<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, 1997
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 and non-voting common equity
held by non-affiliates of the registrant (i.e., persons other than directors and
executive officers of the registrant) is $54,717,533 and is based upon the last
sales price ($27.75) as quoted on the Nasdaq Stock Market for March 12, 1998.
The Registrant had 2,461,853 shares outstanding as of March 13, 1998
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED
DECEMBER 31, 1997 ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-K.
PORTIONS OF THE PROXY STATEMENT FOR THE 1998 ANNUAL MEETING OF
STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
<PAGE>
INDEX
PART I PAGE
----
Item 1. Business.................................................... 3
Additional Item. Executive Officers of the Registrant............... 33
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........................................ 35
Item 6. Selected Financial Data..................................... 35
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 35
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk................................................. 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...................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 36
Item 13. Certain Relationships and Related Transactions.............. 36
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K......................................... 36
SIGNATURES................................................................ 39
2
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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, 1997 the
Association had total assets of $309.7 million and stockholders' equity of $41.8
million (13.5% of total assets). In 1997, the Association paid a dividend to the
Company in the amount of $3.1 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.
3
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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,
1997, the Association's total mortgage loans outstanding were $231.7 million, of
which $187.0 million were one- to four-family residential mortgage loans, or
77.0% of the Association's total loan portfolio. Of the one- to four-family
residential mortgage loans outstanding at that date, 65.9% were fixed-rate
loans, and 34.1% were adjustable-rate ("ARM") loans. At the same date,
multi-family residential mortgages totaled $23.0 million, or 9.5% of the
Association's total loan portfolio, of which 53.7% were fixed-rate loans either
fully amortizing or with a balloon payment and 46.3% were ARM loans. At December
31, 1997, the Association had commercial real estate loans of $12.5 million, or
5.1% of the Association's total loan portfolio, and construction and land loans
of $9.2 million, or 3.8% of the Association's total loan portfolio. At December
31, 1997, the Association had $454,000 in purchased loans and loan
participations with $429,000 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,
totaled $11.2 million, or 4.6% of the Association's total loan portfolio. At
December 31, 1997, the Association did not own any mortgage-backed securities.
4
<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,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ -------------------
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........... $186,967 76.98% $180,815 79.61% $172,800 81.31% $169,608 81.14% $162,073 83.50%
Multi-family.................. 23,016 9.48 18,993 8.36 16,556 7.79 16,711 7.99 11,768 6.06
Commercial real estate........ 12,489 5.14 10,819 4.76 9,779 4.60 9,430 4.51 7,528 3.88
Construction.................. 6,307 2.60 2,927 1.29 865 .41 1,035 .50 1,121 .58
Land.......................... 2,936 1.21 2,387 1.05 1,740 .82 1,008 .48 633 .33
-------- ------ -------- ------ -------- ------- -------- ------ -------- ------
Total mortgage loans....... 231,715 95.41 215,941 95.07 201,740 94.93 197,792 94.62 183,123 94.35
Other loans: 11,154 4.59 11,197 4.93 10,784 5.07 11,237 5.38 10,975 5.65
-------- ------ -------- ------ -------- ------- -------- ------ -------- ------
Total loans receivable..... 242,869 100.00% 227,138 100.00% 212,524 100.00% 209,029 100.00% 194,098 100.00%
====== ====== ====== ====== ======
Less:
Loans in process.............. 30 198 117 188 222
Unearned discounts and
deferred loan fees........... 1,838 2,159 2,455 2,843 3,155
Allowance for loan losses..... 903 883 883 883 921
-------- -------- -------- -------- --------
Loans receivable, net...... $240,098 $223,898 $209,069 $205,115 $189,800
======== ======== ======== ======== ========
</TABLE>
5
<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,
------------------------------------------------
1997 1996 1995
----------- ----------- ----------
(In thousands)
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of period ............................ $ 215,941 $ 201,740 $ 197,792
Mortgage loans originated(1)
One-to four-family ........................... 33,426 35,091 34,116
Multi-family ................................. 5,145 5,494 1,249
Commercial real estate ....................... 3,272 816 2,748
Construction ................................. 10,749 7,850 3,368
Land ......................................... 2,524 2,663 930
--------- --------- ---------
Total mortgage loans originated ............ 55,116 51,914 42,411
--------- --------- ---------
Mortgage Loans Purchased
Commercial real estate ....................... -- 500 --
Transfer of mortgage loans to
foreclosed real estate ....................... (682) -- --
Principal repayments ............................ (38,660) (38,213) (38,463)
--------- --------- ---------
At end of period .................................. $ 231,715 $ 215,941 $ 201,740
========= ========= =========
Other loans (gross):
At beginning of period ............................ $ 11,197 $ 10,784 $ 11,237
Other loans originated(1) ....................... 7,001 6,244 6,183
Principal repayments ............................ (7,044) (5,831) (6,636)
--------- --------- ---------
At end of period .................................. $ 11,154 $ 11,197 $ 10,784
========= ========= =========
</TABLE>
- -------------------------
(1) Includes line of credit originations.
6
<PAGE>
Loan Repricing. The following table shows the repricing of the
Association's loan portfolio at December 31, 1997. The table does not include
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on the Association's loans totaled $45.8 million, $44.0
million, $45.1 million, $42.4 million and $67.8 million for the years ended
December 31, 1997, 1996, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
At December 31, 1997
-------------------------------------------------------------
Mortgage Loans
----------------------------
One- to Total
Four-Family Loans
Originated Other Other Loans Receivable
------------ ------------ ------------ -------------
(In thousands)
<S> <C> <C> <C> <C>
Amounts due:
Within 1 year.......................... $ 15,244 $12,591 $10,524 $ 38,359
--------- ------- ------- ---------
After 1 year
1 to 3 years......................... 21,933 4,656 402 26,991
3 to 5 years......................... 27,235 5,854 202 33,291
5 to 10 years........................ 23,495 8,377 21 31,893
10 to 20 years....................... 51,992 11,298 5 63,295
Over 20 years........................ 47,068 1,972 -- 49,040
--------- ------- ------- ---------
Total due after 1 year............... 171,723 32,157 630 204,510
--------- ------- ------- ---------
Total amounts due.................... 186,967 44,748 11,154 242,869
Less:
Loan in process........................ 30 -- -- 30
Unearned discounts, premiums
and deferred loan fees, net.......... 1,483 355 -- 1,838
Allowance for possible loan losses..... 601 270 32 903
--------- ------- ------- ---------
Loans receivable, net................ $184,853 $44,123 $11,122 $240,098
========= ======= ======= =========
</TABLE>
7
<PAGE>
The following table sets forth at December 31, 1997, the dollar amount
of all loans due after December 31, 1998, 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, 1998
-------------------------------------------------------------
Fixed Adjustable Total
------------------ ------------------ ------------------
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family originated.................. $123,620 $48,103 $171,723
Other originated................................ 19,007 12,720 31,727
Other purchased................................. 429 -- 429
Other loans....................................... 631 -- 631
-------- ------- --------
Total loans receivable...................... $143,687 $60,823 $204,510
======== ======= ========
</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 1997, the Association did not originate any loans through mortgage
brokers.
The Association offers fixed-rate and ARM loans on one- to four-family
residential properties. At December 31, 1997, 28.4% of the Association's total
loan portfolio was on a bi-weekly payment basis. At December 31, 1997, $123.2
million, or 65.9% of the total one- to four-family mortgage loan portfolio, were
fixed-rate and $63.8 million, or 34.1%, 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. 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
8
<PAGE>
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, 1997, $23.0 million, or 9.5%, 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, 53.7% were fixed-rate fully amortizing loans or loans with a balloon
payment, and 46.3% 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 $235,000 at December 31,
1997. The largest multi-family loan at December 31, 1997, had an outstanding
balance of $1.6 million. This loan is secured by a 6 unit condominium located in
Chicago, Illinois. The loan has been current since its origination in December
of 1997.
Commercial Real Estate Lending. Commercial real estate lending is not a
significant part of the Association's lending activities. At December 31, 1997,
the Association's commercial real estate loan portfolio totaled $12.5 million,
or5.1% 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, 1997, had an outstanding
balance of $1.14 million. This loan is secured by an office building located in
Oak Brook, Illinois and is current as of December 31, 1997. 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
9
<PAGE>
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, 1997, the
Association had one construction loan commitment in the amount of $260,000. The
outstanding balance of nineteen construction loans at such date was $6.3
million, or2.6% 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, 1997, the Association had nine land loans, five to
developers and four to homeowners with outstanding balances totaling $2.9
million, or1.2% 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,
1997, $10.7 million, or4.4% of the total loan portfolio, consisted of consumer
loans and $461,000 or0.2% 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.
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
10
<PAGE>
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, 1997, the largest aggregate amount of loans outstanding
to one borrower totaled $4.9 million and consisted of 17 loans on 2, 3 or 4 unit
apartment buildings. The largest single loan to this borrower is a $1.1 million
loan on a 4 unit apartment building. At December 31, 1997, 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, 1997, was $6.3
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.
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, 1997, the Association had one loan classified doubtful
totalling $139,000 (net of a $175,000 specific valuation reserve). The loan is
secured by a 38 unit multi-family property located in Maywood, Illinois. There
is also one loan classified as substandard at December 31, 1997,
11
<PAGE>
totalling $354,000. The loan is on a combination commercial/residential
property. At December 31, 1997, the Association had 12 loans classified as
special mention totaling $1.8 million. Eleven are on one- to four-family
residences and had an average balance at such date of $133,000; the remaining
loan is on a multi-family residential property with an outstanding balance of
$299,000. At December 31, 1997, none of the Association's loans were classified
as loss.
12
<PAGE>
At December 31, 1997, 1996 and 1995, respectively, delinquencies in the
Association's portfolio were as follows:
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
------------------------------------------------- ------------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
----------------------- ----------------------- ------------------------ ---------------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
---------- ----------- ---------- ----------- ---------- ------------ -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family............ 12 $1,354 3 $118 8 $667 8 $862
Multi-family................... -- -- -- -- 1 320 -- --
Commercial..................... -- -- 1 354 -- -- 1 385
--- ------ --- --- --- ---- --- ------
Total mortgage loans........ 12 $1,354 4 472 9 987 9 1,247
Other loans.................... 1 21 -- -- -- -- --
--- ------ --- --- --- ---- --- ------
Total all loans............. 13 $1,375 4 472 9 $987 9 $1,247
=== ====== === === === ==== === ======
Delinquent loans to total
loans......................... 0.57% 0.19% 0.43% 0.56%
==== ===== ==== ====
<CAPTION>
At December 31, 1995
---------------------------------------------------
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 .......... 13 $1,237 9 $473
Multi-Family.................. -- -- 1 235
Commercial.................... -- -- 1 397
--- ------ - ----
Total mortgage loans........ 13 1,237 11 1,105
Other loans................... -- -- 1 36
--- ------ -- ------
Total all loans............. 13 $1,237 12 $1,141
=== ====== == ======
Delinquent loans to
total loans................ 0.59% 0.55%
==== ====
</TABLE>
13
<PAGE>
The following table sets forth information regarding non-accrual loans
delinquent 90 days or more. At December 31, 1997, there was one restructured
loan 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,
-----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans delinquent
90 days or more.............................. $472 $1,247 $1,105 $290 $729
Restructured real estate loans 314 -- -- -- --
Other loans delinquent 90 days or more......... -- 320 36 18 41
------ ------ ----- ---- -----
Total non-performing loans............. 786 1,567 1,141 308 770
Total foreclosed real estate, net of
related allowance for losses................... -- -- -- 447 98
------ ------ ----- ---- -----
Total nonperforming assets............. $786 $1,567 $1,141 $755 $868
====== ====== ===== ==== =====
Non-performing loans to total loans............. 0.33% 0.70% 0.55% 0.15% 0.40%
Total non-performing assets to total assets..... 0.25% 0.50% 0.37% 0.25% 0.29%
</TABLE>
- -------------------------------
(1) For the year ended December 31, 1997 gross interest income which would have
been recorded had the non-performing loans been current in accordance with
their original terms amounted to approximately $21,000.
The balance of non-performing assets, amounting to $786,000 at December
31, 1997, decreased from $1.6 million at December 31, 1996. The largest single
delinquency was a mortgage loan secured by a combination commercial/residential
property in the amount of $354,000 at December 31, 1997.
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, 1997, the Association had a specific reserve in the amount of
$175,000 against the restructured real estate loan.
