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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
COMMISSION FILE NUMBER 0-20082
ALLIANCE BANCORP
(Exact name of registrant as specified in its charter)
DELAWARE 36-3811768
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE GRANT SQUARE, HINSDALE, ILLINOIS 60521
(Address of principal executive offices) (Zip Code)
(630) 323-1776
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all the 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 the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Common Stock, $0.01 par value -8,024,293 shares outstanding as of May 13,
1998.
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ALLIANCE BANCORP AND SUBSIDIARIES
FORM 10-Q
Index
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Consolidated Statements of Financial Condition
as of March 31, 1998 and December 31, 1997 1
Consolidated Statements of Income for the Three
Months Ended March 31, 1998 and 1997 2
Consolidated Statements of Changes in Stockholders' Equity
for the Three Months Ended March 31, 1998 and 1997 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature Page 19
</TABLE>
<PAGE>
ALLIANCE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, December 31,
(In thousands, except share data) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Assets
Cash and due from banks $ 10,507 10,839
Interest-bearing deposits 2,406 33,784
Investment securities available for sale, at fair value 85,720 91,475
Mortgage-backed securities available for sale, at fair value 409,896 213,957
Loans, net of allowance for losses of $5,409 at
March 31, 1998 and $5,395 at December 31, 1997 965,161 957,897
Accrued interest receivable 10,589 8,353
Real estate 2,153 2,510
Premises and equipment, net 8,417 7,729
Stock in Federal Home Loan Bank of Chicago, at cost 18,177 12,855
Other assets 24,041 15,186
- --------------------------------------------------------------------------------------------------------------------
$ 1,537,067 1,354,585
====================================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 1,020,204 1,022,614
Borrowed funds 357,537 173,531
Collateralized mortgage obligations 771 1,065
Advances by borrowers for taxes and insurance 10,903 11,675
Accrued expenses and other liabilities 15,582 14,762
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 1,404,997 1,223,647
- --------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, $.01 par value; authorized 1,500,000 shares; none outstanding - -
Common stock, $.01 par value; authorized 11,000,000 shares;
8,176,734 shares issued and 8,024,293 outstanding at March 31, 1998
8,176,234 shares issued and 8,022,147 outstanding at December 31, 1997 82 82
Additional paid-in capital 86,545 86,553
Retained earnings, substantially restricted 46,937 44,167
Treasury stock, at cost; 152,441 shares at March 31, 1998 and
154,087 at December 31, 1997 (1,486) (1,502)
Accumulated other comprehensive income (8) 1,638
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 132,070 130,938
- --------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
- --------------------------------------------------------------------------------------------------------------------
$ 1,537,067 1,354,585
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
1
<PAGE>
ALLIANCE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(In thousands, except per share amounts) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Interest Income:
Loans $ 17,831 16,708
Mortgage-backed securities 4,839 1,497
Investment securities 1,947 473
Interest-bearing deposits 1,020 137
Commercial paper - 31
Federal funds sold - 15
- --------------------------------------------------------------------------------------------------------------------
Total interest income 25,637 18,861
- --------------------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits 11,740 8,933
Borrowed funds 3,995 2,348
Collateralized mortgage obligations 23 60
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 15,758 11,341
- --------------------------------------------------------------------------------------------------------------------
Net interest income 9,879 7,520
Provision for loan losses 100 -
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 9,779 7,520
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Noninterest Income:
Gain (loss) on sales of loans and mortgage-backed securities 365 (396)
Income from real estate operations 454 59
Servicing fee income 74 105
ATM fee income 461 291
Other fees and commissions 4,191 2,619
Other 26 19
- --------------------------------------------------------------------------------------------------------------------
Total noninterest income 5,571 2,697
- --------------------------------------------------------------------------------------------------------------------
Noninterest Expense:
Compensation and benefits 5,264 4,382
Occupancy expense 1,206 1,045
Federal deposit insurance premiums 156 128
Advertising expense 152 118
ATM expense 393 260
Computer services 280 363
Other 1,838 1,593
- --------------------------------------------------------------------------------------------------------------------
Total noninterest expense 9,289 7,889
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 6,061 2,328
Income tax expense 2,409 899
- --------------------------------------------------------------------------------------------------------------------
Net income $ 3,652 1,429
====================================================================================================================
Basic earnings per share $ 0.46 0.23
Diluted earnings per share $ 0.42 0.21
====================================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
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ALLIANCE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Accumulated
Additional Stock Other
Comprehensive Common Paid-in Retained Treasury Purchased Comprehensive
(In thousands, except share and per share amounts) Income Stock Capital Earnings Stock By ESOP Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three Months Ended March 31, 1997
Balance at December 31, 1996 $ 27 21,066 37,117 (1,284) (428) 128 56,626
Comprehensive income:
Net income 1,429 - - 1,429 - - - 1,429
Other comprehensive income, net of tax
Change in unrealized gain (loss) on
securities, net of reclassification
adjustment (861) - - - - - (861) (861)
---------------
Comprehensive income 568
Issuance of 3,930,405 shares for merger of
Liberty Bancorp 26 65,106 - - (556) - 64,576
Cash dividends declared, $0.10 per share - - (534) - - - (534)
Purchase of treasury stock - - - (75) - - (75)
Proceeds from exercise of stock options 1 167 - - - - 168
Principal payment on ESOP loan - - - - 984 - 984
