federal income tax
liability has been recognized.
<PAGE>
28
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(continued)
13) INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
THE PROVISION FOR INCOME TAXES CONSISTS OF THE FOLLOWING: YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $1,583,308 2,103,348 1,920,814
Deferred 125,275 211,725 267,451
- ------------------------------------------------------------------------------------------------------------------------------
$1,708,583 2,315,073 2,188,265
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A RECONCILIATION OF THE STATUTORY FEDERAL INCOME TAX RATE TO EFFECTIVE INCOME
TAX RATE IS AS FOLLOWS:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0 34.0
State income taxes .8 1.9 2.0
Other (.6) (.2) (.4)
- ------------------------------------------------------------------------------------------------------------------------------
Effective income tax rate 34.2% 35.7% 35.6
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
DEFERRED FEDERAL INCOME TAX EXPENSE CONSISTS OF THE FOLLOWING TAX
EFFECTS OF TIMING DIFFERENCES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loan fees $ 229,990 245,140 120,840
Deferred directors' fees (31,625) (28,245) (26,030)
Incentive and retirement plan expense (87,730) (95,160) (12,250)
Statutory bad debt deduction in excess of book provision -- 150,665 176,010
Unrealized gain on trading account securities 9,000 (2,835) 26,185
Other 5,640 (57,840) (17,304)
- ------------------------------------------------------------------------------------------------------------------------------
$ 125,275 211,725 267,451
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
29
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(continued)
14) REGULATORY CAPITAL REQUIREMENTS
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA) was signed into law on August 9, 1989; regulations for savings
institutions' minimum capital requirements went into effect on December 7, 1989.
In addition to its capital requirements, FIRREA includes provisions for changes
in the Federal regulatory structure for institutions, including a new deposit
insurance system, increased deposit insurance premiums and restricted investment
activities with respect to noninvestment-grade corporate debt and certain other
investments. FIRREA also increases the required ratio of housing-related assets
in order to qualify as a savings institution.
Capital regulations require the Association to have 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. FIRREA requires that
in meeting the core, tangible and risk-based capital ratios, savings
institutions must deduct investments in and loans to subsidiaries engaged in
activities not permissible for a national bank.
In determining compliance with the risk-based capital requirement, the
Association is allowed to use both core capital and supplementary capital
provided the amount of supplementary capital used does not exceed the
Association's core capital. Supplementary capital of First Federal Savings and
Loan Association of Westchester is defined to include all of the Association'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.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 THE ASSOCIATION'S REGULATORY EQUITY CAPITAL WAS AS FOLLOWS:
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stockholders' equity $40,101,086 40,101,086 40,101,086
Investment in nonincludable subsidiary (349,948) (349,948) (349,948)
General loss allowances -- -- 707,800
- --------------------------------------------------------------------------------------------------------------------------
Regulatory capital computed 39,751,138 39,751,138 40,458,938
Minimum capital requirement 4,564,972 9,129,945 10,608,480
- --------------------------------------------------------------------------------------------------------------------------
REGULATORY CAPITAL EXCESS $35,186,166 30,621,193 29,850,458
- --------------------------------------------------------------------------------------------------------------------------
Computed capital ratio 13.06% 13.06% 30.51%
Minimum capital ratio 1.50 3.00 8.00
- --------------------------------------------------------------------------------------------------------------------------
REGULATORY CAPITAL EXCESS 11.56% 10.06% 22.51%
- --------------------------------------------------------------------------------------------------------------------------
A RECONCILIATION OF THE ASSOCIATION'S EQUITY CAPITAL AT DECEMBER 31, 1996 IS AS FOLLOWS:
Stockholders' equity $47,832,776
Less Company stockholders' equity not available for regulatory capital (7,731,690)
- --------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY OF THE ASSOCIATION $40,101,086
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
30
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(continued)
15) STOCKHOLDERS' EQUITY
As part of the Conversion, the Association established a liquidation account for
the benefit of all eligible depositors who continue to maintain their deposit
accounts in the Association after conversion. In the unlikely event of a
complete liquidation of the Association, 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 Association's
capital stock. The Association 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 Association to be reduced below the amount
required for the liquidation account. Except for such restrictions, the
existence of the liquidation account does not restrict the use or application of
retained earnings.
The Association's capital exceeds all of the fully phased-in capital
requirements imposed by FIRREA. OTS regulations generally provide that an
institution that exceeds all fully phased-in capital requirements before and
after a proposed capital distribution could, after prior notice but without the
approval by the OTS, make capital distributions during the fiscal year of up to
100% of its net income to date during the fiscal year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the calendar year. Any
additional capital distributions would require prior regulatory approval.
Unlike the Association, 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 Association.
