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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended Commission File No.: 0-20082
September 30, 1996
HINSDALE FINANCIAL CORPORATION
(exact name of registrant as specified in its charter)
Delaware 36-3811768
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. No.)
One Grant Square, Hinsdale, Illinois 60521
(Address of principal executive offices)
Registrant's telephone number, including area code: (630) 323-1776
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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)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, i.e., persons other than directors and executive officers of
the registrant, is $61,058,178 and is based upon the last sales price as quoted
on NASDAQ for December 13, 1996.
The Registrant had 2,695,085 shares of common stock outstanding as of
December 13, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Part III-Portions of the Proxy Statement for the 1996 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
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PART I
Item 1. Business.
General
Hinsdale Financial Corporation ("the Company") is a registered savings and
loan holding company incorporated under the laws of the state of Delaware and is
engaged in the business of providing financial service products to the public
through its wholly-owned subsidiary, Hinsdale Federal Bank for Savings ("the
Bank").
The Bank, a Federal savings bank chartered under the authority of the
Office of Thrift Supervision ("OTS"), originally was organized in 1934, and
changed its charter from a federal savings and loan association to a federal
savings bank in 1991. The Bank is a member of the Federal Home Loan Bank
("FHLB") System and its deposit accounts are insured to the maximum allowable
amount by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is
regulated by the OTS and the FDIC and is further regulated by the Board of
Governors of the Federal Reserve System as to reserves required to be maintained
against deposits and certain other matters.
The Bank is a community-oriented company providing financial services
through ten retail banking facilities in DuPage and western Cook counties in
Illinois. The Bank offers a variety of deposit products in an attempt to attract
funds from the general public in highly competitive market areas surrounding its
offices. In addition to deposit products, the Bank also offers its customers
financial advice and security brokerage services through INVEST Financial
Corporation ("INVEST"). The Bank invests its retail deposits in mortgage and
consumer loans, investment securities and mortgage-backed securities, secured
primarily by one-to four-family residential loans.
The earnings of the Bank are primarily dependent on its net interest
income, which is the difference between the interest income earned on its loans,
mortgage-backed securities, and investment portfolios, and its cost of funds,
consisting of the interest paid on its deposits and borrowings. The Bank has
determined to place additional emphasis on expanding its portfolio of home
equity lines of credit, the interest rates on which adjust with the prime rate.
An increase in home equity lines of credit is intended to enhance the Bank's
interest rate spread and its interest rate risk management.
On May 31, 1995, the Company acquired Preferred Mortgage Associates, Ltd.
("Preferred"), one of the largest mortgage brokers in the Chicago metropolitan
area. Preferred has four mortgage origination offices including its headquarters
in Downers Grove, Illinois. Established in 1987, Preferred brokered loans for
approximately twenty-five separate lenders in 1996. The Bank anticipates that it
will continue to retain approximately 20% of Preferred's current annual loan
origination volume. Financial results for Preferred are included on a
consolidated basis from the date of acquisition. Effective October 1, 1995, the
Company transferred the ownership of Preferred to the Bank. The acquisition of
Preferred has resulted in significant increases in both noninterest income and
noninterest expense.
The Bank's earnings are also affected by noninterest income, including
income related to loan origination fees contributed by Preferred and the
noncredit consumer related financial services offered by the Bank, such as net
commissions received by the Bank from securities brokerage services, commissions
from the sale of insurance products, loan servicing income, fee income on
transaction accounts, and interchange fees from its shared ATMs. The Bank's
noninterest income has also been affected by gains from the sale of various
assets, including loans, mortgage-backed securities, investment securities, loan
servicing, and real estate. Noninterest expense consists principally of employee
compensation, occupancy expense, federal deposit insurance premiums, and other
general and administrative expenses of the Bank and Preferred.
On August 2, 1996, the Company announced an Agreement and Plan of Merger
with Liberty Bancorp, Inc., which provides, among other things, that (i) Liberty
Bancorp , Inc. will be merged with and into Hinsdale Financial Corporation, with
Hinsdale Financial Corporation as the surviving corporation, which effective
upon consummation of the transactions contemplated in the Merger Agreement, will
amend its Certificate of Incorporation to increase the total number of
authorized shares of common stock to 11,000,000 and operate under the name
"Alliance Bancorp", (ii) Liberty Federal Savings Bank, the savings bank
subsidiary of Liberty Bancorp, Inc., will be merged with and into Hinsdale
Federal Bank for Savings, the savings bank subsidiary of the Hinsdale Financial
Corporation, and the resulting bank will operate under the new name of Liberty
Federal Bank, and (iii) each
1
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outstanding share of Liberty Bancorp, Inc. common stock issued and outstanding
at the effective time of the Merger shall be converted into 1.054 shares of
common stock of Alliance Bancorp. The Merger has been approved by the
shareholders of both companies. Consummation of the Merger is subject to all
required regulatory approvals. It is expected that the Merger will be completed
during the first quarter of 1997 and be accounted for under the purchase method
of accounting.
Market Area and Competition
The Bank's deposit gathering and lending areas include the County of
DuPage and western Cook County, where the Bank's offices are located. The Bank
currently operates out of ten locations, eight of which are located in DuPage
County, two of which are located in western Cook County. The Bank's home office
is located in Hinsdale, Illinois. Management believes that all of its offices
are located in communities that can generally be characterized as stable
residential neighborhoods of predominantly one and two family residences.
The Company faces significant competition both in making mortgage and
consumer loans and in attracting deposits. The Company's competition for loans
comes principally from savings and loan associations, savings banks, mortgage
banking companies, insurance companies and commercial banks. Its most direct
competition for deposits has historically come from savings and loan
associations, savings banks, commercial banks and credit unions. The Company
faces additional competition for deposits from short-term money market funds and
other corporate and government securities funds and from other financial
institutions such as brokerage firms and insurance companies.
Regulatory Environment
On September 30, 1996, legislation was enacted which, among other things,
imposes a special one-time assessment on Savings Association Insurance Fund
("SAIF") member institutions, including the Bank, to recapitalize the SAIF and
spreads the payments of Financing Corporation Bonds ("FICO") across all SAIF and
Bank Insurance Fund ("BIF") members. The FDIC special assessment being levied is
65.7 basis points on the amount of SAIF assessable deposits held as of March 31,
1995. The special assessment of $2.8 million was recognized by the Bank as an
expense in the fourth quarter and is tax deductible and was paid on November 27,
1996.
Under this Legislation, BIF members will pay a portion of the FICO payment
equal to 1.3 basis points on BIF-insured deposits beginning on January 1, 1997,
compared to 6.5 basis points on SAIF-insured deposits and will pay a pro rata
share of the FICO payment on the earlier of January 1, 2000 or the date upon
which the savings association ceases to exist. The Legislation also requires the
BIF and SAIF to be merged by January 1, 1999 provided that subsequent
legislation is adopted to eliminate the savings association charter and there
are no remaining savings associations as of that date.
As a result of this legislation, the FDIC recently proposed to lower SAIF
assessments to 0 to 27 basis points effective January 1, 1997, a range
comparable to that of BIF members, although SAIF members must also make the FICO
payments described above. Management cannot predict the level of FDIC insurance
assessments on an on-going basis or whether the BIF and SAIF will eventually be
merged.
The legislation enacted also eliminated the availability of the percentage-
of-taxable-income method for computing additions to the tax bad debt reserves
for all thrifts for tax years beginning after December 31, 1995. The new rules
also require that thrift institutions recapture all or a portion of their tax
bad debt reserves added since their base year (i.e., the last taxable year
beginning before January 1, 1988). An institution is required to recapture the
excess of its bad debt reserves as of the beginning of the year of change over
the balance of bad debt reserves outstanding at the end of its base year. The
excess is recaptured into taxable income ratably over six years beginning with
the 1996 year, although postponement of the recapture is possible for a two-year
period if the institution meets a minimum level of mortgage lending activity.
Management does not believe that this legislation will have a material impact on
the operations of the Company.
2
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Item 2. Properties.
The Company is located and conducts its business at the Bank's Main Office
at One Grant Square, Hinsdale, Illinois, which the Bank leases. In addition to
the Main Office, the Bank leases branch locations at 2745 W. Maple Avenue,
Lisle, Illinois; 6 S. Walker Avenue, Clarendon Hills, Illinois; the Brush Hill
Depot, Hinsdale, Illinois; and 138 N. York Road, Elmhurst, Illinois. The Bank
owns branch offices located at 810 S. Oak Park Avenue, Oak Park, Illinois; 6301
S. Cass Avenue, Westmont, Illinois; 115 High Street, West Chicago, Illinois; and
7525 Madison Street, Forest Park, Illinois. The Bank also owns the building, but
leases the land at its branch at 1125 S. York Road, Bensenville, Illinois.
Preferred conducts its business through four office locations, which are leased,
in the Chicago area. The Company believes that the current facilities are
adequate to meet the present and immediately foreseeable needs of the Bank and
the Company. See Note 7 of the "Notes to Consolidated Financial Statements" for
the net book value of the Company's premises and equipment and Note 13 for
liability under lease commitments.
Item 3. Legal Proceedings.
Goodwill Litigation
On August 30, 1995, the U. S. Court of Appeals for the Federal Circuit
rejected the federal government's appeal of a 1992 U. S. Court of Claims' ruling
that the government breached its contract with Glendale Federal Bank regarding
supervisory goodwill and that the government is liable for damages. The
government subsequently appealed this decision to the United States Supreme
Court and on July 1, 1996, the Supreme Court by a vote of 7 to 2, ruled that the
government had breached its contract. On December 29, 1992, Hinsdale Federal
Bank filed a similar action against the federal government in the U. S. Claims
Court seeking damages in connection with the supervisory goodwill arising from
the Bank's 1982 merger of North America Federal Savings. The Bank based its
decision to complete that merger upon the assurance that the supervisory
goodwill resulting from the merger could be included in regulatory capital and
be amortized over a life of forty years. The Complaint alleges that the
enactment of the Financial Institutions Reform, Recovery and Enforcement Act of
1989, and the regulations promulgated thereunder, breached the federal
government's contract with the Bank. At this time management cannot predict the
outcome of this pending litigation. No assurance can be given that a favorable
court ruling will be rendered as to the Bank's claims, or the amount, if any, to
be recovered by the Bank or the timing of any recovery.
Other Litigation
In addition to the matter described above, the Company or its subsidiaries
are involved as plaintiff or defendant in various legal actions incidental to
their business, none of which is believed by management to be material to the
consolidated financial condition or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Hinsdale Financial Corporation's common stock is traded on the National
Association of Securities Dealer's Automated Quotation/National Market System
(NASDAQ/NMS) under the symbol "HNFC." Newspaper stock tables list the company as
"Hinsdle." As of September 30, 1996 the Holding Company had approximately 410
stockholders of record (not including the number of persons or entities holding
stock in nominee or street name through various brokerage firms) and 2,695,085
outstanding shares of common stock. The table shows the reported high and low
sale prices of the common stock during the fiscal years ended September 30, 1996
and 1995, respectively.
<TABLE>
<CAPTION>
1996 1995
High Low High Low
<S> <C> <C> <C> <C>
First quarter 22.25 21.00 19.20 16.40
Second quarter 22.50 21.00 18.60 16.80
Third quarter 26.75 21.00 18.60 16.60
Fourth quarter 27.00 21.75 23.00 17.80
</TABLE>
All share prices have been adjusted to reflect the 25% common stock split
effected in the form of a stock dividend declared on October 18, 1995.
4
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Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
At September 30
(Dollars in thousands, except per share data) 1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets $ 650,897 703,707 643,289 537,832 515,430
Investment securities 1,998 1,998 22,734 37,673 36,827
Mortgage-backed securities 5,367 7,147 30,701 162,349 192,797
Loans receivable, net 590,722 614,371 544,284 286,273 230,767
Real estate 1,249 1,872 6,030 6,608 13,839
Deposits 452,472 445,505 419,436 437,632 450,974
Collateralized mortgage obligations 2,542 4,353 6,063 11,278 16,306
Borrowed funds 128,949 185,339 160,857 37,029 1,200
Stockholders' equity 55,471 51,977 46,716 41,516 37,848
Book value per share (4) $ 20.58 19.39 17.64 15.74 13.86
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For The Year Ended September 30
1996 1995 1994 1993 1992
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Selected Operating Data:
Interest income $ 45,701 45,944 37,028 34,024 38,534
Interest expense 28,967 28,442 18,968 17,933 25,034
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Net interest income 16,734 17,502 18,060 16,091 13,500
Less provision for loan losses 50 185 125 300 15
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Net interest income after provision for loan losses 16,684 17,317 17,935 15,791 13,485
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Noninterest income:
Gain on sales of loans receivable, mortgage-backed
securities and investment securities 452 344 369 1,446 2,175
Gain on sales of real estate and other assets 61 300 - - 277
Other 12,434 6,104 4,713 4,350 4,065
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Total noninterest income 12,947 6,748 5,082 5,796 6,517
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Noninterest expense:
General and administrative expenses 25,696 16,697 15,312 13,915 14,020
Amortization of cost in excess of fair value of net
assets acquired - - - - 61
Write-off of cost in excess of fair value of net
assets acquired - - - - 7,626 (1)
Provision for real estate losses - - - - 485
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Total noninterest expense 25,696 16,697 15,312 13,915 22,192
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Income (loss) before income taxes 3,935 7,368 7,705 7,672 (2,190)
Income tax expense 861 2,909 2,989 3,074 1,858
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Income (loss) before cumulative effect of change in
accounting principle 3,074 4,459 4,716 4,598 (4,048)
Cumulative effect of change in accounting for
income taxes - - - - 2,102 (2)
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Net income (loss) $ 3,074 4,459 4,716 4,598 (1,946) (1)
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Primary earnings per share (4) $ 1.10 1.61 1.69 1.65 0.34 (3)
Fully diluted earnings per share (4) $ 1.10 1.61 1.69 1.63 0.34 (3)
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Cash dividends paid per common share $ - - - - N/A
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</TABLE>
(continued)
5
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(continued)
<TABLE>
<CAPTION>
At or For The Year Ended September 30
(Dollars in thousands) 1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Selected Financial Ratios And Other Data:
Average assets $ 670,430 677,573 584,039 522,837 528,025
Return on average assets 0.46 0.66 0.81 0.88 (0.37)
Return on average equity 5.69 9.07 10.73 11.61 (8.70) (1)
Average stockholders' equity to average assets 8.06 7.26 7.53 7.57 4.24
Stockholders' equity to total assets 8.52 7.39 7.26 7.72 7.34
Tangible capital to total assets (Bank only) 7.85 7.15 7.09 7.54 6.91
Leverage capital to total assets (Bank only) 8.07 7.15 7.09 7.54 6.91
Risk-based capital ratio (Bank only) 13.72 13.64 13.85 17.83 16.06
Interest rate spread during the year 2.19 2.35 2.98 3.05 2.70
Net yield on average interest-earning assets 2.58 2.67 3.22 3.25 2.73
General and administrative expenses to average assets 3.83 2.46 2.62 2.66 2.66
Non-performing loans to total loans 0.15 0.21 0.18 0.32 0.65
Non-performing assets to total assets 0.17 0.18 0.85 1.04 2.50
Average interest-earning assets to average
interest-bearing liabilities 1.09 x 1.07 1.07 1.06 1.00
Loan originations $ 542,578 262,154 403,414 228,965 169,885
Full-service customer service facilities 9 9 9 9 9
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</TABLE>
(1) During 1991, the Bank determined that the enactment of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") and
changing economic conditions in the thrift industry had altered the
environment in which the Bank operated and impaired the ability to
profitably realize the intangible benefits from the acquisition of North
America Federal Savings and Loan Association ("NAF") in 1982. Accordingly
in 1991, the Bank recorded a write-down of goodwill of approximately $27.6
million, reducing income and stockholders' equity for this substantial
charge. The Bank also reevaluated the useful life of the remaining
unimpaired goodwill and reduced the amortization period from 40 years to
20 years. On the basis of several factors, management of the Bank
determined that the Bank's remaining goodwill was permanently impaired and
accordingly, during fiscal 1992, charged the remaining carrying value of
goodwill to expense.
(2) Reflects the adoption of Statement of Financial Accounting Standards No.
109 ("Statement 109").
(3) Earnings per share for the year ended September 30, 1992 was based upon
net income from July 7, 1992 through September 30, 1992.
(4) All share amounts have been adjusted to reflect the 25% common stock split
effected in the form of a stock dividend declared on October 18, 1995.
6
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Comparison of Operating Results for the Years Ended September 30, 1996 and
September 30, 1995
General
Net income totaled $3.1 million, or $1.10 per fully diluted share for the
year ended September 30, 1996, compared to $4.5 million, or $1.61 per fully
diluted share for the year ended September 30, 1995. Excluding the one-time
Savings Association Insurance Fund ("SAIF") assessment, net income totaled $4.8
million, or $1.71 per fully diluted share for the year ended September 30, 1996.
Net interest income for the year ended September 30, 1996 was $16.7 million, a
decrease of $768,000, or 4.4%.
Interest Income
Interest income for the year ended September 30, 1996 totaled $45.7
million, a decrease of $243,000, or 0.5% from the prior year. Interest income on
mortgage loans increased $680,000 to $39.9 million from the prior year. The
average mortgage loan portfolio when comparing year to year increased $2.3
million, or 0.4%. The average yield on the mortgage loan portfolio increased to
7.11% for the year ended September 30, 1996, from 7.02% for the 1995 year. The
average balance of equity lines of credit increased $15.4 million, or 84.0%, to
$33.8 million for the year ended September 30, 1996. This increase resulted in
an increase in interest income of $1.1 million. The Bank has determined to place
additional emphasis on expanding its portfolio of equity lines of credit, the
interest rates on which adjust with the prime rate. An increase in equity lines
of credit is intended to enhance the Bank's interest rate spread and its
interest rate risk management. The decrease in the average consumer loan
portfolio of $4.2 million for the year ended September 30, 1996 is primarily
related to the sale of the credit card portfolio. The Bank recorded a gain on
the sale of $183,000 in the second quarter of fiscal 1996. The average balance
of the mortgage-backed securities portfolio decreased $13.4 million to $7.3
million from the prior year. The decrease in the average mortgage-backed
securities portfolio was primarily due to the sale of $20.2 million during
fiscal 1995, resulting in a decrease of interest income of $1.0 million. The
average balance of the investment securities portfolio decreased $10.2 million
to $10.1 million from the prior year. This decrease was primarily related to the
sales and maturities in the portfolio in fiscal 1995, resulting in a decrease in
interest income of $530,000.
Interest Expense
Interest expense for the year totaled $29.0 million, an increase of
$525,000, or 1.8%, from the prior year. Interest expense on deposit accounts
increased $2.3 million, or 13.0%, to $19.7 million for the year. The average
cost of deposits for the year was 4.30%, an increase from the average cost of
4.02% for the 1995 year. The average deposit base increased $24.3 million, or
5.6%, to $457.5 million for the year ended September 30, 1996. The deposit base
continues to be affected by alternative investment products and competition
within the Company's market areas. For the year, the Company recorded interest
expense on borrowed funds of $8.8 million on an average balance of $136.7
million at an average cost of 6.47%. This compares to interest expense of $10.4
million on an average balance of $171.5 million at an average cost of 6.05% for
the year ended 1995. The decrease in the average balance of borrowed funds of
$34.8 million was partial offset by the increase in the average deposit base of
$24.3 million. The average balance of the Collateralized Mortgage Obligations
("CMO") bonds outstanding decreased $1.7 million, or 34.0%, to $3.2 million for
the year ended September 30, 1996 compared to the 1995 year. The average cost of
the CMO bonds for the year ended 1996 was 13.34% an increase from the average
cost of 12.87% for the year ended 1995. This increase was due to adjustments
made to the discount on the bonds for changes in the estimated average
maturities of the mortgage-backed securities collateralizing the bonds.
Net Interest Income
Net interest income for the year ended September 30, 1996 decreased
$768,000, or 4.4%, to $16.7 million from the comparable 1995 year. Both the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities increased when comparing 1996 and 1995. The average
yield on interest-earning assets has remained stable over the past two years,
increasing slightly from 7.02% to 7.04%. The Bank continues to concentrate on
improving asset yields, specifically through increased consumer lending.