14
<PAGE>
The following table sets forth the Association's allowance for possible
loan losses at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year..................... $883 $883 $883 $921 $925
Provision for loan losses........................ -- -- -- -- --
Charge-offs: One- to four-family mortgage loans.. -- -- -- (38) (15)
Recoveries: One- to four-family mortgage loans... 20 -- -- -- 11
---- ---- ---- ---- ----
Balance at end of year........................... $903 $883 $883 $883 $921
==== ==== ==== ==== ====
Ratio of net charge-offs during the period to
average loans outstanding during the period.... --% --% --% .02% .01%
Ratio of allowance for loan losses to net
loans receivable at the end of period.......... .38 .39 .42 .43 .49
Ratio of allowance for loan losses to total
non-performing assets at the end of period..... 114.86 56.34 77.37 116.88 106.11
Ratio of allowance for loan losses to non-
performing loans at the end of the period...... 114.86 56.34 77.37 286.51 119.61
</TABLE>
15
<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,
-------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ----------------------------- --------------------------
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 86.46% $ 175 87.97 $ -- 89.10%
Commercial................... -- 5.14 -- 4.76 -- 4.60
Construction................. -- 2.60 -- 1.29 -- .41
Land......................... -- 1.21 -- 1.05 -- .82
Other Loans:
Equity lines of credit....... -- 4.23 -- 4.55 -- 4.64
Consumer..................... -- 0.36 -- 0.38 -- 0.43
--- ---- --- ---- --- ----
Total Specific Allowances............... 175 100.00% 175 100.00% -- 100.00%
--- ====== --- ====== --- ======
General Allowances:
Mortgage Loans:
Residential.................. 375 86.46 590 87.97% 547 89.10%
Commercial................... 60 5.14 59 4.76 52 4.60
Construction................. 20 2.60 6 1.29 5 .41
Land......................... 17 1.21 8 1.05 6 .82
Other Loans:
Equity lines of credit....... 32 4.23 35 4.55 33 4.64
Consumer..................... 1 0.36 -- 0.38 2 0.43
Unallocated.................. 223 -- 10 -- 238 --
--- ------ --- ------ --- ------
Total General Allowances................ 728 100.00% 708 100.00% 883 100.00%
--- ====== --- ====== --- ======
Total allowances for loan losses.... $903 $883 $883
=== ==== ====
</TABLE>
- --------------------
(1) Percent of loans in each category to total loans receivable at the date
indicated.
16
<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, 1997, the
Company had investment securities in the aggregate amount of $55.4 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. Investment securities
which are categorized as held for trade are carried at 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,
------------------------------------------------------------------------
1997 1996 1995
--------------------- ------------------------ ------------------
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 ....................... $ 7,782 $ 7,782 $ 5,700 $ 5,700 $ 3,150 $ 3,150
Money Market funds ....................... 2,282 2,282 2,021 2,021 756 756
FHLB daily investments ................... 95 95 157 157 65 65
------- ------- ------- ------- ------- -------
Total interest-earning deposits ..... $10,159 $10,159 $ 7,878 $ 7,878 $ 3,971 $ 3,971
======= ======= ======= ======= ======= =======
Investment securities held with intent
to hold to maturity:
U.S. Government securities and agency
obligations ........................... $53,968 $53,974 $68,737 $68,638 $82,111 $82,359
Other .................................. -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total investment securities held with
intent to hold to maturity ......... $53,968 $53,974 $68,737 $68,638 $82,111 $82,359
======= ======= ======= ======= ======= =======
Investment securities held for trade:
Equity securities ........................ $ 1,462 $ 1,462 $ 827 $ 827 $ 501 $ 501
======= ======= ======= ======= ======= =======
</TABLE>
17
<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, 1997.
<TABLE>
<CAPTION>
At December 31, 1997,
------------------------------------------------------------------------------------------
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
------- ------- ------- ------- ------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency securities...... $41,960 5.5% $12,008 5.68% $ -- --% $ -- --%
------- ------- ------- -------
Total........... $41,960 $12,008 $ -- $ --
======= ======= ======= -------
<CAPTION>
At December 31, 1997,
---------------------------------------------------
Total Investment Securities
---------------------------------------------------
Average
Remaining Approximate Weighted
Years to Carrying Fair Average
Maturity Value Value Yield
----------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and
agency securities...... 0.83 $53,968 $53,974 5.61%
------- -------
Total........... $53,968 $53,974
======= =======
</TABLE>
There were no investment securities (exclusive of the U.S. government
securities) issued by any one entity with a total carrying value in excess of
10% of stockholders' equity at December 31, 1997.
18
<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, 1997, passbook savings and NOW
checking accounts amounted to 30.2% total deposits.
The following table presents the deposit activity of the Association
for the periods indicated.
Year Ended December 31,
------------------------------------------
1997 1996 1995
-------------- ------------ -----------
(In thousands)
Deposits............................. $272,714 $246,689 $260,972
Withdrawals.......................... 279,705 253,374 266,096
-------- -------- --------
Deposit net of withdrawals........... (6,991) (6,685) (5,124)
Interest credited on deposits........ 11,448 11,195 10,445
-------- -------- --------
Total increase in deposits.. $ 4,457 $ 4,510 $ 5,321
======== ======== ========
19
<PAGE>
At December 31, 1997, the Association had outstanding $42.1 million in
deposit accounts in amounts of $100,000 or more ("Jumbo Accounts") maturing as
follows:
Amount
----------------
Maturity Period (In thousands)
---------------
Three months or less................... $12,478
Over three through six months.......... 5,238
Over six through 12 months............. 10,673
Over 12 months......................... 13,715
------
Total......................... $42,104
=======
Type of Jumbo Accounts
----------------------
Negotiated............................. $19,265
Core................................... 22,839
------
Total......................... $42,104
=======
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,
-----------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ---------------------------- -----------------------------
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..................... $ 17,207 6.63% 1.98% $ 15,816 6.20% 2.00% $ 14,630 5.84% 2.01%
Money Market............ 7,511 2.89 2.88 9,271 3.63 2.88 10,960 4.37 2.88
Passbook savings........ 61,225 23.58 3.04 62,743 24.59 3.04 62,927 25.11 3.04
------ ----- ------ ----- ------ -----
Total................... 85,943 33.10 87,830 34.42 88,517 35.32
------ ----- ------ ----- ------ -----
Certificate accounts:
Six month............... 17,916 6.90 5.54 23,619 9.26 5.45 21,667 8.64 5.40
Twelve month............ 17,491 6.74 6.05 17,082 6.69 5.65 15,698 6.26 5.68
Eighteen month.......... 40,988 15.79 5.84 21,198 8.31 5.53 20,340 8.12 5.41
Two to five years....... 51,321 19.77 6.48 59,770 23.43 6.44 60,286 24.05 6.39
IRA and Keogh........... 45,952 17.70 6.29 45,655 17.89 6.27 44,136 17.61 6.28
------ ----- ------ ----- ------ -----
Total................... 173,668 66.90 167,324 65.58 162,127 64.68
------- ----- ------- ----- ------- -----
Total deposits............ $259,611 100.00% 5.03 $255,154 100.00% 4.95 $250,644 100.00% 4.85
======== ====== ======== ====== ======== ======
</TABLE>
20
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at December 31, 1997, 1996, and 1995 and the
periods to maturity of the certificate accounts outstanding at December 31,
1997.
<TABLE>
<CAPTION>
Period to Maturity
from December 31, 1997
At December 31, -------------------------------------------------------------
----------------------------------- Within One to Two to
1997 1996 1995 One Year Two Years Three Years Thereafter Total
------ ------ ------ -------- --------- ---------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.99% or less.......... $ -- $ -- $ 1,668 $ -- $ -- $ -- $ -- $ --
4.00% to 4.99%......... 275 394 10,476 231 24 20 -- 275
5.00% to 5.99%......... 97,468 100,077 80,353 70,496 10,599 8,687 7,686 97,468
6.00% to 6.99%......... 50,024 41,776 41,371 20,399 16,061 13,163 401 50,024
7.00% to 7.99%......... 17,335 16,934 20,616 1,241 8,725 7,152 217 17,335
8.00% to 8.99%......... 8,566 8,143 7,643 -- 4,709 3,857 -- 8,566
-------- -------- -------- ------- ------- ------- ------- --------
$173,668 $167,324 $162,127 $92,367 $40,118 $32,879 $ 8,304 $173,668
======== ======== ======== ======= ======= ======= ======= ========
</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, 1997, Westco, Inc. had a net loss of
$15,000 and net income of $9,000, 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.
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
21
<PAGE>
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, 1997, the Association had 50 full-time employees and 10
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 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
22
<PAGE>
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, and no multiple savings and loan holding company may acquire
more than 5% of the voting stock of a company engaged in impermissible
activities.
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 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 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
23
<PAGE>
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
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 as principal that are 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 at least 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 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, 1997, the
Association met each of its capital
24
<PAGE>
requirements 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, 1997.
<TABLE>
<CAPTION>
Capital
Excess ----------------------------------
Actual Required (Deficiency) Actual Required
------------------ -------------- ------------------ --------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible........... $41,502 $4,635 $36,867 13.43% 1.50%
Core (Leverage).... 41,502 9,270 32,232 13.43 3.00
Risk-based......... 42,230 11,523 30,707 29.32 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
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. 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. The SAIF was
25
<PAGE>
undercapitalized due primarily to a 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. 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 was 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 spread the obligations for payment of the FICO bonds
across all SAIF and Bank Insurance Fund ("BIF") members. The BIF is the fund
which primarily insures commercial bank deposits. Beginning on January 1, 1997,
BIF deposits were assessed for a FICO payment of approximately 1.3 basis points,
while SAIF deposits pay approximately 6.4 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 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. 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 assessment rate for fiscal 1997 was 6.48 basis points and
the premium paid for this period was $165,000. 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. Various proposals to eliminate the federal thrift charter, create
a uniform financial institutions charter and abolish the OTS have been
introduced in Congress. Some bills would require federal savings institutions to
convert to a national bank or some type of state charter by a specified date, or
they would automatically become national banks. Under some proposals, 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. A more recent bill passed by the House
Banking Committee would allow federal savings institutions to continue to
exercise activities being conducted when they convert to a bank regardless of
whether a national bank could engage in the activity. Holding companies for
26
<PAGE>
savings institutions would become subject to the same regulation as holding
companies that control commercial banks, with some limited grandfathering,
including for savings and loan holding company activities. The grandfathering
would be lost under certain circumstances such as a change in control of the
Company. The Company is unable to predict whether such legislation would be
enacted or the extent to which the legislation would restrict or disrupt its
operations.
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,
1997, the Association's limit on loans to one borrower was $6.3 million. At
December 31, 1997, the Association's largest aggregate outstanding balance of
loans to one borrower consisted of seventeen loans totaling $4.9 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 either must qualify as a
"domestic building and loan association" as defined in the Internal Revenue Code
or 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, 1997, the Association maintained 91.6% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test. Recent
legislation has expanded the extent to which education loans, credit card loans
and small business loans may be considered "qualified thrift investments."
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
27
<PAGE>
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, 1997, the Association was a Tier 1 Bank.
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 was 5% for fiscal 1997, but is subject to
change 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.
During 1997, OTS regulations also required each savings institution to maintain
an average daily balance of short-term liquid assets of at least 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 OTS has recently lowered the liquidity requirement from 5% to
4% and eliminated the 1% short term liquid asset requirement. The Association's
liquidity ratio for December 31, 1997 was 36.5%, 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, 1997 totaled $79,000.
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
28
<PAGE>
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
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 required for most of 1997 that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$49.3
29
<PAGE>
million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement was 3%; and for accounts aggregating greater than $49.3
million, the reserve requirement was $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 exempted from the reserve requirements. The Association maintained
compliance with the foregoing requirements. For 1998, the Federal Reserve Board
has decreased from $49.3 to $47.8 million the amount of transaction accounts
subject to the 3% reserve requirement and to increase the amount of exempt
reservable balances from $4.4 million to $4.7 million. 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 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
1997 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 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
30
<PAGE>
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 1996 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, 1997.
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.
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 35% 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
31
<PAGE>
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.
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.
Impact of New Accounting Standards
Accounting for Transfers and Servicing of Financial assets and
Extinguishments of Liabilities. In December 1996, the FASB issued Statement of
Financial Accounting Standards No. 127 ("SFAS No. 127"), "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125". The statement
delays for one year the implementation of SFAS No. 125, as it relates to (1)
secured borrowings and collateral, and (2) for the transfers of financial assets
that are part of repurchase agreements, dollar-rolls, securities lending and
similar transactions. The Company has adopted portions of SFAS No. 125 (those
not deferred by SFAS No. 127) effective January 1, 1997. Adoption of these
portions did not have a significant effect on the Company's financial condition
or results of operations. Based on its review of SFAS No. 125, management does
not believe that adoption of the portions of SFAS No. 125 which have been
deferred by SFAS No. 127 will have a material effect on the Company.
