<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1996
Commission File No.: 0-19968
SOUTHWEST BANCSHARES, INC.
(exact name of registrant as specified in its charter)
DELAWARE 36-3811042
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
4062 SOUTHWEST HIGHWAY, HOMETOWN, ILLINOIS 60456
(Address of principal executive offices)
Registrant's telephone number, including area code: (708) 636-2700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
The registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this 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 $34,016,533 and is based upon the last sales price as quoted on
The Nasdaq Stock Market for March 17, 1997.
As of March 17, 1997, the Registrant had 2,639,116 shares outstanding
(excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER
31, 1996 IS INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-K.
THE PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF STOCKHOLDERS IS
INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
<PAGE> 2
INDEX
PART I PAGE
----
Item 1. Business ........................................... 1
Additional Item. Executive Officers of the Registrant....... 40
Item 2. Properties.......................................... 41
Item 3. Legal Proceedings................................... 41
Item 4. Submission of Matters to a Vote of Security Holders. 41
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................. 41
Item 6. Selected Financial Data............................. 42
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 42
Item 8. Financial Statements and Supplementary Data......... 42
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............. 42
PART III
Item 10. Directors and Executive Officers of the Registrant.. 42
Item 11. Executive Compensation.............................. 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management...................................... 43
Item 13. Certain Relationships and Related Transactions...... 43
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K......................................... 43
SIGNATURES
<PAGE> 3
PART I
ITEM 1. BUSINESS.
- - -----------------
GENERAL
Southwest Bancshares, Inc. (also referred to as the "Company") was
incorporated under Delaware law on February 11, 1992. On June 11, 1992, the
Registrant acquired Southwest Federal Savings and Loan Association of Chicago
(the "Association" or "Southwest Federal") as a part of the Association's
conversion from a mutual to a stock federally chartered savings and loan
association. The Registrant is a savings and loan holding company and is subject
to regulation by the Office of Thrift Supervision (the "OTS"), the Federal
Deposit Insurance Corporation (the "FDIC") and the Securities and Exchange
Commission (the "SEC"). Currently, the Registrant does not transact any material
business other than through the Association and Southwest Bancshares Development
Corporation. The Registrant retained 50% of the net conversion proceeds
amounting to $13.4 million which was invested in federal funds and high-grade,
marketable securities. At December 31, 1996, the Company had total assets of
$382.4 million and stockholders' equity of $39.9 million (10.4% of total
assets).
Southwest Federal has operated for over 113 years and was originally
organized in 1883 as an Illinois-chartered building and loan association. In
1937 it converted to a federally chartered and insured savings and loan
association. The Association is a member of the Federal Home Loan Bank (the
"FHLB") System and its deposit accounts are insured up to applicable limits by
the FDIC.
The Association's principal business has been and continues to be
attracting retail deposits from the general public and investing those deposits,
together with funds generated from operations, primarily in one- to four-family,
owner-occupied, fixed-rate loans, and to a lesser extent, multi-family
residential mortgage loans, commercial real estate loans, land and construction
loans, mortgage-backed securities and other short-term investments, including
U.S. Government and federal agency securities and other marketable securities.
The Association's revenues are derived principally from interest on its mortgage
loan and mortgage-backed securities portfolios and interest and dividends on its
investment securities. The Association's primary sources of funds are deposits,
principal and interest payments on loans and mortgage-backed securities and, to
a much lesser extent, FHLB-Chicago advances.
Southwest Bancshares Development Corporation, an Illinois corporation, was
incorporated on November 19, 1992, for the primary purpose of engaging in real
estate development projects as a joint venture partner.
1
<PAGE> 4
MARKET AREA
The Association has been, and continues to be, a community-oriented
savings institution offering a variety of financial sources to meet the needs in
the communities it serves. The Association's deposit-gathering area is
concentrated in the neighborhoods surrounding its six offices, one of which is
located in southwest Chicago with the five others located in the Chicago suburbs
of Cicero, Hometown, Oak Lawn and Orland Park, all in Cook County. The
Association's lending base primarily covers the same area and extends, to a
lesser extent, to Will and DuPage counties. The Association's home office is
located in southwest Chicago. Management believes that all of its branches are
located in communities that can generally be characterized as stable,
residential neighborhoods of predominately one- to four-family residences.
LENDING ACTIVITIES
LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIO COMPOSITIONS. The loan
portfolio composition consists primarily of conventional fixed-rate,
first-mortgage loans secured by one- to four-family residences and, to a lesser
extent, multi-family residences. At December 31, 1996, the total mortgage loans
outstanding were $266.3 million, of which $167.3 million were one- to
four-family residential mortgage loans, or 61.1% of the loan portfolio. At that
same date, multi-family residential mortgage loans totalled $50.5 million, or
18.5% of the loan portfolio.
The remainder of the mortgage loans, which totalled $48.5 million, or
17.7% of total loans outstanding at December 31, 1996, consisted of commercial
real estate loans which totalled $26.5 million, or 9.7% of the loan portfolio,
land loans which totalled $10.6 million, or 3.9% of the loan portfolio and
construction loans which totalled $11.4 million, or 4.2% of the loan portfolio.
At December 31, 1996, purchased mortgage loans totalled $ 6.2 million, or 2.3%
of the loan portfolio. All purchased mortgage loans were originated in the
Chicago metropolitan area, except for a participation loan in DeKalb, Illinois
of $881,000. Other loans held by the Association, which principally consist of
line of credit and share loans, totalled $7.3 million, or 2.7% of total loans
outstanding at December 31, 1996.
The Company and its subsidiaries also invest in mortgage-backed
securities. At December 31, 1996, the amortized cost and carrying (market) value
of total mortgage-backed securities aggregated $33.4 million and $32.8 million,
respectively, or 8.6% of total assets, of which 56.1% were backed by adjustable
rate mortgage ("ARM") loans and 43.9% were backed by fixed-rate loans. All of
the mortgage-backed securities at December 31, 1996 were insured or guaranteed
by either the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC").
2
<PAGE> 5
The following table sets forth the composition of the loan portfolio and
mortgage-backed securities portfolio of the Company and its subsidiaries in
dollar amounts and in percentages of the respective portfolios at the dates
indicated. Mortgage-backed securities are shown at amortized cost and not market
value. This table does not include unrealized losses on mortgage-backed
securities classified available for sale in the amount of $535,000 at December
31, 1996.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- ---------------- ---------------- --------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ ------- -------- -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family............ $167,303 61.14% $157,374 61.99% $161,932 65.17% $143,127 65.75% $131,457 68.79%
Multi-family................... 50,504 18.46 48,453 19.08 46,785 18.83 41,771 19.19 32,875 17.20
Commercial real estate......... 26,534 9.70 24,075 9.48 20,479 8.24 17,646 8.11 13,934 7.29
Construction................... 11,409 4.16 7,216 2.84 5,378 2.16 7,765 3.57 8,581 4.49
Land........................... 10,558 3.86 15,560 6.13 12,937 5.21 7,147 3.28 4,085 2.14
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
Total mortgage loans......... 266,308 97.32 252,678 99.52 247,511 99.61 217,456 99.90 190,932 99.91
Other loans...................... 7,328 2.68 1,229 0.48 968 0.39 227 0.10 173 0.09
-------- ------ -------- ------ -------- ------ -------- ----- ------- -----
Total loans receivable....... 273,636 100.00% 253,907 100.00% 248,479 100.00% 217,683 100.00% 191,105 100.00%
====== ====== ====== ====== ======
Less:
Loans in process............... 7,187 6,826 6,031 5,950 3,470
Unearned discounts and
deferred loan fees........... 3,267 3,468 3,607 3,398 3,002
Allowance for loan losses...... 751 754 738 708 805
-------- -------- -------- -------- --------
Loans receivable, net.......... $262,431 $242,859 $238,103 $207,627 $183,828
======== ======== ======== ======== ========
Mortgage-backed securities:
CMOs and REMICs................ $ 9,218 27.50% $ 9,542 30.28% $ 9,826 28.84% $ 10,658 34.55% $ 15,464 29.47%
FHLMC.......................... 4,555 13.59 5,410 17.17 6,195 18.18 6,065 19.66 10,713 20.43
FNMA........................... 7,699 22.97 3,432 10.89 4,174 12.25 5,182 16.80 6,862 13.09
GNMA........................... 12,049 35.94 13,126 41.66 13,873 40.73 8,941 28.99 19,402 37.01
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage-backed
securities................. 33,521 100.00% 31,510 100.00% 34,068 100.00% 30,846 100.00% 52,441 100.00%
====== ====== ====== ====== ======
Net premiums (discounts)......... (145) (111) (88) 116 342
-------- -------- -------- -------- --------
Net mortgage-backed securities... $ 33,376 $ 31,399 $ 33,980 $ 30,962 $ 52,783
======== ======== ======== ======== ========
</TABLE>
3
<PAGE> 6
The following table sets forth the Company and its subsidiaries' loan
originations and loan and mortgage-backed securities purchases, sales and
principal repayments for the periods indicated. Mortgage-backed securities are
shown at market value.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE LOANS (GROSS):
At beginning of period.................. $252,678 $247,511 $217,456
-------- -------- --------
Mortgage loans originated:
One- to four-family.................... 31,558 13,511 32,342
Multi-family........................... 7,993 6,556 9,240
Commercial real estate................. 2,211 5,169 3,240
Construction........................... 15,779 10,060 10,539
Land................................... 1,931 13,242 10,982
-------- -------- --------
Total mortgage loans originated...... 59,472 48,538 66,343
-------- -------- --------
Mortgage loans purchased:
One- to four-family.................... 48 77 100
Multi-family........................... 2,619 -- --
Commercial real estate................. 2,196 -- --
Land................................... 1,191 -- --
-------- -------- --------
Total mortgage loans purchased....... 6,054 77 100
-------- -------- --------
Total mortgage loans originated
and purchased..................... 65,526 48,615 66,443
-------- -------- --------
Transfer of mortgage loans to real
estate owned.......................... (134) (156) (162)
Principal repayments.................... (49,754) (38,499) (36,226)
Sales of loans.......................... (2,008) (4,793) --
-------- -------- --------
At end of period........................ $266,308 $252,678 $247,511
======== ======== ========
OTHER LOANS (GROSS):
At beginning of period.................. $ 1,229 $ 968 $ 227
Other loans originated................. 7,131 2,092 773
Principal repayments................... (1,032) (1,831) (32)
-------- -------- --------
At end of period........................ $ 7,328 $ 1,229 $ 968
======== ======== ========
MORTGAGE-BACKED SECURITIES (GROSS):
At beginning of period.................. $ 31,510 $ 34,068 $ 30,846
Mortgage-backed securities purchased... 4,996 -- 12,332
Mortgage-backed securities sold........ -- -- (5,086)
Amortization and repayments............ (4,985) (2,558) (4,024)
-------- -------- --------
At end of period........................ $ 33,521 $ 31,510 $ 34,068
======== ======== ========
</TABLE>
4
<PAGE> 7
LOAN MATURITY AND REPRICING. The following table shows the maturity or
period to repricing of the Company and its subsidiaries' loan and
mortgage-backed securities portfolios at December 31, 1996. Mortgage-backed
securities are shown at amortized cost, not market value, and consist of loans
with adjustable rates and fixed rates. Information for a presentation of such
adjustable rate loans based on contractual terms to maturity is unavailable and
therefore such loans are shown as being due in the period during which the
interest rates are next subject to change. The table does not include
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on mortgage loans totalled $49.8 million, $38.5 million,
and $36.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
----------------------------------------------------------------------------------------
TOTALS
-----------------------------
ONE- TO TOTAL MORTGAGE-
FOUR- MULTI- COMMERCIAL OTHER LOANS BACKED
FAMILY FAMILY REAL ESTATE LAND CONSTRUCTION LOANS RECEIVABLE SECURITIES TOTAL
-------- -------- --------- ------- ------------ ------ ---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMOUNTS DUE:
Within one year......................... $ 7 $ 724 $ -- $10,558 $11,409 $7,215 $ 29,913 $18,832 $ 48,745
After one year:
One to three years.................... 644 120 -- -- -- -- 764 -- 764
Three to five years................... 1,308 4,902 2,763 -- -- 113 9,086 -- 9,086
Five to 10 years...................... 6,643 3,027 3,428 -- -- -- 13,098 1,165 14,263
10 to 20 years........................ 52,056 33,053 13,593 -- -- -- 98,702 -- 98,702
Over 20 years......................... 106,645 8,678 6,750 -- -- -- 122,073 13,524 135,597
-------- ------- -------- ------- ------- ------ -------- ------- ---------
Total due or repricing after one year 167,296 49,780 26,534 -- -- 113 243,723 14,689 258,412
-------- ------- ------- ------- ------- ------ -------- ------- ---------
Total amount due or repricing........ $167,303 $50,504 $26,534 $10,558 $11,409 $7,328 273,636 33,521 307,157
======== ======= ======= ======= ======= ====== -------- ------- ---------
LESS:
Loans in process........ (7,187) -- (7,187)
Unearned discounts, premiums and
deferred loan fees, net (3,267) (145) (3,412)
Allowance for possible loan losses (751) -- (751)
-------- ------- --------
Loans receivable and mortgage-
backed securities, net $262,431 $33,376 $295,807
======== ======= ========
</TABLE>
5
<PAGE> 8
The following table sets forth at December 31, 1996, the dollar amount of
all loans and mortgage-backed securities due or repricing after December 31,
1997, and whether such loans have fixed interest rates or adjustable interest
rates.