However, early in 1996, the Bank sold its higher yielding credit card portfolio
due to high costs and charge-offs. Additionally, first year discounts on new
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home equity lines of credit have slowed the improvement in loan income. The Bank
has been able to maintain and increase its deposit base over the last two years
despite intense competition from other depositories and mutual funds. The
average cost of interest-bearing liabilities has increased from 4.67% to 4.85%.
Each successive quarter of 1996 has shown cost improvement through lower
interest rates compared to 1995.
Provision for Loan Losses
The provision for loan losses was $50,000 for year ended September 30, 1996
compared to $185,000 for the 1995 year. At September 30, 1996, the ratio of non-
performing loans to total loans was 0.15% compared to 0.21% at September 30,
1995. The allowance for loan losses represents 0.41% of total loans receivable
at September 30, 1996 compared to 0.42% at September 30, 1995. Based on
management's evaluation of the loan portfolio, past loan loss experience and
known and inherent risks in the portfolio, management believes that the
allowance is adequate.
Noninterest Income
Total noninterest income for the year ended September 30, 1996 was $12.9
million, an increase of $6.2 million from the 1995 year.
Gain on sales of loans and mortgage-backed securities totaled $452,000 for
the year, compared to $362,000 recorded in 1995. In fiscal 1996, the Bank sold
its credit card portfolio, recording a gain on the sale of $183,000.
The increase in fees and commissions of $5.8 million is primarily
attributable to the full year of origination fees contributed by Preferred of
$7.8 million compared to $2.3 million in 1995.
In fiscal 1995, the Bank sold a shopping center in Orland Park, Illinois,
recording a gain on sale of real estate of $299,000 compared to gains on sales
of real estate of $61,000 recorded in fiscal 1996.
Other noninterest income increased $826,000. In fiscal 1995, the Bank
wrote-off its equity investment of $381,600 in The RESCORP Companies as compared
to tax refunds of $392,000 and $53,000 from the redemption of an equity
investment recorded in fiscal 1996.
Noninterest Expense
Noninterest expense for the year ended September 30, 1996 totaled $25.7
million. Excluding the one-time SAIF assessment of $2.8 million, noninterest
expense increased $6.2 million, or 37.0% from the 1995 year.
Compensation and benefits increased $3.7 million, or 41.1%, to $12.8
million for 1996. The increase is primarily related to the full year of
operations of Preferred which totaled $5.7 million compared to $1.6 million for
the 1995 year.
Occupancy expense for the year ended September 30, 1996 totaled $3.0
million, an increase of $821,000, or 38.0% from the 1995 year. Of the increase,
$325,339 is due to the amortization in fiscal 1995 of $390,407 compared to
$65,068 in fiscal 1996 of the deferred gain on the sale of Bank premises in 1991
as a result of lease back arrangements on a portion of the property sold which
offset rental expense. The remaining increase is primarily attributable to the
full year of operations of Preferred.
All other components of noninterest expense increased $1.6 million, or
29.7%, to $7.1 million. This increase is primarily the result of the full year
of operations of Preferred.
Income Tax Provision
The provision for income taxes for the year ended September 30, 1996 was
$861,000. The effective tax rate for the 1996 year was 21.9% compared to 39.5%
for the 1995 year. This decrease is primarily related to the reversal of the
SFAS 109 valuation allowance which is no longer deemed necessary.
8
<PAGE>
Comparison of Operating Results for the Years Ended September 30, 1995 and
September 30, 1994
General
Net income totaled $4.5 million for the year ended September 30, 1995,
compared to $4.7 million reported for the year ended September 30, 1994. Net
interest income for the year ended September 30, 1995 was $17.5 million, a
decrease of $558,000, or 3.1%.
Interest Income
Interest income for the year ended September 30, 1995 totaled $45.9
million, an increase of $8.9 million, or 24.1%, from the prior year. Interest
income on mortgage loans increased $12.8 million to $39.2 million from the prior
year. This increase resulted primarily from an increase in the average mortgage
loan portfolio of $181.0 million, or 48.0%, to $557.9 million. The average yield
on the mortgage loan portfolio increased from 6.99% for the year ended September
30, 1994, to 7.02% for the 1995 year. The average balance of equity lines of
credit increased $5.0 million, or 37.8%, to $18.3 million for the year ended
September 30, 1995. This increase resulted in an increase in interest income of
$720,000. The Bank has determined to place additional emphasis on expanding its
portfolio of equity lines of credit, the interest rates on which adjust with the
prime rate. An increase in equity lines of credit is intended to enhance the
Bank's interest rate spread and its interest rate risk management. Interest
income on the mortgage-backed securities portfolio decreased $5.1 million to
$1.6 million from the prior year. The average balance of the mortgage-backed
securities portfolio decreased $89.4 million, or 81.2%, to $20.7 million. The
decrease in the average mortgage-backed securities portfolio was due to the sale
of $20.2 million of mortgage-backed securities during fiscal 1995 and the sale
of $63.9 million of mortgage-backed securities in the last half of fiscal 1994.
Interest Expense
Interest expense for the year totaled $28.4 million, an increase of $9.5
million, or 49.9%, from the prior year. Interest expense on deposit accounts
increased $3.8 million, or 28.2%, to $17.4 million for the year. The average
cost of deposits for the year was 4.02%, an increase from the average cost of
3.16% for the 1994 year. The average deposit base increased $3.4 million, or
0.8%, to $433.2 million for the year ended September 30, 1995. The deposit base
continues to be affected by alternative investment products and competition
within the Company's market areas. For the year, the Company recorded interest
expense on borrowed funds of $10.4 million on an average balance of $171.5
million at an average cost of 6.05%. This compares to interest expense of $4.3
million on an average balance of $87.0 million at an average cost of 4.93% for
the year ended 1994. The significant increase in borrowed funds is attributable
to the increase in the average mortgage loan portfolio. The average balance of
the Collateralized Mortgage Obligations ("CMO") bonds outstanding decreased $2.7
million, or 35.8%, to $4.9 million for the year ended September 30, 1995
compared to the 1994 year. The average cost of the CMO bonds for the year ended
1995 was 12.87% a decrease from the average cost of 14.27% for the year ended
1994. This decrease was due to adjustments made to the discount on the bonds for
changes in the estimated average maturities of the mortgage-backed securities
collateralizing the bonds.
Net Interest Income
Net interest income for the year ended September 30, 1995 decreased
$558,000, or 3.1%, to $17.5 million from the comparable 1994 year. Both the
average yield on interest-earning assets and the average cost of interest-
bearing liabilities increased when comparing 1995 and 1994. The average yield on
interest-earning assets increased from 6.60% to 7.02%. The average cost of
interest-bearing liabilities increased from 3.62% to 4.67%. This resulted in a
net interest rate spread of 2.35% for the year ended September 30, 1995 compared
to 2.98% for the year ended September 30, 1994. The average balance of interest-
earning assets increased $93.8 million, when comparing 1995 and 1994, and
interest-bearing liabilities increased $85.2 million. Both increases in the
average balances can be attributed to the growth in the mortgage loan portfolio.
9
<PAGE>
Provision for Loan Losses
The provision for loan losses increased $60,000 for the year to $185,000.
At September 30, 1995, the ratio of non-performing loans to total loans was
0.21% compared to 0.18% at September 30, 1994. The allowance for losses on loans
at September 30, 1995 was $2,589,000. The allowance for loan losses represents
0.42% of total loans receivable at September 30, 1995 compared to 0.50% at
September 30, 1994. Based on management's evaluation of the loan portfolio, past
loan loss experience and known and inherent risks in the portfolio, management
believes that the allowance is adequate.
Noninterest Income
Total noninterest income for the year ended September 30, 1995 was $6.7
million, an increase of $1.7 million from the 1994 year.
The increase in fees and commissions of $2.1 million is attributable to the
origination fees contributed by Preferred from the date of acquisition.
The Bank sold the shopping center in Orland Park, Illinois, recording a
gain on sale of real estate of $299,000 in the fourth quarter of fiscal 1995.
Other noninterest income decreased $843,000. In fiscal 1995, the Bank
wrote-off its equity investment of $381,600 in The RESCORP Companies as compared
to equity earnings of $418,400 received from other investments in fiscal 1994.
Noninterest Expense
Noninterest expense for the year ended September 30, 1995 totaled $16.7
million, an increase of $1.4 million, or 9.1%.
Compensation and benefits increased $827,000, or 10.0%, to $9.1 million
for 1995. The increase was primarily related to the operations of Preferred from
the date of acquisition.
Federal deposit insurance premiums for the year ended September 30, 1995
totaled $985,000, a decrease of $22,000, or 2.2% from the 1994 year.
All other components of noninterest expense increased $580,000, or 9.6%,
to $6.6 million for 1995. This increase is primarily the result of the
operations of Preferred from the date of acquisition.
Income Tax Provision
The provision for income taxes for the year ended September 30, 1995 was
$2.9 million. The effective tax rate for the 1995 year was 39.5% compared to
38.8% for the 1994 year.
10
<PAGE>
Average Balance Sheets
The following table sets forth certain information relating to the
Company's Consolidated Statements of Financial Condition and reflects the
average yield on assets and the average cost of liabilities for the periods
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 daily balances and include
non-performing loans. The yields and costs include fees which are considered
adjustments to yields.
<TABLE>
<CAPTION>
Year Ended September 30
1996 1995
--------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net $ 560,251 $ 39,864 7.11% 557,934 39,184 7.02
Equity lines of credit 33,753 2,798 8.29 18,343 1,678 9.15
Consumer loans 7,847 742 9.46 12,066 1,376 11.40
Mortgage-backed securities 7,309 603 8.25 20,693 1,614 7.80
Interest-bearing deposits 29,964 1,033 3.45 25,281 901 3.56
Investment securities 10,053 661 6.57 20,221 1,191 5.89
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 649,177 45,701 7.04 654,538 45,944 7.02
Noninterest-earning assets 21,253 23,035
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 670,430 677,573
==================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Savings accounts $ 344,780 $ 17,543 5.09% 317,834 15,027 4.72
NOW noninterest-bearing accounts 35,311 -- -- 31,423 -- --
NOW interest-bearing accounts 22,861 364 1.59 22,875 381 1.67
Money market accounts 54,521 1,784 3.27 61,045 2,024 3.32
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits 457,473 19,691 4.30 433,177 17,432 4.02
Funds borrowed:
Borrowed funds 136,740 8,846 6.47 171,521 10,382 6.05
Collateralized mortgage obligations 3,224 430 13.34 4,881 628 12.87
- ----------------------------------------------------------------------------------------------------------------------------------
Total funds borrowed 139,964 9,276 6.63 176,402 11,010 6.24
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 597,437 28,967 4.85 609,579 28,442 4.67
Other liabilities 18,955 18,805
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 616,392 628,384
Stockholders' equity 54,038 49,189
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 670,430 677,573
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income/interest rate spread $ 16,734 2.19% 17,502 2.35
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/
net interest margin $ 51,740 2.58% 44,959 2.67
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets to
interest-bearing liabilities 1.09x 1.07
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
At September 30
1994 1996
------------------------------------------------------------------------
Average
Average Yield/ Yield/
(Dollars in thousands) Balance Interest Cost Balance Cost
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net 376,892 26,347 6.99 $ 537,174 7.22%
Equity lines of credit 13,315 958 7.19 48,223 8.04
Consumer loans 9,964 952 9.55 5,325 8.29
Mortgage-backed securities 110,069 6,675 6.06 5,367 8.73
Interest-bearing deposits 15,782 174 1.10 22,924 5.77
Investment securities 34,677 1,922 5.54 9,443 6.58
- ----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 560,699 37,028 6.60 628,456 7.24
Noninterest-earning assets 23,340 22,441
- ----------------------------------------------------------------------------------------------------------------------
Total assets 584,039 $ 650,897
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Savings accounts 297,138 11,261 3.79 $ 343,554 5.00%
NOW noninterest-bearing accounts 38,579 -- -- 37,207 --
NOW interest-bearing accounts 22,375 390 1.74 21,356 1.61
Money market accounts 71,731 1,946 2.71 50,355 3.29
- ----------------------------------------------------------------------------------------------------------------------
Total deposits 429,823 13,597 3.16 452,472 4.24
Funds borrowed:
Borrowed funds 86,996 4,286 4.93 128,949 6.17
Collateralized mortgage obligations 7,601 1,085 14.27 2,542 12.80
- ----------------------------------------------------------------------------------------------------------------------
Total funds borrowed 94,597 5,371 5.68 131,491 6.30
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 524,420 18,968 3.62 583,963 4.70
Other liabilities 15,648 11,463
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 540,068 595,426
Stockholders' equity 43,971 55,471
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 584,039 $ 650,897
- ----------------------------------------------------------------------------------------------------------------------
Net interest income/interest rate spread 18,060 2.98 2.54%
- ----------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/
net interest margin 36,279 3.22
- ----------------------------------------------------------------------------------------------------------------------
Interest-earning assets to
interest-bearing liabilities 1.07
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Rate/Volume Analysis
The following table 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), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended September 30, 1996 Year Ended September 30, 1995
Compared To Compared To
Year Ended September 30, 1995 Year Ended September 30, 1994
----------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
In Net Interest Income In Net Interest Income
Due To Due To
----------------------------------------------------------------------------------------
(In thousands) Volume Rate Net Volume Rate Net
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans, net $ 167 513 680 12,723 114 12,837
Equity lines of credit 1,291 (171) 1,120 418 302 720
Consumer loans (427) (207) (634) 221 203 424
Mortgage-backed securities (1,099) 88 (1,011) (6,568) 1,507 (5,061)
Interest-bearing deposits 161 (29) 132 154 573 727
Investment securities (655) 125 (530) (845) 114 (731)
- -------------------------------------------------------------------------------------------------------------------------------
Total (562) 319 (243) 6,103 2,813 8,916
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits 1,008 1,251 2,259 107 3,728 3,835
Funds borrowed (2,388) 654 (1,734) 5,062 577 5,639
- -------------------------------------------------------------------------------------------------------------------------------
Total (1,380) 1,905 525 5,169 4,305 9,474
- -------------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 818 (1,586) (768) 934 (1,492) (558)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Financial Condition
At September 30, 1996, total consolidated assets of the Company were $651
million, a decrease of $53 million, or 7.5% from 1995. The decrease in assets is
essentially related to the net decrease in loans receivable of $24 million, or
3.8% and the decrease in interest-bearing deposits of $28 million from the prior
year.
The Company's $591 million loan portfolio consists primarily of mortgage
loans on residential real estate. Loans held for sale of $17 million at
September 30, 1996, represent loans originated for delivery to other lenders by
Preferred, or for securitization and sale into the secondary market by the Bank.
Equity lines of credit and consumer loans represent $54 million, or 9.1% of the
loan portfolio. The Company originated and purchased $542 million in loans
during fiscal 1996 offset by sales of $476 million and cash repayments of $90
million.
Deposits increased $7 million, or 1.6%, to $452 million at September 30,
1996. Collateralized mortgage obligations decreased $2 million, or 41.6%, to $3
million at September 30, 1996, due to payments and prepayments of the
mortgage-backed securities held as collateral for the bonds. Borrowings
decreased by $56 million which was offset by a corresponding decrease in
interest-bearing deposits of $28 million.
Stockholders' equity increased $3.5 million to $55.5 million at September
30, 1996. The increase was due to earnings of $3.1 million, proceeds from the
exercise of stock options and the related tax benefit of $0.2 million, and the
repayment of the ESOP loan of $0.2 million. On October 18, 1995, the Company
declared a 25% stock split effected in the form of a stock dividend and issued
554,932 shares.
Asset/Liability Management
The Company manages its exposure to interest rate risk by emphasizing the
origination and purchase of adjustable-rate mortgage ("ARM") loans. Management
believes that by investing in ARM loans, short-term profits are possibly
sacrificed compared to yields obtainable through investment in fixed-rate loans,
however, the Company's exposure to the risk of interest rate fluctuations is
reduced, thereby enhancing long-term profitability. The fixed-rate mortgage
loans the Bank originates are securitized and sold into the secondary market,
with servicing retained, as part of its operation and interest rate risk
management strategy.
The Bank seeks to lengthen the maturities of its deposits by emphasizing
savings certificates with maturities of three months or more. At September 30,
1996, savings certificates with original maturities of three months or more
totaled $265 million, or 58.5%, of total deposits. The Bank seeks to reduce its
risk of early withdrawals from its longer term savings certificates by requiring
early withdrawal penalties on all certificates. The Bank does not actively
solicit high-rate jumbo certificates of deposit or brokered funds.
Matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are interest rate sensitive by monitoring
an institution's interest rate sensitivity gap. An asset or liability is to be
considered interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets
anticipated, based upon certain assumptions, to mature or reprice within a
specific time period and the amount of interest-bearing liabilities anticipated,
based upon certain assumptions, to mature or reprice within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income while a positive gap would tend to adversely
affect net interest income. The Company's one-year interest sensitivity gap as a
percent of total assets was a negative 10% at September 30, 1996. The Company
anticipates that its GAP position, in fiscal 1997, will not exceed the current
percentage.
13
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1996, which are
anticipated by the Company to reprice or mature in each of the future time
periods shown. Except as stated below, the amounts of assets and liabilities
shown which reprice or mature during a particular period were based upon the
contractual terms of the asset or liability or certain assumptions concerning
the amortization and prepayment of such assets and liabilities. Regular savings
accounts, NOW accounts and money market accounts, which collectively totaled
$151 million at September 30, 1996, were assumed to be withdrawn at annual
percentage rates of 17%, 37% and 79%, respectively. The collateralized mortgage
obligations were assumed to prepay at the same rate used for the mortgage-backed
securities collateralizing these obligations. Management believes that these
assumptions approximate actual experience and considers them reasonable,
although the actual amortization and repayment of assets and liabilities may
vary substantially.
<TABLE>
<CAPTION>
At September 30, 1996
More Than More Than
1 Year 1 Year 3 Years More Than
(Dollars in thousands) Or Less To 3 Years To 5 Years 5 Years Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans (1) $ 202,480 291,954 23,158 21,062 538,654
Equity lines of credit (1) 48,223 - - - 48,223
Consumer loans (1) 2,575 836 461 1,453 5,325
Mortgage-backed securities (2) 1,100 1,510 980 1,629 5,219
Interest-bearing deposits 22,924 - - - 22,924
Investment securities (2) 9,446 - - - 9,446
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 286,748 294,300 24,599 24,144 629,791
INTEREST-BEARING LIABILITIES:
Regular savings accounts 13,405 20,361 13,274 31,813 78,853
NOW interest-bearing accounts 7,902 7,233 1,936 4,285 21,356
Money market accounts 39,780 5,540 2,638 2,397 50,355
Certificate accounts 181,091 38,107 45,503 - 264,701
Borrowed funds 108,949 15,000 5,000 - 128,949
Collateralized mortgage obligations 1,634 908 - - 2,542
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 352,761 87,149 68,351 38,495 546,756
- -------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $ (66,013) 207,151 (43,752) (14,351) 83,035
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap $ (66,013) 141,138 97,386 83,035
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap as a
percentage of total assets (10.14) % 21.68 14.96 12.76
Cumulative net interest-earning assets as a
percentage of interest-sensitive liabilities 81.29 % 132.08 119.16 115.19
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of the gap analysis, mortgage loans, equity lines of credit
and consumer loans are not reduced by the allowance for loan losses and
are reduced for non-performing loans.
(2) Mortgage-backed and investment securities do not reflect unrealized gains
(losses) resulting from the adoption of FASB No. 115.
(See accompanying notes to consolidated financial statements.)
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as ARM loans, have features
which restrict changes in interest rates on a short-term basis and over the life
of the asset. Further, in the event of a change in interest rates, prepayment
and early withdrawal levels would likely deviate significantly from those
assumed in calculating the table. Finally, the ability of many borrowers to
service their debt may decrease in the event of an interest rate increase.
14
<PAGE>
Liquidity
The Company's primary sources of funds are deposits, borrowings, proceeds
from principal and interest payments on loans and mortgage-backed securities and
the sale of securitized loans. While maturities and scheduled amortization of
loans and mortgage-backed securities are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by interest rate cycles
and economic conditions.