Reporting Comprehensive Income. In June 1997, the FASB issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). This statement establishes standards for reporting and the display of
comprehensive income and its components (revenues, expenses, gains, losses) in a
full set of general-purpose financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The Company has not yet
determined the impact of adopting this statement.
Disclosures about Segments of an Enterprise and Related Information. In
June 1997, the FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments
32
<PAGE>
of an Enterprise and Related Information" ("SFAS No. 131") which becomes
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments and requires enterprises to report selected
information about operating segments in interim financial reports. The Company
has not yet determined the impact of adopting this statement.
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Company keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.
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 49 Executive Vice President and Treasurer of the
Company and the Association
Gregg P. Goossens 49 Executive Vice President of the Company and
the Association
Mary S. Suffi 57 Vice President and Secretary of the Company;
Senior Vice President and Secretary of the
Association
Kenneth J. Kaczmarek 48 Vice President and Controller of the
Company; Senior Vice President and
Controller of the Association
</TABLE>
- -------------------
(1) As of December 31, 1997.
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 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.
33
<PAGE>
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.
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, 1997 Owned
- -------- -------- ----------------- ----
<S> <C> <C> <C>
Main Office (1) 1963 $1,104,000 Owned
2121 S. Mannheim Road
Westchester, Illinois 60154
Limited Service Office 1978 507,000 Owned
10551 W. Cermak Road
Westchester, Illinois 60154
Total net book value $1,611,000
==========
</TABLE>
- --------------------
(1) The Association also owns property at 2103 S. Mannheim Road, Westchester,
Illinois 60154, with a net book value of $164,000, 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.
34
<PAGE>
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 36 and
the information concerning restrictions on dividends appears in Note 15 to the
Notes to Consolidated Financial Statements on page 32 in the Registrant's 1997
Annual Report to Stockholders and are incorporated herein by reference.
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 1997 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 1997 Annual Report to Stockholders on pages 6 through 14 and is
incorporated herein by reference.
Items 7A. Quantitative and Qualitative Disclosure About Market Risks.
- ---------------------------------------------------------------------
The above captioned information appears under the heading "Market Risk
Sensitivity" in the Registrant's 1997 Annual Report to Stockholders on pages 7
through 9 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 1997 Annual Report to Stockholders on pages 15
through 35 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
35
<PAGE>
be held on April 21, 1998, at pages 4 through 5. 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 21, 1998, at pages 5
and 7 and pages 11 through 14.
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 21,
1998, at pages 4 through 5.
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 21, 1998,
at page 14.
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 1997 Annual Report to
Stockholders.
PAGE
Independent Auditors' Report..................................... 15
Consolidated Statements of Financial Condition,
December 31, 1997 and 1996.................................... 16
Consolidated Statements of Income for the
Years Ended December 31, 1997, 1996 and 1995.................. 17
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995.......... 18
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995.................. 19
Notes to Consolidated Financial Statements....................... 20-35
36
<PAGE>
The remaining information appearing in the 1997 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.*
10.2 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*
10.9 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****
(b) Executive Salary Continuation Plan between First
Federal Savings and Loan Association of Westchester
and Richard A. Brechlin and Gregg P. Goossens ****
11.0 Computation of earnings per share (filed herewith)
13.0 Portions of the 1997 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)
37
<PAGE>
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, as amended and declared effective on and any post-
effective amendments thereto, Registration No. 33-46441.
** Incorporated herein by reference into this document from the
Exhibits to the Proxy Statement filed on August 31, 1992 for
the Special Meeting of Stockholders held on September 27,
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.
**** Incorporated herein by reference into this documents from
the Exhibits to Form 10-K for the fiscal year ended December
31, 1996, filed with the SEC on March 21, 1997.
38
<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.
<TABLE>
<S> <C>
Date: March 31, 1998 By: /s/ David C. Burba
---------------------------------
David C. Burba
Chief Executive Officer, President
and Chairman of the Board
Date: March 31, 1998 By: /s/ Richard A. Brechlin
---------------------------------
Richard A. Brechlin
Chief Financial Officer, Executive
Vice President and Treasurer
Date: March 31, 1998 By: /s/ Kenneth J. Kaczmarek
---------------------------------
Kenneth J. Kaczmarek
Chief Accounting Officer,
Vice President and Controller
</TABLE>
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.
<TABLE>
<S> <C> <C>
/s/ David C. Burba Chief Executive Officer, March 31, 1998
- ------------------------- President and
David C. Burba Chairman of the Board
/s/ Rosalyn M. Lesak Director March 31, 1998
- -------------------------
Rosalyn M. Lesak
/s/ James E. Dick Director March 31, 1998
- -------------------------
James E. Dick
/s/ Edward A. Matuga Director March 31, 1998
- -------------------------
Edward A. Matuga
/s/ Thomas J. Nowicki Director March 31, 1998
- -------------------------
Thomas J. Nowicki
/s/ Robert E. Vorel, Jr. Director March 31, 1998
- -------------------------
Robert E. Vorel, Jr.
</TABLE>
39
<PAGE>
Exhibit No. 11.0 Statement re: Computation of Earnings Per Share
Year Ended
December 31, 1997
-----------------
Net income $4,707,972
==========
Total weighted average number of common shares
outstanding used in basic EPS
calculation 2,496,296
==========
Basic earnings per share $ 1.89
==========
Total weighted average number of common shares
outstanding 2,496,296
Add
common stock equivalents for shares issuable under
Stock Option Plans
197,485
----------
Weighted average number of shares
outstanding adjusted for common stock equivalents
2,693,781
==========
Diluted earnings per share $ 1.75
==========
40
<PAGE>
PORTIONS OF THE 1997 ANNUAL REPORT TO STOCKHOLDERS
EXHIBIT 13.0
41
<PAGE>
1
- --------------------------------------------------------------------------------
SELECTED FINANCIAL HIGHLIGHTS
(Dollars in Thousands) AT DECEMBER 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Total assets $315,944 $310,992 $306,143
Loans receivable, net 240,098 223,898 209,069
Deposits 259,611 255,154 250,644
Increase in deposits 4,457 4,510 5,321
Stockholders' equity 48,587 47,833 47,917
Equity to total assets 15.38% 15.38% 15.65%
Net interest income $ 11,035 $ 11,010 $ 10,982
Net income 4,708 3,288 4,167
Loans originated 62,117 58,158 48,594
Interest rate spread during period 2.87% 2.88% 3.06%
Diluted earnings per share $ 1.75 $ 1.16 $ 1.43
Book value per share at end of period $ 19.72 $ 18.63 $ 17.78
<PAGE>
2
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
DAVID C. BURBA
Chairman of the Board
and President
Westco Bancorp, Inc.
[PICTURE APPEARS HERE]
ROSALYN M. LESAK
Chairman of the Board
First Federal Savings
of Westchester
[PICTURE APPEARS HERE]
It is with great pleasure that I report to you record earnings for Westco
Bancorp and First Federal Savings and Loan Association of Westchester, its
subsidiary. For the year ended December 31, 1997, earnings totalled $4.7
million; and that translated into $1.89 basic earnings per share. At December
31, 1997 a share of Westco Bancorp common stock had a book value of $19.72 and a
market value of $27.25. Net earnings rose 43.2%, basic earnings per share rose
51.2%, book value per share increased 5.7%, and the market value of a share of
Westco Bancorp stock increased 28.0%.
Although approximately 5% of our net income was derived from gains from trading
and holding equity stocks of banks and thrifts, our earnings are essentially the
result of management's continued focus on maintaining core earnings, reducing
operating costs and staying with the business of a traditional thrift.
We are very proud of this success as highlighted by an Office of Thrift
Supervision report released in 1997. This report named First Federal Savings of
Westchester as one of the top 100 thrift performers in the nation, and it was
based upon analyses of several operating factors over a three year period.
Shareholders' equity totalled $41.6 million at the end of 1997. In December, the
Board declared the Company's seventeenth consecutive dividend, increasing the
amount 13% to 17 cents per share. This was the fourth consecutive year of
increasing dividends.
Assets of the Company amounted to $315.9 million at December 31, 1997 reflecting
a 1.6% increase from $311.0 million at the end of 1996. Total deposits of First
Federal also increased 1.6%. Deposits totalled $259.6 million at December 31,
1997 up from $255.2 million at December 31, 1996.
VALUE PER SHARE AT DECEMBER 31
[BAR GRAPH APPEARS HERE]
As interest rates have fallen and remained relatively stable over the past
several years, we found it appropriate to redeploy funds from maturing
investment securities into our regular lending activity, which coincidentally
experienced increased demand for funds.
The loan portfolio increased 7.2% to $240.1 million at December 31, 1997 from
$224.0 million at December 31, 1996. The $16 million increase in outstanding
loans follows a $15 million increase in 1996, and although the lending remains
primarily financing of one-to four-family, owner-occupied homes, First Federal
is continuing to build its portfolio of construction and land loans. At December
31, 1997, construction and land loans totalled $9.2 million, and these types of
loans represented 3.8% of the Association's loan portfolio.
Certainly no financial institution can post record earnings without attending to
asset quality and loan delinquencies. At December 31, 1997 non-performing loans
and non-performing assets totalled $786,000, a decrease of 50% from $1.6 million
at the end of 1996. Non-performing loans, which represented all of the Company's
non-performing assets at the end of 1997, equalled a meager .32% of total loans
and .25% of total assets. Once again, management has not considered it necessary
to add
<PAGE>
3
- --------------------------------------------------------------------------------
LENDING (IN MILLIONS)
[BAR GRAPH APPEARS HERE]
to the provisions for loan losses during the year. At December 31, 1997, after a
$20,000 recovery, total allowances for loan losses amounted to $902,800, or .38%
of net loans receivable and 114.9% of non-performing loans.
The Company's $54.0 million portfolio of U.S. Treasury and agency securities at
year end had an average maturity of only 10 months. Combined with $14.0 million
in cash and cash equivalents at December 31, 1997, these items represent over
20% of the Company's assets, further demonstrating management's attention to
asset quality.
From a strength and safety standpoint, First Federal continues to post capital
ratios well above requirements. The Office of Thrift Supervision requires
capital ratios of 8.0%, 3.0% and 1.5% for risk-based capital, core capital and
tangible capital. At December 31, 1997 the Association's capital ratios were
29.3%, 13.4% and 13.4% respectively.
During 1997, we continued to attend to improve our facilities. We completed the
remodeling of our lobby area which gave our operation a truly modern appearance
and increased the privacy of our customers. Enhanced technology throughout the
office has improved efficiency at most positions, and a conversion to new teller
equipment in 1998 will address our only significant "Year 2000" problem - that
being obsolete teller terminals.
Some aspects of the Deposit Insurance Funds Act of 1996 have not yet been
determined, including the modernization of banking industry charters. Until
these issues are finally resolved, we cannot predict the affects any legislation
may have on the Company. We do, however, remain confident that we are positioned
to be a competitive banking institution. Quality customer service and products
are fundamental principles which we will not abandon.
Finally, I would like to address a sad footnote to the end of the year. In
February of 1998, Director Edward C. Moticka passed away after a very short and
unexpected illness. Having served as a director of this Company and the
Association for 20 years and being a lifelong friend of Mrs. Lesak, it is
impossible to describe the importance of Ed's role to us and this operation. An
accountant by profession and a person of unwavering integrity, his wife
described him best, "He didn't have clients; he made them all friends." For
those of us who knew and worked with this very nice man, we will miss him
dearly.
Thank you for your confidence and continued support of our proud heritage.
Sincerely,
/s/ David C. Burba
David C. Burba
Chairman of the Board and President
Westco Bancorp, Inc.