<TABLE>
<CAPTION>
DUE OR REPRICING AFTER
DECEMBER 31, 1997
--------------------------------------
FIXED ADJUSTABLE TOTAL
---------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family....... $167,296 $ -- $167,296
Other..................... 76,314 -- 76,314
Other loans.................. 113 -- 113
-------- -------- --------
Total loans receivable....... 243,723 -- 243,723
Mortgage-backed securities(1) 14,689 -- 14,689
-------- -------- --------
Total loans receivable and
mortgage-backed securities $258,412 $ -- $258,412
======== ======== ========
</TABLE>
- - ----------------------------------
(1) Does not include CMOs and REMICs which are backed by ARMs because the
repricing period is immeasurable. Mortgage-backed securities are carried
at market value.
ONE- TO FOUR-FAMILY MORTGAGE LENDING. The Association offers first
mortgage loans secured by one- to four-family residences, including townhouse
and condominium units, in the Association's primary lending area. Typically,
such residences are single- or two-family homes that serve as the primary
residence of the owner. Loan originations are generally obtained from existing
or past customers, members of the local communities, local real estate agent
referrals and builder/developer referrals within the Association's area. The
Association does not use mortgage brokers to solicit loan applicants.
The Association offers fixed-rate loans on one- to four-family residential
properties. The Association does not offer ARM loans on one- to four-family
residences. The Association's fixed-rate mortgage loans are made for terms of 15
to 30 years. Interest rates charged on fixed-rate loans are competitively priced
based on market conditions and the cost of funds. Origination fees range from
zero points to 2.5% depending on the interest rate charged and other factors.
Generally, the Association's standard underwriting guidelines conform to FHLMC
guidelines with periodic exceptions granted to customers with a long-standing
relationship on a case-by-case basis, which are approved by the Chief Lending
Officer or the President. On occasion, the Association sells a portion of its
fixed-rate mortgage loans to FHLMC. The Association may sell additional
fixed-rate mortgage loans to assist in controlling its interest-rate risk. The
Association retains the servicing on any fixed-rate loans it sells.
The Association makes one- to four-family residential mortgage loans in
amounts up to 80% of the appraised value of the secured property and will
originate loans with loan-to-value
6
<PAGE> 9
ratios of up to 95% with private mortgage insurance ("PMI"). On a case-by-case
basis, PMI on the amount in excess of such 80% ratio is waived for borrowers
with whom the Association generally has had a long-standing relationship. At
December 31, 1996, of the total one- to four-family residential mortgage loans
of the Association, $2.9 million, or 1.7% of these loans with balances greater
than the 80% loan-to-value ratio, did not have PMI. Originated mortgage loans in
the Association's portfolio generally include due-on-sale clauses which provide
the Association with the contractual right to deem the loan immediately due and
payable in the event that the borrower transfers ownership of the property
without the Association's consent. It is the Association's policy to enforce
due-on-sale provisions.
The Association also originates fixed-rate equity mortgage loans secured
by one- to four-family residences in its primary market area. These loans
generally are originated with a fixed interest rate for amortization periods of
up to 15 years. A 1% to 1.5% origination fee is usually charged. These mortgage
loans on owner-occupied, one- to four-family residences are traditionally
subject to a 75% loan-to-value limitation, including the first mortgage.
Typically, the Association provides a fixed-rate equity mortgage loan on
property for which it has a first mortgage. As of December 31, 1996, $1.5
million, or .5% of the Association's total loans outstanding, consisted of
fixed-rate equity mortgage loans on which the Association did not make the first
mortgage.
MULTI-FAMILY LENDING. In the Chicago metropolitan area, the Association
originates fixed-rate multi-family loans with terms of 15 to 20 years, with an
origination fee of 1% to 2%. In addition, the Association also offers two
balloon loans, amortized over 25 years with an origination fee of 1% to 1.5%.
One is a five year balloon and the other is a seven year balloon. These loans
are generally made in amounts up to 75% of the appraised value of the secured
property. Most of the Association's multi-family loans are not owner-occupied.
In making such loans, the Association bases its underwriting decision primarily
on the net operating income generated by the real estate to support the debts,
the financial resources and income level of the borrower, the borrower's
experience in owning or managing similar property, the marketability of the
property and the Association's lending experience with the borrowers. The
Association also receives a personal guarantee from the borrower.
As of December 31, 1996, $50.5 million, or 18.5% of the loan portfolio,
consisted of originated multi-family residential loans located in the
Association's primary lending area. The typical multi-family property in the
Association's local multi-family lending portfolio has between five and twelve
dwelling units, some of which also include retail units, with an average loan
balance of approximately $199,000. At December 31, 1996, the Association had
$5.2 million outstanding in balloon loans with an average interest rate of
8.14%. The largest multi-family loan at December 31, 1996 is in the
Association's primary market area and had an outstanding balance of $2.9
million. This loan is secured by an 84 unit apartment complex located in the
Chicago metropolitan area. The Association has sold a 50% participation interest
in this loan to another local financial institution.
7
<PAGE> 10
The Association has entered into a master participation agreement with
another local lender. During the 1996 fiscal year, the Association purchased an
interest in three multi-family loans totaling $2.5 million. One loan has a fixed
term of 15 years and the other two loans are five year balloon loans. The same
underwriting criteria described above were used in determining to enter into
these agreements.
COMMERCIAL REAL ESTATE LENDING. At December 31, 1996, the Association's
commercial real estate loan portfolio totalled $26.5 million, or 9.7% of the
loan portfolio. All the Association's commercial real estate loans are secured
by improved property such as office buildings, retail strip shopping centers,
industrial condominium units and other small businesses which are located in the
Chicago metropolitan area. At December 31, 1996, the Association had $8.0
million outstanding in balloon loans, at an average interest rate of 8.45%. The
largest commercial real estate loan at December 31, 1996 was a $3.2 million loan
on a 26 unit shopping center to a borrower with whom the Association has a
long-standing business relationship. The Company and the Association are major
tenants of this center. The interest rates, terms of loans and underwriting
criteria for commercial real estate is similar to the criteria for multi-family
residential properties.
The Association entered into a participation agreement with another local
financial institution to purchase a 50% interest in a commercial loan. At
December 31, 1996, the Association had a 50% interest in a $4.4 million
commercial real estate loan. The underwriting criteria used in determining to
enter into this agreement was similar to those of multi-family loans.
LAND AND CONSTRUCTION LENDING. In its primary market area, the Association
originates loans for the acquisition of land (either unimproved land or improved
lots), and for making the necessary improvements to prepare land for sale as
improved residential or commercial property on which the purchaser can then
build (collectively, "land loans"). In addition, the Association originates
loans to finance the construction of one- to four-family homes and, to a much
lesser extent, multi-family residential and commercial real estate property
(collectively, "construction loans"). At December 31, 1996, land and
construction loans totalled $10.6 million, or 3.9%, and $11.4 million, or 4.2%,
respectively, of the loan portfolio. The Association generally has a policy of
originating land and construction loans only in Chicago and the surrounding
suburban area. Land and construction loans afford the Association the
opportunity to increase the interest rate sensitivity of its loan portfolio and
to receive yields higher than those obtainable on fixed-rate loans secured by
existing residential properties. These higher yields correspond to the higher
risks associated with land and construction loans.
Land loans include loans to developers for the development of residential
subdivisions and loans on raw land and on improved lots to contractors and
individuals. At December 31, 1996, the Association had 23 land loans to
developers and contractors totalling $10.6 million. Land development loans
typically are short-term loans. The interest rate on land loans is generally at
1% to 2% over the prime rate as reported in The Wall Street Journal and is
-------------------------
adjusted monthly. The loan-to-value ratio generally does not exceed 75%. Loans
typically are made to customers
8
<PAGE> 11
of the Association and developers and contractors with whom the Association has
had previous lending experience. The Association generally requires an
independent appraisal of the property and feasibility studies may be required to
determine the profit potential of the development. All of the Association's land
loans have been made in the Chicago metropolitan area. Although the Association
may make land loans to current customers, the Association is presently not
actively marketing this type of loan.
The Association principally finances the construction of individual, owner
and non owner-occupied houses with preference given to contractors with whom the
Association has had long-term, successful relationships. Construction loans
generally, are adjustable rate interest only loans with terms of 12 to 18
months. The interest rate on construction loans is generally 1% to 2% over the
prime rate as reported in The Wall Street Journal and is adjusted monthly. Such
-----------------------
loans typically have loan-to-value ratios of up to 80%. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
The Association also offers construction permanent financing for owner-occupied
residences. These loans are originated for current market interest rates, terms
and origination fees. There is generally an additional origination fee of 1% for
this loan product. Interest only is generally charged for four months and the
loan automatically converts in the sixth month to principal and interest
payments for a maturity of 30 years or less. Construction pay outs are disbursed
in four increments as construction progresses and inspections warrant. Of the
$11.4 million construction loans outstanding on December 31, 1996, $10.2 million
were one- to four- family residences including townhouses and condominium units
and $1.2 million were for multi-unit apartment buildings.
The Company and the Association originated various loans to joint venture
projects during the year 1996. The rates and terms were comparable to rates and
terms to any other borrower. As of December 31, 1996, the Association has one
outstanding commitment for a line of credit to a joint venture project in the
amount of $1.7 million.
The Company entered into a participation agreement with a local area
lender, selling a 50% interest in the loans originated to the joint venture. The
Association entered into various participations with another local area lender.
The participation loans were for various land development and construction
projects in the Chicago area.
As of December 31, 1996, the Association was negotiating with a
long-standing customer, an acquisition and improvement loan in the amount of
$6.0 million for a subdivision located in the southwestern suburbs. The
Association was also negotiating the sale of a portion of this loan to two other
local financial institutions.
At December 31, 1996, the largest aggregate amount of loans outstanding to
one borrower totalled $4.7 million. These 5 outstanding loans are all secured by
multi-family dwellings with a building containing limited office space. All
loans to this borrower are current and are within the Association's "loans to
one borrower" limitation established by OTS regulations.
9
<PAGE> 12
OTHER LENDING. During the year ended December 31, 1996 the Association
offered an adjustable rate line of credit for builders with whom the Association
has had a long-standing relationship. These loans are secured by real estate
with an interest rate adjusted to the prime rate, generally from .5% to 1.5%
above the prime rate, as reported in The Wall Street Journal and is adjusted
------------------------
monthly. During 1996, the Company originated a line of credit loan to a joint
venture project. At December 31, 1996, the Association had line of credit loans
totalling $8.6 million with $4.6 million being drawn by borrowers which
represent 1.7% of the loan portfolio.