The Bank is required by regulation to maintain specific minimum levels of
liquid investments. Regulations currently in effect require the Bank to maintain
liquid assets at least equal to 5.0% of the sum of its average daily balance of
net withdrawable accounts and short-term borrowed funds. This regulatory
requirement may be changed from time to time by the OTS to reflect current
economic conditions and deposit flows. The Bank's liquidity ratios were 5.6% and
11.3% at September 30, 1996 and 1995, respectively.
The Company's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term investments and
interest-bearing deposits. The levels of these assets are dependent on the
Company's operating, financing, lending, and investing activities during any
given period. At September 30, 1996 and 1995, cash and cash equivalents totaled
$29.0 million and $56.3 million, respectively.
Liquidity management for the Company is both a daily and long-term
function of the Company's management strategy. Excess funds are generally
invested in short-term investments such as federal funds and interest-bearing
deposits. In the event that the Company should require funds beyond its ability
to generate them internally, additional sources of funds are available through
the use of FHLB advances.
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.
Net cash related to operating activities, consisting primarily of interest
and dividends received less interest paid on deposits, and the origination and
sale of loans, provided $15.5 million for the year ended September 30, 1996 and
provided $33.7 million for the year ended September 30, 1995.
Net cash related to investing activities, consisting primarily of
principal collections on loans and mortgage-backed securities and proceeds from
the sale or maturity of loans, mortgage-backed securities, and investment
securities, offset by disbursements for loans originated for investment,
purchases of loans, mortgage-backed securities and investment securities,
provided $13.8 million and utilized $36.0 million for the years ended September
30, 1996 and 1995, respectively.
Net cash related to financing activities, consisting primarily of net
activity in deposit and escrow accounts, proceeds from FHLB advances, and the
repayment of collateralized mortgage obligations, utilized $56.6 million and
provided $38.2 million for the years ended September 30, 1996 and 1995,
respectively.
At September 30, 1996, the Company had outstanding commitments to
originate and purchase $36.1 million 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
September 30, 1996, totaled $181.1 million. Management believes that a
significant portion of such deposits will remain with the Company.
Capital Compliance
The Bank's tangible capital ratio at September 30, 1996, is 7.9%. This
exceeds the tangible capital requirement of 1.5% of adjusted assets by $41.2
million. The Bank's leverage capital ratio at September 30, 1996, is 8.1%. This
exceeds the leverage capital requirement of 3.0% of adjusted assets by $33.0
million. The Bank's risk-based capital ratio is 13.7% at September 30, 1996. The
Bank currently exceeds the risk-based capital requirement of 8.0% of
risk-weighted assets by $22.5 million.
The Office of Thrift Supervision ("OTS") issued a final rule on August 31,
1993 that adds an interest rate risk component to the risk-based capital
requirement for savings institutions. Savings institutions with a greater than
normal interest rate exposure must take a deduction from the total capital
available to meet their risk-based capital
15
<PAGE>
requirement. The deduction is equal to one-half of the difference between the
institution's actual measured exposure and the normal level of exposure.
The institution's actual measured interest rate risk is expressed as the
change that occurs in its net portfolio value ("NPV") as a result of a
hypothetical 200 basis point increase or decrease in interest rates (whichever
leads to the lower NPV) divided by the estimated economic value of its assets.
An above normal decline in NPV is one that exceeds two percent of an
institution's assets expressed in terms of economic value. The regulation became
effective January 1, 1994. Subsequent to the issuance of the final rule on
August 31, 1993, the OTS issued a postponement of the interest rate risk
requirement. However, if the rule were to be in effect at September 30, 1996,
the Bank's capital requirement would have increased by $785,000 under the
formula for calculating an interest rate risk component as described above.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and the accompanying Notes therein
have been prepared in accordance with generally accepted accounting principles
("GAAP"), which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
16
<PAGE>
Lending Activities
General
The Company's loan portfolio, which totaled $591 million at September 30,
1996, consists primarily of first mortgage loans secured by owner-occupied
one-to four-family residences. At September 30, 1996, 82% of total loans
receivable consisted of owner-occupied, one-to four-family residential loans, of
which 94% were adjustable-rate mortgage loans ("ARMs"). The remaining loans
consisted of multi-family residential loans ($25 million), commercial real
estate loans ($19 million), construction and land loans ($10 million), equity
lines of credit ($48 million) and consumer loans ($5 million), consisting of
home equity loans, student loans, personal loans and automobile loans.
One-to Four-Family Mortgage Loans
The Bank offers a variety of first mortgage loans secured by one-to
four-family, primarily owner-occupied, residences, including townhouse and
condominium units, located within the Bank's lending area. Fixed-rate conforming
mortgage loans are originated or purchased by the Bank to be securitized through
FNMA and sold into the secondary market. Adjustable-rate mortgage loans are
originated or purchased for the Bank's own portfolio. The Bank generally follows
Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") underwriting guidelines for all one-to four-family
residential mortgage loans. The Bank's primary source of loan originations is
through Preferred. Preferred operates out of four locations in the Chicago area
as well as through the Bank's retail offices. Preferred's loan origination staff
are commission based employees. They obtain loan referrals from realtors,
builders, past customers, as well as through mass media marketing. The Bank has
utilized other local wholesale mortgage brokers. The Bank purchases mortgage
loans from these brokers at the time of loan closing. The Bank will only
purchase residential first mortgage loans that meet the Bank's underwriting
standards, which generally follow FNMA and FHLMC guidelines. For the year ended
September 30, 1996, one-to four-family mortgage loan originations and purchases
totaled $485 million.
The interest rates at which the Bank offers to grant a mortgage are
determined by the secondary market pricing for comparable mortgage-backed
securities, local mortgage competition, and the Bank's yield requirements. Upon
receipt of a completed loan application from a prospective borrower for a loan
secured by one-to four-family residential real estate, a credit report is
ordered, income and certain other information is verified and, if necessary,
additional financial information is requested. A current appraisal of the real
estate intended to secure the proposed loan is required. It is the Bank's policy
to obtain title insurance on all real estate first mortgage loans. Borrowers
must also provide a hazard insurance policy at or before closing. Generally, the
borrower's monthly mortgage payment will include, in addition to the normal
principal and interest payment, escrow funds for the payment of real estate
taxes and if required, private mortgage insurance and/or flood insurance. Most
mortgage loans originated include due-on-sale clauses, which provide the Bank
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 Bank's
consent. It is the Bank's policy to enforce due-on-sale provisions.
The Bank originates or purchases one-to four-family residential mortgage
loans in amounts up to 97% of the appraised value of the secured property. In
cases where the loan to value ratio exceeds 80%, the Bank requires private
mortgage insurance on the loan. All one-to four-family mortgage loans are
reviewed by the Board of Directors' Loan Committee, and all loans in excess of
$300,000 are individually reviewed by the Board of Directors prior to issuance
of a commitment. All one-to four-family mortgage loans between $200,000 and
$300,000 require review and approval by the Senior Management Credit Review
Committee.
In addition to 15 and 30 year fixed-rate mortgage loans which qualify for
sale to FNMA or FHLMC, the Bank offers a 7/23 balloon mortgage which also
qualifies for sale to FNMA. This loan carries a fixed rate for 7 years and a
provision allowing for a conversion to a 23 year fixed-rate loan at the end of
the initial 7 year term at the then current interest rate. The Bank also offers
fixed-rate jumbo loans which are originated to be sold directly to alternative
conduits. The rates quoted for these loans and the underwriting procedures are
designed to meet specific investor requirements.
17
<PAGE>
As previously stated, most ARM loans originated or purchased by the Bank
are underwritten according to FNMA standards and held in portfolio. The ARM
loans offered include loans that have a first payment adjustment after one,
three, or five years. The ARM interest rates offered are determined by secondary
market pricing, competitive conditions and the Bank's yield requirements. One
year ARMs are underwritten based on the initial rate, as well as the fully
indexed rate after the first adjustment period in order to minimize default
risk. Generally, the one year ARMs have an annual interest rate cap of 2% and a
maximum increase of 6% over the life of the loan. These adjustments are based on
the one year Treasury index. The three and five year ARMs are underwritten based
upon the initial rate which approximates a fully indexed rate. The three and
five year ARMs carry a fixed rate for the first three or five years and adjusts
annually thereafter in the same manner as the one year ARM. The Bank also offers
a three/three ARM which adjusts every three years based upon the three year
Treasury index and has a 2% maximum rate adjustment and a 6% maximum rate
increase over the life of the loan. As compared to fixed-rate loans, ARM loans
generally pose different risks. In a rising interest rate environment, the
underlying loan payment rises, which increases the potential for default by the
borrower. At the same time, the marketability of the underlying property may be
adversely affected by higher interest rates. In a decreasing rate environment,
mortgagors tend to refinance into fixed-rate loans.
Mortgage Banking Program
The mortgage banking activities of the Bank are performed in conjunction
with the origination and purchase of conforming fixed-rate mortgage loans which
are securitized through FNMA for sale into the secondary market, generally with
servicing retained. The servicing fee income is generally .25% of the total loan
balances serviced.
The Bank's interest rate risk management policy specifies the use of
certain hedging activities in an attempt to reduce exposure to changes in loan
market prices from the time of commitment until securitization. The Bank engages
in hedging transactions as a method of reducing its exposure to interest rate
risk present in the secondary market. The Bank's hedging transactions are
generally forward commitments to sell fixed-rate mortgage-backed securities at a
specified price and at a specified future date. The loans securitized through
FNMA are generally used to satisfy these forward commitments. The sale of
fixed-rate mortgage-backed securities for future delivery presents a risk to the
Bank that, if the Bank is not able to deliver the mortgage-backed securities on
the specified delivery date, it may be required to repurchase the forward
commitment to sell at the then current market price.
The mortgage banking activities of Preferred consist of originating
mortgage loans for correspondent lenders. Preferred presents loan applications
to these lenders to be underwritten and accepted by issuing a funding
commitment. The loans are closed in the name of Preferred, utilizing warehouse
loans to provide funding. Upon payment by the correspondent lenders for the
funded loan and a servicing fee, the loan is transferred and the warehouse loan
is repaid.
Multi-Family, Commercial Real Estate and Construction Lending
At September 30, 1996 multi-family loans represent 4% of total loans
receivable. Multi-family residential mortgage loans are offered under the Bank's
ARM or balloon programs with initial rate periods of one, three and five years.
Multi-family residential mortgage loans are made for terms to maturity of up to
30 years, carry a loan-to-value ratio of approximately 75% and require a
positive net operating income to debt service ratio. Loans secured by
multi-family properties are qualified on the basis of rental income generated by
the property. At September 30, 1996 commercial real estate loans represent 3% of
total loans receivable.
The Bank has a construction loan program which combines the construction
loan and the mortgage loan in one closing. As part of this program, the Bank
also handles inspections for the customer and offers single or multiple payout
options. Generally, the Bank does not make loans on unimproved vacant property
or for the purpose of land acquisition and development. The Bank does, however,
offer three and five year balloon mortgages on improved single family lots which
are expected to result in an end loan origination under one of the Bank's loan
programs.
18
<PAGE>
Equity Lines of Credit and Consumer Loans
The Bank originates home equity loans secured by one-to four-family
residences in its primary market area. The Bank's underwriting procedures for
these loans include a review of the completed loan application, satisfactory
credit report and verification of stated income and other financial information.
An appraisal of the property securing the equity loan is required. Title
insurance is obtained on equity loans over $100,000. For equity loans that are
less than $100,000, the title is verified by a title search and a second lien
position is secured. The Bank currently originates two types of equity loans.
One is a home equity line of credit, which is originated for loan amounts
ranging from $2,500 to $300,000 not to exceed 80% of the property's current
appraised value less all existing liens. These loans carry a variable interest
rate which adjusts monthly based upon the prime rate, as published in the
Wall Street Journal. The loan term is seven years and the majority of these
- -------------------
loans require interest only payments with the full outstanding principal balance
due at the maturity of the loan. The Bank also grants fixed-rate home equity
loans for loan amounts up to $200,000, not to exceed 80% of the current
appraised value of the related property less all existing liens.
The Bank offers automobile financing to customers within its market areas.
Credit is offered to qualified borrowers for loan amounts up to 80% of the
market value of the automobile at competitive rates with terms ranging from 30
to 60 months, depending on the age of the car. The Bank does not engage in any
automobile dealer financing.
The Bank also offers other types of consumer loans, including overdraft
protection and student loans. Existing checking account customers at the Bank
can qualify for up to $2,400 overdraft protection. The Bank offers student loans
under the Illinois Guaranty Loan Program ("IGLP"). These loans are made to
students in amounts up to a maximum of $4,000 per year to undergraduates and
$7,500 per year to graduate students.
Short-term, fully collateralized loans are also extended to customers.
These loans generally have a variable interest rate tied to the prime rate, as
published in the Wall Street Journal, for 90 - 360 day terms and are secured by
-------------------
collateral including stocks, bonds, real estate, or deposit accounts at the
Bank.
Environmental Issues
The Company encounters certain environmental risks in its lending
activities. Under federal and state environmental laws, lenders may become
liable for the costs of cleaning up hazardous materials found on security
property. Although environmental risks are usually associated with industrial
and commercial loans, risks may be substantial for residential lenders like the
Company if environmental contamination makes security property unsuitable for
use. This could also have an effect on nearby property values. In accordance
with FNMA and FHLMC guidelines, appraisals for single-family residences on which
the Company lends include comment on environmental influences. The Company
attempts to control risk by training its appraisers and underwriters to be
cognizant of signs indicative of environmental hazards. No assurance can be
given, however, that the values of properties securing loans in the Company's
portfolio will not be adversely affected by unforeseen environmental risks.
19
<PAGE>
The following table sets forth the composition of the Company's loan portfolio
in dollar amounts and in percentages at the dates indicated.
<TABLE>
<CAPTION>
At September 30
-----------------------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
-------- -------- --------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family $ 487,041 81.86% 535,530 86.51 462,444 83.61
Multi-family 25,217 4.24 25,538 4.13 29,286 5.30
Commercial real estate 19,156 3.22 16,193 2.62 18,808 3.40
Construction 7,418 1.25 6,870 1.11 13,484 2.44
Land 2,579 0.43 1,642 0.26 1,316 0.24
-------- -------- --------- -------- -------- --------
Total mortgage loans 541,411 91.00 585,773 94.63 525,338 94.99
Equity lines of credit 48,223 8.11 21,441 3.46 15,642 2.82
Consumer loans 5,325 0.89 11,810 1.91 12,087 2.19
-------- -------- --------- -------- -------- --------
Total loans receivable 594,959 100.00% 619,024 100.00 553,067 100.00
====== ====== ======
Add (deduct):
Loans in process (4,053) (4,266) (8,304)
Unearned discounts and deferred
loan (fees) costs 2,228 2,202 2,269
Allowance for loan losses (2,412) (2,589) (2,748)
-------- --------- --------
Loans receivable, net $ 590,722 614,371 544,284
======== ========= ========
<CAPTION>
At September 30
----------------------------------------------
1993 1992
----------------------------------------------
Percent Percent
of of
Amount Total Amount Total
--------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One-to four-family $ 232,485 78.20 180,421 75.98
Multi-family 21,697 7.30 21,132 8.90
Commercial real estate 19,377 6.51 16,988 7.15
Construction 8,177 2.75 4,736 1.99
Land 175 0.06 93 0.04
--------- -------- --------- -------
Total mortgage loans 281,911 94.82 223,370 94.06
Equity lines of credit 10,677 3.59 5,841 2.46
Consumer loans 4,716 1.59 8,259 3.48
--------- -------- --------- -------
Total loans receivable 297,304 100.00 237,470 100.00
======== =======
Add (deduct):
Loans in process (8,404) (3,457)
Unearned discounts and deferred
loan (fees) costs 29 (870)
Allowance for loan losses (2,656) (2,376)
--------- ---------
Loans receivable, net 286,273 230,767
========= =========
</TABLE>
20
<PAGE>
The following table sets forth the Company's loan originations and loan
purchases, sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
Year Ended September 30
--------------------------------------------
1996 1995 1994
--------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Total loans receivable:
At beginning of year $ 619,024 553,067 297,304
Mortgage loans originated:
One-to four-family 479,332 168,469 144,504
Multi-family 4,103 353 5,717
Commercial real estate 4,762 250 1,550
Construction 18,095 15,976 25,418
Land 1,355 545 859
---------- ----------- -----------
Total mortgage loans originated 507,647 185,593 178,048
Mortgage loans purchased:
One-to four-family 5,736 63,233 193,840
Multi-family - 423 3,554
Land - 280 510
---------- ----------- -----------
Total mortgage loans purchased 5,736 63,936 197,904
Equity lines of credit 26,782 5,799 16,478
Consumer loans originated 2,215 2,793 10,988
---------- ----------- -----------
Total loans originated and purchased 542,380 258,121 403,418
Mortgage loans acquired, purchase of business - 15,243 -
Transfer of mortgage loans to foreclosed real estate (353) - -
Principal repayments (90,429) (64,142) (85,405)
Sales of loans (475,663) (143,265) (62,250)
---------- ----------- -----------
At end of year $ 594,959 619,024 553,067
========== =========== ===========
</TABLE>
21
<PAGE>
Loan Maturity and Repricing
The following table shows the scheduled principal amortization of the
Company's mortgage loan portfolio at September 30, 1996. Loans that have
adjustable rates are amortized using the current interest rate. The table does
not include prepayments.
<TABLE>
<CAPTION>
At September 30, 1996
-----------------------------------------------------------------------------
One-to Total
Four- Multi- Commercial Land and Loans
Family Family Real Estate Construction Receivable
-----------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans:
Amounts due:
Within one year $ 6,707 2,000 286 876 9,869
After one year:
One to five years 31,582 6,945 1,411 2,243 42,181
Over five years 431,768 16,272 17,459 6,878 472,377
-------------- ------------ ---------------- -------------- -----------
Total due after one year 463,350 23,217 18,870 9,121 514,558
-------------- ------------ ---------------- -------------- -----------
Total mortgage loans held
for investment $ 470,057 25,217 19,156 9,997 524,427
-------------- ------------ ---------------- --------------
Mortgage loans held for sale 16,984
Equity lines of credit 48,223
Consumer loans 5,325
-----------
Total loans receivable 594,959
Add (deduct):
Loans in process (4,053)
Unearned discounts and deferred loan costs 2,228
Allowance for loan losses (2,412)
------------
Loans receivable, net $ 590,722
------------
</TABLE>
The following table sets forth, at September 30, 1996, the dollar amount
of mortgage loans due after September 30, 1997, and indicates whether such loans
have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due or Repricing after September 30, 1997
----------------------------------------------------------------------
Fixed Adjustable Total
---------------------- ----------------------- ---------------------
(In thousands)
<S> <C> <C> <C>
One-to four-family $ 21,239 442,111 463,350
Multi-family 15,080 8,137 23,217
Commercial real estate 16,567 2,303 18,870
Construction and land 1,478 7,643 9,121
--------------------- --------------------- -------------------
Total mortgage loans $ 54,364 460,194 514,558
--------------------- --------------------- -------------------
</TABLE>
Delinquencies and Classified Assets
Delinquent and Impaired Loans
Delinquencies on all loans are reviewed monthly by the Board of Directors.
Procedures taken with respect to delinquent loans differ depending on whether
the loan is serviced by the Bank or serviced by others.
The Bank's collection procedures with respect to loans serviced by the
Bank include sending a past due notice to the borrower on the seventeenth day of
nonpayment, making telephone contact with the borrower, sending a second late
notice on the twenty-third day of nonpayment and a letter on the last day of the
month. A notice of intent to foreclose is sent on the forty-fifth day of
delinquency. When the borrower is contacted, the Bank attempts
22
<PAGE>
to obtain full payment of the amount past due. However, the Bank generally will
seek to reach agreement with the borrower on a forbearance plan to avoid
foreclosure.