/s/ Rosalyn M. Lesak
Rosalyn M. Lesak
Chairman of the Board
First Federal Savings of Westchester
<PAGE>
4
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA AND
OTHER DATA OF THE COMPANY
<TABLE>
<CAPTION>
AT DECEMBER 31
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets $315,944 310,992 306,143 299,571 301,806
Loans receivable, net 240,098 223,898 209,069 205,115 189,800
Investment securities 55,430 69,564 82,612 81,816 94,995
Deposits 259,611 255,154 250,644 245,323 249,603
Stockholders' equity 48,587 47,833 47,917 46,388 45,033
- -----------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING DATA:
Interest income $ 23,648 23,384 22,414 20,818 21,675
Interest expense 12,613 12,374 11,432 10,405 11,236
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 11,035 11,010 10,982 10,413 10,439
Less provision for loan losses -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 11,035 11,010 10,982 10,413 10,439
- -----------------------------------------------------------------------------------------------------------------------------
Non-interest income:
Loan fees and service charges 274 274 187 199 284
Commission income 270 250 245 306 297
Unrealized gain on trading
securities - net 225 7 34 10 54
Gain (loss) on sale of securities 268 80 145 (10) 13
Gain on sale of real estate owned 39 -- -- 30 33
Other income 239 252 233 298 325
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest income 1,315 863 844 833 1,006
- -----------------------------------------------------------------------------------------------------------------------------
Non-interest expense:
Staffing costs 3,220 3,199 3,184 3,030 3,149
Office occupancy and equipment 508 468 543 498 462
Federal deposit
insurance premiums 165 557 571 583 559
SAIF special assessment -- 1,602 -- -- --
Other 995 1,050 1,046 986 1,080
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 4,888 6,876 5,344 5,097 5,250
- -----------------------------------------------------------------------------------------------------------------------------
Income before income tax expenses 7,462 4,997 6,482 6,149 6,195
Income tax expenses 2,754 1,709 2,315 2,188 2,086
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 4,708 3,288 4,167 3,961 4,109
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
5
- --------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS AND OTHER DATA
<TABLE>
<CAPTION>
AT DECEMBER 31
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets 1.51% 1.06% 1.38% 1.30% 1.35%
Return on average
stockholders' equity 9.81 6.83 8.86 8.54 9.08
Average stockholders' equity to
average assets 15.56 15.61 15.24 14.90
Stockholders' equity to total assets 15.38 15.38 15.65 15.48 14.92
Interest rate spread during period 2.87 2.88 3.06 2.90 2.90
Net interest margin (1) 3.64 3.65 3.77 3.52 3.55
Operating expenses to
average assets 1.57 2.22 1.77 1.67 1.73
Net interest income to operating
expenses 2.26x 1.60x 2.05x 2.04x 1.99x
Average interest-earning assets to
average interest-bearing liabilities 1.19x 1.19x 1.18x 1.18x 1.17x
ASSET QUALITY RATIOS:
Non-performing loans to
total loans (2) .33% .70% .55% .15% .40%
Non-performing assets to
total assets (3) .25 .50 .37 .25 .29
Allowance for loan losses
to total loans .38 .39 .42 .43 .49
Allowance for loan losses
to non-performing loans 114.86 56.34 77.37 286.51 119.68
Allowance for loan losses to
non-performing assets 114.86 56.34 77.37 116.88 106.19
REGULATORY CAPITAL RATIOS: (4)
Tangible 13.43% 13.06% 13.28% 13.45% 13.18%
Core 13.43 13.06 13.28 13.45 13.18
Risk-based 29.32 30.51 33.14 34.05 36.14
OTHER DATA:
Loan originations $62,117 $58,158 $48,594 $57,866 $69,374
Number of deposit accounts $19,022 18,635 18,992 19,043 19,166
Book value per share outstanding (5) $19.72 $18.63 $17.78 $16.41 $15.22
Earnings per share: (5)
Basic $1.89 $1.25 $1.52 $1.34 $1.30
Diluted $1.75 $1.16 $1.43 $1.27 $1.24
- ------------------------------------------------------------------------------------------------------------------------
</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 and
restructured loans.
(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) 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. Outstanding shares at December 31, 1997 totalled 2,464,353. 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 $315.9 million at December 31, 1997 with net
loans outstanding and total deposits amounting to $240.1 million and $259.6
million respectively. Stockholders' equity in the Company totalled $48.6
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 16 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 $187.0 million or
77.0% of the total loan portfolio at December 31, 1997. 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 liquidity made up of relatively short 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 66% of these mortgage loans have fixed rates and
34% have adjustable rates. The Company's ratio of non-performing loans to total
loans receivable was .33% at December 31, 1997 down from .70% at December 31,
1996. 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, 1997, 28.4% 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 expense ratio was 1.57%, or 8.2%
lower than in 1996, disregarding the one-time $1.6 million FDIC special
assessment.
The Company has taken steps to reduce or control its interest rate risk by
maintaining a 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. During the past two years, the Company has reduced this
portfolio, redeploying approximately $30 million into loan programs. 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.
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.
<PAGE>
7
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
(CONTINUED)
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 if 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, 1997, the Company had its seventh stock repurchase program in place. The
Company's Board of Directors raised its quarterly dividend to $0.17 per share to
stockholders of record as of December 31, 1997. The dividend permits
shareholders to share directly in the success of the operations.
YEAR 2000 ANALYSIS
Neither the Company nor its subsidiaries utilize their own proprietary software.
The Association has a contract with NCR Corporation for data processing services
on savings and loans accounts. NCR, as well as vendors supplying software for
other internal uses, has assured the Company that all systems will be Year 2000
compliant by mid-1999. The office of Thrift Supervision has indicated that it
will conduct a separate examination of the preparedness of thrifts on this issue
during 1998. The Association's teller terminals, installed in 1988 and 1989,
must be replaced in order to assure Year 2000 compliance.
Apart from the estimated $125,000 capital outlay needed to upgrade the teller
equipment during 1998, which management considers routine in the Company's
ongoing effort to maintain its operational facilities, management does not
expect the total cost to become Year 2000 compliant to be significant.
MARKET RISK SENSITIVITY
The Company's financial instrument assets and liabilities are subject to varying
degrees of actual or theoretical market risk. The only significant exposure of
these instruments results from the interest rate risk embedded in them based
upon their contractual terms.
The following presentations are provided in an attempt to quantify the market
risk sensitivity, and include a Net Portfolio Value analysis and an Interest
Rate Sensitivity table. The Company does not currently invest in derivative
financial instruments.
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 September 30, 1997, 2% of the Association's Net Portfolio Value was $990,000,
and the maximum decrease in the Net Portfolio Value for a 200 basis point change
in interest rates, as calculated by the OTS, is $7.0 million. As a result, if
the rule were in effect, the Association would have been required to make a $3.0
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 $27.7 million in excess of the risk-based capital
requirement.
<PAGE>
8
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
(CONTINUED)
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 September 30, 1997, the
latest date for which information is available.
---------------------------------
Net Portfolio Value
- ---------------------------------------------------------------------------
Assumed Change
in Interest Rates $ Amount $ Change % Change
(Basis Points) (In Thousands of Dollars)
+400 $ 34,201 $ (15,153) -31%
+300 38,270 (11,084) -22
+200 42,382 (6,972) -14
+100 46,273 (3,081) -6
0 49,354
-100 50,813 1,459 3
-200 51,495 2,141 4
-300 52,621 3,267 7
-400 54,843 5,489 11
As indicated above, the Net Portfolio Value of the Association is expected to
decline $7.0 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, 1997.
The following Interest Rate Sensitivity table below provides information about
the Company's financial instruments that are sensitive to changes in interest
rates. The table presents approximate principal cash flows and related weighted
average interest rates by expected maturity dates as of December 31, 1997.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATES (IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 THEREAFTER TOTAL FAIR MARKET
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
U.S. Government
& Agency Securities $ 41,960 $ 12,008 $ 0 $ 0 $ 0 $ 0 $ 53,968 $ 53,974
Average Interest Rate 5.62% 5.69% - - - -
Fixed Rate Loans $ 913 $ 884 $ 1,805 $ 1,637 $ 2,574 $136,874 $144,687 $ 148,276
Average Interest Rate 8.69% 8.71% 9.02% 8.72% 8.25% 8.04%
Variable Rate Loans $ 5,608 $ 2,909 $ 567 $ 2,263 $ 2,392 $ 81,672 $ 95,411 $ 100,326
Average Interest Rate 9.35% 9.56% 8.50% 8.52% 8.67% 7.78%
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Variable Rate Passbook
Accounts $ 61,225 $ 0 $ 0 $ 0 $ 0 $ 0 $ 61,225 $ 61,225
Average Interest Rate 3.00% - - - - -
Variable Rate NOW Checking
and MMDA Accounts $ 24,718 $ 0 $ 0 $ 0 $ 0 $ 0 $ 24,718 $ 24,029
Average Interest Rate 2.29% - - - - -
Fixed Rate Certificates
of Deposit $ 85,178 $ 43,517 $ 35,663 $ 5,547 $ 3,142 $ 621 $173,668 $ 173,278
Average Interest Rate 5.49% 5.76% 5.97% 5.70% 5.73% 5.76%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
9
- --------------------------------------------------------------------------------
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.
The following Interest Rate Sensitivity table below provides information about
the Company's financial instruments that are sensitive to changes in interest
rates. The table presents approximate principal cash flows and related weighted
average interest rates by expected maturity dates as of December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 COMPARED TO 1996 1996 COMPARED TO 1995
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 (373) 1.396 (28) 995 145 920 8 1,073
Interest-bearing deposits 10 96 3 109 (85) 116 (25) 6
Investment securities 87 (915) (19) (847) (115) (115)
FHLB Stock 1 6 7 3 3 6
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL (275) 583 (44) 264 63 924 (17) 970
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Passbook accounts (8) (9) (17) 20 (90) (1) (71)
NOW accounts 4 1 5 (9) 24 15
Money market accounts 2 (51) (49) (57) (57)
Certificate accounts 40 259 1 300 400 624 30 1,054
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL 38 200 1 239 411 501 29 941
- -----------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN NET
INTEREST INCOME 25 29
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
10
- --------------------------------------------------------------------------------
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>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
- -------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
INTEREST-EARNING ASSETS:
Loans receivable, net $232,383 $19,607 8.44% $216,166 $18,612 8.61% $205,407 $17,539 8.54%
Interest-bearing deposits 9,624 513 5.33 7,774 404 5.20 6,025 398 6.61
Investment securities 59,264 3,394 5.73 75,580 4,241 5.61 77,692 4,356 5.61
Federal Home Loan Bank
("FHLB") Stock 1,966 134 6.82 1.873 127 6.78 1,821 121 6.64
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $303,237 $23,648 7.80 $301,393 $23,384 7.76 $290,945 $22,414 7.70
- -------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EARNING ASSETS 8,846 7,900 10,262
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $312,083 $309,293 $301,207
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
DEPOSITS:
Passbook accounts $ 62,197 $ 1,867 3.00% $ 62,508 $ 1,884 3.01% $ 65,519 $ 1,955 2.98%
NOW accounts 16,098 302 1.88 16,040 297 1.85 14,791 282 1.91
Money market accounts 8,447 243 2.88 10,228 292 2.85 12,264 349 2.85
Certificate accounts 169,006 10,201 6.04 164,697 9,901 6.01 153,860 8,847 5.75
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING
LIABILITIES $255,748 $12,613 4.93 $253,473 $12,374 4.88 $246,434 $11,433 4.64
- -------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST BEARING LIABILITIES 8,330 7,683 7,750
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $264,078 $261,156 $254,184
STOCKHOLDERS' EQUITY 48,005 48,137 47,023
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $312,083 $309,293 $301,207
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME/INTEREST RATE
SPREAD (1) $11,035 2.87% $11,010 2.88% $10,981 3.06%
- -------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS ASSETS/NET INTEREST
MARGIN (2) $ 47,489 3.64% $ 47,920 3.65% $ 44,511 3.77%
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS TO
INTEREST-BEARING LIABILITIES 1.19X 1.19X 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>
11
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
(CONTINUED)
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND DECEMBER 31, 1996.
GENERAL. Net income for the year ended December 31, 1997, totalled $4.7 million,
an increase of $1.4 million, or 43.2%, from $3.3 million in 1996. This increase
was primarily due to the absence of the $1.6 million special assessment made by
the FDIC to recapitalize the Savings Association Insurance Fund pursuant to
legislation enacted in 1996. In addition, income increased as a result of a
$392,000 decrease in regular FDIC premiums, an increase of $25,000 in net
interest income and an increase of $453,000 in non-interest income. These
increases were partially offset by increases of $6,000 in other non-interest
expenses and $1.0 million in income taxes.
INTEREST INCOME. Interest income increased $264,000, or 1.1%, to $23.6 million
in 1997 from $23.4 million for 1996. The increase was the result of a $1.8
million increase in average earning assets and a slight increase in the average
asset yield to 7.80% from 7.76%. Total interest income on loans increased
$995,000, or 5.3%, to $19.6 million in 1997 from $18.6 million in 1996. Interest
on investments decreased $854,000 to $3.4 million in 1997 from $4.2 million in
1996. These changes resulted primarily from the Company's redeployment of
approximately $15.0 million of maturing treasury securities into lending
programs.