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 $ 54 86,339 38,012 (1,359) - (733) 122,313
===================================================================================================================================
Three Months Ended March 31, 1998
Balance at December 31, 1997 $ 82 86,553 44,167 (1,502) - 1,638 130,938
Comprehensive income:
Net income 3,652 - - 3,652 - - - 3,652
Other comprehensive income, net of tax
Change in unrealized gain (loss) on
securities, net of reclassification
adjustment $ (1,646) - - - - - (1,646) (1,646)
---------------
Comprehensive income 2,006
Cash dividends declared, $0.11 per share - - (882) - - - (882)
Treasury stock distributed under employee
benefit plan - (17) - 16 - - (1)
Proceeds from exercise of stock options - 7 - - - - 7
Tax benefit from stock related compensation - 2 - - - - 2
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 82 86,545 46,937 (1,486) - (8) 132,070
===================================================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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ALLIANCE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 3,652 1,429
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 342 410
Provision for loan losses 100 -
Amortization of premiums, discounts, and deferred loan fees 172 307
Additions to deferred fees 173 (32)
Amortization of collateralized mortgage obligations discount 7 17
Originations of loans held for sale (203,107) (95,680)
Sale of loans originated for resale 169,949 100,984
(Gain) loss on sales of loans and mortgage-backed securities (365) 396
(Increase) decrease in Stock in Federal Home Loan Bank of Chicago (5,322) -
(Increase) decrease in accrued interest receivable (2,236) 312
(Increase) decrease in other assets (7,388) 3,717
Increase (decrease) in accrued expenses and other liabilities 823 (4,628)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (43,200) 7,232
- --------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of loans 1,234 -
Sale of mortgage-backed securities available for sale 51,046 -
Maturities of investment securities available for sale 15,500 4,500
Loans originated or purchased for investment (51,111) (27,621)
Purchases of:
Mortgage-backed securities available for sale (265,707) (8,041)
Investment securities available for sale (9,747) (3,613)
Premises and equipment (1,030) (574)
Net assets acquired through merger, net of cash acquired - 16,417
Principal collected on loans 74,777 39,936
Principal collected on mortgage-backed securities 16,653 3,871
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (168,385) 24,875
- --------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits (2,177) 26,008
Proceeds from borrowed funds 209,000 40,000
Repayment of borrowed funds (25,000) (96,484)
Repayment of collateralized mortgage obligations (301) (270)
Net increase (decrease) in advance payments by borrowers for taxes and insurance (772) (793)
Cash dividends paid (882) (534)
Decrease in ESOP loan - 984
Proceeds from exercise of stock options 7 168
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 179,875 (30,921)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (31,710) 1,186
Cash and cash equivalents at beginning of period 44,623 27,241
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 12,913 28,427
====================================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 15,144 10,909
Income taxes 2,225 720
Supplemental Disclosures of Noncash Activities:
Loans exchanged for mortgage-backed securities $ 1,507 2,786
Additions to real estate acquired in settlement of loans $ 497 -
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
ALLIANCE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended March 31, 1998 and 1997
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation have been included.
The unaudited consolidated financial statements include the accounts of
Alliance Bancorp ("the Company"), its wholly-owned subsidiaries: Liberty Lincoln
Service Corporation II, Liberty Wexford LLC and Liberty Federal Bank ("the
Bank"), and the Bank's wholly-owned subsidiaries: Preferred Mortgage Associates,
Ltd. ("Preferred"), Liberty Financial Services, Inc., Liberty Lincoln Service
Corporation and NASCOR II Corporation. All material intercompany balances and
transactions have been eliminated.
(2) Comprehensive Income
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." The Company adopted this statement
effective January 1, 1998. The following table sets forth the required
disclosures of the reclassification amounts as presented on the statement of
changes in stockholders' equity and the related tax effects allocated to each
component of other comprehensive income for the periods indicated:
<TABLE>
<CAPTION>
Before Tax Net
Tax (Expense) of Tax
(In thousands) Amount or Benefit Amount
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three Months Ended March 31, 1997
Disclosure of reclassification amount:
Unrealized holding gain (loss) on securities arising during
the period $ (1,304) 443 (861)
Less: reclassification adjustment for gain (loss) included in
net income - - -
- ---------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on securities $ (1,304) 443 (861)
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 1998
Disclosure of reclassification amount:
Unrealized holding gain (loss) on securities arising during
the period $ (2,819) 977 (1,842)
Less: reclassification adjustment for gain (loss) included in
net income 326 (130) 196
- ---------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on securities $ (2,493) 847 (1,646)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(3) Earnings per Share
In 1997, FASB issued SFAS No. 128, "Earnings per Share." Statement 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Earnings per share
amounts for the quarter ended March 31, 1997 have been restated to conform to
the Statement 128 requirements. The following table sets forth the computation
of basic and diluted earnings per share for the periods indicated:
5
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<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------
(In thousands, except share data) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Numerator:
Net income $ 3,652 1,429
Denominator:
Basic earnings per share-weighted average shares 8,023,386 6,207,150
Effect of dilutive securities-stock options 634,871 509,212
Diluted earnings per share-adjusted weighted average shares 8,658,257 6,716,362
Basic earnings per share $ 0.46 0.23
Diluted earnings per share $ 0.42 0.21
</TABLE>
(4) Commitments and Contingencies
At March 31, 1998, the Company had outstanding commitments to originate and
purchase loans of $82.0 million. Unused equity lines of credit available to
customers were $85.3 million at March 31, 1998.