With respect to loans serviced by others, of which the Bank had $1.8
million at September 30, 1996, the Bank obtains monthly reports from the loan
servicers. The Bank contacts the servicer with respect to any loan that becomes
delinquent 60 days or more to review collection efforts. The Bank reviews the
servicer's recommendation regarding foreclosure when a loan is between 60 and 90
days delinquent and instructs the servicer to proceed in accordance with the
Bank's instructions.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan"
and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" effective October 1, 1995. These statements apply
to all loans that are identified for evaluation except for large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment. These loans include, but are not limited to, credit card,
residential mortgage and consumer installment loans. Substantially all of the
Company's lending is excluded from the provisions of SFAS No. 114 and SFAS No.
118. Of the remaining loans which are to be evaluated for impairment, management
has determined through an internal loan review process that there were no loans
at September 30, 1996 nor during the year ended September 30, 1996, which met
the definition of an impaired loan. A loan is considered impaired when it is
probable that a creditor will be unable to collect contractual principal and
interest due according to the contractual terms of the loan agreement.
It is the policy of the Bank to discontinue the accrual of interest on any
loan that is 90 days or more past due. The Bank historically has not incurred
any significant losses on one-to four-family residential mortgage loans and
typically has not incurred losses on the disposition of foreclosed one-to
four-family residential properties.
Set forth below is certain information regarding delinquent loans at
September 30, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
At September 30, 1996 At September 30, 1995
---------------------------------------------------------------------------------------------------------
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) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-family 9 $ 1,029 8 $ 932 15 $ 1,765 9 $ 1,237
Equity lines of credit - - - - 1 41 - -
Consumer loans 1 1 - - 17 42 22 63
---------- ------------ ------------ ------------ ---------- -------------- ----------- ------------
Total loans 10 1,030 8 $ 932 33 1,848 31 1,300
---------- ------------ ------------ ------------ ---------- -------------- ----------- ------------
Delinquent loans to total
loans 0.17% 0.15% 0.30% 0.21%
------------ ------------ -------------- ------------
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1994
-----------------------------------------------------
60-89 Days 90 Days or More
------------------------ ----------------------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
---------- ------------ ----------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to four-family 11 $ 503 4 $ 491
Construction 2 55 - -
Commercial real estate - - 1 442
---------- ----------- ----------- -------------
Total mortgage loans 13 558 5 933
Consumer loans 7 29 22 66
---------- ----------- ----------- -------------
Total loans 20 587 27 $ 999
---------- ----------- ----------- -------------
Delinquent loans to total
loans 0.11% 0.18%
----------- -------------
</TABLE>
23
<PAGE>
The following table sets forth information as to non-accrual loans as well
as to other non-performing assets, at the dates indicated. The Bank discontinues
the accrual of interest on loans ninety days or more past due, at which time all
accrued but uncollected interest is reversed.
<TABLE>
<CAPTION>
At September 30
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- -------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans
90 days or more past due $ 932 1,237 933 869 1,443
Non-accrual consumer loans
90 days or more past due - 63 66 90 90
------------- -------------- ------------- ------------- -------------
Total non-performing loans 932 1,300 999 959 1,533
Total foreclosed real estate 207 - (3) 4,447 4,629 (2) 11,339
------------- -------------- ------------- ------------- -------------
Total non-performing assets (1) $ 1,139 1,300 5,446 5,588 12,872
------------- -------------- ------------- ------------- -------------
Total non-performing loans to
total loans 0.15 % 0.21 0.18 0.32 0.65
------------- -------------- ------------- ------------- -------------
Total non-performing assets to
total assets 0.17 % 0.18 0.85 1.04 2.50
------------- -------------- ------------- ------------- -------------
</TABLE>
(1) The real estate assets held for years 1992 through 1995 by the Bank's
subsidiary, Grant Square Service Corporation, consist of real estate held
(and acquired) for development and sale and are not included in
non-performing assets and would not be so included if such assets were to
be owned directly by the Bank. The real estate assets held by Grant Square
Service Corporation were sold in fiscal 1996.
(2) The reduction in foreclosed real estate primarily relates to the sale of a
shopping center in Lisle, Illinois which was acquired by the Bank in
settlement of a non-performing loan on June 3, 1992.
(3) The reduction in foreclosed real estate relates to the sale of a shopping
center in Orland Park, Illinois which was acquired by the Bank in
settlement of a non-performing loan on January 5, 1992.
For the fiscal year ended September 30, 1996, the interest that would have
been included in income if the non-performing loans had been current in
accordance with their terms, is $60,646. During this same period, interest
recorded on non-performing loans totaled $27,925.
Classified Assets
Federal regulations 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. An asset is
considered "substandard" if it is inadequately protected by the paying capacity
and net worth of the obligor or the collateral pledged, if any. "Substandard"
assets include those characterized by the "distinct possibility" that the
insured institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," "highly
questionable and improbable," on the basis of currently existing facts,
conditions and values. Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to a sufficient degree of
risk to warrant classification in one of the aforementioned categories but
possess credit deficiencies or potential weaknesses are required to be
designated "special mention" by management.
When an insured institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for
losses in an amount deemed prudent by management. General allowances represent
loss allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When an insured institution
classifies problem assets as "loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge-off such amount. An institution's determination as to
the
24
<PAGE>
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which can require the establishment of additional
general or specific loss allowances. The Bank regularly reviews the assets in
its portfolio to determine whether any assets require classification in
accordance with applicable regulations.
As of September 30, 1996, the Bank had total classified assets of
$207,000, all of which were classified "substandard," and consisted of
foreclosed single family residential loans (real estate owned).
Allowance for Loan Losses
Management employs a systematic methodology to conduct its periodic
evaluation of the adequacy of the allowance based upon the Bank's past loss loan
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral and current and prospective economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for losses on loans receivable.
The following table sets forth certain information regarding the Company's
allowance for loan losses at the dates indicated.
<TABLE>
<CAPTION>
For the Year Ended September 30
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- --------------- -------------- --------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 2,589 2,748 2,656 2,376 2,376
Provision for loan losses 50 185 125 300 15
Charge-offs:
Mortgage loans:
One-to four-family - - - - (15)
Commercial real estate (71) (77) - (20) -
Commercial loans - (50) - - -
Consumer loans:
Credit cards (166) (229) (33) - -
Auto loans (9) - - - -
Recoveries:
Consumer loans:
Credit cards 17 12 - - -
Auto loans 2 - - - -
-------------- --------------- -------------- --------------- -------------
Balance at end of year $ 2,412 2,589 2,748 2,656 2,376
-------------- --------------- -------------- --------------- -------------
Ratio of charge-offs during the year to
average loans outstanding during the year 0.04 % 0.06 0.01 0.01 0.01
Ratio of allowance for loan losses to net
loans receivable at end of year 0.41 % 0.42 0.51 0.93 1.03
Ratio of allowance for loan losses to non-
performing loans at end of year 258.80 % 199.15 275.08 276.96 154.99
</TABLE>
25
<PAGE>
The following table sets forth the breakdown of the allowance for loan losses by
loan category at the dates indicated.
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995 September 30, 1994
------------------------------- --------------------------- --------------------------
% of Loans % of Loans % of Loans
in Category in Category in Category
to Total to Total to Total
Outstanding Outstanding Outstanding
Amount Loans Amount Loans Amount Loans
--------------- --------------- ----------- -------------- ---------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family $ 25 81.86 % $ 25 86.51 % $ 25 83.61%
Multi-family 525 4.24 525 4.13 525 5.30
Consumer loans - - 213 1.91 268 2.19
Unallocated 1,862 - 1,826 - 1,930 -
--------------- --------------- ----------- -------------- ---------- ------------
Total allowance for loan losses $ 2,412 100.00 % $ 2,589 100.00 % $ 2,748 100.00%
--------------- --------------- ----------- -------------- ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
September 30, 1993 September 30, 1992
------------------------------- -------------------------------
% of Loans % of Loans
in Category in Category
to Total to Total
Outstanding Outstanding
Amount Loans Amount Loans
--------------- --------------- ----------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One-to four-family $ 25 78.20 % $ 25 75.98 %
Multi-family 525 7.30 525 8.90
Unallocated 2,106 - 1,826 -
--------------- --------------- ----------- ------------------
Total allowance for loan losses $ 2,656 100.00 % $ 2,376 100.00 %
--------------- --------------- ----------- ------------------
</TABLE>
26
<PAGE>
Investment Activities
The investment policy of the Company, as established by the Board of
Directors and implemented by the asset/liability committee, 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
compliment the Company's lending activities. Federally chartered savings
institutions such as the Bank 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 proportion of their assets in commercial
paper, corporate debt securities and asset-backed securities. The Company's
current policy does not allow the institution to engage in interest rate swaps
or joint ventures or to invest in non-investment grade bonds or high-risk
mortgage derivatives. The Company's investment policy does, however, allow for
the use of mortgage-backed security short sales in hedging the amount of loans
in the Bank's mortgage pipeline. These short sales, in effect, are forward
commitments to sell mortgage-backed securities similar to those the Bank will
deliver into the secondary market upon securitization of the loans it originates
or purchases. At September 30, 1996, the Bank had no commitments to sell FNMA
mortgage-backed securities.
The following table sets forth certain information regarding the fair and
carrying values of the Company's investment portfolios at the dates indicated:
<TABLE>
<CAPTION>
At September 30
--------------------------------------------------------------------------
1996 1995 1994
--------------- ---------------- -----------------------------------
Fair Fair Carrying Fair
Value Value Value Value
---------------- --------------- --------------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Interest-bearing deposits:
FHLB daily investment $ 22,924 50,845 13,122 13,122
Investment securities:
U.S. Treasury notes $ - - 19,937 19,896
Federal Home Loan Bank note, due 1997 1,998 (1) 1,998 (1) 2,005 1,990
Dreyfus Treasury Prime Cash Management - - 792 792
---------------- --------------- --------------- ----------------
Total investment securities $ 1,998 1,998 22,734 22,678
---------------- --------------- --------------- ----------------
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation $ 460 (1) 782 (1) 20,493 20,238
Federal National Mortgage Association:
Held for investment - - 7,257 7,214
Available for sale 4,907 (1) 6,365 (1) 2,951 2,951
---------------- --------------- --------------- ----------------
Total mortgage-backed securities $ 5,367 7,147 30,701 30,403
---------------- --------------- --------------- ----------------
</TABLE>
(1) For the years 1996 and 1995, fair value equals carrying value.
27
<PAGE>
The table below sets forth certain information regarding the Company's
investment securities at September 30, 1996.
<TABLE>
<CAPTION>
Investment Securities: At September 30, 1996
- ------------------------------------------- ---------------------------------------------------------
Weighted
Fair Average
Maturity Period Value Yield
- -------------------------------------------- ---------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Less than one year $ 1,998 5.97 %
--------------------
Total investment securities $ 1,998
--------------------
Average remaining years to maturity 1.0
--------------------
<CAPTION>
Mortgage-Backed Securities: At September 30, 1996
- -------------------------------------------- ----------------------------------------------------------
Weighted
Fair Average
Maturity Period Value Yield
- -------------------------------------------- ----------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
One to five years $ 407 11.34 %
Five to ten years 130 9.25
More than ten years 4,830 8.51
---------------------
Total mortgage-backed securities $ 5,367 8.73
---------------------
Average remaining years to maturity 10.6
---------------------
</TABLE>
28
<PAGE>
Sources of Funds
General
Deposits, loan and mortgage-backed securities repayments, sales of loans and
FHLB advances are the primary source of the Company's funds for use in lending,
investing and for other general purposes.
Deposits
The Bank offers a variety of deposit accounts having a range of interest
rates and terms. The Bank's deposits principally consist of fixed-term
certificates, regular savings, money market, individual retirement accounts, and
NOW (checking) accounts. In addition, the Bank offers commercial checking
accounts. The flow of deposits is influenced significantly by general economic
conditions, the Bank's pricing policies, changes in money market and prevailing
interest rates, and competition. The Bank's deposits are typically obtained from
the area in which its offices are located. The Bank relies primarily on customer
service and long standing relationships with customers to attract and retain
these deposits. The Bank has never used brokered deposits. Certificate accounts
in excess of $100,000 are not actively solicited by the Bank; however, when such
deposits are made to the Bank, a market rate of interest is paid.
The Bank seeks to attract and retain stable core deposits through the
services it offers customers, such as by providing extended hours, both early
and late, at its offices and walk-up/drive-up facilities. In addition, customers
can access their accounts through an ATM network throughout the metropolitan
Chicago area and on a nationwide basis and through a 24-hour telephone banking
system. When pricing deposits, consideration is given to local competition,
market conditions and the need for funds. Management's strategy has been to
price its deposit rates at the median of the rates paid for deposits in its
respective markets.
The following table presents the deposit activity of the Bank for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended September 30
---------------------------------------------------------
1996 1995 1994
-------------- ----------------- --------------
(In thousands)
<S> <C> <C> <C>
Deposits $ 1,966,050 1,593,336 1,811,827
Withdrawals (1,976,850) (1,583,172) (1,842,693)
-------------- ----------------- --------------
Net deposits (withdrawals) (10,800) 10,164 (30,866)
Interest credited on deposits 17,767 15,905 12,670
-------------- ----------------- --------------
Total increase (decrease) in deposits $ 6,967 26,069 (18,196)
============== ================= ==============
</TABLE>
At September 30, 1996, the Bank had outstanding $44.8 million in
certificate accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
Amount
-----------------
(In thousands)
<S> <C>
Maturity Period
- ----------------
Three months or less $ 12,692
Over three through six months 8,603
Over six through twelve months 8,979
Over twelve months 14,482
-----------------
Total $ 44,756
=================
</TABLE>
29
<PAGE>
The following table sets forth the distribution of the Bank's average deposit
accounts and the average interest rates paid on each category of deposits
presented for the years indicated:
<TABLE>
<CAPTION>
For The Year Ended September 30
---------------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------------------------------------------------------------------------------
Average Average Average
Percent Interest Percent Interest Percent Interest
Average of Total Rate Average of Total Rate Average of Total Rate
Balance Deposits Paid Balance Deposits Paid Balance Deposits Paid
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand accounts:
NOW noninterest-bearing $ 35,311 7.72% -% 31,423 7.25 - 38,579 8.97 -
NOW interest-bearing 22,861 5.00 1.59 22,875 5.28 1.67 22,375 5.21 1.74
Regular savings 82,177 17.96 2.55 88,081 20.34 2.76 97,494 22.68 2.64
Money market 54,521 11.92 3.27 61,045 14.09 3.32 71,731 16.69 2.71
---------- ---------- ---------- ---------- ---------- ----------
Total 194,870 42.60 2.18 203,424 46.96 2.38 230,179 53.55 2.13
---------- ---------- ---------- ---------- ---------- ----------
Certificate accounts:
Three months plus 3,995 0.87 4.87 3,984 0.92 4.53 4,383 1.02 3.03
Six months plus 69,774 15.25 5.58 51,735 11.94 5.33 40,696 9.47 3.25
One year plus 64,350 14.07 5.99 54,543 12.60 5.42 41,054 9.55 3.49
Two year plus 11,488 2.51 5.40 15,329 3.54 4.49 18,002 4.19 4.27
Three year plus 3,431 0.75 5.02 3,962 0.91 4.84 4,657 1.08 5.27
Four year plus 1,422 0.31 5.24 1,463 0.34 5.32 1,485 0.34 5.76
Five year plus 63,578 13.90 6.38 57,573 13.29 6.40 49,029 11.41 6.39
Jumbo 19,661 4.30 5.89 12,793 2.95 5.84 3,945 0.92 4.02
Retirement and other 24,904 5.44 5.71 28,371 6.55 4.64 36,393 8.47 3.87
---------- ---------- ---------- ---------- ---------- ----------
Total 262,603 57.40 5.88 229,753 53.04 5.48 199,644 46.45 4.35
---------- ---------- ---------- ---------- ---------- ----------
Total deposits 457,473 100.00% 4.30% 433,177 100.00 4.02 429,823 100.00 3.16
========== ========== ========== ========== ========== ==========
</TABLE>
30
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at September 30, 1996, 1995 and 1994 and the
periods to maturity of the certificate accounts outstanding at September 30,
1996.
<TABLE>
<CAPTION>
Period to Maturity
At September 30 from September 30, 1996
----------------------------------------- ----------------------------------------------------
Within One to
1996 1995 1994 One Year Three Years Thereafter Total
------------ ----------- ----------- ----------- ------------ ----------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.00% to 3.99% $ - 6,218 67,752 - - - -
4.00% to 4.99% 6,360 15,361 62,582 5,881 479 - 6,360
5.00% to 5.99% 182,958 104,439 46,559 144,095 29,927 8,936 182,958
6.00% to 6.99% 56,607 100,578 15,133 31,039 7,635 17,933 56,607
7.00% to 7.99% 18,682 26,595 11,255 13 35 18,634 18,682
8.00% to 8.99% 94 171 2,004 63 31 - 94
------------ ----------- ----------- ----------- ------------ ----------- ---------
Total $ 264,701 253,362 205,285 181,091 38,107 45,503 264,701
============ =========== =========== =========== ============ =========== =========
</TABLE>
Borrowings and Collateralized Mortgage Obligations
Although deposits are the Bank's primary source of funds, the Bank's
policy has been to utilize borrowings, such as advances from the FHLB-Chicago.
The Bank obtains advances from the FHLB-Chicago upon the security of its
capital stock in the FHLB-Chicago and certain of its mortgage loans. Such
advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum amount that the
FHLB-Chicago will advance to member institutions, including the Bank, for
purposes other than meeting withdrawals, fluctuates from time to time in
accordance with the policies of the OTS and the FHLB-Chicago. The maximum amount
of FHLB-Chicago advances to a member institution generally is reduced by
borrowings from any other source. At September 30, 1996, the Bank's FHLB-Chicago
advances totaled $129 million.
The CMOs outstanding at September 30, 1996 were issued through a
limited-purpose finance subsidiary in 1985. The CMOs are securitized by
mortgage-backed securities that are pledged to an unaffiliated commercial bank
as trustee. The original issuance of CMOs aggregated $65.9 million and the Bank
received cash of $59.4 million. The outstanding aggregate balance of the CMOs at
September 30, 1996 was $3 million and the book value of the mortgage-backed
securities collateralizing the CMOs was $5 million. The CMOs were originally
issued in two series, each originally having four tranches, the fourth being a
zero coupon tranche. At September 30, 1996 the first three tranches of both
Series have prepaid. The original maturity of the bond issue was structured over
26 years. The estimated remaining life of the CMOs as of September 30, 1996 was
2 years. The funds derived from issuance of the CMOs were used to repay FHLB
advances and to fund the Bank's lending activities in 1985 and 1986.
In connection with the initial public offering, the Bank established a
leveraged Employee Stock Ownership Plan ("ESOP"). The ESOP was funded by the
proceeds from a $1.2 million loan from an unaffiliated third party lender at a
rate of prime and one half of one percent, maturing June 30, 1999. The loan is
secured by shares of the Company purchased with the proceeds of the loan. On
August 29, 1996, the loan from the unaffiliated third party lender was repaid by
the Bank from proceeds borrowed from the Company. The terms of the loan
agreement between the Bank and the Company are unchanged from that of the
original loan agreement with the unaffiliated third party lender. The Bank
remains committed to make contributions to the ESOP sufficient to allow the ESOP
to fund its debt service requirements on the loan.
Preferred utilizes warehouse lines of credit obtained from the Bank and
various outside lenders to fund their mortgage banking activities. These lines
of credit are collateralized by mortgages originated for sale, but not yet
delivered, to correspondent lenders. During fiscal 1996, the warehouse lines of
credit obtained from outside lenders were repaid and all funding of Preferred's
mortgage banking operations remains with the Bank.