INTEREST EXPENSE. For the year ended December 31, 1997, interest expense
increased $239,000, or 1.9%, to $12.6 million as compared to $12.4 million for
the year ended December 31, 1996. The primary reasons for the increase were an
increase in the average cost of liabilities to 4.93% in 1997 from 4.88% in 1996
and an increase in the average balance of interest-bearing liabilities of $2.3
million, or 0.9%. 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 and due to a decrease in the average
balance of passbook and money market accounts being offset by an increase in the
average balance of certificates. 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 1997 and 1996 at
$11.0 million. The interest rate spread decreased 1 basis point to 2.87% in 1997
from 2.88% in 1996.
PROVISION FOR LOAN LOSSES. The Company did not make any provision for loan
losses in 1997 or 1996 nor were there any charge-offs. During 1997, the Company
recovered $20,000 from a previous loan loss. The total allowance for loan losses
amounted to $902,800 at December 31, 1997 and $882,800 at December 31, 1996, or
114.9% and 56.3% of non-performing assets at year end in 1997 and 1996
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 1997 amounted to $1.3 million as
compared to $863,000 for the year ended December 31, 1996, an increase of
$453,000, or 52.4%. This increase was due primarily to increases of $406,000 on
realized and unrealized gains on trading securities and $20,000 on commission
income received from the sale of various insurance and financial products
through the Association's wholly-owned subsidiary, Westco, Inc.. The Company
also recorded a profit on the sale of properties acquired through foreclosure
amounting to $39,000 in 1997. These increases were partially offset by a $12,000
decrease in other operating income.
NON-INTEREST EXPENSE. Non-interest expense for 1997 totalled $4.9 million, an
increase of $2.0 million, or 28.9%, from $6.9 million for the year ended
December 31, 1996. The decrease was due to the absence of the FDIC's $1.6
million special assessment, a decrease of $392,000 in regular FDIC premiums, a
$7,000 decrease in advertising expense and a $57,000 decrease in other operating
expenses. These decreases were partially offset by increases in staffing costs,
office occupancy and equipment costs and data processing costs of $20,000,
$40,000 and $10,000 respectively.
INCOME TAX EXPENSE. Federal and state income taxes increased $1.0 million, or
61.2%, to $2.8 million in 1997 from $1.7 million in 1996. Income taxes increased
in 1997 due primarily to the increase in net income. State income taxes also
increased as a result of the redeployment of non-taxable U.S. Treasury
investments to taxable loan programs.
<PAGE>
12
- --------------------------------------------------------------------------------
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.
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>
13
- --------------------------------------------------------------------------------
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 4.0%, having been lowered from 5.0% by the OTS during 1997.
The Association's liquidity ratios were 36.5% and 30.1% at December 31, 1997 and
1996, 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, 1997 and 1996 cash
and cash equivalents totalled $14.0 million and $11.4 million, respectively.
The primary investing activity of the Company is the origination of mortgage
loans. During the years ended December 31, 1997 and 1996, the Company originated
mortgage loans in the amounts of $55.1 million and $51.9 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. At December 31, 1997 and 1996, the
Company's portfolio of short-and intermediate-term U. S. government and
government agency securities totalled $54.0 million and $68.7 million,
respectively.
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 $3.9 million and $3.5 million for the years ending December 31, 1997 and
1996, respectively. Net cash provided 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 $1.4 million and $1.3 million for the years
ending December 31, 1997 and 1996, respectively. Net cash provided by financing
activities, consisting primarily of net activity in deposit and escrow accounts
were $15,000 and $754,000 for the years ending December 31, 1997 and 1996,
respectively.
The Company has other sources of liquidity if a need for additional funds
arises. Additional sources of funds include Federal Home Loan Bank of Chicago
advances. The Company has not borrowed from the bank since 1980.
At December 31, 1997, the Company had outstanding loan commitments to originate
$2.4 million of loans and to fund $12.8 million of unused home equity lines of
credit. 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, 1997 totalled $92.4 million. Management
believes that a significant portion of such deposits will remain with the
Company.
Stockholders' equity totalled $48.6 million at December 31, 1997, with 2,464,353
common shares outstanding. The book value per common share outstanding was
$19.72. The Association's Tangible, Core and Risk-based capital ratios were
13.4%, 13.4% and 29.3% 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, 1997 stood at $41.5 million.
IMPACT OF REGULATORY CHANGES
Deposits of the Association are presently insured by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
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. The SAIF was undercapitalized due primarily to a
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. 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 was generally tax deductible.
The Funds Act also spread the obligations for payment of the FICO bonds across
all SAIF and Bank Insurance Fund
<PAGE>
14
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
(continued)
("BIF") members. The BIF is the fund which primarily insures commercial bank
deposits. Beginning on January 1, 1997, BIF deposits were assessed for a FICO
payment of approximately 1.3 basis points, while SAIF deposits pay approximately
6.4 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 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. 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.
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.
Various proposals to eliminate the federal thrift charter, create a uniform
financial institutions charter and abolish the OTS have been introduced in
Congress. Some bills would require federal savings institutions to convert to a
national bank or some type of state charter by a specified date, or they would
automatically become national banks. Under some proposals, 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. A more recent bill passed by the House
Banking Committee would allow federal savings institutions to continue to
exercise activities being conducted when they convert to a bank regardless of
whether a national bank could engage in the activity. Holding companies for
savings institutions would become subject to the same regulation as holding
companies that control commercial banks, with some limited grandfathering,
including for savings and loan holding company activities. The grandfathering
would be lost under certain circumstances such as a change in control of the
Company. The Company is unable to predict whether such legislation would be
enacted or the extent to which the legislation would restrict or disrupt its
operations.
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 December 1996, the FASB issued Statement of Financial Accounting Standards
No. 127 ("SFAS No. 127"), "Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125". The statement delays for one year the implementation
of SFAS No. 125, as it relates to (1) secured borrowings and collateral, and (2)
for the transfers of financial assets that are part of repurchase agreements,
dollar-rolls, securities lending and similar transactions. The Company has
adopted portions of SFAS No. 125 (those not deferred by SFAS No. 127) effective
January 1, 1997. Adoption of these portions did not have a significant effect on
the Company's financial condition or results of operations. Based on its review
of SFAS No. 125, management does not believe that adoption of the portions of
SFAS No. 125 which have been deferred by SFAS No. 127 will have a material
effect on the Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). This statement
establishes standards for reporting and the display of comprehensive income and
its components (revenues, expenses, gains, losses) in a full set of
general-purpose financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The Company has not yet determined the impact
of adopting this statement.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131") which becomes effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments and requires
enterprises to report selected information about operating segments in interim
financial reports. The Company has not yet determined the impact of adopting
this statement.
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Company keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.
<PAGE>
15
- --------------------------------------------------------------------------------
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, 1997 and 1996, 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,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Westco Bancorp, Inc.
and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ending
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Cobitz, Vandenberg, Fennessy
January 16, 1998
Palos Hills, Illinois
<PAGE>
16
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and amounts due from depository institutions $ 3,797,551 $ 3,511,480
Interest-bearing deposits 10,158,974 7,877,846
- ---------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 13,956,525 11,389,326
Investment securities
(fair value: 1997 - $53,973,913; 1996 - $68,638,354) (note 2) 53,968,243 68,737,012
Investment securities held for trade (note 3) 1,462,220 826,875
Loans receivable (net of allowance for loan losses:
1997 - $902,800; 1996 - $882,800 (note 4) 240,097,597 223,898,424
Stock in Federal Home Loan Bank of Chicago 1,997,000 1,876,000
Office properties and equipment - net (note 5) 2,091,639 1,909,043
Accrued interest receivable (note 6) 1,476,004 1,504,690
Prepaid expenses and other assets (note 7) 894,505 850,677
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 315,943,733 310,992,047
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Deposits (note 8) 259,610,699 255,153,961
Borrowed money (note 9) -- --
Advance payments by borrowers for taxes and insurance 3,183,539 3,077,294
Other liabilities (note 10) 4,562,544 4,928,016
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 267,356,782 263,159,271
- ---------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value: authorized 1,000,000 shares;
none outstanding -- --
Common stock, $.01 par value: authorized 5,000,000 shares; 3,521,570 shares issued
and 2,464,353 shares outstanding at December 31, 1997 and 3,484,310 shares issued
and 2,567,053 shares outstanding at December 31, 1996 35,216 34,843
Additional paid-in capital 23,020,242 22,518,095
Retained earnings, substantially restricted 41,583,949 38,420,579
Treasury stock, at cost (1,057,217 and 917,257 shares at December 31, 1997 and 1996) (15,679,170) (12,393,283)
Common stock acquired by Employee Stock Ownership Plan (373,286) (622,143)
Common stock awarded by Association Recognition and Retention Plan __ (125,315)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (NOTES 14 AND 15) 48,586,951 47,832,776
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 17 and 18)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 315,943,733 $310,992,047
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
17
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans $19,607,277 18,612,355 17,538,749
Interest on investment securities 3,377,350 4,231,295 4,349,280
Interest on interest-bearing deposits 513,062 404,141 398,496
Dividends on investment securities
held for trade 16,202 9,214 6,692
Dividends on FHLB stock 133,750 126,782 121,035
- ----------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 23,647,641 23,383,787 22,414,252
- ----------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 12,612,838 12,374,093 11,432,540
- ----------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 12,612,838 12,374,093 11,432,540
- ----------------------------------------------------------------------------------------------------------
Net interest income 11,034,803 11,009,694 10,981,712
- ----------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Loan fees and service charges 274,362 273,950 186,799
Commission income 269,719 250,409 245,102
Unrealized gain on trading securities - net 225,165 7,120 34,200
Gain on sale of trading securities 267,849 79,992 145,575
Gain on sale of real estate owned 38,865 -- --
Other income 239,544 251,456 232,801
- ----------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST INCOME 1,315,504 862,927 844,477
- ----------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Staffing costs (notes 11 and 12) 3,219,947 3,199,578 3,183,657
Advertising 155,435 162,637 152,073
Occupancy and equipment expenses (note 5) 507,968 467,838 542,514
Data processing 222,023 212,317 219,400
Federal deposit insurance premiums 164,725 556,594 571,191
SAIF special assessment (note 16) -- 1,601,961 --
Other 618,372 675,012 675,123
- ----------------------------------------------------------------------------------------------------------
TOTAL NON-INTEREST EXPENSE 4,888,470 6,875,937 5,343,958
- ----------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 7,461,837 4,996,684 6,482,231
Provision for income taxes (note 13) 2,753,865 1,708,583 2,315,073
- ----------------------------------------------------------------------------------------------------------
NET INCOME $ 4,707,972 3,288,101 4,167,158
- ----------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.89 $ 1.25 $ 1.52
Diluted earnings per share $ 1.75 $ 1.16 $ 1.43
Dividends declared per common stock $ .62 $ .50 $ .41
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
18
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
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, 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
Net income 4,707,972 4,707,972
Purchase of treasury stock
(139,960 shares) (3,285,887) (3,285,887)
Exercise of stock options 373 248,146 248,519
Tax benefit related to
employee stock plan 195,368 195,368
Tax benefit related to
stock options exercised 58,633 58,633
Amortization of award
of ARP's stock 125,315 125,315
Contribution to fund
ESOP loan 248,857 248,857
Dividend declared on common stock (1,544,602) (1,544,602)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 35,216 23,020,242 41,583,949 (15,679,170) (373,286) -- 48,586,951
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
19
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Three Years Ended December 31, 1997
<TABLE>
<CAPTION>
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,707,972 3,288,101 4,167,158
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 202,804 190,905 204,625
Amortization of premiums and discounts on
investment securities - net (197,154) (152,927) (755,619)
Amortization of cost of stock benefit plans 374,172 499,537 499,537
Gain on sale of real estate owned (38,865) -- --
Gain on sale of trading accounting securities (315,727) (76,130) (149,363)
Unrealized gain on trading account securities - net (225,165) (7,120) (34,200)
Federal Home Loan Bank stock dividend -- -- (26,800)
Proceeds from sales of trading account securities 6,196,552 4,294,663 11,297,280
Purchase of trading account securities (6,291,005) (4,537,138) (10,779,664)
Decrease in deferred income on loans (320,405) (296,348) (387,676)
Increase in current and deferred income tax 640,666 117,862 305,825
(Increase) decrease in interest receivable 28,686 58,978 (350,878)
Increase (decrease) in interest payable (16,962) 2,546 5,337
Change in other prepaid and accrued items, net (812,885) 119,469 509,153
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,932,684 3,502,398 4,504,715
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of investment securities 53,151,128 62,899,546 83,300,000
Purchases of investment securities (38,185,205) (49,372,748) (83,674,494)
Purchase of Federal Home Loan Bank stock (121,000) (14,600) (94,200)
Purchase of loans -- (500,000) --
Disbursements for loans (62,285,072) (58,076,870) (48,665,770)
Loan repayments 45,813,834 44,044,042 45,099,365
Proceeds from sale of real estate owned 631,335 -- 447,180
Property and equipment expenditures (385,400) (236,321) (143,538)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided for investing activities (1,380,380) (1,256,951) (3,731,457)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 248,519 50,000 60,000
Deposit account receipts 272,713,637 246,689,651 260,972,193
Deposit account withdrawals (279,704,564) (253,374,173) (266,096,524)
Interest credited to deposit accounts 11,447,665 11,194,844 10,445,350
Increase (decrease) in advance payments by
borrowers for taxes and insurance 106,245 203,883 (635,646)
Payment of dividends (1,510,720) (1,237,488) (1,103,856)
Purchase of treasury stock (3,285,887) (2,772,909) (2,170,770)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,895 753,808 1,470,747
- ---------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 2,567,199 2,999,255 2,244,005
Cash and cash equivalents at beginning of year $ 11,389,326 8,390,071 6,146,066
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 13,956,525 11,389,326 8,390,071
- ---------------------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 12,645,000 12,386,747 11,366,403
Income taxes 2,113,200 1,587,722 2,009,248
Non-cash investing activities:
Transfer of loans to real estate owned -- $ 681,972 -- --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
20
Notes to Consolidated Financial Statements
December 31, 1997
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, 1997 and one loan was evaluated for impairment at
December 31, 1997.