The Association also offered an adjustable Home Equity Line of Credit,
secured by real estate with an interest rate at prime rate or 1% over the prime
rate, as reported in The Wall Street Journal and is adjusted monthly. At
------------------------
December 31, 1996, the Association had loans totalling $4.8 million with $2.6
million being drawn by borrowers which represents 1.0% of the loan portfolio.
The Association also offers other loans, primarily share loans secured by
deposit accounts. At December 31, 1996, $56,000, or .02% of the loan portfolio
consisted of these loans.
LOAN APPROVAL PROCEDURES AND AUTHORITY. Certain loan officers can approve
real estate mortgage loans in an amount up to $200,000. Real estate mortgage
loans in an amount up to $500,000 can be approved by the Association's President
or Chief Lending Officer. All loans in excess of $500,000 and up to $1.0 million
must have the approval of two of the members of the Loan Committee of the Board
of Directors, which currently consists of the Association's President, Chief
Lending Officer and two outside directors. This Committee meets monthly as well
as on an as-needed basis. Real estate loans in excess of $1.0 million require
the Board of Directors approval before a commitment can be issued.
For loans originated by the Association, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered. Income,
source of down payment and certain other information is verified and, if
necessary, additional financial information is required. An appraisal of the
real estate intended to secure the proposed loan is required, which currently is
performed by an independent appraiser designated and approved by the
Association. The Board annually approves appraisers used by the Association and
reviews the Association's Appraisal Policy. The Association also has a Quality
Control System which includes a director, who is a member of the Member
Appraisal Institute ("MAI"), who reviews appraisal reports on a random basis. It
is the Association's policy to obtain title insurance on all real estate
mortgage loans. Borrowers must also obtain hazard insurance and flood insurance,
which is required prior to closing. Borrowers generally are required to advance
funds on a monthly basis together with each payment of principal and interest to
a mortgage escrow account from which the Association makes disbursement for such
items as real estate taxes, hazard insurance, flood insurance and private
mortgage insurance premiums.
MORTGAGE - BACKED SECURITIES. The Company and its subsidiaries have
significant investments in mortgage-backed securities and has, at times,
utilized such investments to complement its mortgage lending activities. At
December 31, 1996, the amortized cost of
10
<PAGE> 13
mortgage-backed securities totalled $33.4 million, or 8.7% of total assets, of
which all were available for sale and are carried at market value. The market
value of such securities totalled approximately $32.8 million at December 31,
1996. See Note 3 to the Consolidated Financial Statements in the 1996 Annual
Report to Stockholders and "Impact of New Accounting Standards". Included in the
total mortgage-backed securities are Collateralized Mortgage Obligations (the
"CMOs") and Real Estate Mortgage Investment Conduits (the "REMICs") which had a
carrying (market) value of $8.8 million. In order to reduce its interest-rate
risk, the Association, in recent years, has sold mortgage-backed securities
backed by fixed-rate GNMA and FHLMC loans and purchased CMOs and REMICs backed
by ARM loans. The weighted average life of CMOs and REMICs at December 31, 1996
was 25 years. However, based on current prepayment rates, the weighted average
life is expected to be approximately 8 years. The Company and its subsidiaries
typically purchase CMOs and REMICs rated in one of the two highest rating
categories by a nationally recognized rating agency. At December 31, 1996, $24.2
million, or 72.4% of the amortized cost of the Company and its subsidiaries'
mortgage-backed securities portfolio, was directly insured or guaranteed by the
GNMA, the FNMA or the FHLMC. An additional $9.2 million, or 27.6% of the
amortized cost of the Company and its subsidiaries' mortgage-backed securities
portfolio, consisted of CMOs and REMICs backed by federal agency collateral. At
such date, the mortgage-backed securities portfolio had a weighted average
interest rate of 6.61%.
DELINQUENCIES AND CLASSIFIED ASSETS
DELINQUENT LOANS. The Association attempts to contact a borrower by phone
when a loan is 20 days past due. If the loan is less than one year old, a notice
is sent at that time. A late notice is also sent after payment is 30 days past
due. If payment is not received, an additional late notice is sent by both
certified and regular mail after payment is 60 days past due. In the event that
payment is not received, additional letters may be sent and/or phone calls made
to the borrower. When contact is made with the borrower at any time prior to
foreclosure, the Association will attempt to obtain full payment or work out a
repayment schedule with the borrower. Once a loan is 90 days past due, and if a
repayment plan has not been established, a foreclosure notice is sent to the
borrower. Property acquired by the Association as a result of a foreclosure on a
mortgage loan is classified as real estate owned. Interest income is reduced by
the full amount of accrued and uncollected interest on all loans once they
become 90 days delinquent.
CLASSIFIED ASSETS. Federal regulations and the Association's
Classification of Assets Policy provide for the classification of loans and
other assets such as debt and equity securities considered by the OTS to be of
lesser quality as "substandard", "doubtful" or "loss" assets. An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of 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", on the basis of
currently existing facts, conditions
11
<PAGE> 14
and values, "highly questionable and improbable". 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
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are required to be designated "special
mention" by management, including one- to four-family residences that are
delinquent 76 days or more, or other mortgage loans that are delinquent 45 days
or more unless the collateral has been sold and closing is imminent.
When an insured institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
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 classification of its assets and the amount of its valuation allowances is
subject to review by the OTS which can order the establishment of additional
general or specific loss allowances. In connection with the filing of its
periodic reports with the OTS, the Association regularly reviews the problem
loans in its portfolio to determine whether any loans require classification in
accordance with applicable regulations.
Assets classified by the Association as substandard, doubtful or loss are
included in non-performing loans delinquent 90 days or more or are included in
real estate owned. At December 31, 1996, the Association had 11 loans classified
as special mention totalling $724,000. All loans are on single family residences
with an average balance of $65,798. Several of the foregoing loans were current
on December 31, 1996 but are being monitored due to past delinquencies. The
Association also had classified 11 loans totalling $847,000 as substandard at
December 31, 1996. Ten of these loans were on one- to four-family,
owner-occupied residences, with an average balance of $80,400, and one is on
combination commercial and residential property, with a balance of $43,000.
Three are loans in which the borrower is in bankruptcy and payments are being
made by the trustee in bankruptcy and 2 loans are in foreclosure, while the
borrowers on the remainder of these loans are on repayment plans. Twelve of the
loans totalling $778,000 are classified as either special mention or substandard
but do not qualify as non-performing loans because they are less than 90 days
delinquent.
12
<PAGE> 15
At December 31, 1996, 1995 and 1994, delinquencies in the Association's
loan portfolio were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family...... 6 $419 10 $811 11 $579 8 $696
Multi-family............. 1 68 -- -- 1 20 -- --
Commercial real estate... -- -- -- -- -- -- 1 68
Land and Construction.... -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total loans............ 7 $487 10 $811 12 $599 9 $764
==== ==== ==== ==== ==== ==== ==== ====
Delinquent loans to
total loans............ 0.20% 0.30% 0.24% 0.30%
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
-----------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------- --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS
--------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family...... 9 $542 10 $589
Multi-family............. 3 240 -- --
Commercial real estate... -- -- -- --
Land and Construction.... -- -- -- --
---- ---- ---- ----
Total loans............ 12 $782 10 $589
==== ==== ==== ====
Delinquent loans to
total loans............ 0.31% 0.24%
==== ====
</TABLE>
13
<PAGE> 16
NON-PERFORMING ASSETS. The following table sets forth information
regarding loans which are 90 days or more delinquent. The Association continues
accruing interest on delinquent loans 90 days or more past due, but reserves
100% of the interest due on such loans, thus effecting a non-accrual status. At
December 31, 1996 there were no other known problem assets except as described
above or as included in the table below.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1996(1) 1995 1994 1993 1992
------- ---- ----- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual delinquent mortgage loans... $811 $764 $589 $568 $418
Total real estate owned, net of related
allowance for losses.................. 117 47 136 -- 146
---- ---- ---- ---- ----
Total non-performing assets........... $928 $811 $725 $568 $564
==== ==== ==== ==== ====
Non-performing loans to total loans..... 0.30% 0.30% 0.24% 0.26% 0.22%
Total non-performing assets to total assets 0.24% 0.23% 0.21% 0.18% 0.18%
</TABLE>
- - -----------------------------
(1) For the year ended December 31, 1996, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with
their original terms amounted to approximately $18,600.
14
<PAGE> 17
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risk inherent in its loan
portfolio and the general economy. Such evaluation, which includes a review of
all loans on which full collectability may not be reasonably assured, considers
among other matters, the estimated net realizable value of the underlying
collateral, economic conditions, historical loan loss experience and other
factors that warrant recognition in providing for an adequate loan loss
allowance.
The following table sets forth the Association's allowance for possible
loan losses at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.......... $ 754 $ 738 $ 708 $ 805 $ 735
Provision for loan losses............... 24 16 30 15 70
Charge-offs net of recoveries
(one- to four-family).................. -- -- -- (15) --
Charge-offs net of recoveries
(multi-family)......................... (27) -- -- (97) --
Allowance transferred from (to)
real estate owned...................... -- -- -- -- --
----- ----- ----- ----- -----
Balance at end of year.................. $ 751 $ 754 $ 738 $ 708 $ 805
===== ===== ===== ===== =====
At end of period allocated to:
Mortgage loans(1)...................... $ 751 $ 754 $ 738 $ 708 $ 805
Ratio of net charge-offs during the
period to average loans outstanding
during the period...................... .01% --% --% .06% --%
Ratio of allowance for loan losses to net
loans receivable at the end of period.. 29 .31 .31 .34 .44
Ratio of allowance for loan losses to
total non-performing assets at the
end of period.......................... 80.93 92.97 101.79 124.65 142.73
Ratio of allowance for loan losses to
non-performing loans at the end of
the period............................. 92.60 98.69 125.30 124.65 192.58
</TABLE>
- - ---------------------------
(1) The total amount of the Association's allowance for possible loan losses
for each of the periods shown was allocated to mortgage loans. At the end
of each reported period, mortgage loans represented in excess of 97% of
total loans.
15
<PAGE> 18
INVESTMENT ACTIVITIES
The investment policy of the Company and its subsidiaries, which is
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 complement the Association's lending activities. Federally
chartered savings institutions have the authority to invest in various types of
liquid assets, including United States Treasury obligations, securities of
various federal agencies, certain certificates of deposit of insured banks and
savings institutions, certain bankers acceptances, repurchase agreements and
loans on federal funds. Subject to various restrictions, federally chartered
savings institutions may also invest a portion of their assets in commercial
paper, corporate debt securities and asset-backed securities. At December 31,
1996, the Company and its subsidiaries had investment securities in the
aggregate amount of $57.1 million. The investment portfolio is classified as
available for sale.
The following table sets forth certain information regarding the amortized
cost and market, or carrying, values of the Company and its subsidiaries'
investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------
1996 1995 1994
------------------ ------------------ -------------------
(DOLLARS IN THOUSANDS)
CARRYING CARRYING CARRYING
AMORTIZED (MARKET) AMORTIZED (MARKET) AMORTIZED (MARKET)
COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Certificates of deposit......... $ 198 $ 198 $ 95 $ 95 $ 95 $ 95
FHLB daily investment........... 5,122 5,122 6,767 6,767 1,151 1,151
Other daily investments......... 60 60 712 712 289 289
------- ------- ------- ------- ------- -------
Total interest-bearing deposits $ 5,380 $ 5,380 $ 7,574 $ 7,574 $ 1,535 $ 1,535
======= ======= ======= ======= ======= =======
Investment securities:
U.S. Government securities and
obligations(1)................ $47,296 $46,591 $42,692 $41,983 $56,043 $51,177
Investment in common stock of
various entities.............. 485 663 550 641 968 879
FHLB-Chicago stock.............. 3,108 3,108 3,319 3,319 3,169 3,169
ARM portfolio fund.............. 6,649 6,631 7,170 7,197 206 203
Municipal bonds ................ 130 130 160 160 185 185
A.I.D. certificates............. 4 4 5 5 6 6
------- ------- ------- ------- ------- -------
Total investment securities... $57,672 $57,127 $50,577 $53,305 $57,408 $55,619
======= ======= ======= ======= ======= =======
</TABLE>
- - ---------------------------------------
(1) For a complete description, see Note 2 to the "Notes to Consolidated
Financial Statements" in the 1996 Annual Report to Stockholders.