31
<PAGE>
The following table sets forth certain information regarding borrowings
and collateralized mortgage obligations at or for the dates indicated:
<TABLE>
<CAPTION>
At or For the Year Ended September 30
--------------------------------------------------------
1996 1995 1994
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB-Chicago advances:
Average balance outstanding $ 134,235 166,353 86,076
Maximum amount outstanding at any
month-end during the year $ 148,900 184,300 160,000
Balance outstanding at end of year $ 128,900 162,700 160,000
Weighted average interest rate during the year (1) 6.42% 6.02 4.90
Weighted average interest rate at end of year 6.17% 6.25 5.38
Collateralized mortgage obligations:
Average balance outstanding $ 3,224 4,881 7,601
Maximum amount outstanding at any
month-end during the year $ 3,962 5,558 9,687
Balance outstanding at end of year $ 2,542 4,353 6,063
Weighted average interest rate during the year (1) 13.34% 12.87 14.27
Weighted average interest rate at end of year 12.80% 13.16 12.99
Debt of Employee Stock Ownership Plan:
Average balance outstanding $ 575 750 920
Maximum amount outstanding at any
month-end during the year $ 643 814 986
Balance outstanding at end of year $ - 686 857
Weighted average interest rate during the year (1) 9.11% 9.30 7.19
Weighted average interest rate at end of year -% 9.25 8.25
Warehouse lines of credit:
Average balance outstanding $ 1,930 4,418 -
Maximum amount outstanding at any
month-end during the year $ 15,320 24,069 -
Balance outstanding at end of year $ - 21,953 -
Weighted average interest rate during the year (1) 9.12% 6.88 -
Weighted average interest rate at end of year -% 8.54 -
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Computed on the basis of daily balances.
32
<PAGE>
Subsidiaries
The following is a description of the Bank's subsidiaries.
Grant Square Service Corporation ("GSSC") was a wholly-owned subsidiary of
the Bank. The remaining real estate investments were sold in fiscal 1996 and the
corporation was dissolved.
Hinsdale Insurance Services, Inc., a wholly-owned subsidiary of the Bank,
provides full service insurance services including life, health, accident,
automobile, property insurance and annuities. These insurance products are
offered to customers of the Bank and consumers in the Bank's respective markets.
NASCOR II Corporation is a limited-purpose finance subsidiary of the Bank
that was established in 1985 through which the CMOs were issued. The CMOs are
secured by mortgage-backed securities pledged to an independent trustee. The
outstanding aggregate balance of the CMOs at September 30, 1996 was $3 million,
and the book value of the mortgage-backed securities collateralizing the CMOs
was $5 million. The funds derived from issuance of the CMOs were used to repay
FHLB advances and to fund the Bank's lending activities in 1985 and 1986. Upon
repayment of the CMO bonds, NASCOR II Corporation will have served its
limited-purpose as a finance subsidiary of the Bank.
Preferred Mortgage Associates, Ltd., a wholly-owned subsidiary of the
Bank, is one of the largest mortgage brokers in the Chicago metropolitan area.
Preferred has four mortgage origination offices including its headquarters in
Downers Grove, Illinois. Established in 1987, Preferred brokered loans for
approximately twenty-five separate lenders in 1996. Preferred will continue to
provide mortgage originations for lenders locally and nationwide. The Bank
anticipates that it will continue to retain approximately 20% of Preferred's
current loan origination volume.
Personnel
As of September 30, 1996, the Company had 263 full-time employees and 84
part-time employees. The employees are not represented by a collective
bargaining unit, and the Company 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
OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the
activities of savings institutions, such as the Bank, are governed by the HOLA
and the Federal Deposit Insurance Act ("FDI Act").
The Bank is subject to extensive regulation, examination and supervision
by the OTS, as its primary federal regulator, and the FDIC, as the deposit
insurer. The Bank 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 Bank 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
Bank's 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 regulation, whether by
the FDIC, OTS, or Congress, could have a material adverse impact on the Company,
the Bank and their operations. Certain of the regulatory requirements applicable
to the Bank and the Company are referred to below or elsewhere herein. The
description of statutory provisions and regulations applicable to savings
institutions
33
<PAGE>
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
Bank 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 will not be restricted under existing laws as to the types
of business activities in which it may engage, provided that the Bank continues
to be a qualified thrift lender ("QTL"). 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 activities authorized
by OTS regulation.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5% of a nonsubsidiary company engaged in activities other
than those permitted by the HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in
a multiple savings and loan holding company controlling savings institutions in
more than one state, subject 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 Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Federal Savings Institution Regulation
Capital Requirements
The OTS capital regulations require savings institutions to meet three
minimum capital standards: a 1.5% tangible capital ratio, a 3% leverage (core)
capital ratio and an 8% risk-based capital ratio. In addition, the prompt
corrective action standards discussed below also establish, in effect, a minimum
2% tangible capital standard, a 4% leverage (core) capital ratio (3% for
institutions receiving the highest rating on the CAMEL financial institution
rating system), and, together with a risk-based capital standard itself, a 4%
Tier I risk-based capital standard. Core capital is defined as common
stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
purchased mortgage servicing rights and credit card relationships. The OTS
regulations also require that, in meeting the leverage ratio, tangible and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a
34
<PAGE>
risk-weight 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. If the Bank had been subject
to an interest rate risk capital component as of September 30, 1996, the Bank's
capital requirement would have increased by $785,000 under the formula for
calculating an interest rate risk component as described above.
Prompt Corrective Action Regulation
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 I risk-based 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 the 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
The FDIC has adopted a risk-based deposit insurance system that assesses
deposit insurance premiums according to the level of risk involved in an
institution's activities. An institution's risk category is based upon whether
the institution is classified as "well capitalized," "adequately capitalized" or
"undercapitalized" and one of three supervisory subcategories within each
capital group. The supervisory subgroup to which an institution is assigned is
based on a supervisory evaluation and information which the FDIC determines to
be relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. Based on its capital and supervisory subgroups, each
SAIF member institution is assigned an annual FDIC assessment rate between 23
basis points for an institution in
35
<PAGE>
the highest category (i.e., well capitalized and healthy) and 31 basis points
for an institution in the lowest category (i.e., undercapitalized and posing
substantial supervisory concern). The FDIC has authority to further raise
premiums if deemed necessary. If such action is taken, it could have an adverse
effect on the earnings of the Bank.
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 Bank, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996. A special assessment of $2.8 million was
recognized by the Bank as an expense in the fourth quarter. The special
assessment is tax deductible, which led to an after-tax charge of $1.8 million,
or $0.10 per share.
The Funds Act also spreads the obligations for payment of the Financing
Corporation ("FICO") bonds across all SAIF and BIF members. Beginning on January
1, 1997, BIF deposits will be assessed for FICO payments at a rate of 20% of the
rate assessed on SAIF deposits. Based on current estimates by the FDIC, BIF
deposits will be assessed a FICO payment of 1.3 basis points, while SAIF
deposits will be assessed an estimated 6.5 basis points. Full pro rata sharing
of the FICO payments between BIF and SAIF members will occur on the earlier of
January 1, 2000 or the date the BIF and SAIF are merged. The Funds Act specifies
that the BIF and SAIF will be merged on January 1, 1999, provided no savings
associations remain as of that time.
As a result of the Funds Act, the FDIC recently proposed to lower SAIF
assessments to 0 to 27 basis points effective January 1, 1997, a range
comparable to that of BIF members. However, SAIF members will continue to make
higher 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.
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 an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition or violation that might
lead to termination of deposit insurance.
Loans to One Borrower
Under 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 September 30, 1996, the
Bank's limit on loans to one borrower was $8.2 million. At September 30, 1996,
the Bank's largest aggregate outstanding balance of loans to one borrower
consisted of two loans totaling $6.7 million.
QTL Test
The HOLA requires savings institutions to meet a QTL test. Under the QTL
test, a savings and loan association is required to maintain at least 65% of its
"portfolio assets" (total assets less (i) specified liquid assets up to 20% of
total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed securities) in at least 9 months out of each 12 month period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
September 30, 1996, the Bank maintained 96.2% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
Limitations on Capital Distributions
OTS regulations impose limitations on all capital distributions by savings
institutions. Capital distributions include cash dividends, payments to
repurchase or otherwise acquire the savings association's shares, payments to
stockholders of another institution in a cash-out merger and other distributions
charged against capital. The rule establishes three
36
<PAGE>
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 up to (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 Bank's capital fell
below its regulatory requirements or the OTS notified it that it was in need of
more than normal supervision, the Bank's ability to make capital distributions
could be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice. In December 1994, the OTS proposed amendments to its
capital distribution regulation that would generally authorize the payment of
capital distributions without OTS approval provided the payment does not make
the institution 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 September 30, 1996 , the Bank is a
Tier 1 Bank.
Liquidity
Federally insured savings associations are required to maintain an average
daily balance of liquid assets equal to a certain percentage of the sum of
average daily balances of net withdrawable deposit accounts and borrowings
payable in one year or less. The liquidity requirement may vary from time to
time (between 4.0% and 10.0%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required liquid
asset ratio is 5.00%.
For purposes of this ratio, liquid assets include specified short-term
assets (such as cash, certain time deposits, certain bankers' acceptances and
short-term United States Treasury obligations), and long-term assets such as
United States Treasury obligations of more than one and less than five years and
federal agency obligations with a minimum term of 18 months. The regulations
governing liquidity requirements include as liquid assets debt securities hedged
with forward commitments obtained from dealers in United States Government
securities or associations whose accounts are insured by the FDIC, debt
securities directly hedged with a short financial futures position, and debt
securities that provide the holder with a right to redeem the security at par
value, regardless of the stated maturities of such securities. The OTS has also
designated as liquid assets certain mortgage-related securities and certain
mortgage loans (qualifying as backing for certain mortgage-backed securities)
with less than one year to maturity. Short-term liquid assets currently must
constitute at least 1% of an association's average daily balance of net
withdrawable deposit accounts and current borrowings. Penalties may be imposed
upon associations for violations of the liquidity requirements. The monthly
average liquidity ratio of the Bank for September 1996 was 5.28% and exceeded
the then applicable requirement of 5.0%.
Assessments
Savings institutions are required to pay assessments to the OTS to fund
the agency's operations. The general assessment, paid on a semi-annual basis, is
computed upon the savings institution's total assets, including consolidated
subsidiaries, as reported in the Bank's latest quarterly thrift financial
report. The assessment paid by the Bank for the fiscal year ended September 30,
1996 totaled $147,136.
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
Section 11 of HOLA provides that transactions between an insured
subsidiary of a holding company and an affiliate thereof will be subject to the
restrictions that apply to transactions between banks that are members of the
37
<PAGE>
Federal Reserve System and their affiliates pursuant to Sections 23A and 23B of
the Federal Reserve Act ("FRA"). Generally, Sections 23A and 23B: (i) limit the
extent to which a financial institution or its subsidiaries may engage in
"covered transactions" with an "affiliate," to an amount equal to 10% of the
institution's capital and surplus, and limit all "covered transactions" in the
aggregate with all affiliates to an amount equal to 20% of such capital and
surplus; and (ii) require that all transactions with an affiliate, whether or
not "covered transactions," be on terms substantially the same, or at least as
favorable to the institution or subsidiary as those provided to a non-affiliate.
The term "covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and similar types of transactions. Management believes
that the Bank is in compliance with the requirements of Sections 23A and 23B. In
addition to the restrictions that apply to financial institutions generally
under Sections 23A and 23B, Section 11 of the HOLA places three other
restrictions on savings associations, including those that are part of a holding
company organization. First, savings associations may not make any loan or
extension of credit to an affiliate unless that affiliate is engaged only in
activities permissible for bank holding companies. Second, savings associations
may not purchase or invest in affiliate securities except for those of a
subsidiary. Finally, the Director is granted authority to impose more stringent
restrictions when justifiable for reasons of safety and soundness.
Extensions of credit by the Bank to executive officers, directors, and
principal stockholders and related interests of such persons are subject to
Sections 22(g) and 22(h) of the FRA and Subpart A of the Federal Reserve Board's
Regulation O. These rules prohibit loans to any such individual where the
aggregate amount exceeds an amount equal to 15% of an institution's unimpaired
capital and surplus plus an additional 10% of unimpaired capital and surplus in
the case of loans that are fully secured by readily marketable collateral,
and/or when the aggregate amount outstanding to all such individuals exceeds the
institution's unimpaired capital and unimpaired surplus. These rules also
provide that no institution shall make any loan or extension of credit in any
manner to any of its executive officers or directors, or to any person who
directly or indirectly, or acting through or in concert with one or more
persons, owns, controls, or has the power to vote more than 10% of any class of
voting securities of such institution ("Principal Stockholder"), or to a related
interest (i.e., any company controlled by such executive officer, director, or
Principal Stockholder), or to any political or campaign committee the funds or
services of which will benefit such executive officer, director, or Principal
Stockholder or which is controlled by such executive officer, director, or
Principal Stockholder, unless such loan or extension of credit is made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, does not
involve more than the normal risk of repayment or present other unfavorable
features, and the institution follows underwriting procedures that are not less
stringent than those applicable to comparable transactions by the institution
with persons who are not executive officers, directors, Principal Stockholders,
or employees of the institution. A savings association is therefore prohibited
from making any new loans or extensions or credit to the savings association's
executive officers, directors, and 10% stockholders at different rates or terms
than those offered to the general public. The rules identify limited
circumstances in which an institution is permitted to extend credit to executive
officers. Management believes that the Bank is in compliance with Sections 22(g)
and 22(h) of the FRA and Subpart A of the Federal Reserve Board's Regulation O.
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 proceedings for receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and an
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
38
<PAGE>
Guidelines address internal controls and information systems; internal audit
system; credit underwriting; loan documentation; interest rate risk exposure;
asset growth; and compensation, fees and benefits.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Chicago,
which is one of the 12 regional FHLBs. As a member of the FHLB, the Bank is
required to purchase and maintain stock in the FHLB of Chicago in an amount
equal to the greater of 1% of its aggregate unpaid residential mortgage loans,
home purchase contracts or similar obligations at the beginning of each year, or
1/20 (or such greater fraction as established by the FHLB) of outstanding FHLB
advances. At September 30, 1996 the Bank had $7.4 million in FHLB of Chicago
stock, which was in compliance with this requirement. FHLB advances must be
secured by specific types of collateral and may be obtained primarily for the
purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds to cover certain obligations on
bonds issued to fund the resolution of insolvent thrifts and to contribute funds
for affordable housing programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also result in the FHLBs
imposing a higher rate of interest on advances to their members. For the years
ended September 30, 1996, 1995 and 1994, dividends from the FHLB-Chicago to the
Bank amounted to $544,634, $572,577 and $288,425, respectively. If dividends
were reduced, or interest on future FHLB advances increased, the Bank's net
interest income might also be reduced.
Federal Reserve System
Federal Reserve Board regulations require all depository institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW checking accounts) and non-personal time deposits. Reserves of 3%
must be maintained against total transaction accounts of $52.0 million or less
(after a $4.3 million exemption), and an initial reserve of 10% (subject to
adjustment by the Federal Reserve Board to a level between 8% and 14%) must be
maintained against that portion of total transaction accounts in excess of such
amount. At September 30, 1996, the Bank was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS.
39
<PAGE>
Recent and Proposed Changes in Accounting Rules
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS No. 121 is effective for fiscal years
beginning after December 31, 1995. SFAS No. 121 provides guidance for the
recognition and measurement of impairment of long-lived assets, certain
identifiable intangibles, and goodwill related both to assets to be held and
used and assets to be disposed of. SFAS No. 121 requires entities to perform
separate calculations for assets to be held and used to determine whether
recognition of an impairment loss is required and, if so, to measure the
impairment. SFAS No. 121 requires long-lived assets and certain identifiable
intangibles to be disposed of to be reported at the lower of carrying amount or
fair value less costs to sell. The Company does not expect the adoption of SFAS
No. 121 to have a material impact on its consolidated financial condition or
results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 is effective for fiscal years beginning after
December 15, 1995. SFAS No. 123 is effective for the Company in fiscal 1997.
This statement applies to all transactions in which an entity acquires goods or
services by issuing equity instruments or by incurring liabilities where the
payment amounts are based on the entity's common stock price, except for
employee stock ownership plans (ESOPs). A new method of accounting for
stock-based compensation arrangements with employees is established by the
statement. The new method is a fair value based method rather than the intrinsic
value based method that is contained in APB Opinion No. 25. However, the
statement does not require an entity to adopt the new fair value based method
for purposes of preparing its financial statements. Entities are allowed to (1)
continue to use the Opinion No. 25 method or (2) adopt the SFAS No. 123 fair
value based method. The fair value based method will result in higher
compensation cost than the Opinion No. 25 intrinsic value based method for fixed
stock option compensation plans and will result in a different compensation cost
for variable stock option compensation plans. For entities not adopting SFAS No.
123 fair value based method, the statement requires those entities to display in
the footnotes pro forma net income and earnings per share information as if the
fair value based method had been adopted. The Company does not intend to elect
the fair value based method of expense recognition for stock-based compensation
as contemplated by SFAS No. 123, rather will adopt the pro forma disclosure
alternative provided in SFAS No. 123, and continue to account for stock-based
compensation under APB Opinion No. 25.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement, among other things, applies a "financial-components approach" that
focuses on control, whereby an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes assets when
control has been surrendered, and derecognizes liabilities when extinguished.
SFAS No. 125 provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. SFAS
No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. The Company
does not expect this pronouncement to have a significant impact on its
consolidated financial condition or results of operations.
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Company keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.