Allowance for Loan Losses
The determination of the allowance for loan losses involves material estimates
that are susceptible to significant change in the near term. The allowance for
loan losses is maintained at a level adequate to provide for losses
<PAGE>
21
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1997
(continued)
through charges to operating expense. The allowance is based upon past loss
experience and other factors which, in management's judgement, deserve current
recognition in estimating losses. Such other factors considered by management
include growth and composition of the loan portfolio, the relationship of the
allowance for losses to outstanding loans and economic conditions.
Management believes that the allowance is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgements about information available to them at the time of their examination.
Real Estate Owned
Real estate acquired through foreclosure or deed in lieu of foreclosure is
carried at the lower of fair value minus estimated costs to sell or the related
loan balance at the date of foreclosure. 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
The Company computes its earnings per share (EPS) in accordance with SFAS No.
128 "Earnings per Share". This statement simplifies the standards for computing
EPS previously found in Accounting Principles Board Opinion No. 5 "Earnings per
Share" and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS and fully diluted
EPS with diluted EPS.
Basic EPS, unlike primary EPS, excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earinings of the entity.
The following presentation illustrates basic and diluted EPS in accordance with
the provisions of SFAS 128:
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average number of common shares
outstanding used in basic EPS calculation 2,496,296 2,631,287 2,742,496
Add common stock equivalents for shares
issuable under Stock Option Plans 197,485 207,100 179,824
- ------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding
adjusted for common stock equivalents 2,693,781 2,838,387 2,922,320
- ------------------------------------------------------------------------------------------------------
Net income $4,707,972 3,288,101 4,167,158
Basic earnings per share $ 1.89 1.25 1.52
Diluted earnings per share $ 1.75 1.16 1.43
EPS for prior periods has been restated to comply with the provisions of SFAS 128.
</TABLE>
<PAGE>
22
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1997
(continued)
2) Investment Securities
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1997
U.S. Government and agency securities $ 53,968,243 49,133 43,463 53,973,913
- --------------------------------------------------------------------------------------------------------
Weighted average interest rate 5.61%
- --------------------------------------------------------------------------------------------------------
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%
- --------------------------------------------------------------------------------------------------------
</TABLE>
The contractual maturity of investment securities are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
- --------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Term to Maturity Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 41,960,266 41,963,600 41,785,220 41,780,542
Due after one year through two years 12,007,977 12,010,313 26,951,792 26,857,812
- --------------------------------------------------------------------------------------------------------
$ 53,968,243 53,973,913 68,737,012 68,638,354
- --------------------------------------------------------------------------------------------------------
</TABLE>
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, 1997 consists of
equity securities (thrift common stock mutual fund investment with a carrying
value of $178,050 and common stock with a carrying value of $1,284,170). The
investment securities held for trade at December 31, 1996 consists of common
stock equity securities. The adjustment of these securities to their current
fair values has resulted in a net unrealized gain of $217,877 as of December 31,
1997 and a net unrealized gain of $78,562 as of December 31, 1996. Proceeds from
sales of investment securities held for trade during the year ended December 31,
1997 were $6,196,552 with gross gains of $336,549 and gross losses of $20,822
realized on those sales. For the years ended December 31, 1996 and 1995,
proceeds from the sales of investment securities held for trade were $4,294,663
and $11,297,280, respectively, with gross gains of $124,194 and gross losses of
$48,064 realized on those sales for the year ended December 31, 1996 and gross
gains of $161,238 and gross losses of $11,875 realized on those sales for the
year ended December 31, 1995.
In addition, during the year ended December 31, 1997, the Company was involved
in several pair-off transactions involving U.S. Treasury securities with a par
value of $5,000,000. Gross gains of $625 and gross losses of $48,503 were
realized on these transactions. For the years ended December 31, 1996 and 1995,
the Company was involved in pair off transactions involving U.S. Treasury
securities with a par value of $7,900,000 and $23,000,000, respectively. Gross
gains of $4,062 and gross losses of $200 were realized on these transactions
during the year ended December 31, 1996 and gross gains of $7,814 and gross
losses of $11,601 were realized on these transactions during the year ended
December 31, 1995.
<PAGE>
23
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1997
(continued)
4) Loans Receivable
<TABLE>
<CAPTION>
Loans receivable are summarized as follows: December 31,
- ------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans:
One-to-four family $ 186,967,501 180,814,786
Multi-family 23,015,588 18,992,971
Nonresidential 12,488,639 10,819,413
Construction 6,307,130 2,926,952
Land 2,936,303 2,386,664
- ------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 231,715,161 215,940,786
- ------------------------------------------------------------------------------------------------------------------------
Other loans:
Loans on deposits 461,335 425,442
Equity lines of credit 10,282,807 10,331,226
Other 409,336 440,175
- ------------------------------------------------------------------------------------------------------------------------
Total other loans 11,153,478 11,196,843
- ------------------------------------------------------------------------------------------------------------------------
Total loans receivable 242,868,639 227,137,629
- ------------------------------------------------------------------------------------------------------------------------
Less:
Loans in process 29,748 197,506
Deferred loan fees and discounts 1,838,494 2,158,899
Allowance for loan losses 902,800 882,800
- ------------------------------------------------------------------------------------------------------------------------
Loans receivable, net $ 240,097,597 223,898,424
- ------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 8.09% 8.08%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Activity in the allowance for loan losses is summarized as follows: Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 882,800 882,800 882,800
Provision for loan losses -- -- --
Charge - offs -- -- --
Recoveries 20,000 -- --
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 902,800 882,800 882,800
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Non-performing loans consist of four loans delinquent three months or more and
non-accruing totaling approximately $472,000 and one restructured loan totaling
approximately $314,000 or .33% of net loans in force at December 31, 1997.
Comparable figures for 1996 were ten loans totaling approximately $1,567,000 or
.70% of net loans in force. As of December 31, 1997 and 1996, the total
investment in impaired loans was $314,000 and $320,000, respectively. The
impaired loan is 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, 1997 and 1996, gross interest income which
would have been recorded had the non-performing loans been current in accordance
with their original terms amounted to approximately $21,000 and $56,000,
respectively.
<PAGE>
24
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1997
(continued)
5) Office Properties and Equipment
Office properties and equipment are summarized as follows: December 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Cost:
Land $ 366,578 366,578
Buildings 2,475,821 2,289,423
Investment property (a) 332,150 332,150
Furniture and equipment 588,160 547,836
Automobile 23,605 23,605
- --------------------------------------------------------------------------------
3,786,314 3,559,592
Less accumulated depreciation 1,694,675 1,650,549
- --------------------------------------------------------------------------------
$2,091,639 1,909,043
- --------------------------------------------------------------------------------
Depreciation of office properties and equipment for the years ended December 31,
1997, 1996 and 1995 amounted to $202,804, $190,905 and $204,625, 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
Accrued interest receivable is summarized as follows: December 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Investment securities $ 688,768 869,061
Loans receivable 803,457 719,155
Allowance for uncollected interest (16,221) (83,526)
- --------------------------------------------------------------------------------
$1,476,004 1,504,690
- --------------------------------------------------------------------------------
<PAGE>
25
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1997
(continued)
7) Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following: December 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Prepaid insurance $ 17,396 66,433
Prepaid federal and state income taxes -- 156,461
Other prepaid expenses 32,063 41,035
Settlement funds due from broker 176,869 --
Accounts receivable 10,870 20,309
Supplemental employee retirement benefit trust 203,632 --
Cash surrender value of Key Man insurance (a) 453,675 430,814
Deferred income tax benefit - net (b) -- 135,625
- --------------------------------------------------------------------------------
$894,505 850,677
- --------------------------------------------------------------------------------
(a) The Board of Directors has approved an Executive Salary Continuation Plan
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 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
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
26
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1997
(continued)
8) Deposits
<TABLE>
<CAPTION>
Deposit accounts are summarized as follows: December 31,
- ------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Passbook accounts $ 61,224,943 62,742,795
NOW accounts 17,206,820 15,815,922
Money market accounts 7,511,106 9,271,728
- ------------------------------------------------------------------------------------------------------------------
85,942,869 87,830,445
- ------------------------------------------------------------------------------------------------------------------
Certificates of deposit:
6 months 17,915,591 23,619,204
12 months 17,491,232 17,082,010
18 months 40,987,765 21,197,855
24 months and over 51,320,779 59,769,980
IRA and Keogh 45,952,463 45,654,467
- ------------------------------------------------------------------------------------------------------------------
$259,610,699 255,153,961
- ------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 5.03% 4.92%
- ------------------------------------------------------------------------------------------------------------------
A summary of certificates of deposit by maturity is as follows: December 31,
- ------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------
Within 12 months $ 92,366,960 80,863,169
12 months to 23 months 39,195,849 29,153,388
24 months to 35 months 33,800,609 22,782,642
36 months to 48 months 5,312,785 29,575,854
Over 48 months 2,991,627 4,948,463
- ------------------------------------------------------------------------------------------------------------------
Total $173,667,830 167,323,516
- ------------------------------------------------------------------------------------------------------------------
Interest expense on deposits consists of the following: Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Passbook accounts $ 1,867,138 1,884,283 1,954,816
NOW accounts 302,366 297,459 281,706
Money market accounts 242,941 291,818 348,771
Certificates of deposit 10,200,393 9,900,533 8,847,247
- ------------------------------------------------------------------------------------------------------------------
Total $12,612,838 12,374,093 11,432,540
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The aggregate amount of deposit accounts with a balance of $100,000 or
greater was approximately $42,100,000 and $41,142,000 at December 31, 1997 and
1996, 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>
27
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1997
(continued)
10) Other Liabilities
<TABLE>
<CAPTION>
Other liabilities include the following: December 31,
- --------------------------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued interest on deposits $ 32,274 49,236
Accrued real estate taxes 122,000 119,700
Accrued income taxes 92,004 --
Accrued franchise tax payable 3,579 6,028
Accrued retirement and benefit plans 792,718 569,577
Other accrued expenses 308,400 152,587
Deferred income tax liability - net (a) 2,575 --
Deferred directors' fees 663,393 577,133
Dividends payable 418,940 385,058
Accounts payable 35,072 536,030
Official checks payable 2,091,589 2,532,667
- --------------------------------------------------------------------------------------------------------------------------
$4,562,544 4,928,016
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The approximately tax effect of temporary differences that give rise to
the Company's net deferred tax liability at December 31, 1997 under SFAS
109 is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Assets Liabilities Net
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1997
Loan fees deferred for financial reporting purposes $ 479,535 -- 479,535
Nondeductible deferred directors' fees 257,065 -- 257,065
Nondeductible incentive and retirement plan expense 305,230 -- 305,230
Accelerated depreciation for tax purposes -- (14,455) (14,455)
Unrealized gain on trading account securities -- (89,720) (89,720)
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 18,005 -- 18,005
- --------------------------------------------------------------------------------------------------------------------------
Total $1,401,920 (1,404,495) (2,575)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
28
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1997
(continued)
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>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation (actuarial present value of projected benefits
attributed to employee service to date based
on future compensation levels) $ 2,702,349 2,563,874
Plan assets at fair value 2,334,752 2,289,209
- -----------------------------------------------------------------------------------------------------------------------
Plan assets less than projected benefit obligation (367,597) (274,665)
Unrecognized net actuarial (gain) loss 33,211 (2,806)
Unrecognized prior service cost 7,093 9,458
- -----------------------------------------------------------------------------------------------------------------------
Net pension liability included in accrued expenses $ (327,293) (268,013)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in the projected benefit obligation is an amount called the accumulated
benefit obligation. The accumulated benefit obligation represents the actuarial
present value of benefits attributed to employee service and compensation levels
to date. At December 31, 1997, the accumulated benefit obligation was
$2,012,427. The vested portion was $1,990,103.