16
<PAGE> 19
The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities of the Company and its
subsidiaries' investment securities at December 31, 1996.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-------------------------------------------------------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO 10 YEARS MORE THAN 10 YEARS TOTAL INVESTMENT SECURITIES
------------------ ------------------ ----------------- --------------------------- ---------------------------
AVERAGE
WEIGHTED WEIGHTED WEIGHT WEIGHT REMAINING APPROXIMATE WEIGHTED
CARRYING AVERAGE CARRY AVERAGE CARRYING AVERAGED CARRYING AVERAGE YEARS TO CARRYING MARKET AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD MATURITY VALUE VALUE YIELD
------- ----- ----- ----- ----- ----- ----- ----- -------- ----- ----- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
securities
and agency
obligations.... $ 1,006 6.37% $32,429 5.55% $12,655 6.46% $ 501 6.57% 4.5 $46,591 $46,591 5.83%
Investment in
common stock of
various entities -- -- -- -- -- -- 663 -- -- 663 663 --
FHLB-Chicago stock 3,108 7.00 -- -- -- -- -- -- -- 3,108 3,108 7.00
ARM portfolio fund 6,631 6.08 -- -- -- -- -- -- -- 6,631 6,631 6.08
Municipal bonds. -- -- 130 4.35 -- -- -- -- 4.0 130 130 4.35
A.I.D.
certificates.. -- -- 4 4.13 -- -- -- -- 1.9 4 4 4.13
------- ------- ---- ------- ------ ---- ------- -------
Total.......... $10,745 6.37% $32,563 5.55% $12,655 6.46% $1,164 2.83% 4.5 $57,127 $57,127 5.85%
======= ==== ======= ==== ======= ==== ====== ==== ==== ======= ======= ====
</TABLE>
There were no investment securities (exclusive of obligations of the U.S.
Government and federal agencies and the ARM portfolio fund) issued by any one
entity with a total carrying value in excess of 10% of stockholders' equity at
December 31, 1996.
17
<PAGE> 20
SOURCES OF FUNDS
GENERAL. Deposits, repayments on loans and mortgage-backed securities,
stockholders' equity and FHLB-Chicago advances are the primary sources of the
Association's funds for use in lending, investing and for other general
purposes.
DEPOSITS. The Association offers a variety of deposit accounts having a
range of interest rates and terms. The Association's deposits consist of
passbook savings, NOW, money market and certificate accounts. The flow of
deposits is influenced significantly by general economic conditions, changes in
money market and prevailing interest rates and competition. The Association's
deposits are obtained primarily from the areas in which its offices are located.
The Association relies primarily on customer service and long-standing
relationships with customers to attract and retain these deposits. Certificate
accounts in excess of $100,000 are not actively solicited by the Association nor
does the Association use brokers to obtain deposits. Management constantly
monitors the Association's deposit accounts and, based on historical experience,
management believes it will retain a large portion of such accounts upon
maturity.
The following table presents the deposit activity of the Association for
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Deposits................................ $379,691 $346,859 $304,166
Withdrawals............................. 365,340 337,572 316,791
-------- -------- --------
Net deposits (withdrawals).............. 14,351 9,287 (12,625)
Interest credited on deposits........... 10,774 10,342 7,459
-------- -------- --------
Total increase (decrease) in deposits $ 25,125 $ 19,629 $ (5,166)
======== ======== ========
</TABLE>
At December 31, 1996, the Association had outstanding $36.6 million in
deposit accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
MATURITY PERIOD AMOUNT
---------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Three months or less.......... $18,304
Over three through six months. 7,027
Over six through 12 months.... 3,122
Over 12 months................ 8,184
-------
Total................... $36,637
=======
</TABLE>
18
<PAGE> 21
The following table sets forth the distribution of the Association's
deposit accounts at the dates indicated and the weighted average nominal
interest rates on each category of deposits presented. Management does not
believe that the use of year-end balances instead of average balances resulted
in any material difference in the information presented.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------
1996 1995 1994
--------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
------ -------- ------ ------ -------- ------ ------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts:
NOW................ $ 20,661 7.37% 2.71% $ 22,493 8.81% 2.71% $ 17,618 7.48% 2.71%
Money Market....... 39,770 14.18 3.40 40,073 15.70 3.40 52,241 22.16 3.25
-------- ----- -------- ----- -------- -----
Total............ 60,431 21.55 62,566 24.51 69,859 29.64
-------- ----- -------- ----- -------- -----
Passbook accounts.... 47,317 16.87 3.00 47,295 18.52 3.00 52,015 22.07 3.00
-------- ----- -------- ----- -------- -----
Certificate accounts:
Ninety-one day..... 2,358 0.84 4.86 2,793 1.09 4.96 2,094 0.89 4.23
Six month.......... 30,758 10.97 5.20 31,938 12.51 5.47 30,036 12.74 4.27
Eight month........ 16,125 5.75 5.38 20,438 8.01 5.57 -- -- --
Twelve month....... 33,016 11.77 5.23 32,960 12.91 5.76 28,664 12.16 4.23
Eighteen month..... 44,886 16.01 6.11 13,585 5.32 5.66 12,609 5.35 4.84
Thirty month....... 16,313 5.82 5.76 21,046 8.24 5.21 23,557 10.00 4.60
Thirty-six month... 19,458 6.94 5.99 9,486 3.72 5.74 7,042 2.99 5.61
Jumbo.............. 9,772 3.48 5.49 13,201 5.17 5.80 9,803 4.16 4.83
Other.............. -- -- -- -- -- -- -- -- --
-------- ----- ------- ----- ------- -----
Total............ 172,686 61.58 145,447 56.97 113,805 48.29
-------- ----- ------- ----- ------- -----
Total deposits....... $280,434 100.00% $255,308 100.00% $235,679 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at December 31, 1996, 1995 and 1994 and the
periods to maturity of the certificate accounts outstanding at December 31,
1996.
<TABLE>
<CAPTION>
PERIOD TO MATURITY
FROM DECEMBER 31, 1996
-------------------------------
AT DECEMBER 31, WITHIN ONE TO
------------------------------
1996 1995 1994 ONE YEAR THREE YEARS(1) TOTAL
---------- ---------- --------- -------- -------------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
5.99% or less......... $122,404 $126,434 $113,340 $109,110 $13,294 $122,404
6.00% to 6.99%........ 50,282 18,633 465 4,928 45,354 50,282
7.00% to 7.99%........ -- 380 -- -- -- --
8.00% to 8.99%........ -- -- -- -- -- --
-------- -------- -------- -------- ------- --------
Total................ $172,686 $145,447 $113,805 $114,038 $58,648 $172,686
======== ======== ======== ======== ======= ========
</TABLE>
- - ---------------------------
(1) The Association does not offer certificate accounts with a period to
maturity exceeding three years.
19
<PAGE> 22
BORROWINGS
Although deposits are the Association's primary source of funds, the
Association's policy has been to utilize borrowings as an alternative source of
funds. The Association obtains advances from the FHLB-Chicago. These advances
are collateralized by the capital stock of the FHLB-Chicago held by Southwest
Federal and certain of the Association's mortgage loans, mortgage-backed
securities and investment securities. See "Regulation and Supervision--Federal
Home Loan Bank System". 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 Association, 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. In
connection with its initial public offering, the Association established an
Employee Stock Ownership Plan (the "ESOP"). The ESOP was funded by the proceeds
from a $2,240,000 loan from an unaffiliated third-party lender which was
refinanced by the Company on September 30, 1994. The loan carries an interest
rate of one-eighth of one percent under prime rate, and matures in the year
1999. The loan is secured by the shares of the Company purchased with the loan
proceeds. The Association has committed to make contributions to the ESOP
sufficient to allow the ESOP to fund the debt service requirements of the loan.
During 1996, the Company entered into sales of securities under agreements to
repurchase (repurchase agreements). These transactions are accounted for as
financings, and the obligation to repurchase securities sold are reflected as
borrowed money in the consolidated statements of financial condition, while the
securities sold continue to be accounted for as assets. The securities sold
under agreements to repurchase consisted of mortgage-backed securities, and were
held in the Company's account with the broker who arranged the transaction. At
December 31, 1996, the Company's FHLB-Chicago advances totalled $54.2 million
and repurchase agreements totalled $1.0 million, representing all borrowings and
16.1% of total liabilities.
20
<PAGE> 23
The following tables set forth certain information regarding borrowed
funds for the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------------------
1996 1995 1994
---------------- --------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB-Chicago advances:
Average balance outstanding.......... $ 52,162 $47,132 $38,995
Maximum amount outstanding at any
month-end during the period....... 59,158 62,375 60,375
Balance outstanding at end of period. 54,158 52,658 60,375
Weighted average interest rate during
the period........................ 6.45% 6.35% 4.79%
Weighted average interest rate at end
of period......................... 6.37% 6.51% 6.11%
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------------
1996 1995 1994
-------------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Repurchase agreements:
Average balance outstanding.......... $ 458 $ -- $ --
Maximum amount outstanding at any
month-end during the period....... 1,000 -- --
Balance outstanding at end of period. 1,000 -- --
Weighted average interest rate during
the period........................ 5.53% -- --
Weighted average interest rate at end
of period......................... 5.70% -- --
</TABLE>
21
<PAGE> 24
SUBSIDIARY ACTIVITIES
SOUTHWEST SERVICE CORPORATION. Southwest Service Corporation (the "SSC")
is primarily engaged in the acquisition of real estate and development into
improved residential lots and lots to be used for the construction of
condominium buildings and townhomes. At December 31, 1996, SSC was involved in 4
active real estate development projects which are located in the Chicago
metropolitan area. At this same date, the Association had an unsecured loan of
$600,000 to SSC which was used to pay income tax liabilities which is eliminated
in consolidation in the Association's consolidated financial statements. SSC
also operates as a full service insurance agency which offers a variety of
insurance products and annuities. SSC's income has been a significant component
of the Association's non-interest income and was $653,400 for the period ending
December 31, 1996.
Hartz-Southwest Partnership (the "Partnership") is a joint venture
partnership entered into between SSC and Hartz Construction Co., Inc. (the
"Hartz"), a builder/developer with whom SSC has had a successful and
long-standing relationship. The purpose of the partnership is to acquire,
develop and sell real property located in the Association's primary lending
area. This joint venture has been profitable for the past 7 years. Each of the
partners makes a 50% capital contribution in the form of cash to acquire and
develop the partnership's properties into sites primarily for single family
residences, including townhomes and condominiums. Upon closing of the sale of a
developed site, SSC receives a 50% share of the development profit and 25% of
the gross profit upon completion of construction of the dwelling by Hartz. SSC's
net investment in this partnership at December 31, 1996 was $2.9 million.
The first project is the Bramblewood Subdivision in Oak Forest, Illinois.
As of December 31, 1996, 69 of the 75 single family lots comprising Phase One
have been sold and closed. During 1996, 11 contracts were signed at an average
selling price of $215,300 and 16 purchases closed with an average profit to SSC
of $18,100 each.
Also during 1996, underground improvements for the 35 lots in Phase Two
were completed. Four contracts were signed at an average selling price of
$245,000 and one purchase closed with a profit to SSC of $22,800.