The Bank has a credit enhancement agreement with a local municipality to
guarantee the repayment of an aggregate of $2.0 million on municipal revenue
bonds ( the "Bonds"), which are secured by first mortgages on an apartment
building project. To secure the guarantee of the Bonds, the Bank has pledged
mortgage-backed securities issued by the Government National Mortgage
Association ("GNMA"). The Bank's obligations on these Bonds expire in the year
1998 or the dates the Bonds are repaid, if earlier. In the event of default on
the Bonds, the Bank's maximum liability would be its pro rata amount of the
credit guaranty and if the Bank does not act to meet its agreed upon
obligations, the collateral pledged as security for the Bank's guarantee may be
liquidated and the proceeds used to repay the defaulted Bonds. The Bank's
position in such case would be secured by a first mortgage lien on the
underlying apartment properties and a lien against all income derived therefrom.
(5) Proposed Merger
On December 16, 1997, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with Southwest Bancshares, Inc. ("Southwest"), which provides,
among other things, that (i) Southwest will be merged (the "Merger") with and
into Alliance Bancorp, with Alliance Bancorp as the surviving corporation, (ii)
Southwest Federal Savings and Loan Association of Chicago, the savings
association subsidiary of Southwest ("Southwest Federal"), will be merged with
and into Liberty Federal Bank, the savings bank subsidiary of Alliance Bancorp
("Liberty Federal") with Liberty Federal as the surviving institution, (iii)
each outstanding share of Southwest common stock issued and outstanding at the
effective time of the Merger will be converted into shares of common stock of
Alliance Bancorp in accordance with an "Exchange Ratio," as described below, and
(iv) each share of Alliance Bancorp's common stock issued and outstanding
immediately prior to the effective time of the Merger will remain an outstanding
share of common stock of Alliance Bancorp. The directors of Alliance Bancorp
and Southwest have entered into agreements to vote shares owned by them in favor
of the Agreement.
Under the Agreement, and subject to certain qualifications, the Exchange Ratio
will be as follows: (i) if the Alliance Bancorp Market Value (as defined in the
Agreement) is less than or equal to $30.475 and greater than or equal to
$22.525, then 1.1981 shares of Alliance Bancorp Common Stock; (ii) if the
Alliance Bancorp Market Value is greater than $30.475 and less than or equal to
$35.00, then that number of shares of Alliance Bancorp Common Stock, determined
by dividing $36.5125 by the Alliance Bancorp Market Value; (iii) if the Alliance
Bancorp Market Value is greater than $35.00, then 1.0432 shares of Alliance
Bancorp Common Stock; and (iv) if the Alliance Bancorp Market Value is less than
$22.525, then that number of shares of Alliance Bancorp Common Stock, determined
by dividing $26.9875 by the Alliance Bancorp Market Value. Alliance Bancorp has
the right to terminate the Agreement if the Alliance Bancorp Market Value is
less than $19.875, unless Southwest provides notice pursuant to the Agreement
that it wants to proceed with the Merger, in which event the Exchange Ratio will
be 1.3579. Southwest Bancshares, Inc. has approximately $393 million in assets,
$307 million in deposits, and $46 million in stockholders' equity.
6
<PAGE>
Consummation of the Merger is subject to certain conditions, including the
approval of stockholders of each of Alliance Bancorp and of Southwest, and the
receipt of all required regulatory approvals. The Merger is expected to be
accounted for using the pooling-of-interests method. It is expected that the
Merger will be completed prior to June 30, 1998.
(6) Reclassifications
Certain reclassifications of prior year amounts have been made to conform with
the current year presentation.
7
<PAGE>
ALLIANCE BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
GENERAL
On February 10, 1997, Hinsdale Financial Corporation ("Hinsdale Financial")
completed a merger of equals with Liberty Bancorp Inc. of Chicago, Illinois
("Liberty Bancorp"). Liberty Bancorp was merged with and into Hinsdale
Financial. Concurrent with the merger, Hinsdale Financial changed its name to
Alliance Bancorp ("the Company"), and 3,930,405 shares of the Company's common
stock were exchanged for all of the outstanding shares of Liberty Bancorp.
Additionally in connection with the merger, the wholly-owned subsidiary of
Liberty Bancorp, Liberty Federal Savings Bank ("Liberty Federal Savings"), was
merged with and into the wholly-owned subsidiary of Hinsdale Financial, Hinsdale
Federal Bank for Savings ("Hinsdale Federal"), which then changed its name to
Liberty Federal Bank ("Liberty Federal", the "Bank"). The merger of Liberty
Bancorp with and into the Company was recorded as a purchase accounting
transaction, in which all of Liberty Bancorp's assets and liabilities were
recorded at fair value at the closing date. The fair value of net assets
acquired approximated the purchase price; accordingly, no goodwill was recorded.
Liberty Bancorp had total assets of $680 million and deposits of $516 million at
the date of the merger.
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, Liberty Federal 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
14 retail banking facilities in Chicago, north and western Cook County and
DuPage County in Illinois. The Bank offers a variety of deposit products in an
attempt to attract funds from the general public in the 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 loan,
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,
multi-family mortgage loans and commercial real estate loans.
The Bank's earnings are also affected by noninterest income, including income
related to loan origination fees contributed by the Bank's wholly-owned
subsidiary, Preferred Mortgage Associates, Ltd. ("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, 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.
The Bank's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities.
8
<PAGE>
LIQUIDITY/CAPITAL RESOURCES
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 4.0% 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 average liquidity
ratio was 10.34% for the quarter ended March 31, 1998.
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 March
31, 1998, cash and cash equivalents totaled $12.9 million.