Net pension expense for the years ended December 31, 1997, 1996 and 1995 is
being accounted for per SFAS No. 87 "Employers' Accounting for Pensions" and
include the following components:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 156,643 140,042 150,937
Interest cost on projected benefit obligation 166,652 145,942 137,488
Actual return on plan assets (175,962) (175,409) (326,583)
Net amortization and deferral 2,365 2,365 176,218
- ---------------------------------------------------------------------------------------------------------------------------
Net pension expense $ 149,698 112,940 138,060
- ---------------------------------------------------------------------------------------------------------------------------
Assumptions used to develop the net periodic pension cost were:
Discount rate 6.50% 6.50% 6.50%
Expected long-term rate of return on assets 9.00% 8.00% 8.00%
Rate of increase in compensation levels 4.00% 6.00% 6.00%
</TABLE>
(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 options on shares of
common stock authorized under the Employees' Plan was 276,000. All of the
options in the Incentive Plan have been granted at $6.67 per share and are
currently exercisable. The number of shares of common stock authorized under the
Directors' Plan was 69,000 and are currently exercisable. The term of the
options issued under both Plans expires ten years from the date of grant. The
following is an analysis of the stock option activity for each of the years in
the three year period ended December 31, 1997 and the stock options outstanding
at the end of the respective periods.
<PAGE>
29
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1997
(continued)
(12) Officer, Director and Employee Plans (continued)
<TABLE>
<CAPTION>
Exercise Price
- -----------------------------------------------------------------------------------------------------------
Options Number of Options Per Share Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1995 326,633 $ 6.67 - 12.92 $ 2,216,751
Granted 517 15.50 8,013
Exercised (9,000) 6.67 (60,000)
- -----------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995 318,150 6.67 - 15.50 2,164,764
Granted 0 -- --
Exercised (7,500) 6.67 (50,000)
- -----------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 310,650 6.67 - 15.50 2,114,764
Granted 0 -- --
Exercised (37,260) 6.67 (248,519)
- -----------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 273,390 $ 6.67 - 15.50 $ 1,866,245
- -----------------------------------------------------------------------------------------------------------
Exercisable at December 31, 1997 273,390 $ 6.67 - 15.50 $ 1,866,245
- -----------------------------------------------------------------------------------------------------------
Options available for future grants at December 1997 - 0 -
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company implemented SFAS No. 123 "Accounting for Stock-Based Compensation"
during 1996. The Company will retain its current accounting method for its
stock-based compensation plans. This statement will only result in additional
disclosures for the Company, and as such, its adoption did not, nor is it
expected to have, a material impact on the Company's financial condition or its
results of operations.
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, 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
$231,912, $251,044 and $268,261 for the years ended December 31, 1997, 1996 and
1995 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 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, 1997, all shares were
awarded and vested. The $1,253,356 contributed to the ARPs was amortized to
compensation expense as the plan participants become vested in those shares. As
of December 31, 1997, the entire amount of deferred compensation expense has
been recognized.
Executive Salary Continuation Plan. This plan provides certain executive
officers with enhanced retirement, disability, death or change of control
benefits in exchange for a commitment to perform consulting services after
retirement. The Association has recorded benefit expense of $68,229, $65,464 and
$30,500 for the years ended December 31, 1997, 1996 and 1995, respectively.
Supplemental Executive Retirement Plan. The Association maintains a Supplemental
Executive retirement Plan covering certain executive officers. This plan is
intended to partially offset the effects of IRS limitations on salaries in the
Association's qualified retirement benefit plans. The Association has recorded
benefit expense of $90,600, $48,000 and $60,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
<PAGE>
30
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1997
(continued)
13) Income Taxes
The Company has adopted SFAS No. 109 which required 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,
1997 includes approximately $5,500,000 for which no deferred federal income tax
liability has been recognized.
The provision for income taxes consists of the following:
Years Ended December 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Current $2,615,665 1,583,308 2,103,348
Deferred 138,200 125,275 211,725
- --------------------------------------------------------------------------------
$2,753,865 1,708,583 2,315,073
- --------------------------------------------------------------------------------
A reconciliation of the statutory federal income tax rate to effective income
tax rate is as follows:
Years Ended December 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes 2.7 .8 1.9
Other .2 (.6) (.2)
- --------------------------------------------------------------------------------
Effective income tax rate 36.9% 34.2% 35.7
- --------------------------------------------------------------------------------
Deferred federal income tax expense consists of the following tax effects of
timing differences:
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Loan fees $ 146,965 229,990 245,140
Deferred directors' fees (33,425) (31,625) (28,245)
Incentive and retirement plan expense (35,950) (87,730) (95,160)
Statutory bad debt deduction in excess of book provision -- -- 150,665
Unrealized gain on trading account securities 57,370 9,000 (2,835)
Other 3,240 5,640 (57,840)
- -------------------------------------------------------------------------------------------------------------------------
$ 138,200 125,275 211,725
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
31
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1997
(continued)
14) Regulatory Capital Requirements
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. 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.
At December 31, 1997 and 1996, the Association's regulatory equity capital was
as follows:
<TABLE>
<CAPTION>
Tangible Core Risk-based
December 31, 1997 Capital Capital Capital
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stockholders' equity $ 41,845,289 41,845,289 41,845,289
Investment in nonincludable subsidiary (343,486) (343,486) (343,486)
General loss allowances -- -- 727,800
- ------------------------------------------------------------------------------------------------------------
Regulatory capital computed 41,501,803 41,501,803 42,229,603
Minimum capital requirement 4,634,895 9,269,790 11,523,040
- ------------------------------------------------------------------------------------------------------------
Regulatory capital excess $ 36,866,908 32,232,013 30,706,563
- ------------------------------------------------------------------------------------------------------------
Computed capital ratio 13.43% 13.43% 29.32%
Minimum capital ratio 1.50 3.00 8.00
- ------------------------------------------------------------------------------------------------------------
Regulatory capital excess 11.93% 10.43% 21.32%
- ------------------------------------------------------------------------------------------------------------
A reconciliation of the Association's equity capital at December 31, 1997 is as follows:
<CAPTION>
<S> <C>
Stockholders' equity $ 48,586,951
Less Company stockholders' equity not available for regulatory capital (6,741,662)
- ------------------------------------------------------------------------------------------------------------
Stockholders' equity of the Association $ 41,845,289
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
Tangible Core Risk-based
December 31, 1996 Capital Capital Capital
- ------------------------------------------------------------------------------------------------------------
<S> <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%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of the Association's equity capital at December 31, 1997 is as
follows:
<TABLE>
<S> <C>
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>
32
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1997
(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.
In addition, the Association may not declare or pay cash dividends on or
repurchase any of its shares of common stock if the effect thereof would cause
stockholders' equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements.
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.
On February 14, 1997, the Board of Directors of the Company authorized
management to purchase up to 200,000 shares of its outstanding stock in an
additional repurchase program. Under the authorization, repurchases are to be
made from time to time through open market purchases or unsolicited negotiated
transactions. Shares purchased under this authorization will be held in treasury
and will be available for various corporate purposes. As of December 31, 1997,
139,960 shares were repurchased at an average price of $23.48 per share while
60,040 shares remain to be purchased.
16) SAIF Special Assessment and its Impact on SAIF Insurance Premiums
The deposits of 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 had achieved its required level of
reserves while the SAIF had not yet achieved its required reserves. In order to
help eliminate this disparity and any competitive disadvantage due to disparate
deposit insurance premium schedules, legislation to recapitalize the SAIF was
enacted in September 1996.
The legislation required a special one-time assessment of 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 was
intended to fully recapitalize the SAIF fund so that commercial bank and thrift
deposits would be charged the same FDIC premiums beginning January 1, 1997. As
of such date, deposit insurance premiums for highly rated institutions, such as
the Association, have been 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 1.52 cents per $100 of deposits until
the year 2000 when the assessment will be imposed at the same rate on all FDIC
insured institutions.
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 extend on previously approved unused lines of credit.
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 $2,356,600 at December 31, 1997
represent amounts which the Association plans to fund within the normal
commitment period of 60 to 90 days. Of this amount, $984,600 are in fixed rate
commitments with rates ranging from 7.25% to 10.75%, and $1,372,000 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. 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.
<PAGE>
33
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1997
(continued)
The Association has approved, but unused, home equity lines of credit of
approximately $12,800,000 at December 31, 1997. 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 $3,500,000 at
December 31, 1997. Approval of construction lines of credit is based upon
underwriting standards and limitations similar to construction lending.
The Association has issued letters of credit totaling approximately $685,500,
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.
18) Contingencies
The Association is, from time to time, a party to certain lawsuits arising in
the ordinary course of its banking business. 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 from third party sources.
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.
The estimated fair value of the Company's financial instruments as of December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1997
- -------------------------------------------------------------------------------------------------------------------
Carrying Fair
Amount Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 13,956,525 13,956,525
Investment securities 53,968,243 53,973,913
Investment securities held for trade 1,462,220 1,462,220
Loans receivable 240,097,597 248,602,000
Financial liabilities:
Deposits 259,610,699 261,862,000
- -------------------------------------------------------------------------------------------------------------------
December 31, 1996
- -------------------------------------------------------------------------------------------------------------------
Carrying Fair
Amount Value
- -------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 11,389,326 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
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
34
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1997
(continued)
20) Condensed Parent Company Only Financial Statements
The following condensed statement of financial condition, as of December 31,
1997 and 1996 and condensed statements of income and cash flows for the years
ended December 31, 1997, 1996 and 1995 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,
- ----------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 2,320,887 2,991,530
Investment securities 2,982,954 3,774,305
Investment securities held for trade 1,462,220 826,875
Loans receivable 373,286 622,143
Equity investment in the Association 41,689,359 40,514,696
Prepaid expenses and other assets 176,869 --
- ----------------------------------------------------------------------------------------------------------
49,005,575 48,729,549
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Accrued taxes and other liabilities 574,554 483,163
Common stock 35,216 34,843
Additional paid-in capital 22,491,026 22,184,247
Retained earnings 41,583,949 38,420,579
Treasury stock (15,679,170) (12,393,283)
- ----------------------------------------------------------------------------------------------------------
$ 49,005,575 48,729,549
- ----------------------------------------------------------------------------------------------------------
Statement of Income
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Interest income $ 347,636 416,615 369,278
Unrealized gain on trading securities -- net 225,165 7,120 34,200
Gain on sale of trading securities 267,849 79,992 142,221
Other income -- 8,164 --
Non-interest expense (188,710) (227,759) (247,318)
- ----------------------------------------------------------------------------------------------------------
Net income before income taxes and
equity in earnings of subsidiaries 651,940 284,132 298,381
Provision for federal and state income taxes (218,631) (96,749) (100,983)
- ----------------------------------------------------------------------------------------------------------
Net income before equity in
earnings of subsidiaries 433,309 187,383 197,398
Equity in earnings of subsidiaries 4,274,663 3,100,718 3,969,760
- ----------------------------------------------------------------------------------------------------------
Net income $ 4,707,972 3,288,101 4,167,158
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
35
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1997
(continued)
20) Condensed Parent Company Only Financial Statements (continued)
Statement of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 4,707,972 3,288,101 4,167,158
Equity in earnings of the Association (4,274,663) (3,100,718) (3,969,760)
Amortization of premiums and discounts
on investment securities (167,150) (216,128) (197,247)
Unrealized gain on trading securities -- net (225,165) (7,120) (34,200)
Gain on sale of trading securities (315,727) (76,130) (146,009)
Purchase of trading securities (6,291,005) (4,537,138) (7,479,664)
Proceeds from sale of trading securities 6,196,552 4,294,663 7,993,926
(Increase) decrease in prepaid expenses and other assets (176,869) 4,990 92,210
Increase in accrued taxes and other liabilities 116,142 53,814 1,417
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (for) operating activities (429,913) (295,666) 427,831
- -------------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from maturities of investment securities 15,151,128 11,899,546 23,300,000
Purchase of investment securities (14,192,627) (12,362,904) (23,907,090)
Loan repayment from subsidiary 248,857 248,857 248,857
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (for) investing activities 1,207,358 (214,501) (358,233)
- -------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from exercise of stock options 248,519 50,000 60,000
Purchase of treasury stock (3,285,887) (2,772,909) (2,170,770)
Payment in lieu of issuing fractional shares -- (761) --
Dividends received from Association 3,100,000 4,000,000 4,000,000
Payment of dividends (1,510,720) (1,237,488) (1,103,856)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (for) financing activities (1,448,088) 38,842 785,374
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (670,643) (471,325) 854,972
Cash and cash equivalents at beginning of year 2,991,530 3,462,855 2,607,883
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,320,887 2,991,530 3,462,855
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
36
- --------------------------------------------------------------------------------
Officers and Directors
Association Officers Directors
David C. Burba* David C. Burba
President Chairman of the Board
Westco Bancorp, Inc.