The Association provided a $500,000 line of credit loan to this project
using five model homes as collateral. SSC anticipates approximately 20 closings
in 1997 with this project to be completed in 1998; however, there can be no
assurance that such closings will occur or that the project will be completed in
1998.
The second project is Timberline Subdivision located in Orland Hills,
Illinois. During 1996, 11 contracts on quad townhomes were signed at an average
selling price of $120,600 and 17 purchases closed with an average profit to SSC
of $9,275 per unit. At December 31, 1996, three contracts were outstanding. Two
contracts on single family lots were signed during the year at an average
selling price of $188,000. SSC expects this project to be completed in 1997 with
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<PAGE> 25
the closing of 28 purchases. No financing for this project was provided by the
Company or the Association.
The third project is the Pepperwood Subdivision located in Orland Hills,
Illinois. The Village of Orland Hills approved the land plan for this project
during the fall of 1996. Installation of site improvements for Phase One
commenced shortly thereafter and completion is anticipated in the spring of
1997. Phase One will consist of 66 single family lots with four models currently
under construction. The Association provided a $1.4 million line of credit loan
to fund site improvements for this project.
The fourth project is Liberty Square located in Lombard, Illinois. For
this project, 4.4 acres were acquired in October, 1996, for the purpose of
constructing 112 condominium units in three elevator buildings. Construction of
the first building is anticipated in the spring of 1997 and will take
approximately nine months for completion. This project site is adjacent to the
Yorktown Shopping Center. The Association has an outstanding loan commitment of
$1.7 million to fund site improvements and construction of the first building.
SOUTHWEST BANCSHARES DEVELOPMENT CORPORATION. Southwest Bancshares
Development Corporation (the "SBDC") was formed in November, 1992 for joint
venture real estate development and is involved in 3 projects at December 31,
1996. During the year ended December 31, 1996, SBDC contributed $269,200 to the
non-interest income of the Company.
The first project is Bailey Park located in Darien, Illinois. As of
December 31, 1996, 46 of the 65 units have been sold and closed. During 1996, 16
contracts were signed at an average selling price of $172,300 and 19 purchases
closed at an average profit to SBDC of $15,200 per unit. Nineteen units remain
at year end, of which three units were partially complete when the property was
purchased and 16 are new units. SBDC expects all remaining units to be
constructed and sold in 1997. No financing for this project was provided by the
Company or Association.
The second project is the Courtyards of Ford City located in southwest
Chicago, with plans to construct 124 condominium units. Construction of the
first 24 unit building was completed during the year and the models opened in
October of 1996. As of December 31, 1996, four units were sold with closings
scheduled for early 1997. The Company originated two line of credit loans to
this project during 1996. The first loan for $1.1 million was for site
improvements. The second loan for $1.5 million was for the construction of a 24
unit condominium building. The Company has sold a 50% interest in these loans to
a local area lender. SBDC anticipates approximately 16 closings in 1997;
however, there can be no assurance that such closings will occur in 1997.
The third project is the Laraway Ridge Subdivision located in New Lenox,
Illinois. The lift station servicing this site was completed by the Village of
New Lenox during the summer of 1996. At that time, engineering plans were
submitted to the Village of New Lenox for their approval. SBDC anticipates the
engineering and the offsite improvements on Phase One to be
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<PAGE> 26
completed by the summer of 1997. This subdivision will consist of 317 single
family sites, a 7.5 acre commercial site, 17.5 acres of open land suitable for a
park and 11 acres which have been donated for a proposed school. The Company has
a $1.1 million loan outstanding on this project. The proceeds of this loan were
used for land acquisition.
Real estate development activities involve risks that could have an
adverse effect on the profitability of the Company. SBDC and SSC generally incur
substantial costs to acquire land, design projects, install site improvements
and engage in marketing activities prior to commencement of construction and
receipt of proceeds from sales. Because such costs generally are not recouped
until sales of a number of the units are closed, there are negative cash flows
in the early stages of the project. During the construction phase, a number of
factors could result in cost overruns, which could decrease or possibly
eliminate the potential profit from the project. In addition, the profit
potential on any given project may cease if the project is not completed, the
underlying value of the project or the general market area declines, the project
is not sold, or is sold over a longer period of time than initially
contemplated, or a combination of these or other factors occurs. All of the real
estate development projects are located in the Chicago metropolitan area.
Accordingly, the ability to generate income from such projects is dependent, in
part, on the economy in that area. Notwithstanding the risks involved, the
Company has recorded positive income from real estate development activities
during each of the past 7 years. Depending on economic conditions in its primary
market area, the Company presently intends to continue real estate development
activities at moderate levels consistent with its prior experience. In
attempting to insure that risks are minimized, the Company currently monitors
the activities of its real estate projects closely. Each project site is visited
regularly by an officer. In addition, pro forma operating statements are
prepared on each project which are updated or revised as warranted.
In addition to the risks involved in real estate development activities,
pursuant to the OTS capital regulations, for purposes of determining its capital
requirements, the Association is required to deduct from capital certain
investments in and loans to SSC. See "Regulation and Supervision--The OTS
Capital Requirements" for a further discussion of this rule and its effect on
the Association.
COMPETITION
The Chicago metropolitan area has a high density of financial
institutions, many of which are significantly larger and have greater financial
resources than the Association, and all of which are competitors of the
Association to varying degrees. The Association's competition for loans comes
principally from savings and loan associations, savings banks, mortgage banking
companies, insurance companies and commercial banks. Its most direct competition
for deposits has historically come from savings and loan associations, savings
banks, commercial banks and credit unions. The Association faces additional
competition for deposits from short-term money market funds and other corporate
and government securities funds. The Association also faces increased
competition from other financial institutions such as brokerage firms and
insurance
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<PAGE> 27
companies for deposits. Competition may also increase as a result of the lifting
of restrictions on the interstate operations of financial institutions.
The Association is a community-oriented financial institution serving its
market area with a wide selection of residential loans and retail financial
services. Management considers the Association's reputation for financial
strength and customer service as its major competitive advantage in attracting
and retaining customers in its market area. The Association also believes it
benefits from its community bank orientation as well as its relatively high core
deposit base.
PERSONNEL
As of December 31, 1996, the Association had 85 full-time employees and 19
part-time employees. The employees are not represented by a collective
bargaining unit, and the Association considers its relationship with its
employees to be excellent.
REGULATION AND SUPERVISION
GENERAL
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Office of Thrift Supervision (the "OTS") under the Home Owners' Loan Act, as
amended (the "HOLA"). In addition, the activities of savings institutions, such
as the Association, are governed by the HOLA and the Federal Deposit Insurance
Act (the "FDI Act").
The Association is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Association is a member of the Federal Home Loan Bank (the
"FHLB") System and its deposit accounts are insured up to applicable limits by
the Savings Association Insurance Fund (the "SAIF") managed by the FDIC. The
Association must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other savings institutions. The OTS and/or the FDIC conduct
periodic examinations to test the Association's safety and soundness and
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
FDIC or the Congress could have a material adverse impact on the Company, the
Association and their operations. Certain of the regulatory requirements
applicable to the Association and to the Company are referred to below or
elsewhere herein. The description of statutory provisions and
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<PAGE> 28
regulations applicable to savings institutions and their holding companies set
forth in this Form 10-K does not purport to be a complete description of such
statutes and regulations and their effects on the Association and the Company.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally will not be restricted under existing laws as to the types
of business activities in which it may engage, provided that the Association
continues to be a qualified thrift lender (the "QTL"). See "Federal Savings
Institution Regulations - QTL Test". Upon any non-supervisory acquisition by the
Company of another savings institution or savings bank that meets the QTL test
and is deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act (the "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 Association must notify the OTS 30
days before declaring any dividend to the Company. In addition, the financial
impact of a holding company on its subsidiary institution is a matter that
26
<PAGE> 29
is evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
FEDERAL SAVINGS INSTITUTION REGULATION
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core capital) ratio and an 8% risk-based capital ratio. In
addition, the prompt corrective action standards discussed below also establish,
in effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital
ratio (3% for institutions receiving the highest rating on the CAMEL financial
institution rating system), and, together with the risk-based capital standard
itself, a 4% Tier I risk-based capital standard. Core capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
purchased mortgage servicing rights and credit card relationships. The OTS
regulations also require that, in meeting the 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 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
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<PAGE> 30
to the interest rate risk component, unless the OTS determines otherwise. For
the present time, the OTS has deferred implementation of the interest rate risk
component. At December 31, 1996, the Association met each of its capital
requirements, in each case on a fully phased-in basis.
The following table is an analysis of the Association's estimated interest
rate risk as of December 31, 1996, as measured by changes in Net Portfolio Value
("NPV") for instantaneous and sustained parallel shifts in interest rates, up
and down 400 basis points in 100 point increments.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
NET PORTFOLIO VALUE
-------------------------------------------
DOLLARS IN THOUSANDS
ASSUMED
CHANGE
IN RATES $ AMOUNT $ CHANGE % CHANGE
-------- -------- -------- --------
<C> <C> <C> <C>
+400 bp -536 -35,996 -102%
+300 bp 7,842 -27,618 -78%
+200 bp 16,793 -18,667 -53%
+100 bp 26,169 -9,291 -26%
0 bp 35,460
-100 bp 43,735 8,275 23%
-200 bp 50,901 15,441 44%
-300 bp 57,328 21,868 62%
-400 bp 65,120 29,660 84%
</TABLE>
At December 31, 1996, 2.0% of the present value of the Association's
assets was approximately $7.6 million, which was less than $18.7 million, the
decrease in NPV resulting from a 200 basis point change in interest rates. As a
result, if the interest rate risk rule were in effect and were applicable, the
Association would have been required to make a $5.6 million deduction from total
capital in calculating its risk-based capital requirement, although the
Association's capital would have remained far in excess of regulatory minimums.
As noted above, the market value of the Association's net assets would be
anticipated to decline significantly in the event of certain designated
increases in interest rates. For instance, in the event of a 200 basis point
increase in interest rates, NPV is anticipated to fall by $18.7 million or 53%.
On the other hand, a decrease in interest rates is anticipated to cause an
increase in NPV.
Certain assumptions related to interest rates, loan prepayment rates,
deposit decay rates and the market value of certain assets under the various
interest rate scenarios, were utilized by
28
<PAGE> 31
the OTS in assessing the interest rate risk of thrift institutions in preparing
the previous table. In the event that interest rates change to the designated
levels, there can be no assurance that the Association's assets and liabilities
would perform as set forth above. In addition, a change in Treasury rates to the
designated levels accompanied by a change in shape of the Treasury yield curve
would cause significantly different changes to the NPV than indicated above.
During the last several years, the Board of Directors has determined to
reduce the level of tolerated interest rate risk as measured by the
Association's interest rate sensitivity gap and by the changes to its NPV based
upon specified interest rate shocks. The actual and targeted levels of tolerated
interest rate risk are reviewed on a quarterly basis and are subject to change
depending on economic and competitive factors.
The following table presents the Association's capital position at
December 31, 1996 relative to fully phased-in regulatory requirements.
<TABLE>
<CAPTION>
EXCESS CAPITAL(1)
-----------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
------------ --------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Tangible......... $28,187 $ 5,565 $22,622 7.60% 1.50%
Core (Leverage).. 28,187 11,131 17,056 7.60 3.00
Risk-based:
Tier I (core) 28,187 7,364 20,823 15.31 4.00
Total.......... $28,926 $14,728 $14,198 15.71 8.00
</TABLE>
- - -----------------------
(1) Although the OTS capital regulations require savings institutions to meet a
1.5% tangible capital ratio and a 3% leverage (core) capital ratio, the
prompt corrective action standards discussed below also establish, in
effect, a minimum 2% tangible capital standard, a 4% leverage (core)
capital ratio (3% for institutions receiving the highest rating on the
CAMEL financial institution rating system), and, together with the
risk-based capital standard itself, a 4% Tier I risk-based capital
standard.