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 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 Federal Home Loan
Bank of Chicago ("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, utilized $43.2 million for the three months
ended March 31, 1998. Net cash related to investing activities, consisting
primarily of disbursements for loans originated or purchased for investment,
purchases of mortgage-backed and investment securities, offset by principal
collections on loans and mortgage-backed securities, utilized $168.4 million for
the three months ended March 31, 1998. Net cash provided by financing
activities, consisting primarily of net activity in deposit and escrow accounts,
net proceeds from borrowed funds and the repayment of collateralized mortgage
obligations, totaled $179.9 million for the three months ended March 31, 1998.
In connection with the Company's loan origination activities, the Company'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 Company will engage in
hedging transactions as a method of reducing its exposure to interest rate risk
present in the secondary market. The Company's hedging transactions are
generally forward commitments to sell fixed-rate mortgage-backed securities at a
specified future date. The loans securitized through the Federal National
Mortgage Association ("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 Company that, if the Company 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. At March 31, 1998 the Company had no forward commitments to sell FNMA
mortgage-backed securities.
The Bank's tangible capital ratio at March 31, 1998 was 7.39%. This exceeded
the tangible capital requirement of 1.5% of adjusted assets by $90.9 million.
The Bank's leverage capital ratio at March 31, 1998 was 7.39%. This exceeded
the leverage capital requirement of 3.0% of adjusted assets by $67.8 million.
The Bank's risk-based capital ratio was 15.51% at March 31, 1998. The Bank
currently exceeds the risk-based capital requirement of 8.0% of risk-weighted
assets by $57.3 million.
CHANGES IN FINANCIAL CONDITION
The Company had total assets of $1.5 billion at March 31, 1998, an increase of
$182 million, or 13.5%, from December 31, 1997. Mortgage-backed and investment
securities increased $190 million offset by a corresponding increase in FHLB
borrowings of $184 million. One of the Bank's business strategies is to
leverage its capital with increased securities investments, funded by FHLB
borrowings.
9
<PAGE>
Loans totaled $965.2 million at March 31, 1998, an increase of $7.3 million.
Loan originations were $254.2 million for the three months ended March 31, 1998,
offset by loan sales of $171.2 million and principal repayments of $74.8
million.
Deposits totaled $1.0 billion at March 31, 1998, a decrease of $2 million.
The deposit base and the interest paid on deposits continues to be affected by
alternative investment products and competition within the Company's market
areas.
Stockholders' equity totaled $132.1 million at March 31, 1998, an increase of
$1.1 million. At March 31, 1998, the number of common shares outstanding was
8,024,293 and the book value per common share outstanding was $16.46 per share.
On March 19, 1998, the Company declared a $0.11 per share cash dividend payable
April 20, 1998 to shareholders of record on March 31, 1998.
On December 16, 1997, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with Southwest Bancshares, Inc. ("Southwest"), which provides,
among other things, that (i) Southwest will be merged (the "Merger") with and
into Alliance Bancorp, with Alliance Bancorp as the surviving corporation, (ii)
Southwest Federal Savings and Loan Association of Chicago, the savings
association subsidiary of Southwest ("Southwest Federal"), will be merged with
and into Liberty Federal Bank, the savings bank subsidiary of Alliance Bancorp
("Liberty Federal") with Liberty Federal as the surviving institution, (iii)
each outstanding share of Southwest common stock issued and outstanding at the
effective time of the Merger will be converted into shares of common stock of
Alliance Bancorp in accordance with an "Exchange Ratio," as described below, and
(iv) each share of Alliance Bancorp's common stock issued and outstanding
immediately prior to the effective time of the Merger will remain an outstanding
share of common stock of Alliance Bancorp. The directors of Alliance Bancorp
and Southwest have entered into agreements to vote shares owned by them in favor
of the Agreement.
Under the Agreement, and subject to certain qualifications, the Exchange Ratio
will be as follows: (i) if the Alliance Bancorp Market Value (as defined in the
Agreement) is less than or equal to $30.475 and greater than or equal to
$22.525, then 1.1981 shares of Alliance Bancorp Common Stock; (ii) if the
Alliance Bancorp Market Value is greater than $30.475 and less than or equal to
$35.00, then that number of shares of Alliance Bancorp Common Stock, determined
by dividing $36.5125 by the Alliance Bancorp Market Value; (iii) if the Alliance
Bancorp Market Value is greater than $35.00, then 1.0432 shares of Alliance
Bancorp Common Stock; and (iv) if the Alliance Bancorp Market Value is less than
$22.525, then that number of shares of Alliance Bancorp Common Stock, determined
by dividing $26.9875 by the Alliance Bancorp Market Value. Alliance Bancorp has
the right to terminate the Agreement if the Alliance Bancorp Market Value is
less than $19.875, unless Southwest provides notice pursuant to the Agreement
that it wants to proceed with the Merger, in which event the Exchange Ratio will
be 1.3579.
Consummation of the Merger is subject to certain conditions, including the
approval of stockholders of each of Alliance Bancorp and of Southwest, and the
receipt of all required regulatory approvals. It is expected that the Merger
will be completed prior to June 30, 1998.
RECENT AND PROPOSED CHANGES IN ACCOUNTING RULES
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for the
way that public business enterprises report information about operating segments
in interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. This Statement need not be applied to interim financial
statements in the initial year of application, but comparative information for
interim periods in the initial year of application shall be reported in
financial statements for interim periods in the second year of application. It
is not expected that adoption of this statement will have a material impact on
the consolidated financial statements.