40
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Hinsdale Financial Corporation
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30
(In thousands, except share data) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 6,069 5,427
Interest-bearing deposits 22,924 50,845
Investment securities available for sale, at fair value at
September 30, 1996 and September 30, 1995 1,998 1,998
Mortgage-backed securities available for sale, at fair value at
September 30, 1996 and September 30, 1995 5,367 7,147
Loans, net of allowance for losses of $2,412 and $2,589 at September 30, 1996 and 1995 590,722 614,371
Accrued interest receivable 3,431 3,275
Real estate 1,249 1,872
Premises and equipment, net 6,669 5,756
Stock in Federal Home Loan Bank of Chicago, at cost 7,445 9,215
Other assets 5,023 3,801
- ------------------------------------------------------------------------------------------------------------------------
$ 650,897 703,707
========================================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 452,472 445,505
Borrowed funds 128,949 185,339
Collateralized mortgage obligations 2,542 4,353
Advances by borrowers for taxes and insurance 2,820 8,385
Deferred income taxes 1,452 2,184
Accrued expenses and other liabilities 7,191 5,964
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 595,426 651,730
========================================================================================================================
Stockholders' Equity:
Preferred stock, $.01 par value; authorized 1,500,000 shares; none outstanding - -
Common stock, $.01 par value; authorized 6,000,000 shares;
2,790,085 shares issued and 2,695,085 outstanding at September 30, 1996;
2,774,994 shares issued and 2,679,994 outstanding at September 30, 1995 27 27
Additional paid-in capital 21,066 20,861
Retained earnings, substantially restricted 36,038 32,966
Treasury stock, at cost (95,000 shares) (1,284) (1,284)
Common stock purchased by:
Employee Stock Ownership Plan (471) (686)
Bank Recognition and Retention Plans - (86)
Net unrealized gains on securities available for sale, net of tax 95 179
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 55,471 51,977
========================================================================================================================
Commitments and contingencies
- ------------------------------------------------------------------------------------------------------------------------
$ 650,897 703,707
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
Hinsdale Financial Corporation
Consolidated Statements of Income
<TABLE>
<CAPTION>
For The Year Ended September 30
(In thousands, except per share amounts) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans $ 43,404 42,238 28,257
Mortgage-backed securities 603 1,614 6,675
Investment securities 661 1,191 1,922
Interest-bearing deposits 1,033 901 174
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 45,701 45,944 37,028
- ----------------------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits 19,691 17,432 13,597
Borrowed funds 8,846 10,382 4,286
Collateralized mortgage obligations 430 628 1,085
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 28,967 28,442 18,968
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 16,734 17,502 18,060
Provision for loan losses 50 185 125
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 16,684 17,317 17,935
- ----------------------------------------------------------------------------------------------------------------------
Noninterest Income:
Gain (loss) on sales of:
Loans and mortgage-backed securities 452 362 369
Investment securities available for sale - (18) -
Real estate and other assets 61 300 -
Income from real estate operations 302 613 507
Servicing fee income 445 417 435
Fees and commissions 11,212 5,425 3,279
Other 475 (351) 492
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest income 12,947 6,748 5,082
- ----------------------------------------------------------------------------------------------------------------------
Noninterest Expense:
Compensation and benefits 12,832 9,096 8,269
Occupancy expense 2,983 2,162 1,884
Federal deposit insurance premiums 1,062 985 1,007
Federal deposit insurance special assessment 2,829 - -
Computer services 537 577 632
Other 5,453 3,877 3,520
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest expense 25,696 16,697 15,312
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,935 7,368 7,705
Income tax expense 861 2,909 2,989
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 3,074 4,459 4,716
- ----------------------------------------------------------------------------------------------------------------------
Primary earnings per share $ 1.10 1.61 1.69
Fully diluted earnings per share $ 1.10 1.61 1.69
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
Hinsdale Financial Corporation
Consolidated Statements of Changes In Stockholders' Equity
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained Treasury
(In thousands) Stock Capital Earnings Stock
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1993 $ 22 20,386 23,796 (1,284)
Net income - - 4,716 -
Proceeds from exercise of stock options - 83 - -
Tax benefit from stock related compensation - 84 - -
Principal payment on ESOP - - - -
Distribution of BRP stock awards - - - -
- ---------------------------------------------------------------------------------------------------
Balance at September 30, 1994 22 20,553 28,512 (1,284)
Net income - - 4,459 -
Proceeds from exercise of stock options - 255 - -
Tax benefit from stock related compensation - 53 - -
Principal payment on ESOP - - - -
Stock split effected in the form of a stock
dividend 5 - (5) -
Distribution of BRP stock awards - - - -
Cumulative effect of change in accounting for
securities available for sale, net of tax - - - -
Change in net unrealized gains (losses)
on securities available for sale,
net of tax - - - -
- ---------------------------------------------------------------------------------------------------
Balance at September 30, 1995 27 20,861 32,966 (1,284)
Net income - - 3,074 -
Proceeds from exercise of stock options - 121 - -
Tax benefit from stock related compensation - 84 - -
Principal payment on ESOP - - - -
Fractional shares related to stock split - - (2) -
Distribution of BRP stock awards - - - -
Change in net unrealized gains (losses)
on securities available for sale,
net of tax - - - -
- ---------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $ 27 21,066 36,038 (1,284)
===================================================================================================
<CAPTION>
Unrealized
Common Common Gains (Losses)
Stock Stock on Securities
Acquired Acquired Available
(In thousands) by ESOP by BRPs for Sale Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1993 (1,029) (375) - 41,516
Net income - - - 4,716
Proceeds from exercise of stock options - - - 83
Tax benefit from stock related compensation - - - 84
Principal payment on ESOP 172 - - 172
Distribution of BRP stock awards - 145 - 145
- ------------------------------------------------------------------------------------------------------------
Balance at September 30, 1994 (857) (230) - 46,716
Net income - - - 4,459
Proceeds from exercise of stock options - - - 255
Tax benefit from stock related compensation - - - 53
Principal payment on ESOP 171 - - 171
Stock split effected in the form of a stock
dividend - - - -
Distribution of BRP stock awards - 144 - 144
Cumulative effect of change in accounting for
securities available for sale, net of tax - - (234) (234)
Change in net unrealized gains (losses)
on securities available for sale,
net of tax - - 413 413
- -------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 (686) (86) 179 51,977
Net income - - - 3,074
Proceeds from exercise of stock options - - - 121
Tax benefit from stock related compensation - - - 84
Principal payment on ESOP 215 - - 215
Fractional shares related to stock split - - - (2)
Distribution of BRP stock awards - 86 - 86
Change in net unrealized gains (losses)
on securities available for sale,
net of tax - - (84) (84)
- -------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 (471) - 95 55,471
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
Hinsdale Financial Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended September 30
(In thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 3,074 4,459 4,716
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,138 942 746
Amortization of deferred gain (65) (390) (390)
Distribution of BRP awards 86 144 145
Provision for loan losses 50 185 125
Amortization of premiums, discounts, and deferred loan fees 389 89 5
Additions to deferred fees (497) (218) (2,215)
Amortization of collateralized mortgage obligations discount 151 197 405
Originations of loans held for sale (460,556) (144,000) (51,759)
Sale of loans originated for resale 471,016 130,747 56,563
Sale of mortgage-backed securities held for sale - 20,214 -
Sale and maturities of investment securities available for sale - 19,957 -
Gain on sale of loans and mortgage-backed securities (452) (362) (369)
Loss on sale of investment securities - 18 -
Gain on sale of real estate and other assets (61) (300) -
(Increase) decrease in Stock in Federal Home Loan Bank of Chicago 1,770 (1,175) (4,902)
(Increase) decrease in accrued interest receivable (156) 86 (318)
(Increase) decrease in other assets (1,046) 1,763 1,393
Increase (decrease) in accrued expenses and other liabilities 687 1,345 (761)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 15,528 33,701 3,384
- -------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of loans held for investment 4,803 12,527 2,957
Proceeds from sale of real estate held for development and sale 805 4,300 321
Proceeds from maturities of investment securities held for investment - - 20,000
Proceeds from sale of mortgage-backed securities held for investment - - 63,892
Purchase of investment securities held for investment - - (4,942)
Loans originated for investment (76,286) (54,218) (153,751)
Loans purchased (5,736) (63,936) (197,904)
Purchase of premises and equipment (1,872) (857) (772)
Purchase of business, net of cash acquired - (1,898) -
Principal collected on loans 90,429 64,142 85,405
Principal collected on mortgage-backed securities 1,666 3,916 70,640
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 13,809 (36,024) (114,154)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
44
<PAGE>
Hinsdale Financial Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(continued) Year Ended September 30
(In thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities:
Net increase (decrease) in deposits 6,967 26,069 (18,196)
Proceeds from borrowed funds 30,000 118,359 271,800
Repayment of borrowed funds (86,390) (109,371) (147,971)
Repayment of collateralized mortgage obligations (1,962) (1,907) (5,620)
Net increase (decrease) in advance payments by borrowers for taxes
and insurance (5,565) 4,634 1,075
Decrease in ESOP loan 215 171 172
Proceeds from options exercised 121 255 83
Cash paid in lieu of fractional shares related to 25% stock split (2) - -
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (56,616) 38,210 101,343
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (27,279) 35,887 (9,427)
Cash and cash equivalents at beginning of year 56,272 20,385 29,812
==========================================================================================================================
Cash and cash equivalents at end of year $ 28,993 56,272 20,385
==========================================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 29,173 28,178 18,572
Income taxes 2,478 2,461 2,385
Supplemental Disclosures of Noncash Activities:
Loans exchanged for mortgage-backed securities $ 36,469 19,734 59,297
Additions to real estate acquired in settlement of loans 353 - -
Additions to loans resulting from the sale of real estate
acquired in settlement of loans - - 104
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements
September 30, 1996, 1995 and 1994
1. Summary of Significant Accounting Policies
The accounting and reporting policies of Hinsdale Financial Corporation
("Company") conform to generally accepted accounting principles ("GAAP") and to
practices within the thrift industry. In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the statement
of financial condition and revenues and expenses for the 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.
A. Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiary, Hinsdale Federal Bank for Savings ("Bank"), and the
Bank's wholly-owned subsidiaries: Preferred Mortgage Associates, Ltd.
("Preferred"), Grant Square Service Corporation, Hinsdale Insurance Services,
Inc., and NASCOR II Corporation. All material intercompany balances and
transactions have been eliminated.
B. Investment and Mortgage-Backed Securities
On October 1, 1994, the Company adopted the provisions of the Financial
Accounting Standards Board ("FASB") Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company has elected to classify
all investment and mortgage-backed securities as available for sale. Statement
No. 115 establishes the accounting and reporting for investments in equity and
debt securities that have readily determinable fair values. Under Statement 115,
investments which the entity has the positive intent and ability to hold to
maturity are classified as "held-to-maturity" and measured at amortized cost.
Investments purchased for the purpose of being sold are classified as "trading
securities" and measured at fair value with any changes in fair value included
in earnings. All other investments that are not classified as
"held-to-maturity," or "trading" are classified as "available for sale."
Investments available for sale are measured at fair value with any changes in
fair value reflected as a separate component of stockholders' equity, net of
tax.
Gains and losses on sales are determined using the specific identification
method. Premiums and discounts are amortized to interest income using the
interest method over the estimated remaining lives of the securities.
The Company also arranges for "swap" transactions with the Federal
National Mortgage Association ("FNMA") which involve the exchange of fixed-rate
mortgage loans for mortgage-backed securities. These mortgage-backed securities
are carried at the lower of cost or market.
C. Loans Receivable
Loans receivable are stated at unpaid principal balances adjusted for
deferred loan costs, unearned discounts, loans in process, and allowance for
loan losses. Loan origination fees and certain direct loan origination costs are
deferred, and the net fees or costs are recognized using the level-yield method
over the contractual life of the loans. Any unamortized net fees or costs on
loans sold or repaid prior to maturity are recognized in the period such loans
are sold or repaid.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Additions to the allowance for
loan losses are provided based upon a periodic evaluation by management.
Management's periodic evaluations of the adequacy of the allowance are based on
the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral, and current and prospective
economic conditions.
46
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for losses on loans
receivable. Such agencies may require the Company to recognize additions to the
provision for losses based on their judgments of information available to them
at the time of their examination. Interest income on loans is not recognized on
loans which are 90 days or greater delinquent and on loans which management
believes are uncollectable.
The Company 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" effective
October 1, 1995. These statements apply to all loans that are identified for
evaluation except for large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment. These loans include, but are not limited
to, credit card, residential mortgage and consumer installment loans.
Substantially all of the Company's lending is excluded from the provisions of
SFAS No. 114 and SFAS No. 118. Of the remaining loans which are to be evaluated
for impairment, management has determined through an internal loan review
process that there were no loans at September 30, 1996 nor during the year ended
September 30, 1996, which met the definition of an impaired loan. A loan is
considered impaired when it is probable that a creditor will be unable to
collect contractual principal and interest due according to the contractual
terms of the loan agreement.
D. Loans Held for Sale
Loans classified "held for sale" are comprised of one-to four-family real
estate loans originated for resale in the secondary market or to other
investors. Loans are identified as held for sale before or soon after
origination. Loans held for sale are accounted for at the lower of cost or
market, with each periodic lower of cost or market adjustment included in
earnings. The lower of cost or market values are determined on an individual
loan basis. Gains and losses on sales of loans are recognized based upon the
difference between the selling price and the carrying value of the related loans
sold.
E. Loan Servicing
On October 1, 1995, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights, an amendment of FASB Statement No. 65." This
statement requires mortgage loan servicing rights to be recognized as separate
assets from the related loans, regardless of how those servicing rights are
acquired. A mortgage banking enterprise that acquires mortgage servicing rights
through either the purchase or origination of mortgage loans and sells or
securitizes those loans with servicing retained, is required to allocate the
total cost of the mortgage loans to the mortgage servicing rights and to the
loans (without the mortgage servicing rights) based on their estimated relative
fair values. The allocation of the total cost of the loan between the mortgage
servicing rights and the loan results in increased gains on the sales of the
loans, reflecting the value of the servicing rights.
The statement further requires that mortgage servicing rights periodically
be evaluated for impairment based on the fair value of those rights. The fair
value of the mortgage servicing rights is determined by discounting the present
value of estimated expected future cash flows using a discount rate commensurate
with the risks involved. This method of valuation incorporates assumptions that
market participants would use in their estimates of future servicing income and
expense, including assumptions about prepayments, default, and interest rates.
For purposes of measuring impairment, the loans underlying the mortgage
servicing rights are stratified on the basis of interest rate and type. The
amount of impairment is the amount by which the mortgage servicing rights, net
of accumulated amortization, exceed their fair value. Impairment, if any, is
recognized through a valuation allowance and a charge to current operations.
Mortgage servicing rights, net of valuation allowances, are amortized in
proportion to, and over the period of, the estimated net servicing revenue of
the underlying mortgages, which are collateralized by single family properties.
47
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
F. Foreclosed Real Estate
Real estate acquired through foreclosure, or deed in lieu of foreclosure,
is carried at the lower of fair value or the related loan balance on the
property at the date of foreclosure, net of costs to dispose. Valuations are
periodically performed by management subsequent to acquisition and charges are
made to operations if the carrying value of a property exceeds its estimated net
realizable value. Costs relating to the development and improvement of property
are capitalized to the extent the carrying value does not exceed the net
realizable value of the property. Costs relating to holding the property are
charged to expense.
G. Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is charged to operations under the straight-line method based on
the estimated useful lives of the assets, which are primarily forty years for
building and improvements, ten years for furniture and fixtures, three to five
years for equipment, and three years for automobiles. Amortization of leasehold
improvements is computed on the straight-line method over the lesser of the
lease term or useful life of the property.
H. Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax
return. The provision for Federal and state taxes on income is based on earnings
reported in the financial statements.
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying the
applicable tax rate to differences between the financial statement carrying
amounts and the tax basis of existing assets and liabilities. Under Statement
109, the effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date of any such tax law
change.
I. Earnings Per Share
Primary earnings per share for the years ended September 30, 1996, 1995
and 1994, were determined by dividing net income for the year by 2,799,674,
2,772,965 and 2,790,280, respectively, the weighted average number of common and
common equivalent shares outstanding for each year. Fully diluted earnings per
share were determined by dividing net income for the year by 2,804,240,
2,778,061 and 2,795,989, respectively. Stock options are regarded as common
share equivalents and are considered in calculating both primary and fully
diluted earnings per share calculations. Common stock equivalents are computed
using the treasury stock method. All share amounts have been adjusted to reflect
the 25% common stock split effected in the form of a stock dividend declared on
October 18, 1995.
J. Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and interest-bearing deposits.
K. Reclassifications
Certain reclassifications of prior year amounts have been made to conform
with current year presentation.
48
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
2. Investment Securities Available for Sale
Investment securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1996
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Bank note, due 1997 $ 2,001 - (3) 1,998
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 5.97%
===================================================================
September 30 ,1995
Federal Home Loan Bank note, due 1997 2,003 - (5) 1,998
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 5.94%
===================================================================
</TABLE>
The maturities of investment securities available for sale are summarized
as follows:
<TABLE>
<CAPTION>
September 30, 1996
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 2,001 - (3) 1,998
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
There were no sales during fiscal 1996. Proceeds from the sale of
investment securities during 1995 were $15.0 million. Gross gains of $680 and
gross losses of $18,350 were realized on those sales. There were no sales during
fiscal 1994.
49
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
3. Mortgage-Backed Securities Available for Sale
Mortgage-backed securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1996
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation $ 457 4 (1) 460
Federal National Mortgage Association 4,762 145 - 4,907
- ---------------------------------------------------------------------------------------------------------------------------------
$ 5,219 149 (1) 5,367
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 8.73%
================================================================
September 30, 1995
Federal Home Loan Mortgage Corporation $ 771 11 - 782
Federal National Mortgage Association 6,099 266 - 6,365
- ---------------------------------------------------------------------------------------------------------------------------------
$ 6,870 277 - 7,147
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate 8.82%
================================================================
</TABLE>
Included above are mortgage-backed securities held by NASCOR II
Corporation with an amortized cost of $5,163,746 and $6,797,400 as of September
30, 1996 and 1995, respectively, and market values of $5,313,897 and $7,074,185
as of September 30, 1996 and 1995, respectively.
There were no sales during fiscal 1996. Proceeds from the sale of
mortgage-backed securities during 1995 were $20.2 million. Gross gains of
$264,763 and gross losses of $27,563 were realized on those sales. Proceeds from
the sale of mortgage-backed securities during 1994 were $63.9 million. Gross
gains of $529,627 and gross losses of $408,145 were realized on those sales.
50
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
4. Loans
Loans are summarized as follows:
<TABLE>
<CAPTION>
September 30
(In thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
One-to four-family:
Held for investment $ 470,057 504,829
Held for sale 16,984 30,701
Multi-family 25,217 25,538
Commercial real estate 19,156 16,193
Construction loans 7,418 6,870
Land 2,579 1,642
Equity lines of credit 48,223 21,441
Consumer loans 5,325 11,810
- ---------------------------------------------------------------------------------------------------------------------------------
594,959 619,024
Add (deduct):
Loans in process (4,053) (4,266)
Deferred loan costs 2,228 2,202
Allowance for losses on loans (2,412) (2,589)
=================================================================================================================================
$ 590,722 614,371
=================================================================================================================================
Weighted average interest rate 7.12 % 7.31
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Adjustable-rate mortgage loans were $472.9 million and $515.6 million at
September 30, 1996 and 1995, respectively. The weighted average interest rate
for adjustable-rate mortgage loans was 7.11% and 7.07% at September 30, 1996 and
1995, respectively.
The following is a summary of the changes in allowance for losses on
loans:
<TABLE>
<CAPTION>
For The Year Ended September 30
(In thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 2,589 2,748 2,656
Provision for loan losses 50 185 125
Charge-offs, net of recoveries (227) (344) (33)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 2,412 2,589 2,748
=================================================================================================================================
</TABLE>
Non-accrual loans were as follows:
<TABLE>
<CAPTION>
Percent of
Year Number Amount Total Loans
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
September 30, 1996 8 $ 932 0.15 %
September 30, 1995 31 1,300 0.21
September 30, 1994 27 999 0.18
</TABLE>
51
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans were $232,308,169, $220,930,582 and $208,489,293 at September 30,
1996, 1995 and 1994, respectively. Included in loans serviced for others are
mortgages, totaling $1,007,568, $1,108,735 and $883,574 at September 30, 1996,
1995 and 1994, respectively, which require the Bank to repurchase the loans
under stipulated circumstances. Custodial balances maintained in connection with
the mortgage loans serviced for others and included in deposits and advance
payments by borrowers for taxes and insurance were $2,366,590, $4,424,133 and
$1,830,732 at September 30, 1996, 1995 and 1994, respectively.
As a result of the adoption of SFAS No. 122 on October 1, 1995, $402,170
was capitalized as mortgage servicing rights during the year ended September 30,
1996. The following reflects capitalized servicing rights activity for the years
ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
(In dollars) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 191,446 -
Additions 402,170 219,174
Amortization (108,033) (27,728)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 485,583 191,446
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of the servicing rights at September 30, 1996 is $606,000.
A charge to current earnings of $1,700 was the result of the evaluation of the
fair value of the mortgage servicing rights at September 30, 1996. The valuation
allowance for mortgage servicing rights is $1,700 at September 30, 1996.
5. Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
September 30
(In thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage loans $ 2,964 2,879
Mortgage-backed securities 79 98
Equity lines of credit and Consumer loans 388 298
- ---------------------------------------------------------------------------------------------------------------------------------
$ 3,431 3,275
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
6. Real Estate
Real estate consisted of the following:
<TABLE>
<CAPTION>
September 30
(In thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate owned - Residential $ 218 -
Real estate held for development and sale - 841
Real estate held for investment 1,031 1,031
- ---------------------------------------------------------------------------------------------------------------------------------
$ 1,249 1,872
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The property related to real estate held for development and sale was sold
during fiscal 1996 and a loss of $21,939 was realized on this sale. Commercial
real estate owned for which the Bank acquired the deed on the property during
1992 was sold during fiscal 1995 and a gain of $298,604 was realized on this
sale.
7. Premises and Equipment
Premises and equipment, at cost, less accumulated depreciation and
amortization are summarized as follows:
<TABLE>
<CAPTION>
September 30
(In thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 1,040 889
Office buildings and improvements 5,158 4,720
Furniture, fixtures, and equipment 8,673 8,034
Leasehold improvements 1,482 1,478
- ---------------------------------------------------------------------------------------------------------------------------------
16,353 15,121
Less accumulated depreciation and amortization 9,684 9,365
- ---------------------------------------------------------------------------------------------------------------------------------
$ 6,669 5,756
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in occupancy expense is depreciation and amortization of premises
and equipment of $911,957, $735,436 and $578,081 for the years ended September
30, 1996, 1995 and 1994, respectively.