16) SAIF SPECIAL ASSESSMENT AND ITS IMPACT ON SAIF INSURANCE PREMIUMS
The deposits of savings associations, such as First Federal Savings and Loan
Association of Westchester, are presently insured by the Savings Association
Insurance Fund ("SAIF"), which together with the Bank Insurance Fund ("BIF"),
are the two insurance funds administered by the Federal Deposit Insurance
Corporation ("FDIC"). Financial institutions which are members of the BIF are
experiencing substantially lower deposit insurance premiums because the BIF has
achieved its required level of reserves while the SAIF has not yet achieved its
required reserves. In order to help eliminate this disparity and any competitive
disadvantage due to disparate deposit insurance premium schedules, legislation
to recapitalize the SAIF was enacted in September 1996.
The legislation requires a special one-time assessment of approximately 65.7
cents per $100 of SAIF insured deposits held by the Association at March 31,
1995. The one-time special assessment has resulted in a charge to earnings of
approximately $1,600,000 during the year ended December 31, 1996. The after-tax
effect of this one-time charge to earnings totaled $980,000. The legislation is
intended to fully recapitalize the SAIF fund so that commercial bank and thrift
deposits will be charged the same FDIC premiums beginning January 1, 1997. As of
such date, deposit insurance premiums for highly rated institutions, such as the
Association, will be substantially reduced.
The Association, however, will continue to be subject to an assessment to fund
repayment of the Financing Corporation's ("FICO") obligations. The FICO
assessment for SAIF insured institutions will be 6.48 cents per $100 of deposits
while BIF insured institutions will pay 1.30 cents per $100 of deposits until
the year 2000 when the assessment will be imposed at the same rate on all FDIC
insured institutions. Accordingly, as a result of the reduction of the SAIF
assessment and the resulting FICO assessment, the annual after-tax decrease in
assessment costs is expected to be approximately $260,000 based upon a December
31, 1996 assessment base.
17) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Association 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 investment 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 $3,971,400 at December 31, 1996
represent amounts which the Association plans to fund within the normal
commitment period of 60 to 90 days. Of this amount, $1,399,250 are in fixed rate
commitments with rates ranging from 7.50% to 8.75%, and $2,572,150 are in
adjustable rate commitments. Because the credit worthiness of each customer is
reviewed prior to extension of the commitment, the Association adequately
controls their credit risk on these commitments, as it does for loans recorded
on the balance sheet. The Association conducts all of its lending activities in
the Chicagoland area in which it serves. Management believes the Association has
a diversified loan portfolio and the concentration of lending activities in
these local communities does not result in an acute dependency upon economic
conditions of the lending region.
The Association has approved, but unused, home equity lines of credit of
approximately $12,200,000 at December 31, 1996. Approval of lines of credit is
primarily based upon underwriting standards that 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 Association has approved but unused equity
lines of credit on various construction projects of approximately $3,700,000 at
December 31, 1996. Approval of construction lines of credit is based upon
underwriting standards and limitations similar to construction lending.
<PAGE>
31
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(continued)
17) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
The Association has issued outstanding letters of credit totaling approximately
$1,569,400, the majority being to various municipalities regarding incomplete
construction projects on which the Association had originated mortgage loans, or
regarding builders with whom the Association has had long standing
relationships.
At December 31, 1996, the Company has committed to purchase, in the held to
maturity portfolio, a $1,000,000 Federal Farm Credit Bureau note with a coupon
rate of 5.25% and a maturity date of April 1, 1997.
18) CONTINGENCIES
The Association 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 Association 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 are based on quoted market
prices as published in financial publications.
TRADING ACCOUNT SECURITIES: Fair values for trading account securities are based
on quoted market prices as published in financial publications or broker quotes.
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 a composite of the rates currently offered for
deposits of similar remaining maturities.
<TABLE>
<CAPTION>
THE ESTIMATED FAIR VALUE OF THE COMPANY'S FINANCIAL INSTRUMENTS AS OF DECEMBER 31, 1996 AND 1995 ARE AS FOLLOWS:
DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------------
CARRYING FAIR
AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents $ 11,389,236 11,389,326
Investment securities 68,737,012 68,638,354
Investment securities held for trade 826,875 826,875
Loans receivable 223,898,424 224,942,000
FINANCIAL LIABILITIES:
DEPOSITS 255,153,961 258,532,000
- -----------------------------------------------------------------------------------------------------
December 31, 1995
- -----------------------------------------------------------------------------------------------------
Carrying Fair
Amount Value
- -----------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 8,390,071 8,390,071
Investment securities 82,110,883 82,359,066
Investment securities held for trade 501,150 501,150
Loans receivable 209,069,248 212,549,000
FINANCIAL LIABILITIES:
Deposits 250,643,639 254,985,000
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
32
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(continued)
20) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statement of financial condition, as of December 31,
1996 and 1995 and condensed statements of income and cash flows for the years
ended December 31, 1996, 1995 and 1994 for Westco Bancorp, Inc. should be read
in conjunction with the consolidated financial statements and the notes thereto.