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<PAGE> 32
A reconciliation between regulatory capital and GAAP capital at December
31, 1996 for the Association is presented below:
<TABLE>
<CAPTION>
TOTAL
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
--------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
GAAP capital-originally reported to regulatory authorities $30,715 $30,715 $30,715
Regulatory capital adjustments:
Investment in Non-includables subsidiaries................ (3,162) (3,162) (3,162)
Adjustment for net unrealized losses on certain
available for sale securities........................ 634 634 634
General valuation allowances........................... -- -- 751
Other.................................................. -- -- (12)
------- ------- -------
Regulatory Capital................................... $28,187 $28,187 $28,926
======= ======= =======
</TABLE>
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution is
considered "well capitalized" if its ratio of total capital to risk- weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has a
ratio of total capital to risk-weighted assets of less of than 8%, a ratio of
Tier I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized". A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
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 any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
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<PAGE> 33
INSURANCE OF DEPOSIT ACCOUNTS. Deposits of the Association are presently
insured by the SAIF. Both the SAIF and the Bank Insurance Fund (the "BIF"), the
deposit insurance fund that covers most commercial bank deposits, are
statutorily required to be recapitalized to a 1.25% of insured reserve deposits
ratio. Until recently, members of the SAIF and BIF were paying average deposit
insurance premiums of between 24 and 25 basis points. The BIF met the required
reserve in 1995 whereas the SAIF was not expected to meet or exceed the required
level until 2002 at the earliest. This situation is primarily due to the
statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor
to the SAIF.
In view of the BIF achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Association were placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on SAIF member institutions, including the Association, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF
Special Assessment was recognized by the Association as an expense in the
quarter ended September 30, 1996 and is generally tax deductible. The SAIF
Special Assessment recorded by the Association amounted to $1.7 million on a
pre-tax basis and $1.0 million on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits will
be assessed for FICO payment of 1.3 basis points, while SAIF deposits will pay
6.48 basis points. Full pro rata sharing of the FICO payments between BIF and
SAIF members will occur on the earlier of January 1, 2000 or the date the BIF
and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be
merged on January 1, 1999, provided no savings associations remain as of that
time.
As a result of the Funds Act, the FDIC recently voted to effectively lower
SAIF assessments to 0 to 27 basis points as of January 1, 1997, a range
comparable to that of BIF members. SAIF members will also continue to make the
FICO payments described above. The FDIC also lowered the SAIF assessment
schedule for the fourth quarter of 1996 to 18 to 27 basis points. Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated or whether the BIF
and SAIF will eventually be merged.
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<PAGE> 34
The Association's assessment rate for fiscal 1996 ranged from 18 to 23
basis points and the premium paid for this period was $561,000. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Association.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Association does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
THRIFT RECHARTERING LEGISLATION. The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date. That legislation also requires that the Department of Treasury
submit a report to Congress by March 31, 1997 that makes recommendations
regarding a common financial institutions charter, including whether the
separate charters for thrifts and banks should be abolished. Various proposals
to eliminate the federal thrift charter, create a uniform financial institutions
charter and abolish the OTS have been introduced in Congress. The bills would
require federal savings institutions to convert to a national bank or some type
of state charter by a specified date (January 1, 1998 in one bill, June 30, 1998
in the other) or they would automatically become national banks. Converted
federal thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. Holding companies for savings institutions
would become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for unitary savings and
loan holding company activities. The Company is unable to predict whether such
legislation would be enacted, the extent to which the legislation would restrict
or disrupt its operations or whether the BIF and SAIF funds will eventually
merge.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At December 31,
1996, the Association's limit on loans to one borrower was $4.8 million. At
December 31, 1996, the Association's largest aggregate outstanding balance of
loans to one borrower consisted of $4.7 million. All loans to this borrower were
current.
QTL TEST. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings and loan association is required to maintain at least
65% of its "portfolio assets" (total assets less (i) specified liquid assets up
to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the
value of property used to conduct business) in certain "qualified thrift
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<PAGE> 35
investments" (primarily residential mortgages and related investments, including
certain mortgage-backed securities) in at least 9 months out of each 12 month
period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
December 31, 1996, the Association maintained 86.5% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Association") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice but
without obtaining approval of the OTS, make capital distributions during a
calendar year equal to the greater of (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year or (ii) 75% of its net
income for the previous four quarters. Any additional capital distributions
would require prior regulatory approval. In the event the Association's capital
fell below its regulatory requirements or the OTS notified it that it was in
need of more than normal supervision, the Association's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. In December 1994, the OTS proposed
amendments to its capital distribution regulation that would generally authorize
the payment of capital distributions without OTS approval provided 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 December 31, 1996, the
Association was a Tier 1 Association.
LIQUIDITY. The Association is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 5% but may be changed from
time to time by the OTS to any amount within the range of 4% to 10% depending
upon economic conditions and the savings flows of member institutions. OTS
regulations also require each member savings institution to maintain an average
daily balance of short-term liquid assets at a specified percentage (currently
1%) of the total of its net withdrawable deposit accounts and borrowings payable
in one year or less. Monetary penalties may be imposed for failure to meet these
liquidity requirements. The Association's liquidity and short-term liquidity
ratios for December 31, 1996 were 15.6% and 4.1%, respectively, which exceeded
the then applicable requirements. The Association has never been subject to
monetary penalties for failure to meet its liquidity requirements.
33
<PAGE> 36
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 Association's latest
quarterly thrift financial report. The assessments paid by the Association for
the fiscal year ended December 31, 1996 totalled $86,624.
BRANCHING. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
TRANSACTIONS WITH RELATED PARTIES. The Association's authority to engage
in transactions with related parties or "affiliates" (E.G., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act (the "FRA"). Section 23A limits the aggregate amount
of covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O
thereunder. Among other things, such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and to not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. Regulation O also places individual
and aggregate limits on the amount of loans the Association may make to insiders
based, in part, on the Association's capital position and requires certain board
approval procedures to be followed.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all "institution-affiliated parties", including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse
34
<PAGE> 37
effect on an insured institution. Formal enforcement action may range from the
issuance of a capital directive or cease and desist order to removal of officers
and/or directors to institution of receivership, conservatorship or termination
of deposit insurance. Civil penalties cover a wide range of violations and 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 Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality, earnings and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.
FEDERAL HOME LOAN BANK SYSTEM
The Association is a member of the FHLB System, which consists of 12
regional FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Association, as a member of the FHLB-Chicago, is required to
acquire and hold shares of capital stock in that FHLB in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the FHLB-Chicago, whichever is greater. The
Association was in compliance with this requirement, with an investment in
FHLB-Chicago stock at December 31, 1996, of $3.1 million. FHLB advances must be
secured by specified 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 December 31, 1996, 1995, and 1994, dividends from the FHLB-Chicago to the
Association amounted to $206,000, $218,000, and $139,000, respectively. If
dividends were reduced, or interest on future FHLB advances increased, the
Association's net interest income might also be reduced.
35
<PAGE> 38
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $49.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $49.3 million, the reserve requirement is
$1.48 million plus 10% (subject to adjustment by the Federal Reserve Board
between 8% and 14%) against that portion of total transaction accounts in excess
of $49.3 million. The first $4.4 million of otherwise reservable balances
(subject to adjustments by the Federal Reserve Board) are exempted from the
reserve requirements. The Association is in compliance with the foregoing
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements
imposed by the OTS.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Association report their income on a
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Company. The Association has not been
audited by the IRS since 1985, which covered the tax years through 1984. For its
1996 taxable year, the Association is subject to a maximum federal income tax
rate of 34%.
BAD DEBT RESERVES. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) Percentage
of Taxable Income Method (the "PTI Method") or (ii) the Experience Method. The
reserve for nonqualifying loans was computed using the Experience Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, made significant changes to provisions of the Code
relating to a savings institution's use of bad debt reserves for federal income
tax purposes and requires such institutions to recapture (I.E., take into
income) certain portions of their accumulated bad debt reserves. The 1996 Act
repeals the reserve method of accounting for bad debts effective for tax years
beginning after 1995. Thrift institutions that would be treated as small banks
are allowed to utilize the Experience Method applicable to such institutions,
while thrift institutions that are
36
<PAGE> 39
treated as large banks (those generally exceeding $500 million in assets) are
required to use only the specific charge-off method. Thus, the PTI Method of
accounting for bad debts is no longer available for any financial institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS. Any
Section 481(a) adjustment required to be taken into income with respect to such
change generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject to
the residential loan requirement.
Under the residential loan requirement provision, the recapture required
by the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Association's current taxable year, in which the Association
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Association during its six taxable
years preceding its current taxable year.
Under the 1996 Act, for its current and future taxable years, the
Association is not permitted to make additions to its tax bad debt reserves. In
addition, the Association is required to recapture (I.E., take into income) over
a six year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 other than its supplemental reserve for losses on loans, over
the balance of such reserves as of December 31, 1987. As a result of such
recapture, the Association will incur an additional Federal Income Tax liability
of approximately $1.3 million over the recapture period.
DISTRIBUTIONS. Under the 1996 Act, if the Association makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Association's unrecaptured tax bad debt reserves (including
the balance of its reserves as of December 31, 1987) to the extent thereof, and
then from the Association's supplemental reserve for losses on loans, to the
extent thereof, and an amount based on the amount distributed (but not in excess
of the amount of such reserves) will be included in the Association's income.
Non-dividend distributions include distributions in excess of the Association's
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of the Association's current or
accumulated earnings and profits will not be so included in the Association's
income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Association makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Association does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.
37
<PAGE> 40
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code (the "Code")
imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%.
Only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which a corporation's
adjusted current earnings exceeds its AMTI (determined without regard to this
adjustment and prior to reduction for net operating losses). In addition, for
taxable years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of .12% of the excess of AMTI (with certain modifications)
over $2.0 million is imposed on corporations, including the Company and its
subsidiaries, whether or not an Alternative Minimum Tax ("AMT") is paid. The
Company and its subsidiaries does not expect to be subject to the AMT.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. The Company may exclude
from its income 100% of dividends received from the Association as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company or the Association own more
than 20% of the stock of a corporation distributing a dividend 80% of any
dividends received may be deducted.
ILLINOIS TAXATION. The Association files Illinois income tax returns. For
Illinois income tax purposes, savings institutions are presently taxed at a rate
equal to 7.2% of taxable income. For this purpose, "taxable income" generally
means federal taxable income, subject to certain adjustments (including the
addition of interest income on state and municipal obligations and the exclusion
of interest income on United States Treasury obligations). The exclusion of
income on United States Treasury obligations has the effect of reducing
significantly the Illinois taxable income of savings institutions.
IMPACT OF NEW ACCOUNTING STANDARDS
The following does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Association 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
Federal Accounting Standards Board (the "FASB") which are of particular interest
to financial institutions.
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"),
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of" is effective for fiscal years beginning after December 15, 1995.
The statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss is recognized if the sum of the
expected future cash flows is less than the carrying amount of the asset. The
Company adopted SFAS No. 121 effective January 1, 1996, resulting in no material
impact on the Company's consolidated financial position or results of
operations.
38
<PAGE> 41
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122 ("SFAS No. 122"), "Accounting for Mortgage Servicing Rights". This
statement amends Statement of Financial Accounting Standards No. 65 ("SFAS No.
65"), "Accounting for Certain Mortgage Banking Activities" to require that a
mortgage banking enterprise recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired. SFAS No.
122 requires that a mortgage banking enterprise assess its capitalized mortgage
servicing rights for impairment based on the fair value of those rights. SFAS
No. 122 is effective for fiscal years beginning after December 15, 1995. The
Company adopted SFAS No. 122 effective January 1, 1996, resulting in no material
impact on the Company's consolidated financial position or results of
operations.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation".
This statement establishes a fair value-based method of accounting for stock
options which encourages employers to account for stock compensation awards
based on their fair value at the date the awards are granted. The resulting
compensation award would be shown as an expense on the income statement.