53
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
8. Deposits
Deposits are summarized as follows:
<TABLE>
<CAPTION>
September 30,1996 September 30,1995
Weighted Percent Weighted Percent
Average of Total Average of Total
(Dollars in thousands) Rate Amount Deposits Rate Amount Deposits
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DEMAND ACCOUNTS:
Commercial NOW -% $ 12,887 2.85% -% $ 6,021 1.35%
NOW 0.75 45,676 10.09 0.77 48,271 10.84
Regular savings 2.53 78,853 17.43 2.79 82,769 18.58
Money market 3.29 50,355 11.13 3.44 55,082 12.36
- -------------------------------------------------------------------------------------------------------------------------
2.13 187,771 41.50 2.38 192,143 43.13
- -------------------------------------------------------------------------------------------------------------------------
CERTIFICATE ACCOUNTS:
Three Months Plus 4.88 4,392 0.97 4.90 3,594 0.81
Six Months Plus 5.41 78,357 17.32 5.81 62,025 13.92
One Year Plus 5.77 54,257 11.99 6.05 64,048 14.37
Two Year Plus 5.64 10,079 2.23 4.80 13,616 3.06
Three Year Plus 5.13 3,087 0.68 4.88 3,740 0.84
Four Year Plus 5.20 1,274 0.28 5.20 1,422 0.32
Five Year Plus 6.24 64,768 14.31 6.45 63,176 14.18
Jumbo 5.85 24,425 5.40 6.13 15,441 3.47
Retirement and other 5.60 24,062 5.32 5.36 26,300 5.90
- -------------------------------------------------------------------------------------------------------------------------
5.74 264,701 58.50 5.92 253,362 56.87
- -------------------------------------------------------------------------------------------------------------------------
4.24% $ 452,472 100.00% 4.39 % $ 445,505 100.00%
=========================================================================================================================
</TABLE>
Contractual maturities of certificate accounts at September 30, 1996 are as
follows:
<TABLE>
<CAPTION>
(In thousands)
- ------------------------------------------------------------------------------
<S> <C>
Less than 12 months $ 181,092
12 to 24 months 25,655
25 to 36 months 12,452
Over 36 months 45,502
- ------------------------------------------------------------------------------
$ 264,701
==============================================================================
</TABLE>
The aggregate amount of certificate accounts with a balance of $100,000 or
greater was $44.8 million at September 30, 1996 and $36.5 million at September
30, 1995.
Interest expense for deposit accounts is summarized as follows:
<TABLE>
<CAPTION>
For The Year Ended September 30
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW accounts $ 364 381 390
Money market accounts 1,785 2,024 1,946
Regular savings accounts 2,094 2,426 2,570
Certificate accounts 15,448 12,601 8,691
- ------------------------------------------------------------------------------
$ 19,691 17,432 13,597
==============================================================================
</TABLE>
54
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
9. Borrowed Funds
In connection with the initial public offering, the Bank established a
leveraged Employee Stock Ownership Plan ("ESOP"). The ESOP was funded by the
proceeds from a $1.2 million loan from an unaffiliated third party lender at a
rate of prime and one half of one percent, maturing June 30, 1999. The loan is
secured by shares of the Company purchased with the proceeds of the loan. On
August 29, 1996, the loan from the unaffiliated third party lender was repaid by
the Bank from proceeds borrowed from the Company. The terms of the loan
agreement between the Bank and the Company are unchanged from that of the
original loan agreement with the unaffiliated third party lender. The Bank
remains committed to make contributions to the ESOP sufficient to allow the ESOP
to fund its debt service requirements of the loan.
The Bank has adopted a collateral pledge agreement whereby the Bank has
agreed to at all times keep on hand, free of all other pledges, liens, and
encumbrances, first mortgages with unpaid principal balances aggregating no less
than 167% of the outstanding secured advances from the Federal Home Loan Bank
("FHLB") of Chicago. All stock in the FHLB of Chicago is pledged as additional
collateral for these advances.
Preferred utilizes warehouse lines of credit obtained from the Bank and
various outside lenders to fund their mortgage banking activities. These lines
of credit are collateralized by mortgages originated for sale, but not yet
delivered, to correspondent lenders. During fiscal 1996, the warehouse lines of
credit obtained from outside lenders were repaid and all funding of Preferred's
mortgage banking operations remains with the Bank.
Borrowed funds are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995
Weighted Weighted
Average Average
(Dollars in thousands) Rate Amount Rate Amount
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advances from the FHLB of Chicago due in fiscal:
1996 - % $ - 6.08 63,800
1997 6.10 108,900 6.33 78,900
1998 6.70 15,000 6.70 15,000
2000 6.00 5,000 6.00 5,000
- -----------------------------------------------------------------------------------------------------------------------------
128,900 162,700
Debt of Employee Stock Ownership Plan - % - 9.25 686
Drafts Payable - 49 - 128
Warehouse Lines of Credit - - 8.54 21,825
- -----------------------------------------------------------------------------------------------------------------------------
$ 128,949 185,339
=============================================================================================================================
</TABLE>
55
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
10. Collateralized Mortgage Obligations
The Bank participated in the issuance of collateralized mortgage
obligations ("Obligations") in 1985 through NASCOR II Corporation, its
wholly-owned limited-purpose finance subsidiary. The Bank contributed
mortgage-backed securities to NASCOR II Corporation which, in turn, pledged the
securities to an independent trustee as collateral securing the Obligations.
Substantially all of the collections of principal and interest from the
underlying collateral are paid through to the holders of the Obligations.
The Obligations were issued in two series, each originally having four
maturity classes. Payment of principal is first allocated pro rata to the class
of bonds of each series having the earliest stated maturity, until such class
has been paid in full.
The classes by series are as follows:
<TABLE>
<CAPTION>
September 30
Coupon Stated
(Dollars In thousands) Rate 1996 1995 Maturity
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series I:
Class Z 7.90 % $ 1,948 3,317 April 2010
Series II:
Class Z 9.15 690 1,283 October 2011
- ---------------------------------------------------------------------------------------------------
2,638 4,600
Less unamortized discounts
including underwriting costs 96 247
- ---------------------------------------------------------------------------------------------------
$ 2,542 4,353
===================================================================================================
</TABLE>
The actual maturity of each obligation will vary depending upon the timing
of cash receipts from the underlying collateral. Classes A, B and C of Series I
and II have prepaid.
The Obligations are accounted for as borrowing transactions that are
recorded as liabilities in the consolidated financial statements.
Mortgage-backed securities and cash held by the trustees with an aggregate
market value of $5,317,000 and $7,079,000 were pledged as collateral for the
Obligations at September 30, 1996 and 1995, respectively.
56
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
11. Income Taxes
If certain conditions are met, savings institutions, in determining
taxable income, are allowed special bad debt deductions based on specified
experience formulas or on a percentage of taxable income before such deduction.
The Company used the percentage of taxable income method in 1996, 1995 and 1994
since it resulted in the maximum bad debt deduction.
Federal and State income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
For The Year Ended September 30
(In thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 1,486 3,089 2,285
Deferred (557) (509) 377
- -----------------------------------------------------------------------------------------------------------
929 2,580 2,662
State:
Current 59 445 146
Deferred (127) (116) 181
- -----------------------------------------------------------------------------------------------------------
(68) 329 327
- -----------------------------------------------------------------------------------------------------------
Total income tax expense $ 861 2,909 2,989
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The reasons for the difference between the effective income tax and the
corporate Federal income tax are as follows:
<TABLE>
<CAPTION>
For The Year Ended September 30
(In thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at 34% rate $ 1,338 2,505 2,620
Items affecting Federal income tax rate:
Valuation allowance (307) - -
Federal tax refund (31) - -
Capital loss valuation allowance (33) - -
State income taxes (10) - -
Other, net (28) 75 42
- -----------------------------------------------------------------------------------------------------------
Income tax expense $ 929 2,580 2,662
- -----------------------------------------------------------------------------------------------------------
The significant components of deferred income taxes are as follows:
<CAPTION>
For The Year Ended September 30
(In thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred taxes attributable to changes in gross
deferred tax assets and liabilities (155) (472) 538
Increase (decrease) in beginning-of-year balance
of the valuation allowance for deferred tax assets (529) (153) 20
- -----------------------------------------------------------------------------------------------------------
(684) (625) 558
- -----------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities are
as follows:
<TABLE>
<CAPTION>
September 30
(In thousands) 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
General allowances for losses on loans $ 940 1,003
Deferred profit-sale of premises and
real estate held for investment - 25
Interest income acceleration for tax purposes 266 266
Accrued pension 347 348
Unrealized capital loss 110 148
Illinois net operating loss carryforward 241 382
Other 34 56
- -----------------------------------------------------------------------------------------------
Total gross deferred tax assets 1,938 2,228
Less valuation allowance (291) (820)
- -----------------------------------------------------------------------------------------------
Net deferred tax assets 1,647 1,408
Deferred tax liabilities:
FHLB stock dividends (157) (197)
Loan fees (1,281) (1,552)
Excess servicing (124) (168)
Depreciation (408) (382)
Tax bad debt reserve in excess of base year amount (373) (384)
Mortgage brokerage fees (666) (791)
Other (90) (118)
- -----------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (3,099) (3,592)
Net deferred tax liability $ (1,452) (2,184)
- -----------------------------------------------------------------------------------------------
</TABLE>
The valuation allowance for deferred tax assets as of October 1, 1995, was
$820,000. The net change in the total valuation allowance for the year ended
September 30, 1996 was a decrease of $529,000. The reversal of the SFAS 109
valuation allowance was made to reflect management's belief of deferred tax
asset realizability due to sustained earnings and to also reflect utilization of
state net operating losses and capital loss.
Retained earnings at September 30, 1996 includes approximately $7.6
million for which no Federal or State income tax liability has been provided.
This amount represents allocations of income to bad debt deductions for tax
purposes only. Reductions of amounts so allocated for purposes other than tax
bad debt losses will create income for tax purposes only, which will be subject
to the then current Federal and State income tax rates. The consolidated group
has Illinois net operating loss carryforwards in the amount of $3,358,000. These
losses will expire in varying amounts beginning September 30, 1999 through
September 30, 2011. The capital loss will expire on September 30, 2001.
58
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
12. Pension Plan
The Bank has a defined benefit pension plan covering all salaried
employees meeting certain eligibility requirements. The plan is noncontributory
and the Bank is funding all of the required annual contributions.
The Bank's pension plan financial data is as follows:
<TABLE>
<CAPTION>
September 30
(In thousands) 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
FUNDED STATUS
Actuarial present value of benefit obligations:
Accumulated benefits obligation, including vested
benefits of $1,814 and $1,455 $ 1,984 1,591
- --------------------------------------------------------------------------------------------------------
Plan assets at fair value 2,232 2,008
Projected benefit obligations 3,094 2,825
- --------------------------------------------------------------------------------------------------------
Excess of projected benefit obligation over plan assets (862) (817)
Unrecognized net loss 364 375
Unrecognized prior service cost (41) (41)
Unrecognized net transition asset (355) (415)
- --------------------------------------------------------------------------------------------------------
Accrued pension liability $ (894) (898)
- --------------------------------------------------------------------------------------------------------
<CAPTION>
For The Year Ended September 30
(In thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET PERIODIC PENSION COST
Service costs $ 265 231 267
Interest cost on projected benefit obligation 166 239 246
Actual loss (return) on assets (149) (277) 46
Net amortization and deferral (18) (5) (349)
- ----------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 264 188 210
- ----------------------------------------------------------------------------------------------------------
The rates used in the actuarial valuation are as follows:
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.75% 7.50% 8.00%
Long-term rate of return 8.00% 8.00% 8.00%
Salary progression 5.00% 5.00% 5.00%
- -------------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
13. Lease Commitments
Certain operations of the Company are conducted from leased offices under
short-term operating lease agreements which are generally renewable at the
option of the Company. Operating expenses include rental expense for office
space, net of sublease rental income, of $1,205,927, $978,776 and $876,026 for
the years ended September 30, 1996, 1995 and 1994, respectively.
The projected minimum rentals under existing leases are as follows:
<TABLE>
<CAPTION>
(In thousands) Year Amount
- --------------------------------------------------------------------------------
<S> <C>
1997 $ 920
1998 898
1999 863
2000 836
2001 738
Thereafter 3,270
- --------------------------------------------------------------------------------
$ 7,525
- --------------------------------------------------------------------------------
</TABLE>
During 1991, the Bank sold for cash, land, office buildings and
improvements, and real estate held for investment with an aggregate book value
of $6,271,513. The sale resulted in a pretax gain of approximately $4,322,000,
of which $1,952,033 was deferred as a result of lease back arrangements on a
portion of the property sold. The deferred gain, which represented the present
value of future lease payments, was included in other liabilities. Amortization
of the deferred gain reducing rental expense was $65,068 for the year ended
September 30, 1996 which fully amortized the gain. For each of the two years
ended September 30, 1995 and 1994, $390,407 was amortized.
14. Regulatory Capital
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weighting and other factors. OTS regulations require all
savings institutions to maintain a minimum regulatory tangible capital ratio
equal to 1.5% of total assets, a minimum 3.0% leverage capital ratio, and 8.0%
risk-based capital ratio requirement. Management believes, as of September 30,
1996, that the Bank meets all capital adequacy requirements to which it is
subject.
OTS regulations require that in meeting the leverage ratio, tangible and
risk-based capital standards, savings institutions must deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank. A transitional rule which phases in the deduction from capital over a
five-year period is provided for a savings institution's investment in and loans
to a nonqualifying subsidiary as of April 12, 1989. In December 1992, the Bank
received approval to use the delayed deduction phase-in schedule allowable under
current legislation. The delayed phase-in schedule extends the deduction of
investments in and loans to a nonqualifying subsidiary to July 1, 1996, at which
time 100% will be required to be deducted. This was a change from the 100%
deduction required July 1, 1994. At September 30, 1996 the Bank had no
subsidiaries engaged in impermissible activities.
The OTS issued a final rule on August 31, 1993 that adds interest rate
risk to the risk-based capital requirement for savings institutions. Savings
institutions with a greater than normal interest rate exposure must take a
deduction from the total capital available to meet their risk-based capital
requirement. The deduction is equal to one-half of the difference between the
institution's actual measured exposure and the normal level of exposure.
60
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
The institution's actual measured interest rate risk is expressed as the
change that occurs in its net portfolio value ("NPV") as a result of a
hypothetical 200 basis point increase or decrease in interest rates (whichever
leads to the lower NPV) divided by the estimated economic value of its assets.
An above normal decline in NPV is one that exceeds two percent of an
institution's assets expressed in terms of economic value. The regulation was
effective January 1, 1994. Subsequent to the issuance of the final rule on
August 31, 1993, the OTS has issued a postponement of the interest rate risk
requirement. However, if the rule were to be in effect at September 30, 1996,
the Bank's capital requirement would have increased by $785,000 under the
formula for calculating an interest rate risk component as described above.
As of September 30, 1996, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Bank's capital ratios and balances at September 30, 1996 are as
follows:
<TABLE>
<CAPTION>
Bank Bank Bank
Actual Required Actual Excess
Capital Capital Capital Capital Capital
(Dollars in thousands) Requirement Percentage Balance Balance Balance
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Risk-based 8.0 % 13.7 % $ 31,444 $ 53,911 $ 22,467
Tangible 1.5 7.9 9,742 50,952 41,210
Leverage 3.0 8.1 19,533 52,555 33,022
</TABLE>
A reconciliation of the Bank's equity capital at September 30, 1996 is as
follows:
<TABLE>
<CAPTION>
(In thousands)
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Stockholders' equity $ 55,471
Less:
Holding Company stockholders' equity not available
for regulatory capital 2,821
Goodwill 1,603
Net unrealized gains on securities available for sale, net of tax 95
- -----------------------------------------------------------------------------------------------------------------
Stockholders' equity of the Bank $ 50,952
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
15. Officer, Director and Employee Plans
Bank Employee Stock Ownership Plan (ESOP)
In conjunction with the Bank's conversion, the Company formed an ESOP. The
ESOP covers substantially all employees of the Bank with more than one year of
employment who have attained the age of 21. The ESOP borrowed $1.2 million from
an unaffiliated third party lender and purchased 150,000 common shares of the
Company issued in the conversion. In accordance with generally accepted
accounting principles, the balance of the ESOP loan has been included in
borrowed funds in the Company's consolidated statement of financial condition
and stockholders' equity has been reduced by the same amount. On August 29,
1996, the loan from the unaffiliated third party lender was repaid by the Bank
from proceeds borrowed from the Company. The terms of the loan agreement between
the Bank and the Company are unchanged from that of the original loan agreement
with the unaffiliated third party lender. Contributions to the ESOP by the Bank
are made to fund the principal and interest payments on the debt of the ESOP.
For the years ended September 30, 1996, 1995 and 1994, total contributions made
to the ESOP were $223,790, $241,117 and $237,631, respectively.
Bank Recognition and Retention Plans (BRPs)
In conjunction with the conversion, the Company formed three BRPs, which
purchased 12,797 common shares of the Company issued in the conversion. An
additional 41,064 common shares were purchased subsequent to the conversion. The
funds used to acquire the BRPs shares were contributed by the Bank. These shares
are available for issuance to employees in key management positions with the
Bank. At September 30, 1996, a total of 3,229 plan share awards were
outstanding. The aggregate purchase price of all shares owned by the BRPs is
reflected as a reduction of stockholders' equity and as an amortization expense
as the Bank's employees become vested in their stock awards. As of September 30,
1996, 50,632 shares were vested and distributed to employees. For the years
ended September 30, 1996, 1995 and 1994, $63,407, $137,854 and $142,489,
respectively, was reflected as compensation expense.
Bank 401(K) Plan and Trust
The Plan is a qualified plan covering all employees of Hinsdale Federal
Bank for Savings ("Bank") who have completed at least 1,000 hours of service for
the Bank within a twelve consecutive month period and are age 21 or older. The
Bank adopted the Plan, effective January 1, 1993, for the exclusive benefit of
eligible employees and their beneficiaries. The Plan also provides benefits in
the event of death, disability, or other termination of employment. Participants
may make contributions to the Plan from 1% to 15% of their earnings, subject to
Internal Revenue Service limitations. Non-elective contributions are not
permitted. Matching contributions can be made at the Bank's discretion each Plan
year. No such contributions to the Plan have been made to date.
Preferred 401(K) Plan and Trust
The Plan is a qualified plan covering all employees of Preferred Mortgage
Associates, Ltd. ("Preferred") who have completed at least 1,000 hours of
service for Preferred within a twelve consecutive month period and are age 19 or
older. Preferred adopted the Plan, effective January 1, 1993, for the exclusive
benefit of eligible employees and their beneficiaries. The Plan also provides
benefits in the event of death, disability, or other termination of employment.
Participants may make contributions to the Plan from 1% to 15% of their
earnings, subject to Internal Revenue Service limitations. Non-elective
contributions are not permitted. Matching contributions can be made at
Preferred's discretion each Plan year. No such contributions to the Plan have
been made to date.
62
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
Stock Option Plans
The Company adopted the 1992 Incentive Stock Option Plan for the benefit
of officers and key employees of the Company or its affiliates and the 1992
Incentive Stock Option Plan for Outside Directors of the Company. The number of
shares of common stock authorized under the 1992 Incentive Stock Option Plan is
150,219. Options granted in 1992 under this Plan become exercisable in equal
installments at a rate of 20% per year commencing one year from the date of
grant. The first installment of options became exercisable on July 7, 1993. At
September 30, 1996, the number of shares upon which options were exercisable
were 55,250 at a price of $8.00 per share. Options exercised were 15,091, 31,899
and 10,429 during the fiscal years ended September 30, 1996, 1995 and 1994,
respectively. All options were exercised at a price of $8.00 per share.
The number of shares of common stock authorized under the Directors' Plan
is 122,906. At September 30, 1996, 92,172 shares had been granted and
exercisable at a price of $8.00 per share. Options granted under the Directors'
Plan became immediately exercisable at date of grant. The term of the options
issued under both Plans expires ten years from the date of grant. No options
under the Directors' Plan have been exercised to date.
The Company also adopted the 1994 Incentive Stock Option Plan for the
benefit of officers and other full-time employees of the Company or its
affiliates. The number of shares of common stock authorized under the 1994
Incentive Stock Option Plan is 125,000. On October 18, 1995, 65,250 shares were
granted at a fair value price of $21.20 per share. Options granted under the
1994 Incentive Stock Option Plan become exercisable in three equal installments
commencing one year from date of grant. At September 30, 1996, the number of
outstanding shares granted were 62,875 at a price of $21.20 per share. The first
installment of options became exercisable on October 18, 1996. The term of the
options issued under this Plan expires ten years from the date of grant.
Under all three Plans, no options have expired nor canceled.