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,991,530 3,462,855
Investment securities held for investment 3,774,305 3,094,819
Investment securities held for trade 826,875 501,150
Loans receivable 622,143 871,000
Equity investment in the Association 40,514,696 41,413,979
Prepaid expenses and other assets -- 4,990
- --------------------------------------------------------------------------------------------------------------------------
48,729,549 49,348,793
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued taxes and other liabilities 483,163 363,144
Common stock 34,843 23,179
Additional paid-in capital 22,184,247 22,132,446
Retained earnings 38,420,579 36,450,398
Treasury stock (12,393,283) (9,620,374)
- --------------------------------------------------------------------------------------------------------------------------
$ 48,729,549 49,348,793
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in earnings of the Association $ 3,100,718 3,969,760 3,928,419
Interest income 416,615 369,278 264,759
Unrealized gain on trading securities - net 7,120 34,200 10,358
Gain (loss) on sale of trading securities 79,992 142,221 (7,391)
Other income 8,164 -- --
Non-interest expense (227,759) (247,318) (228,254)
Provision for federal and state income taxes (96,749) (100,983) (7,114)
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,288,101 4,167,158 3,960,777
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
33
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(continued)
20) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,288,101 4,167,158 3,960,777
Equity in earnings of the Association (3,100,718) (3,969,760) (3,928,419)
Amortization of premiums and discounts
on investment securities (216,128) (197,247) (95,906)
Unrealized gain on trading securities - net (7,120) (34,200) (10,358)
(Gain) loss on sale of trading securities (76,130) (146,009) 750
Purchase of trading securities (4,537,138) (7,479,664) (460,256)
Proceeds from sale of trading securities 4,294,663 7,993,926 226,750
Proceeds from redemption of trading securities -- -- 10,063
(Increase) decrease in prepaid expenses and other assets 4,990 92,210 (41,572)
Increase (decrease) in accrued taxes and other liabilities 53,814 1,417 (135,698)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (FOR) OPERATING ACTIVITIES (295,666) 427,831 (473,869)
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 11,899,546 23,300,000 10,400,000
Purchase of investment securities (12,362,904) (23,907,090) (10,402,806)
Loan repayment from subsidiary 248,857 248,857 248,857
NET CASH PROVIDED BY (FOR) INVESTING ACTIVITIES (214,501) (358,233) 246,051
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
- -----------------------------------------------------------------------------------------------------------------------------------
Proceeds from exercise of stock options 50,000 60,000 109,000
Purchase of treasury stock (2,772,909) (2,170,770) (2,045,794)
Payment in lieu of issuing fractional shares (761) -- --
Dividends received from Association 4,000,000 4,000,000 4,100,000
Payment of dividends (1,237,488) (1,103,856) (990,421)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (FOR) FINANCING ACTIVITIES 38,842 785,374 1,172,785
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents (471,325) 854,972 944,967
Cash and cash equivalents at beginning of year 3,462,855 2,607,883 1,662,916
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,991,530 3,462,855 2,607,883
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
34
OFFICERS AND DIRECTORS
ASSOCIATION OFFICERS
DAVID C. BURBA*
President
RICHARD A. BRECHLIN*
Exec. Vice President/Treasurer
GREGG P. GOOSSENS*
Exec. Vice President/Lending
KENNETH J. KACZMAREK*
Senior Vice President/Controller
FREDERICK A. COX
Vice President
ROBERTA SRAMEK
Vice President
MARY S. SUFFI*
Vice President/Secretary
VICTORIA E. BESPOLE
Assistant Vice President
INGRID K. VOLKMANN
Assistant Vice President
ROSANNE M. KLINGELHOFER
Assistant Secretary
DIRECTORS
DAVID C. BURBA
Chairman of the Board
Westco Bancorp, Inc.
ROSALYN M. LESAK
Chairman of the Board
First Federal Savings
of Westchester
JAMES E. DICK
President, Human
Resource Associates
EDWARD A. MATUGA
Attorney-at-Law
EDWARD C. MOTICKA
President, Moticka & Ralph
THOMAS J. NOWICKI
President, Affiliated
Appraisal Company
ROBERT E. VOREL, JR.
President, Crest
Communications, Inc.
*Officers of Westco Bancorp, Inc.
All above directors are members of the board of Westco Bancorp, Inc. and First
Federal Savings of Westchester.