SFAS No. 123 also permits entities to continue to use the intrinsic value
method, allowing them to continue to apply current accounting requirements,
which generally result in no compensation cost for most fixed stock option
plans. If the intrinsic value method is retained, SFAS No. 123 requires
significantly expanded disclosure, including disclosure of the pro forma amount
of net income and earnings per share as if the fair value-based method were used
to account for stock-based compensation. SFAS No. 123 is effective for fiscal
years beginning after December 15, 1995, however, employers will be required to
include in that year's financial statements, information about options granted
in 1995. The Company has determined that it will continue to apply the APB
Opinion #25 method in preparing its consolidated financial statements.
No options were granted by the Company during 1996 or 1995.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125 ("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.
In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127 ("SFAS No 127"), "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125". The statement delays for one year the
implementation of SFAS No. 125, as it relates to (1) secured borrowings and
collateral, and (2) for the transfers of financial assets that are part
39
<PAGE> 42
of repurchase agreement, dollar-roll, securities lending and similar
transactions. The Company has adopted portions of SFAS No. 125 (those not
deferred by SFAS No. 127) effective January 1, 1997. Adoption of these portions
did not have a significant effect on the Company's financial condition or
results of operations. Based on its review of SFAS No. 125, management does not
believe that adoption of the portions of SFAS No. 125 which have been deferred
by SFAS No. 127 will have a material effect on the Company.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
- - ------------------------------------------------------
The following table sets forth certain information regarding the executive
officers of the Company and the Association who are not also directors.
<TABLE>
<CAPTION>
Age at Position with the Company and Association
Name 12/31/96 and Past Five Years Experience
- - ---- -------- -------------------------------------------------
<S> <C> <C>
Robert J. Eckert 56 Vice President of the Company. Vice President
and Chief Financial Officer of the Association.
Michael J. Gembara 37 Vice President of the Company. Vice President of
Subsidiary Operations of the Association.
Ronald D. Phares 62 Vice President of the Company. Senior Vice
President and Chief Operations Officer of
the Association.
Mary A. McNally 39 Corporate Secretary of the Company. Vice
President, Secretary and Chief Lending Officer of
the Association.
Robert C. Olson 50 Comptroller of the Company. Treasurer and
Controller of the Association.
Noralee Goossens 39 Assistant Secretary of the Company. Assistant Vice
President and Assistant Secretary of the
Association.
Kurt R. Kluever 47 Vice President of Marketing and Security Officer of
the Association.
Elaine P. Mankus 58 Vice President of the Association since 1990.
</TABLE>
40
<PAGE> 43
ITEM 2. PROPERTIES.
- - -------------------
The Company is located and conducts its business at the Association's
Hometown office, located at 4062 Southwest Highway in Hometown, Illinois. The
Association conducts its business through its main office facility at 3525 West
63rd Street in Chicago, Illinois. The Association also has branch offices at
5830 W. 35th Street in Cicero, Illinois, at 9640 S. Pulaski Road and 10270 S.
Central Avenue, in Oak Lawn, Illinois and at 9850 W. 159th Street in Orland
Park, Illinois. See Note 9 to the "Notes to Consolidated Financial Statements"
for the net book value of the Association's premises and equipment and for
liability under the lease commitments in the 1996 Annual Report to Stockholders.
ITEM 3. LEGAL PROCEEDINGS.
- - --------------------------
Neither the Company nor its subsidiaries are involved in any pending legal
proceedings, other than routine legal matters occurring in the ordinary course
of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the consolidated financial condition or results
of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- - ------------------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- - ------------------------------------------------------------------------------
Information relating to the market for Registrant's common equity and
related stockholder matters appears in the Registrant's 1996 Annual Report to
Stockholders on pages 21 and 52 and is incorporated herein by reference. On
February 11, 1997, the Company had 375 registered shareholders.
41
<PAGE> 44
ITEM 6. SELECTED FINANCIAL DATA.
- - --------------------------------
The above-captioned information appears under "Selected Consolidated
Financial and Other Data of the Company" in the Registrant's 1996 Annual Report
to Stockholders on pages 4 and 5 and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - --------------------------------------------------------------------------------
OF OPERATIONS.
- - -------------
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1996 Annual Report to Stockholders on pages 6 through 21 and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- - ----------------------------------------------------
The Consolidated Financial Statements of Southwest Bancshares, Inc. and
its subsidiaries, together with the report thereon by Cobitz, VandenBerg &
Fennessy appear in the Registrant's 1996 Annual Report to Stockholders on pages
22 through 51 and are incorporated herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
- - --------------------------------------------------------------------------------
DISCLOSURE.
- - ----------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- - ------------------------------------------------------------
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 22, 1997,
on pages 4 through 7. Information concerning Executive Officers who are not
directors is contained in Part I of this report pursuant to paragraph (b) of
Item 401 of Regulation S-K in reliance on Instruction G.
ITEM 11. EXECUTIVE COMPENSATION.
- - --------------------------------
The information relating to director and executive compensation is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 22, 1997, on pages 8 through
17 (excluding the Compensation Committee Report and the Stock Performance
Graph).
42
<PAGE> 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- - ------------------------------------------------------------------------
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on April 22,
1997, on pages 3 and 5 through 7.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- - --------------------------------------------------------
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 22, 1997, on page 18.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
- - -------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1996 Annual Report to
Stockholders.
PAGE
----
Independent Auditors' Report................................ 22
Consolidated Statements of Financial
Condition as of December 31, 1996 and 1995.................. 23
Consolidated Statements of Earnings
for the Years Ended December 31, 1996,
1995 and 1994............................................... 24
Consolidated Statements of Changes in
Stockholders' Equity for Three Years Ended
December 31, 1996........................................... 25
Consolidated Statements of Cash Flows for
the Years Ended December 31, 1996,
1995 and 1994............................................... 26 - 27
Notes to Consolidated Financial Statements.................. 28 - 51
The remaining information appearing in the 1996 Annual Report to Stockholders is
not deemed to be filed as part of this report, except as expressly provided
herein.
43
<PAGE> 46
(2) All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements
or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report:
3.1 Amended Certificate of Incorporation of Southwest Bancshares,
Inc.*
3.2 Bylaws of Southwest Bancshares, Inc.*
4.0 Stock Certificate of Southwest Bancshares, Inc.*
10.1 Amended and Restated Employment Agreement between the
Association and Richard E. Webber*
10.2 Supplemental Stock Bonus Retirement Agreement between the
Association and Richard E. Webber and the Association and
Albert Rodrigues*
10.3(a) Form of Recognition and Retention Plan and Trust**
(b) Amendments to Recognition and Retention Plan and Trust***
10.4 Incentive Stock Option Plan**
10.5 Stock Option Plan for Outside Directors**
11.0 Computation of earnings per share on separate sheet
13.0 Portions of the 1996 Annual Report to Stockholders
(filed herewith)
21.0 Subsidiary information is incorporated herein by reference to
"Part I - Subsidiaries"
23.0 Consent of Cobitz, VandenBerg & Fennessy (filed herewith)
27.0 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
None
- - ------------------------------------
* Incorporated herein by reference to the Exhibits to Form S-1, Registration
Statement, and Pre-Effective Amendment No. 1, filed on March 13, 1992 and
April 24, 1992, respectively, Registration No. 33-46409.
** Incorporated herein by reference to the Proxy Statement for the Special
Meeting of Stockholders filed on September 11, 1992.
*** Incorporated herein by reference to Exhibit 10.3(b) of the Form 10-K for
the year ended December 31, 1994.
44
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SOUTHWEST BANCSHARES, INC.
By: /s/ Richard E. Webber
-------------------------------------
Richard E. Webber
DATED: March 21, 1997 President, Chief Financial
Officer and Director
(Principal Executive Officer,
Principal Financial Officer
and Principal Accounting Officer)
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.
Name Title Date
---- ----- ----
/s/ Richard E. Webber President, Chief Financial March 21, 1997
- - -----------------------------
Richard E. Webber Officer and Director
(Principal Executive Officer,
Principal Financial Officer
and Principal Accounting Officer)
/s/ Lawrence M. Cox Chairman of the Board of March 21, 1997
- - ---------------------------- Directors
Lawrence M. Cox
/s/ Albert Rodrigues Director March 21, 1997
- - ----------------------------
Albert Rodrigues
/s/ James W. Gee, Sr. Director March 21, 1997
- - ----------------------------
James W. Gee, Sr.
/s/ Joseph A. Herbert Director March 21, 1997
- - ----------------------------
Joseph A. Herbert
/s/ Robert E. Lawler, D.D.S. Director March 21, 1997
- - ----------------------------
Robert E. Lawler, D.D.S.
/s/ Frank J. Muriello Director March 21, 1997
- - ----------------------------
Frank J. Muriello
<PAGE> 1
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
EXHIBIT NO. 11.0
<PAGE> 2
NO. 11.0 STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
-----------------
<S> <C>
Net income $2,628,000
==========
Weighted average shares outstanding 2,751,498
Common stock equivalents due to dilutive 121,360
effect on stock options ----------
Total weighted average common shares 2,872,858
and equivalents outstanding ==========
Primary earnings per share $ 0.91
==========
Total weighted average common shares 2,872,858
and equivalents outstanding
Additional dilutive shares using the end of period
market value versus the average market value
when applying the treasury stock method 254
----------
Total weighted average common shares and
equivalents outstanding for fully diluted
computation 2,873,112
==========
Fully diluted earnings per share $ 0.91
==========
</TABLE>
* Note: If average share price is greater than ending price, use average price
for both primary and fully diluted calculation.
<PAGE> 1
1996 ANNUAL REPORT TO STOCKHOLDERS
EXHIBIT 13.0
<PAGE> 2
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL
AND OTHER DATA OF THE COMPANY
- - -----------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
- - -----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- - -----------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets........................................ $382,361 359,483 350,400 322,548 308,356
Loans receivable, net............................... 262,431 242,859 238,103 207,627 183,828
Investment securities............................... 57,127 53,305 55,619 55,596 42,229
Mortgage-backed securities, net..................... 32,840 31,268 32,626 30,962 52,783
Trading account securities.......................... -- -- -- 7,519 9,829
Interest-bearing deposits........................... 5,380 7,574 1,535 1,541 2,139
Deposits............................................ 280,434 255,308 235,679 240,845 245,225
Borrowed funds...................................... 55,158 52,658 60,375 26,300 7,320
Stockholders' equity (1)............................ 39,859 45,820 48,409 49,477 49,989
Book value per share (actual shares outstanding) (2) 15.11 15.31 14.03 13.55 12.53
- - -----------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
- - -----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- - -----------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income..................................... $ 27,230 26,870 24,589 24,204 25,170
Interest expense.................................... 15,277 14,391 10,045 8,835 11,696
- - -----------------------------------------------------------------------------------------------------------
Net interest income.............................. 11,953 12,479 14,544 15,369 13,474
Less provision for loan losses...................... 24 16 30 15 70
- - -----------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses................................ 11,929 12,463 14,514 15,354 13,404
- - -----------------------------------------------------------------------------------------------------------
Non-interest income:
Gain on sale of investment securities, mortgage-
backed securities, and loans receivable......... 4 129 422 165 6
Insurance commissions............................. 148 140 145 215 243
Income from joint ventures........................ 675 477 455 355 457
Fees and service charges.......................... 179 181 247 522 356
Other............................................. 301 340 268 487 137
- - -----------------------------------------------------------------------------------------------------------
Total non-interest income..................... 1,307 1,267 1,537 1,744 1,199
- - -----------------------------------------------------------------------------------------------------------
Non-interest expense:
Compensation and benefits......................... 4,320 3,928 3,811 4,142 3,717
Office occupancy and equipment expenses........... 1,208 1,042 892 844 848
Insurance premiums................................ 827 841 881 806 832
SAIF special assessment........................... 1,698 -- -- -- --
Data processing................................... 262 243 225 215 219
Other............................................. 1,087 970 946 1,021 760
- - -----------------------------------------------------------------------------------------------------------
Total non-interest expense.................... 9,402 7,024 6,755 7,028 6,376
- - -----------------------------------------------------------------------------------------------------------
Income before income taxes.......................... 3,834 6,706 9,296 10,070 8,227
Income tax expense.................................. 1,206 2,174 3,229 3,668 2,879
- - -----------------------------------------------------------------------------------------------------------
Net income........................................ $ 2,628 4,532 6,067 6,402 5,348
===========================================================================================================
Primary earnings per share (2)...................... $ 0.91 1.31 1.61 1.59 1.26
- - -----------------------------------------------------------------------------------------------------------
Fully diluted earnings per share (2)................ 0.91 1.30 1.61 1.59 1.26
- - -----------------------------------------------------------------------------------------------------------
Dividends declared per common share (2)............. 0.73 0.68 0.17 0.80 --
===========================================================================================================
(1) The Association may not pay dividends to the Company on its stock if its
regulatory capital would thereby be reduced below (i) the aggregate amount
then required for the liquidation account, or (ii) the amount of its
regulatory capital requirements.