10
<PAGE>
ASSET QUALITY
NON-PERFORMING ASSETS
The following table sets forth information as to non-accrual loans and real
estate owned at the dates indicated. The Company discontinues the accrual of
interest on loans ninety days or more past due, at which time all accrued but
uncollected interest is reversed. There were no loans at March 31, 1998 nor
during the quarter ended March 31, 1998, 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. Loans considered for impairment do not
include residential mortgage and consumer installment loans.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands) 1998 1997 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans
90 days or more past due $ 2,481 2,905 2,218 1,601 1,761
Non-accrual commercial loans
90 days or more past due 79 8 - - -
Non-accrual consumer loans
90 days or more past due 104 109 39 26 -
----------------------------------------------------------------
Total non-performing loans 2,664 3,022 2,257 1,627 1,761
Total foreclosed real estate 792 634 687 496 553
----------------------------------------------------------------
Total non-performing assets $ 3,456 3,656 2,944 2,123 2,314
----------------------------------------------------------------
Total non-performing loans
to total loans 0.27% 0.31 0.23 0.16 0.16
Total non-performing assets
to total assets 0.22% 0.27 0.21 0.15 0.18
</TABLE>
CLASSIFICATION OF ASSETS
The Company regularly reviews the assets in its portfolio to determine whether
any assets require classification in accordance with applicable regulations.
As of March 31, 1998 the Company had total classified assets of $928,000, of
which $792,000 were classified "substandard" and $136,000 were classified as
"doubtful." The assets so classified consisted of single family residential
loans and foreclosed single family residential loans (real estate owned).
ASSET/LIABILITY MANAGEMENT
The Company's asset and liability management strategy attempts to minimize the
risk of a significant decrease in net interest income caused by changes in the
interest rate environment without penalizing current income. Net interest
income, the primary source of the Company's earnings, is affected by interest
rate movements. To mitigate the impact of changes in interest rates, a balance
sheet must be structured so that repricing opportunities exist for both assets
and liabilities in approximately equivalent amounts at basically the same time
intervals.
The Company seeks to reduce the volatility of its net interest income by
managing the relationship of interest rate sensitive assets to interest rate
sensitive liabilities. To accomplish this, the Company has attempted to
increase the percentage of assets, whose interest rates adjust more frequently,
and to reduce the average maturity of such assets. A principal focus in recent
years, has been the origination of adjustable-rate residential real estate loans
and consumer loans, which generally have shorter maturities than fixed-rate
residential real estate loans. The Company also originates shorter maturity
fixed-rate commercial real estate loans and purchases commercial leases, which
generally mature or reprice more quickly than fixed-rate residential real estate
loans.
However, adjustable-rate loans are nearly as likely to refinance in low
interest rate environments as fixed-rate loans. Often, interest rate cycles
allow for these refinancings before the adjustable-rate loans can adjust to
fully indexed market rates. In such declining interest rate environments, that
result in high levels of loan refinancings, the Company may decide to acquire
longer fixed-rate mortgage loans or mortgage-backed securities. To provide an
11
<PAGE>
acceptable level of interest rate risk, the Company will implement a funding
strategy using long-term Federal Home Loan Bank borrowings. Imbalances in
repricing opportunities at any point in time constitute an interest sensitivity
gap, which is the difference between interest sensitive assets and interest
sensitive liabilities. These static measurements do not reflect the results of
any potential activity and are best used as early indicators of potential
interest rate exposures.
As part of its asset/liability strategy, the Company has implemented a policy
to maintain its cumulative one-year interest sensitivity gap ratio within a
range of (15%) to 15% of total assets, which reflects the current interest rate
environment and allows the Company to maintain an acceptable net interest rate
spread. The gap ratio will fluctuate as a result of market conditions and
management's expectation of future interest rate trends.
INTEREST RATE SENSITIVITY GAP ANALYSIS
<TABLE>
<CAPTION>
At March 31, 1998
--------------------------------------------------------------
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) $ 384,320 238,429 89,786 125,345 837,880
Equity lines of credit (1) 82,824 - - - 82,824
Consumer loans and leases (1) 9,908 23,297 9,961 4,036 47,202
Mortgage-backed securities (2) 153,610 56,594 41,222 159,124 410,550
Interest-bearing deposits 2,406 - - - 2,406
Investment securities (2) 92,329 3,703 4,697 2,526 103,255
- --------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 725,397 322,023 145,666 291,031 1,484,117
Interest-Bearing Liabilities:
Regular savings accounts 22,323 33,906 22,104 52,978 131,311
NOW interest-bearing accounts 18,425 16,865 4,513 9,993 49,796
Money market accounts 58,878 8,200 3,904 3,547 74,529
Certificate accounts 545,464 147,589 24,281 213 717,547
Borrowed funds 194,237 50,800 62,500 50,000 357,537
Collateralized mortgage obligations 771 - - - 771
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 840,098 257,360 117,302 116,731 1,331,491
- --------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $ (114,701) 64,663 28,364 174,300 152,626
====================================================================================================================
Cumulative interest sensitivity gap $ (114,701) (50,038) (21,674) 152,626
====================================================================================================================
Cumulative interest sensitivity gap as a
percentage of total assets (7.46) % (3.26) (1.41) 9.93
Cumulative net interest-earning assets as a
percentage of interest-bearing liabilities 86.35% 95.44 98.22 111.46
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of the gap analysis, mortgage, equity and consumer loans and
leases are not reduced by the allowance for loan losses and are reduced for
non-performing loans.
(2) Mortgage-backed and investment securities are not increased (decreased) by
unrealized gains (losses) resulting from the adoption of FASB No. 115.