CORPORATE INFORMATION
STOCK PRICE INFORMATION
Westco Bancorp, Inc.'s common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market under the symbol: WCBI. The table below shows the
reported high and low sales prices of the common stock during the periods
indicated in fiscal 1996 and 1995, shown reflecting 1996 stock split.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
DIVIDENDS HIGH LOW
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Fourth Quarter,1996 $ .15 $22.25 $21.50
Third Quarter, 1996 .12 22.25 21.00
Second Quarter,1996 .12 22.00 18.50
First Quarter, 1996 .113 18.66 18.17
Fourth Quarter,1995 .113 18.50 17.50
Third Quarter, 1995 .10 18.00 14.75
Second Quarter,1995 .10 16.00 14.00
First Quarter, 1995 .10 14.50 11.50
- ---------------------------------------------------------------------
</TABLE>
Westco Bancorp, Inc. had approximately 1,400 shareholders at December 31, 1996
based upon shareholders of record and an estimate of shares held in nominee
names.
INVESTOR INFORMATION:
A COPY OF WESTCO BANCORP, INC.'S ANNUAL REPORT ON FORM 10-K, TO BE FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION, IS AVAILABLE WITHOUT CHARGE BY WRITING
OUR CORPORATE OFFICE:
RICHARD A. BRECHLIN
EXECUTIVE VICE PRESIDENT AND TREASURER
2121 S. MANNHEIM ROAD
WESTCHESTER, IL 60154
(708) 865-1100
Shareholders, investors, and analysts interested in additional information may
contact the above.
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of the Shareholders of Westco Bancorp, Inc. will be held at
10:00 a.m., April 15, 1997 at:
1st Federal Savings Building
2121 South Mannheim Road
Westchester, IL 60154
All Shareholders are cordially invited to attend.
STOCK TRANSFER AGENT AND REGISTRAR
Inquiries regarding stock transfer, registration, lost certificates or changes
in name and address should be directed to the stock transfer agent and registrar
by writing:
Harris Trust and Savings Bank
Post Office Box 755
Chicago, IL 60690
Attention: Shareholder Communications
CORPORATE COUNSEL/WASHINGTON, D.C.
Muldoon, Murphy and Faucette
5101 Wisconsin Avenue, N. W.
Washington, D.C. 20016
CORPORATE COUNSEL/CHICAGO, ILLINOIS
Gomberg, Sharfman, Gold and Ostler
208 S. LaSalle, Suite 1200
Chicago, IL 60604
INDEPENDENT AUDITORS
Cobitz, VandenBerg and Fennessy
7800 W. 95th Street, Suite 301
Hickory Hills, IL 60457
<PAGE>
COBITZ, VANDENBERG & FENNESSY
CERTIFIED PUBLIC ACCOUNTANTS
7800 WEST 95TH STREET - SUITE 301
HICKORY HILLS, ILLINOIS 60457
_____
(708) 430-4106
Exhibit 23
INDEPENDENT AUDITOR'S CONSENT
Board of Directors
Westco Bancorp, Inc.
Gentlemen:
We consent to the incorporation by reference in the Registration Statement
of Form S-8 (Registration Nos. 33-54764 and 33-54766) of Westco Bancorp, Inc.
(the "Company") of our report dated January 17, 1997 relating to the
consolidated balance sheets of Westco Bancorp, Inc. and subsidiaries as of
December 31, 1996 and 1995 and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the years in the
three year period ended December 31, 1996, which report is incorporated by
reference in the December 31, 1996 Annual Report on the Company's Form 10-K.
/s/ Cobitz, VandenBerg & Fennessy
Cobitz, VandenBerg & Fennessy
February 18, 1997
Hickory Hills, Illinois
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS LEGEND CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,511,480
<INT-BEARING-DEPOSITS> 7,877,846
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 826,875
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 68,787,012
<INVESTMENTS-MARKET> 68,638,354
<LOANS> 223,898,424
<ALLOWANCE> 882,800
<TOTAL-ASSETS> 310,992,047
<DEPOSITS> 255,153,961
<SHORT-TERM> 0
<LIABILITIES-OTHER> 8,005,310
<LONG-TERM> 0
0
0
<COMMON> 34,843
<OTHER-SE> 47,797,933
<TOTAL-LIABILITIES-AND-EQUITY> 310,992,047
<INTEREST-LOAN> 18,612,355
<INTEREST-INVEST> 4,635,436
<INTEREST-OTHER> 135,996
<INTEREST-TOTAL> 23,383,787
<INTEREST-DEPOSIT> 12,374,093
<INTEREST-EXPENSE> 12,374,093
<INTEREST-INCOME-NET> 11,009,694
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 87,112
<EXPENSE-OTHER> 6,875,937
<INCOME-PRETAX> 4,996,684
<INCOME-PRE-EXTRAORDINARY> 4,996,684
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,288,101
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.16
<YIELD-ACTUAL> 3.65
<LOANS-NON> 1,567,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 882,800
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 882,800
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 882,800
</TABLE>