Richard A. Brechlin*
Exec. Vice President/Treasurer Rosalyn M. Lesak
Chairman of the Board
Gregg P. Goossens* First Federal Savings
Exec. Vice President/Lending of Westchester
Mary S. Suffi* James E. Dick
Senior Vice President/Secretary President
Human Resource Associates
Kenneth J. Kaczmarek*
Senior Vice President/Controller Edward A. Matuga
Attorney-at-Law
Frederick A. Cox Private Practice
Vice President
Edward C. Moticka
Roberta Sramek President
Vice President Moticka & Ralph
Ingrid K. Volkmann Thomas J. Nowicki
Vice President President
Affiliated Appraisal Company
Victoria E. Bespole
Assistant Vice President Robert E. Vorel, Jr.
President
Constance A. Krupka Crest Communications, Inc.
Assistant Vice President
Rosanne M. Klingelhofer
Assistant Secretary
*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 1997 and 1996, shown reflecting 1996 stock split.
- --------------------------------------------------------------------------------
Dividends High Low
- --------------------------------------------------------------------------------
Fourth Quarter,1997 $ .17 $ 29.75 $ 26.13
Third Quarter, 1997 .15 27.00 25.00
Second Quarter,1997 .15 26.63 22.00
First Quarter, 1997 .15 23.50 19.50
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
- --------------------------------------------------------------------------------
Westco Bancorp, Inc. had approximately 1,400 shareholders at December 31, 1997
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 South 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 21, 1998 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 South LaSalle Street, Suite 1200
Chicago, IL 60604
Independent Auditors
Cobitz, VandenBerg and Fennessy
9944 South Roberts Road, Suite 202
Palos Hills, IL 60465
<PAGE>
Consent of Cobitz, VandenBerg & Fennessy
Exhibit 23.0
<PAGE>
[LETTERHEAD OF COBITZ, VANDENBERG & FENNESSY APPEARS HERE]
INDEPENDENT AUDITOR'S CONSENT
Board of Directors
Westco Bancorp, Inc.
We consent to the incorporation by reference in the Registration Statement
on Form S-8 (Registration Nos. 33-54764 and 33-54766) of Westco Bancorp, Inc.
(the "Company") of our report dated January 16, 1998 relating to the
consolidated balance sheets of Westco Bancorp, Inc. and subsidiaries as of
December 31, 1997 and 1996 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, 1997, which report is incorporated by
reference in the December 31, 1997 Annual Report on the Company's Form 10-K.
/s/ Cobitz, Vandenberg & Fennessy
Cobitz, Vandenberg & Fennessy
March 24, 1997
Palos Hills, Illinois
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,797,551
<INT-BEARING-DEPOSITS> 2,376,542
<FED-FUNDS-SOLD> 7,782,432
<TRADING-ASSETS> 1,462,220
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 53,968,243
<INVESTMENTS-MARKET> 53,973,913
<LOANS> 241,000,397
<ALLOWANCE> 902,800
<TOTAL-ASSETS> 315,943,733
<DEPOSITS> 259,610,699
<SHORT-TERM> 0
<LIABILITIES-OTHER> 7,746,083
<LONG-TERM> 0
35,216
0
<COMMON> 0
<OTHER-SE> 48,551,735
<TOTAL-LIABILITIES-AND-EQUITY> 315,943,733
<INTEREST-LOAN> 19,607,277
<INTEREST-INVEST> 3,890,412
<INTEREST-OTHER> 149,952
<INTEREST-TOTAL> 23,647,641
<INTEREST-DEPOSIT> 12,612,838
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 11,034,803
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 493,014
<EXPENSE-OTHER> 4,888,470
<INCOME-PRETAX> 7,461,837
<INCOME-PRE-EXTRAORDINARY> 7,461,837
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,707,972
<EPS-PRIMARY> 1.89
<EPS-DILUTED> 1.75
<YIELD-ACTUAL> 3.64
<LOANS-NON> 472,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 314,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 882,800
<CHARGE-OFFS> 0
<RECOVERIES> 20,000
<ALLOWANCE-CLOSE> 902,800
<ALLOWANCE-DOMESTIC> 175,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 727,800
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,656,878
<INT-BEARING-DEPOSITS> 7,493,223
<FED-FUNDS-SOLD> 4,400,000
<TRADING-ASSETS> 1,217,425
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 53,932,193
<INVESTMENTS-MARKET> 53,983,896
<LOANS> 236,584,453
<ALLOWANCE> 0
<TOTAL-ASSETS> 309,069,787
<DEPOSITS> 254,752,906
<SHORT-TERM> 0
<LIABILITIES-OTHER> 6,284,650
<LONG-TERM> 0
0
0
<COMMON> 35,195
<OTHER-SE> 47,997,036
<TOTAL-LIABILITIES-AND-EQUITY> 309,069,787
<INTEREST-LOAN> 14,522,278
<INTEREST-INVEST> 2,996,546
<INTEREST-OTHER> 106,752
<INTEREST-TOTAL> 17,625,576
<INTEREST-DEPOSIT> 9,374,294
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 8,251,282
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 309,301
<EXPENSE-OTHER> 3,680,655
<INCOME-PRETAX> 5,519,281
<INCOME-PRE-EXTRAORDINARY> 5,519,281
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,503,281
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.29
<YIELD-ACTUAL> 3.63
<LOANS-NON> 635,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 882,800
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 882,800
<ALLOWANCE-DOMESTIC> 175,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 707,800
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,209,452
<INT-BEARING-DEPOSITS> 11,057,414
<FED-FUNDS-SOLD> 3,600,000
<TRADING-ASSETS> 986,972
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 56,442,787
<INVESTMENTS-MARKET> 56,408,382
<LOANS> 233,084,517
<ALLOWANCE> 0
<TOTAL-ASSETS> 311,613,437
<DEPOSITS> 256,129,172
<SHORT-TERM> 0
<LIABILITIES-OTHER> 7,986,109
<LONG-TERM> 0
0
0
<COMMON> 34,979
<OTHER-SE> 47,463,177
<TOTAL-LIABILITIES-AND-EQUITY> 311,613,437
<INTEREST-LOAN> 9,563,479
<INTEREST-INVEST> 2,047,084
<INTEREST-OTHER> 68,691
<INTEREST-TOTAL> 11,679,254
<INTEREST-DEPOSIT> 6,182,919
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 5,496,335
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 94,797
<EXPENSE-OTHER> 2,477,498
<INCOME-PRETAX> 3,505,749
<INCOME-PRE-EXTRAORDINARY> 3,505,749
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,231,649
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.81
<YIELD-ACTUAL> 3.64
<LOANS-NON> 1,272,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 882,800
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 882,800
<ALLOWANCE-DOMESTIC> 175,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 707,800
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,389,416
<INT-BEARING-DEPOSITS> 10,026,211
<FED-FUNDS-SOLD> 7,300,000
<TRADING-ASSETS> 964,113
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 62,402,839
<INVESTMENTS-MARKET> 62,292,211
<LOANS> 227,718,362
<ALLOWANCE> 0
<TOTAL-ASSETS> 309,921,409
<DEPOSITS> 254,295,399
<SHORT-TERM> 0
<LIABILITIES-OTHER> 7,375,521
<LONG-TERM> 0
0
0
<COMMON> 34,886
<OTHER-SE> 48,215,603
<TOTAL-LIABILITIES-AND-EQUITY> 309,921,409
<INTEREST-LOAN> 4,682,417
<INTEREST-INVEST> 1,058,172
<INTEREST-OTHER> 33,863
<INTEREST-TOTAL> 5,774,452
<INTEREST-DEPOSIT> 3,069,408
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 2,705,044
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 24,694
<EXPENSE-OTHER> 1,228,326
<INCOME-PRETAX> 1,688,738
<INCOME-PRE-EXTRAORDINARY> 1,688,738
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,078,638
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
<YIELD-ACTUAL> 3.58
<LOANS-NON> 2,434,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 882,800
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 882,800
<ALLOWANCE-DOMESTIC> 175,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 707,800
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS LEGEND CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FORM 10-K AND I
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> 3,511,400
<INT-BEARING-DEPOSITS> 1,877,846
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 826,875
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 68,787,012
<INVESTMENTS-MARKET> 68,638,354
<LOANS> 233,898,424
<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> 23,383,797
<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>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,902,188
<INT-BEARING-DEPOSITS> 1,504,666
<FED-FUNDS-SOLD> 700,000
<TRADING-ASSETS> 740,750
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 76,213,079
<INVESTMENTS-MARKET> 76,629,446
<LOANS> 219,535,052
<ALLOWANCE> 882,800
<TOTAL-ASSETS> 307,772,487
<DEPOSITS> 252,968,882
<SHORT-TERM> 0
<LIABILITIES-OTHER> 7,103,935
<LONG-TERM> 0
0
0
<COMMON> 34,828
<OTHER-SE> 47,664,842
<TOTAL-LIABILITIES-AND-EQUITY> 307,772,487
<INTEREST-LOAN> 13,814,472
<INTEREST-INVEST> 3,545,132
<INTEREST-OTHER> 100,156
<INTEREST-TOTAL> 17,459,760
<INTEREST-DEPOSIT> 9,250,956
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 8,208,804
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (2,819)
<EXPENSE-OTHER> 5,535,051
<INCOME-PRETAX> 3,241,505
<INCOME-PRE-EXTRAORDINARY> 3,241,505
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,134,905
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.75
<YIELD-ACTUAL> 3.63
<LOANS-NON> 1,619,200
<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>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS LEGEND CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 4,292,518
<INT-BEARING-DEPOSITS> 5,475,410
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 783,784
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 80,376,044
<INVESTMENTS-MARKET> 80,802,492
<LOANS> 215,854,805
<ALLOWANCE> 882,800
<TOTAL-ASSETS> 312,157,887
<DEPOSITS> 256,344,312
<SHORT-TERM> 0
<LIABILITIES-OTHER> 7,577,355
<LONG-TERM> 0
0
0
<COMMON> 34,813
<OTHER-SE> 48,201,406
<TOTAL-LIABILITIES-AND-EQUITY> 312,157,887
<INTEREST-LOAN> 9,148,852
<INTEREST-INVEST> 2,435,443
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,584,295
<INTEREST-DEPOSIT> 6,125,778
<INTEREST-EXPENSE> 6,125,778
<INTEREST-INCOME-NET> 5,458,517
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (64,733)
<EXPENSE-OTHER> 2,625,254
<INCOME-PRETAX> 3,148,845
<INCOME-PRE-EXTRAORDINARY> 3,148,845
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,027,445
<EPS-PRIMARY> .71
<EPS-DILUTED> .70
<YIELD-ACTUAL> 3.64
<LOANS-NON> 931,000
<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>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS LEGEND CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 3,856,382
<INT-BEARING-DEPOSITS> 11,534,302
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 681,975
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 74,941,894
<INVESTMENTS-MARKET> 75,217,004
<LOANS> 212,879,661
<ALLOWANCE> 882,800
<TOTAL-ASSETS> 309,265,433
<DEPOSITS> 252,484,215
<SHORT-TERM> 0
<LIABILITIES-OTHER> 8,398,173
<LONG-TERM> 0
0
0
<COMMON> 23,199
<OTHER-SE> 48,359,846
<TOTAL-LIABILITIES-AND-EQUITY> 309,265,433
<INTEREST-LOAN> 4,502,742
<INTEREST-INVEST> 1,219,386
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,722,128
<INTEREST-DEPOSIT> 3,052,039
<INTEREST-EXPENSE> 3,052,039
<INTEREST-INCOME-NET> 2,670,089
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (38,976)
<EXPENSE-OTHER> 1,304,643
<INCOME-PRETAX> 1,503,884
<INCOME-PRE-EXTRAORDINARY> 1,503,884
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 969,234
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
<YIELD-ACTUAL> 0<F1>
<LOANS-NON> 1,786,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 882,800
<CHARGE-OFFS> 0
<RECOVERIES> 0<F1>
<ALLOWANCE-CLOSE> 882,800
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 882,800
<FN>
<F1>NOT CONTAINED IN FORM 10-Q.
</FN>
</TABLE>