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.
12
<PAGE>
As its primary interest rate risk planning tool, the Bank utilizes a market
value model. The model measures the Bank's interest rate risk by approximating
the Bank's net portfolio value ("NPV"), which is the net present value of
expected cash flows from assets, liabilities and any off-balance sheet
contracts, under a range of interest rate scenarios, which range from a 400
basis point increase to a 400 basis point decrease in market interest rates
(measured in 100 basis point increments). The assumptions used in this model
should not be relied upon as indicative of actual results due to the inherent
shortcomings of the NPV analysis. These shortcomings include (i) the
possibility that actual market conditions could vary from the assumptions used
in the computation of NPV, (ii) certain assets, including adjustable-rate loans,
have features which affect the potential repricing of such instruments, which
may vary from the assumptions used, and (iii) the likelihood that as interest
rates are changing, management would more likely be changing strategies to limit
the indicated changes in NPV as part of its management process.
The following tables set forth for comparison purposes the Bank's projected
change in NPV for the various rate shocks as of March 31, 1998 and December 31,
1997:
<TABLE>
<CAPTION>
March 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Change in NPV as % of Economic
Interest Rates Net Portfolio Value Value of Assets
----------------------------------------------------------- -----------------------------------
In Basis Points $ % NPV % (1)
(Rate Shock) Amount Change Change Ratio Change
- ----------------------- ----------------------------------------------------------- -----------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
400 $ 81,811 $ (61,426) (43) % 5.29 % (3.97) %
300 102,749 (40,488) (28) 6.64 (2.62)
200 124,160 (19,077) (13) 8.03 (1.23)
100 134,145 (9,092) (6) 8.67 (0.59)
Static 143,237 9.26
(100) 130,732 (12,505) (9) 8.45 (0.81)
(200) 111,390 (31,847) (22) 7.20 (2.06)
(300) 94,887 (48,350) (34) 6.13 (3.13)
(400) 76,787 (66,450) (46) 4.96 (4.30)
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Change in NPV as % of Economic
Interest Rates Net Portfolio Value Value of Assets
----------------------------------------------------------- -----------------------------------
In Basis Points $ % NPV % (1)
(Rate Shock) Amount Change Change Ratio Change
- ----------------------- ----------------------------------------------------------- -----------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
400 $ 84,512 $ (54,286) (39) % 6.21% (3.99) %
300 102,298 (36,500) (26) 7.52 (2.68)
200 120,083 (18,715) (13) 8.82 (1.38)
100 129,441 (9,357) (7) 9.51 (0.69)
Static 138,798 10.20
(100) 136,184 (2,614) (2) 10.00 (0.20)
(200) 133,569 (5,229) (4) 9.81 (0.39)
(300) 134,762 (4,036) (3) 9.90 (0.30)
(400) 135,954 (2,844) (2) 9.99 (0.21)
</TABLE>
(1) Based on the economic value of the Bank's assets assuming no change in
interest rates.
As shown by the tables above, an increase or decrease in interest rates
results in net decreases in the Bank's NPV. At the current level of interest
rates, it is assumed that assets reprice prior to the contractual maturity date,
while liabilities reprice at contractual maturity. In the current quarter, the
Bank increased its use of callable Federal Home Loan Bank borrowings, which can
be called away from the Bank if rates rise, thus are valued to the call date.
As interest rates decline, the callable borrowings are valued to maturity, which
can significantly extend the term, thus resulting in a negative affect on NPV.
The comparison of March 31, 1998 to December 31, 1997 NPV
13
<PAGE>
amounts indicate a significant decline in value under each interest rate
scenario due to the foregoing. Because a 200 basis point decrease in interest
rates would cause more than a 2% decrease in the ratio of NPV to the economic
value of the Bank's assets, the Bank is considered by the OTS to have "above
normal" interest rate risk. The result of being characterized as having "above
normal" interest rate risk is that, upon effectiveness of the interest rate risk
component of the OTS' risk-based capital requirements, the Bank would be
required to hold additional capital.
The Bank's target limits are established as percentages of capital, which are
subsequently translated to percentages of static NPV. At March 31, 1998 and
December 31, 1997, respectively, the Bank's Board of Directors had adopted
interest rate risk target limits which established maximum potential changes in
the Bank's NPV of 21%, 42%, 62%, and 70%; and of 22%, 43%, 65%, and 73% in the
event of 1%, 2%, 3% and 4% immediate and sustained increase or decrease in
market interest rates, respectively. As indicated in the table above, at March
31, 1998, and December 31, 1997, the Bank was within such Board-approved limits.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest income
depends upon the volume of interest-earning assets and interest-bearing
liabilities and the interest rate earned or paid on them.