16. Financial Instruments With Off-Balance Sheet Risk and Concentrations of
Credit Risk
The Company is a party to various financial instruments with off-balance
sheet risk in the normal course of its business. These instruments include
commitments to extend credit, standby letters of credit, and forward commitments
to sell loans. These financial instruments carry varying degrees of credit and
interest rate risk in excess of amounts recorded in the financial statements.
Commitments to originate and purchase mortgage loans of $36.1 million at
September 30, 1996 represent amounts which the Company plans to fund within the
normal commitment period of 60 to 90 days of which $14.3 million were fixed-rate
and $21.8 million were adjustable-rate commitments. Because the
credit-worthiness of each customer is reviewed prior to extension of the
commitment, the Company adequately controls their credit risk on these
commitments, as it does for loans recorded on the balance sheet. As part of its
effort to control interest rate risk on these commitments, the Bank enters into
forward commitments to sell fixed-rate mortgage-backed securities to reduce
exposure to changes in loan market prices from the time of commitment until
securitization. Fixed-rate loans originated by the Bank are securitized through
FNMA to satisfy these forward commitments. The risks associated with these
contracts arise from the possible inability of the Bank to deliver the
mortgage-backed securities on the specified delivery date. In such case, the
Bank may be required to repurchase the forward commitment to sell at the then
current market price. For the year ended September 30, 1996, the Bank
securitized and sold $36.5 million of fixed-rate mortgage loans. Of these sales,
$26.2 million were hedged using forward contracts. The sales resulted in a net
gain of $268,000. For the year ended September 30, 1995, the Bank securitized
$19.7 million of fixed-rate mortgage loans. Sales of securitized fixed-rate
mortgage loans totaled $22.9 million for the year of which $11.5 million were
hedged using forward contracts. The sales resulted in a net gain of $7,000.
There were no outstanding forward commitments to sell at September 30,
1996.
63
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
Additionally, the Bank has approved, but unused, home equity lines of
credit, of $55.9 million at September 30, 1996. Approval of equity lines is
based on underwriting standards that do not allow total borrowings, including
the equity line of credit, to exceed 80% of the current appraised value of the
customer's home. This approval is similar to guidelines used when the Bank
originates first mortgage loans, and are a means of controlling its credit risk
on the loan.
The Company conducts substantially all of its lending activities in the
local communities in which it serves.
17. Acquisition of Preferred Mortgage Associates, Ltd.
On May 31, 1995, the Company acquired ("the Acquisition") Preferred
Mortgage Associates, Ltd. ("Preferred"). The operations of Preferred are
included in the Company's 1995 "Consolidated Statements of Income" from the
acquisition date and reflect the application of the purchase method of
accounting. Under this method of accounting, the aggregate cost to the Company
of the Acquisition was allocated to the assets acquired and liabilities assumed,
based on their estimated fair values as of May 31, 1995. Goodwill of $1.8
million was recorded by the Company in connection with the acquisition and is
being amortized on a straight-line basis over 15 years. Preferred was acquired
for an aggregate cash purchase price of $2.5 million. Preferred is one of the
largest mortgage brokers in the Chicago metropolitan area and has four mortgage
origination offices including its headquarters in Downers Grove, Illinois.
Effective October 1, 1995, the Company transferred the ownership of Preferred to
the Bank.
18. Proposed Merger
On August 2, 1996, the Company announced an Agreement and Plan of Merger
("Merger Agreement") with Liberty Bancorp, Inc. ("Liberty") which provides,
among other things, that Liberty will be merged with and into the Company, with
the Company as the surviving corporation, which effective upon consummation of
the transaction contemplated in the Merger Agreement, will amend its Certificate
of Incorporation to increase the total number of authorized shares of common
stock to 11,000,000 and operate under the name "Alliance Bancorp." Liberty is a
Chicago based savings and loan holding company with total assets of
approximately $650 million. Each share of Liberty common stock issued and
outstanding prior to the merger, which approximated 2.5 million shares as of
September 30, 1996, will be converted into the right to receive 1.054 shares of
Alliance Bancorp common stock. The Merger has been approved by the shareholders
of both companies and is subject to approval by regulatory authorities and other
customary conditions. As of September 30, 1996, the Company has capitalized
approximately $230,000 of merger related costs which will be considered
acquisition costs under the proposed merger planned to be accounted for under
the purchase method of accounting.
64
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
19. Condensed Parent Company Only Financial Statements
The following condensed statements of financial condition at September 30,
1996 and 1995 and condensed statements of income and cash flows for the years
ended September 30, 1996, 1995 and 1994 for Hinsdale Financial Corporation
should be read in conjunction with the consolidated financial statements and the
notes thereto.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30
(In thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 2,182 239
ESOP Loan to Bank 471 -
Equity in net assets of subsidiaries 52,650 51,751
Other assets 274 93
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 55,577 52,083
=====================================================================================================================
Liabilities:
Accrued expenses and other liabilities $ 106 106
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 106 106
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 1,500,000 shares;
none outstanding - -
Common stock, $.01 par value; authorized 6,000,000 shares;
2,790,085 shares issued and 2,695,085 outstanding at September 30, 1996;
2,774,994 shares issued and 2,679,994 outstanding at September 30, 1995 27 27
Additional paid-in capital 21,066 20,861
Retained earnings, substantially restricted 36,038 32,966
Treasury stock, at cost (95,000 shares) (1,284) (1,284)
Common stock purchased by:
Employee Stock Ownership Plan (471) (686)
Bank Recognition and Retention Plans - (86)
Net unrealized gains on securities available for sale, net of tax 95 179
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 55,471 51,977
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 55,577 52,083
=====================================================================================================================
(continued)
</TABLE>
65
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
Condensed Parent Company Only Financial Statements
(continued)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For The Year Ended September 30
(In thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in earnings of subsidiaries $ 3,303 4,752 4,700
Interest income 4 24 26
- -----------------------------------------------------------------------------------------------------------------------
Total income 3,307 4,776 4,726
Noninterest expense 379 504 2
- -----------------------------------------------------------------------------------------------------------------------
Income before income tax expense (benefit) 2,928 4,272 4,724
Income tax expense (benefit) (146) (187) 8
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 3,074 4,459 4,716
=====================================================================================================================
STATEMENTS OF CASH FLOWS
Year Ended September 30
(In thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 3,074 4,459 4,716
Equity in earnings of subsidiaries, not providing funds (3,303) (4,752) (4,700)
Dividend received from Bank - 2,000 -
Increase in other assets (181) (93) -
Increase in accrued expenses and other liabilities - 105 1
Interest reinvested on investment securities - (24) (26)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (410) 1,695 (9)
- -----------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of business - (2,631) -
Sale of business 2,705 - -
ESOP loan to Bank (514) - -
Reduction of ESOP loan 43 - -
Proceeds from the maturities of investment securities - 817 -
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 2,234 (1,814) -
- -----------------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from options exercised 121 255 83
Cash paid in lieu of fractional shares related to 25% stock dividend (2) - -
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 119 255 83
- -----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,943 136 74
Cash and cash equivalents at beginning of year 239 103 29
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,182 239 103
=====================================================================================================================
</TABLE>
66
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
20. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosures about
Fair Value of Financial Instruments" ("SFAS No. 107") requires the disclosure of
estimated fair values of all asset, liability and off-balance sheet financial
instruments. The estimated fair value amounts under SFAS No. 107 have been
determined as of a specific point in time utilizing various available market
information, assumptions and appropriate valuation methodologies. Accordingly,
the estimated fair values presented herein are not necessarily representative of
the underlying value of the Company. Rather, the disclosures are limited to
reasonable estimates of the fair value of only the Company's financial
instruments. The use of assumptions and various valuation techniques, as well as
the absence of secondary markets for certain financial instruments, will likely
reduce the comparability of fair value disclosures between financial
institutions. The Company does not plan to sell most of its assets or settle
most of its liabilities at these fair values. The estimated fair values of the
Company's financial instruments as of September 30, 1996 and 1995 are set forth
in the following table and explanation.
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995
(In thousands) Carrying Amount Fair Value Carrying Amount Fair Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 6,069 6,069 5,427 5,427
Interest-bearing deposits 22,924 22,924 50,845 50,845
Investment securities 1,998 1,998 1,998 1,998
Mortgage-backed securities 5,367 5,367 7,147 7,147
Loans 590,722 587,105 614,371 608,780
Interest receivable 3,431 3,431 3,275 3,275
Stock in FHLB of Chicago 7,445 7,445 9,215 9,215
- -----------------------------------------------------------------------------------------------------------------------------
Total financial assets 637,956 634,339 692,278 686,687
=============================================================================================================================
Financial Liabilities:
Non-maturing deposits 187,771 187,771 192,143 192,143
Deposits with stated maturities 264,701 265,359 253,362 254,160
Borrowed funds 128,949 129,040 185,339 185,460
Collateralized mortgage obligations 2,542 2,546 4,353 4,656
Interest payable 1,027 1,027 1,233 1,233
- -----------------------------------------------------------------------------------------------------------------------------
Total financial liabilities $ 584,990 585,743 636,430 637,652
=============================================================================================================================
</TABLE>
The following methods and assumptions are used by the Company in
estimating the fair value amounts for its financial instruments.
Cash, due from banks and interest-bearing deposits. The carrying value of
cash, due from banks and interest-bearing deposits approximates fair value due
to the short period of time between origination of the instrument and their
expected realization.
Investment securities and mortgage-backed securities. The fair value of
these financial instruments was estimated using quoted market prices. The fair
value of FHLB stock is based on its redemption value.
Loans receivable. The fair value of loans receivable held for investment
is based on values obtained in the secondary market. The values obtained in the
secondary market assumed the loans were securitized into pools of loans with
similar characteristics; such as interest rate floors, ceilings and time to next
rate adjustment. Loans in which the secondary market does not exist, the fair
value was estimated based on the credit quality and contractual cash flows
discounted using the current rates.
The fair value of loans held for sale is based on the committed purchase
price to be paid by correspondent lenders.
67
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
Interest receivable and payable. The carrying value of interest receivable
and payable approximates fair value due to the relatively short period of time
between accrual and expected realization.
Deposits. The fair value of deposits with no stated maturity, such as
demand deposits, regular savings, NOW and money market accounts are disclosed as
the amount payable on demand.
The fair value of fixed-maturity deposits is the present value of the
contractual cash flow discounted using interest rates currently being offered
for deposits with similar remaining terms to maturity.
Borrowed funds and collateralized mortgage obligations. The fair value of
FHLB advances is the present value of the contractual cash flows, discounted by
the current rate offered for similar remaining maturities.
The carrying value of warehouse lines of credit approximates fair value
due to the short period of time to repayment.
The fair value of collateralized mortgage obligations is estimated based
on contractual cash flows adjusted for prepayment assumptions, discounted using
the current market rate at which similar bonds would yield with similar
collateral and average life.
Forward delivery commitments. The fair value of forward delivery
commitments is estimated as the purchase price of the contract at September 30,
1996 and 1995.
Commitments to extend credit. The fair value of commitments to extend
credit is estimated as the amount that the Company would receive or pay to
execute a new commitment with terms identical to current commitments considering
current interest rates. As of September 30, 1996 and 1995, the estimated fair
value of the Company's mortgage loan commitments of $36.1 million and $39.7
million, respectively, was $36.6 million and $39.9 million, respectively. All
other commitments to extend credit, including $55.9 million of equity lines of
credit are determined to be reasonable estimates of their fair value.
68
<PAGE>
Hinsdale Financial Corporation
Notes To Consolidated Financial Statements - (Continued)
21. Quarterly Results of Operations (unaudited)
The following are the consolidated results of operations on a quarterly
basis:
<TABLE>
<CAPTION>
Year Ended September 30, 1996
(In thousands, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 11,783 11,496 11,302 11,120
Total interest expense 7,714 7,312 7,056 6,885
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 4,069 4,184 4,246 4,235
Provision for loan losses 50 - - -
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,019 4,184 4,246 4,235
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gain (loss) on sales of mortgage-backed securities,
loans receivable and real estate 98 210 (8) 213
Other noninterest income 2,880 3,361 3,028 3,165
- --------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,978 3,571 3,020 3,378
Noninterest expense 5,296 5,792 5,859 8,749
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (benefit) 1,701 1,963 1,407 (1,136)
Income tax expense (benefit) 679 762 275 (855)
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,022 1,201 1,132 (281)
- --------------------------------------------------------------------------------------------------------------------------------
Primary earnings (loss) per share $ 0.37 0.43 0.40 (0.10)
Fully diluted earnings (loss) per share $ 0.37 0.43 0.40 (0.10)
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended September 30, 1995
(In thousands, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 10,966 11,387 11,780 11,811
Total interest expense 6,329 6,709 7,479 7,925
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 4,637 4,678 4,301 3,886
Provision for loan losses 35 50 75 25
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,602 4,628 4,226 3,861
- --------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gain (loss) on sales of investment securities,
mortgage-backed securities, loans receivable
and real estate (19) 25 295 343
Other noninterest income 1,140 1,008 1,424 2,532
- --------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,121 1,033 1,719 2,875
Noninterest expense 3,667 3,740 4,162 5,128
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,056 1,921 1,783 1,608
Income tax expense 799 759 718 633
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,257 1,162 1,065 975
- --------------------------------------------------------------------------------------------------------------------------------
Primary earnings per share $ 0.45 0.42 0.38 0.35
Fully diluted earnings per share $ 0.45 0.42 0.38 0.35
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hinsdale Financial Corporation
We have audited the accompanying consolidated statements of financial
condition of Hinsdale Financial Corporation and subsidiaries ("the Company") as
of September 30, 1996 and 1995, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the years in
the three-year period ended September 30, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hinsdale
Financial Corporation and subsidiaries as of September 30, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended September 30, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
November 8, 1996
70
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information relating to Directors and Executive Officers is incorporated
herein by reference to the Registrant's Proxy Statement for the 1996 Annual
Meeting of Stockholders.
Item 11. Executive Compensation.
The information relating to executive compensation is incorporated herein by
reference to the Registrant's Proxy Statement for the 1996 Annual Meeting of
Stockholders.
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 1996 Annual Meeting of Stockholders.
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
1996 Annual Meeting of Stockholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements
The following consolidated financial statements of the registrant
and its subsidiaries are filed as a part of this document under
Item 8. Financial Statements and Supplementary Data.
Consolidated Statements of Financial Condition as of September 30,
1996 and 1995
Consolidated Statements of Income for the Years Ended September 30,
1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended September 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended September
30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2) Financial Statement Schedules
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.
71
<PAGE>
(a)(3) Exhibits
The following exhibits are either filed as part of this report or
are incorporated herein by reference.
Exhibit No. 3. Certificate of Incorporation and Bylaws.
(i) Restated Certificate of Incorporation of Hinsdale Financial
Corporation *
(ii) Bylaws of Hinsdale Financial Corporation *
Exhibit No. 10. Material Contracts.
(i) Employment Agreement between the Bank and Mr. Bristol *
(ii) Severance Agreements between the Bank and other officers *
(iii) Employment Agreement between the Company and Howard A.
Davis.+
(vi) Employee Stock Ownership Plan and Trust *
(viii) Bank Recognition and Retention Plans and Trust **
(ix) Incentive Stock Option Plan **
(x) Stock Option Plan for Outside Directors **
(xi) 1994 Incentive Stock Option Plan ***
* Incorporated herein by reference into this document from the
exhibits to Form S-1, Registration Statement, filed on March 31,
1992, Registration No. 33-46877.
** Incorporated herein by reference into this document from the
attachments to the Proxy Statement dated December 27, 1993 for the
Annual Meeting of Stockholders held on February 9, 1994.
*** Incorporated herein by reference into this document from the
attachments to the Proxy Statement dated December 26, 1994 for the
Annual Meeting of Stockholders held on February 8, 1995.
+ Incorporated herein by reference into this document to Exhibit
No. 10 to the Registrant's 1995 Form 10-K.
72
<PAGE>
Exhibit No.11. Statement re: Computation of Per Share Earnings for the
years ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 3,074,000 4,459,000 4,716,000
- -------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 2,686,369 2,662,578 2,641,404
Common stock equivalents due to dilutive effect of
stock options 113,305 110,387 148,876
- -------------------------------------------------------------------------------------------------------------------
Total weighted average common shares and
equivalents outstanding 2,799,674 2,772,965 2,790,280
- -------------------------------------------------------------------------------------------------------------------
Primary earnings per share $ 1.10 1.61 1.69
- -------------------------------------------------------------------------------------------------------------------
Total weighted average common shares and
equivalents outstanding 2,799,674 2,772,965 2,790,280
Additional dilutive shares using end of period market value versus
average market value for the period when utilizing the treasury
stock method regarding stock options 4,566 5,096 5,709
- ---------------------------------------------------------------------------------------------------------------------
Total weighted average common shares and equivalents
outstanding for fully diluted computation 2,804,240 2,778,061 2,795,989
- ---------------------------------------------------------------------------------------------------------------------
Fully diluted earnings per share $ 1.10 1.61 1.69
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Exhibit No. 21. Subsidiaries of the Registrant.
Subsidiary information is incorporated herein by reference to
"Part I - Subsidiaries"
Exhibit No. 23. Consent of KPMG Peat Marwick LLP
Consent of KPMG Peat Marwick LLP to the incorporation by reference
into the registrant's registration statement on Form S-8 of their
report accompanying the financial statements of the registrant for
the fiscal year ended September 30, 1996.
(b) Reports on Form 8-K.
A report on Form 8-K was filed by the Company on August 19, 1996 for
the purposes of reporting, pursuant to Items 5 and 7 of the Form 8-K,
that the Company entered into an Agreement and Plan of Merger with
Liberty Bancorp, Inc. as of August 2, 1996.
73
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HINSDALE FINANCIAL CORPORATION
------------------------------
(Registrant)
By: /s/ Kenne P. Bristol
------------------------
Kenne P. Bristol
DATED: December 13, 1996 President, Chief Executive
----------------- Officer and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Kenne P. Bristol President, Chief Executive Officer December 13, 1996
- --------------------------------- and Director -------------------
Kenne P. Bristol
/s/ William R. Rybak Chairman of the Board of December 13, 1996
- --------------------------------- Directors -------------------
William R. Rybak
/s/ Richard A. Hojnicki Executive Vice President December 13, 1996
- --------------------------------- Chief Financial Officer and -------------------
Richard A. Hojnicki Corporate Secretary
(Principal Financial Officer)
/s/ Ilene M. Bock Senior Vice President and Controller December 13, 1996
- --------------------------------- (Principal Accounting Officer) -------------------
Ilene M. Bock
/s/ Howard A. Davis Director December 13, 1996
- --------------------------------- -------------------
Howard A. Davis
/s/ Howard R. Jones Director December 13, 1996
- --------------------------------- -------------------
Howard R. Jones
/s/ Russell F. Stephens, Jr. Director December 13, 1996
- --------------------------------- -------------------
Russell F. Stephens, Jr.
/s/ Donald E. Sveen Director December 13, 1996
- --------------------------------- -------------------
Donald E. Sveen
</TABLE>
74
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,069
<INT-BEARING-DEPOSITS> 22,924
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,365
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 593,134
<ALLOWANCE> 2,412
<TOTAL-ASSETS> 650,897
<DEPOSITS> 452,472
<SHORT-TERM> 108,949
<LIABILITIES-OTHER> 11,463
<LONG-TERM> 0
0
0
<COMMON> 27
<OTHER-SE> 55,444
<TOTAL-LIABILITIES-AND-EQUITY> 650,897
<INTEREST-LOAN> 43,404
<INTEREST-INVEST> 1,264
<INTEREST-OTHER> 1,033
<INTEREST-TOTAL> 45,701
<INTEREST-DEPOSIT> 19,691
<INTEREST-EXPENSE> 28,967
<INTEREST-INCOME-NET> 16,734
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 452
<EXPENSE-OTHER> 25,696
<INCOME-PRETAX> 3,935
<INCOME-PRE-EXTRAORDINARY> 3,935
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,074
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.10
<YIELD-ACTUAL> 2.58
<LOANS-NON> 932
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,589
<CHARGE-OFFS> 246
<RECOVERIES> 19
<ALLOWANCE-CLOSE> 2,412
<ALLOWANCE-DOMESTIC> 550
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,862
</TABLE>