14
<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>
Three Months Ended March 31,
---------------------------------------------------------------------------
1998 1997
---------------------------------------------------------------------------
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 $ 827,084 $ 15,327 7.41% $ 828,125 $ 14,946 7.22%
Equity lines of credit 84,868 1,652 7.89 64,121 1,230 7.78
Consumer loans and leases 42,522 852 8.02 26,508 532 8.03
Mortgage-backed securities 279,661 4,839 6.92 87,657 1,497 6.83
Interest-bearing deposits 77,975 1,020 5.23 9,438 137 5.81
Federal funds sold - - - 1,069 15 5.61
Commercial paper - - - 2,183 31 5.68
Investment securities 105,185 1,947 7.42 27,396 473 6.95
- ------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,417,295 25,637 7.24 1,046,497 18,861 7.22
Noninterest-earning assets 49,599 47,478
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,466,894 $ 1,093,975
========================================================================================================================
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits:
Savings accounts $ 852,766 $ 11,061 5.26% $ 653,811 $ 8,194 5.08%
NOW noninterest-bearing accounts 44,454 - - 40,469 - -
NOW interest-bearing accounts 51,657 78 0.61 39,811 148 1.51
Money market accounts 74,804 601 3.26 76,493 591 3.13
- ------------------------------------------------------------------------------------------------------------------------
Total deposits 1,023,681 11,740 4.65 810,584 8,933 4.47
Funds borrowed:
Borrowed funds 281,851 3,995 5.67 156,402 2,348 6.01
Collateralized mortgage obligations 768 23 11.98 1,984 60 12.10
- ------------------------------------------------------------------------------------------------------------------------
Total funds borrowed 282,619 4,018 5.69 158,386 2,408 6.08
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,306,300 15,758 4.88 968,970 11,341 4.73
Other liabilities 28,551 25,350
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,334,851 994,320
Stockholders' equity 132,043 99,655
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 1,466,894 $ 1,093,975
========================================================================================================================
Net interest income/
interest rate spread $ 9,879 2.36% $ 7,520 2.49%
========================================================================================================================
Net interest-earning assets/
net interest margin $ 110,995 2.79% $ 77,527 2.87%
========================================================================================================================
Interest-earning assets to
interest-bearing liabilities 1.08 X 1.08 X
========================================================================================================================
<CAPTION>
At March 31,
1998
------------------------
Average Yield/
(Dollars in thousands) Balance Cost
- ----------------------------------------------------------------------------
<S> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans, net $ 834,901 7.56%
Equity lines of credit 82,866 8.15
Consumer loans and leases 47,394 8.03
Mortgage-backed securities 409,896 6.90
Interest-bearing deposits 2,406 5.93
Federal funds sold - -
Commercial paper - -
Investment securities 103,897 7.42
- ----------------------------------------------------------------------------
Total interest-earning assets 1,481,360 7.41
Noninterest-earning assets 55,707
- ----------------------------------------------------------------------------
Total assets 1,537,067
============================================================================
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits:
Savings accounts $ 848,858 5.44%
NOW noninterest-bearing accounts 47,021 -
NOW interest-bearing accounts 49,796 0.49
Money market accounts 74,529 3.32
- ----------------------------------------------------------------------------
Total deposits 1,020,204 4.79
Funds borrowed:
Borrowed funds 357,537 5.60
Collateralized mortgage obligations 771 11.97
- ----------------------------------------------------------------------------
Total funds borrowed 358,308 5.61
- ----------------------------------------------------------------------------
Total interest-bearing liabilities 1,378,512 5.01
Other liabilities 26,485
- ----------------------------------------------------------------------------
Total liabilities 1,404,997
Stockholders' equity 132,070
- ----------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 1,537,067
============================================================================
Net interest income/
interest rate spread 2.40%
=============================== ===========
Net interest-earning assets/
net interest margin
===============================
Interest-earning assets to
interest-bearing liabilities
===============================
</TABLE>
15
<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>
Three Months Ended March 31, 1998
Compared To
Three Months Ended March 31, 1997
---------------------------------------------------
Increase (Decrease)
In Net Interest Income
Due To
---------------------------------------------------
(In thousands) Volume Rate Net
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-Earning Assets:
Mortgage loans, net $ (19) 400 381
Equity lines of credit 404 18 422
Consumer loans and leases 321 (1) 320
Mortgage-backed securities 3,322 20 3,342
Interest-bearing deposits 898 (15) 883
Federal funds sold (15) - (15)
Commercial paper (31) - (31)
Investment securities 1,440 34 1,474
- -----------------------------------------------------------------------------------------------------------------------
Total 6,320 456 6,776
- -----------------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Deposits 2,434 373 2,807
Funds borrowed 1,751 (141) 1,610
- -----------------------------------------------------------------------------------------------------------------------
Total 4,185 232 4,417
- -----------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 2,135 224 2,359
=======================================================================================================================
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND MARCH 31, 1997
GENERAL
Net income totaled $3,652,000, or $0.42 per diluted share for the three months
ended March 31, 1998, as compared to $1,429,000, or $0.21 per diluted share
reported for the quarter ended March 31, 1997. The operating results for the
three months ended March 31, 1997 included the combined entities from the date
of merger (February 10, 1997). Net interest income for the three months ended
March 31, 1998 was $9.9 million, an increase of $2.4 million, or 31.4%, from the
March 31, 1997 quarter of $7.5 million.
INTEREST INCOME
Interest income for the quarter ended March 31, 1998 totaled $25.6 million, an
increase of $6.8 million, or 35.9%, from the prior year's quarter. Interest
income on mortgage loans increased $381,000, or 2.5%, to $15.3 million from the
March 1997 quarter. The average balance of the mortgage portfolio decreased $1.0
million. The annualized average yield on the mortgage loan portfolio increased
to 7.41% for the three months ended March 31, 1998 from 7.22% for the 1997
period. The Bank's mortgage loan portfolio is being affected by the current
market conditions for refinancing single family residences. The portfolio of
single family residential mortgages decreased $165 million from March 31, 1997,
however, an increase in multifamily residential mortgages has had an effect of
increasing the yield on the portfolio. The overall loan portfolio increased
$7.3 million from December 31, 1997.
16
<PAGE>
Interest income on equity lines of credit increased $422,000, or 34.3%, to $1.7
million from the prior year's quarter, primarily as a result of the Bank's
promotion of this product. The average balance of equity lines of credit
increased $20.7 million, or 32.4%, to $84.9 million from $64.1 million from the
March 1997 quarter. Interest income on consumer loans and leases increased
$320,000 to $852,000 for the three months ended March 31, 1998. The average
balance of the consumer loans and leases increased $16.0 million from the 1997
period, primarily as a result of the merger. Interest income on mortgage-backed
securities for the three months ended March 31, 1998 increased $3.3 million to
$4.8 million and the average balance of the mortgage-backed securities portfolio
increased $192.0 million from the March 1997 period. Interest income on
investment securities for the three months ended March 31, 1998 increased $1.5
million to $1.9 million and the average balance of the investment securities
portfolio increased $77.8 million from the March 1997 period. The increases in
both interest income and the average balances of the securities portfolios are
due to the merger and primarily the result of the Bank's strategy to increase
income and leverage capital through additional purchases of investments and
mortgage-backed securities funded by Federal Home Loan Bank borrowings.
Purchases of mortgage-backed and investment securities for the three months
ended March 31, 1998 totaled $275 million.
INTEREST EXPENSE
Interest expense on deposit accounts increased $2.8 million, or 31.4%, to
$11.7 million, for the quarter ended March 31, 1998 compared to the prior year's
quarter. The annualized average cost of deposits for the three months ended
March 31, 1998 was 4.65%, an increase from the annualized average cost of 4.47%
for the March 1997 period. The average deposit base increased $213.1 million to
$1.0 billion during the 1998 period, primarily as a result of the merger. For
the quarter ended March 31, 1998, the Company recorded interest expense on
borrowed funds of $4.0 million on an average balance of $281.9 million at an
annualized cost of 5.67% primarily related to FHLB borrowings. Additional net
proceeds from FHLB borrowings for the three months ended March 31, 1998 totaled
$184 million. The average balance of the Collateralized Mortgage Obligations
("CMO") bonds outstanding decreased $1.2 million, or 61.3%, to $768,000 for the
three months ended March 31, 1998 compared to the 1997 period, due to payments
and prepayments of the mortgage-backed securities held as collateral for the
bonds. The interest expense on the CMO bonds for the 1998 period decreased
$37,000 to $23,000 compared to the three months ended March 31, 1997. The
annualized average cost on the CMO bonds decreased to 11.98% for the 1998
quarter from 12.10% for the three months ended March 31, 1997, due to
adjustments to the discount on the bonds for changes in the estimated average
maturities of the collateral.
NET INTEREST INCOME
Net interest income for the three months ended March 31, 1998 increased $2.4
million or 31.4%, to $9.9 million from the 1997 period. The annualized average
yield on interest-earning assets increased from 7.22% to 7.24% when comparing
the 1997 and 1998 quarters. The annualized average cost of interest-bearing
liabilities increased from 4.73% to 4.88%. This resulted in an annualized
average net interest rate spread of 2.36% for the three-month period ended March
31, 1998 compared to 2.49% for the prior year's period. Both the average
balance of interest-earning assets and interest-bearing liabilities increased
during the quarter ended March 31, 1998 compared to the 1997 quarter.
PROVISION FOR LOAN LOSSES
Based on management's evaluation of the loan portfolio, a provision of
$100,000 for loan losses was recorded during the quarter ended March 31, 1998.
The amount of non-performing loans at March 31, 1998, was $2.7 million, or 0.27%
of total loans, compared to $1.8 million or 0.16% of total loans at March 31,
1997.
NONINTEREST INCOME
Total noninterest income for the three months ended March 31, 1998 was $5.6
million, an increase of $2.9 million from the 1997 period. The current quarter
included a gain of $326,000 on the sale of $51 million of mortgage-backed
securities compared to a loss of $396,000 on the sale of $59 million in
adjustable-rate mortgage loans recorded for the 1997 quarter. The sales for
both the mortgage-backed securities and the loans and subsequent reinvestment of
the proceeds was completed to enhance the Bank's asset and liability mix. Other
fees and commissions increased $1.6 million, primarily due to loan origination
fees contributed by Preferred. Income from
18
<PAGE>
real estate operations for the three months ended March 31, 1998 included income
of $474,000 related to the termination of a real estate venture.
NONINTEREST EXPENSE
Noninterest expense for the quarter ended March 31, 1998 totaled $9.3 million,
an increase of $1.4 million, or 17.7% from the prior year's quarter. This
increase is primarily related to the increase in loan originations and the
related cost from the operations of Preferred and to the combination of the
operations of the merged companies. The year ago quarter included $553,000 in
non-recurring merger related expenses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No. 11 Statement re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
Quarter Ended
March 31, 1998
---------------------
<S> <C>
Net income $ 3,652,000
---------------------
Basic earnings per share-weighted average shares 8,023,386
Effect of dilutive securities-stock options 634,871
---------------------
Diluted earnings per share-adjusted weighted average shares 8,658,257
---------------------
Basic earnings per share $ 0.46
---------------------
Diluted earnings per share $ 0.42
---------------------
</TABLE>
(b) Reports on Form 8-K.
none.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Alliance Bancorp
Dated: May 13,1998 /s/ Kenne P. Bristol
----------- -----------------------------
Kenne P. Bristol
President and
Chief Executive Officer
Dated: May 13, 1998 /s/ Richard A. Hojnicki
------------ -----------------------------
Richard A. Hojnicki
Executive Vice President and
Chief Financial Officer
19
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