(2) All prior share related information has been restated to reflect the 3-for-2
stock split effect, including earnings per share data.
</TABLE>
4
<PAGE> 3
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL
AND OTHER DATA OF THE COMPANY
- - -----------------------------------------------------------------------------------------------------------
AT OR FOR THE YEAR ENDED DECEMBER 31,
- - -----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- - -----------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Return on average assets (1) 0.72% 1.26 1.80 2.03 1.80
Return on average stockholders' equity (2) 6.30 9.26 12.12 12.49 14.23
Average stockholders' equity to average assets 11.45 13.67 14.84 16.23 12.64
Stockholders' equity to total assets 10.42 12.75 13.82 15.34 16.21
Interest rate spread during period 3.08 3.15 4.17 4.74 4.33
Net interest margin (3) 3.47 3.68 4.60 5.18 4.79
Operating expenses to average assets (4) 2.57 1.96 2.00 2.23 2.14
Non-performing loans to total loans (5) 0.30 0.30 0.24 0.26 0.22
Non-performing assets to total assets (6) 0.24 0.23 0.21 0.18 0.18
Allowance for loan losses to non-performing loans 92.60 98.69 125.30 124.65 192.58
Allowance for loan losses to non-performing assets 80.93 92.97 101.79 124.65 142.73
Net interest income to operating expenses 1.27x 1.78 2.15 2.19 2.11
Average interest-earning assets to average
interest-bearing liabilities 1.09 1.12 1.14 1.15 1.11
Loan originations $66,603 50,630 67,116 74,133 60,883
Number of deposit accounts 22,402 21,080 19,282 19,184 19,739
Number of offices 6 5 5 5 4
- - -----------------------------------------------------------------------------------------------------------
(1) Return on average assets was calculated on an annualized basis. The 1996
ratio would have been 1.00% without the one-time SAIF assessment.
(2) Return on average stockholders' equity for 1996 would have been 8.74%
without the one-time SAIF assessment.
(3) Calculation is based upon net interest income before provision for loan
losses divided by interest-earning assets.
(4) For purposes of calculating these ratios, operating expenses equal non-
interest expense less amortization of excess of cost over net assets
acquired. The 1996 ratio would have been 2.11% without the one-time SAIF
assessment.
(5) Non-performing loans consist of loans 90 days or more delinquent.
(6) Non-performing assets consist of non-performing loans and real estate owned.
</TABLE>
5
<PAGE> 4
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Southwest Bancshares, Inc. (the "Company") was organized on February 11, 1992 as
the holding company of Southwest Federal Savings and Loan Association of Chicago
(the "Association") in connection with the Association's conversion from a
federally chartered mutual to a stock savings association.
The Company's business currently consists of the business of the Association,
Southwest Bancshares Development Corporation and Southwest Service Corporation.
The Association's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on its loan
and investment portfolios and its cost of funds, which is the interest paid on
its deposits and borrowings. The Association's operating expenses principally
consist of employee compensation, office occupancy expenses, federal insurance
premiums and other general and administrative expenses. The Association'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. The Association is
subject to regulation by the Office of Thrift Supervision (the "OTS") and the
Federal Deposit Insurance Corporation (the "FDIC").
Southwest Service Corporation (the "SSC") is a wholly-owned subsidiary of the
Association engaged in real estate development activities and the operation of a
general insurance agency.
Southwest Bancshares Development Corporation (the "SBDC"), an Illinois
corporation, was formed November 19, 1992 as a wholly-owned subsidiary of the
Company to also engage in real estate development activities.
The Company authorized a 3-for-2 stock split in the form of a 50% stock dividend
distributed November 13, 1996 to stockholders of record on October 22, 1996.
Accordingly, stockholders of record received
6
<PAGE> 5
one additional share for each two shares owned as of October 22, 1996. All prior
share related information has been restated to reflect the stock split effect,
including earnings per share data.
MANAGEMENT STRATEGY
The Association was originally organized in 1883 and has operated as a
traditional thrift institution seeking to attract deposits from the general
public and investing those deposits, together with funds generated from
operations, primarily in loans on one- to four-family, owner-occupied residences
and mortgage-backed securities. The Association's strategy has been to maintain
profitability and a strong capital position. This strategy has been implemented
by maintaining a stable core of low cost transaction accounts in its deposit
base and managing growth while continuing to serve its depositor and borrower
customers.
Over the past five years, the Company's return on average assets has averaged
1.52%. The Company's interest rate margin during this five year period ranges
from 3.47% to 5.18%, with an average of 4.34%.
Highlights of the key components of the Association's strategy are as follows:
STABLE
DEPOSIT BASE
The Association seeks to maintain a stable core deposit base by providing
quality service to its customers without significantly increasing its cost of
funds or operating expense ratios. The core deposit base, passbook and NOW
accounts, totalled $68.0 million, or 24.24% of total deposits and had a weighted
average nominal rate of 2.86% on such deposits at December 31, 1996.
HIGH ASSET QUALITY
Management seeks to maintain high asset quality in its loan portfolio by
applying the Association's underwriting standards which it utilizes for all
originated mortgage loans and by purchasing mortgage-backed securities
guaranteed by government sponsored agencies. As a result, the Association's
ratio of non-performing loans to total loans was .30% at December 31, 1996 and
has not exceeded .30% in the last five years.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
ASSETS
[The following table is representative of the pyramid graph shown in the middle
of page 7 of the Annual Report to Stockholders.]
At December 1996
----------------
<S> <C>
Other Assets 7.9%
Mortgage-Backed
Securities 8.6%
Investment Securities 14.9%
Loans 68.6%
- - --------------------------------------------------------------------------------
</TABLE>
MANAGED
DEPOSIT GROWTH
The Association has managed its deposit growth primarily through the selected
pricing of its deposit products. This has enabled the Association to maintain a
strong stockholders' equity to total assets ratio, as well as to invest its
funds on a selective basis. Between December 31, 1992 and December 31, 1996, the
Association's deposits have increased by $35.2 million, or 14.36%. Total assets
increased during this same time period by $74.0 million, or 24.00%.
FIXED-RATE MORTGAGE
INVESTING
The Chicago-area mortgage market is highly competitive, with adjustable-rate
mortgage ("ARM") loans being particularly difficult to originate on terms
attractive to the lender. Management believes that investment in fixed-rate
mortgage loans improves net interest income as such loans
7
<PAGE> 6
generally are higher yielding compared to ARMs, which in order to be
competitively priced to home buyers, often carry lower interest rates in the
early years of the loan and have limits on interest rate increases. While
management's strategy to invest primarily in fixed-rate mortgages has maintained
profitability, the Association's investment in fixed-rate mortgage loans has had
a negative effect on the Association's interest rate gap position. As part of
its strategy to reduce interest rate risk, the Association also markets a seven
year term adjustable-rate home equity line-of-credit loan. In addition, the
Association has invested in guaranteed Collateralized Mortgage Obligations
("CMOs"), Federal Home Loan Mortgage Corporation Participation Certificates
("FHLM PCs"), Federal National Mortgage Association Participation Certificates
("FNMA PCs") and Real Estate Mortgage Investment Conduits ("REMICs") backed by
ARM loans.
INCOME FROM SUBSIDIARY
OPERATIONS
The Association has received significant non-interest income from its
subsidiary, SSC, whose operations include real estate development and insurance
activities. SSC's insurance business is fully operational and earnings are
expected to be relatively stable. SBDC was formed November 19, 1992 and is
currently involved in three joint venture developments. In 1996, the income from
all subsidiary operations provided over 60% of all non-interest income for the
Company and should continue to provide income in 1997.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
NET INTEREST MARGIN
[The following table is representative of the graph shown on page 8 of the
Annual Report to Stockholders.]
Year Ended December 31,
-----------------------
1992 1993 1994 1995 1996
- - ---- ---- ---- ---- ----
<C> <C> <C> <C> <C>
4.79% 5.18% 4.60% 3.68% 3.47%
- - --------------------------------------------------------------------------------
</TABLE>
INTEREST RATE
SENSITIVITY ANALYSIS
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are interest rate sensitive and by
monitoring an institution's interest rate sensitivity gap. An asset or liability
is said to be 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 maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing 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.
At December 31, 1996, total interest-bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing in
the same time period by $49.9 million, representing a negative cumulative one
year gap ratio of 13.04%. Thus, during periods of rising
8
<PAGE> 7
interest rates, it is expected that the cost of the Association's
interest-bearing liabilities would rise more quickly than the yield on its
interest-earning assets, which would adversely affect net interest income.
Although in periods of falling interest rates the opposite effect on net
interest income is expected, the Association could experience substantial
prepayments of its fixed-rate mortgage loans which may result in the
reinvestment of such proceeds at market rates which may be lower than current
rates. Management currently believes the risk of prepayments is limited due to
the fact that the yield on the loan portfolio approximates current market rates.
The risk of prepayment is further minimized by the level of short-term,
fixed-rate mortgages originated by the Association; of all mortgage loans
originated by the Association in 1996, 48.2% have been shorter-term mortgage
loans of 15 years or less. In addition, a seven year term home equity
line-of-credit loan was introduced in September, 1995. Management believes that
given the level of capital of the Association and the substantial excess of
interest-earning assets over interest-bearing liabilities, the increased net
income resulting from a mismatch in the maturity of its asset and liability
portfolios provides sufficient returns during periods of declining or stable
interest rates to justify the increased vulnerability to sudden and unexpected
increases in interest rates. The Association has taken the above steps to more
closely monitor its interest rate risk as such risk relates to management's
strategy. The Association's Board of Directors has established an Asset/
Liability Committee which is responsible for reviewing the Association's asset
and liability policies, including interest rate risk. The Committee meets
monthly and reports quarterly to the Board of Directors on interest rate risk
and trends, as well as liquidity and capital ratios and requirements.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996 which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown. Except as stated below, the amount of
assets and liabilities shown which reprice or mature during a particular period
were determined in accordance with the earlier of term to repricing or the
contractual terms of the asset or liability. The Association has assumed that
its passbook savings, NOW and money market accounts, which totalled $107.8
million at December 31, 1996, are withdrawn at the annual percentage rates of
6%, 38% and 14%, respectively. These withdrawal rates are based on the
Association's historical experience regarding deposit withdrawals. Loan
prepayments are based on assumptions provided by the OTS.
Certain shortcomings are inherent in the method of analysis presented in the
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. Additionally, 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. Furthermore, 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.
In this current environment of narrowing interest margins, management continues
to attempt to decrease the interest rate sensitivity by extending liability
maturities and shortening the investment portfolio by laddering maturities.
9
<PAGE> 8
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
More Than More Than More Than More Than
0-3 4-12 One Year to Three Years Five Years 10 Years More Than
months months Three Years to Five Years to 10 Years to 20 Years 20 Years Total
- - ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans (1)......................... $ 21,169 22,404 51,028 39,910 65,388 51,583 7,263 258,745
Other loans (1)............................ 6,734 -- -- 113 -- -- -- 6,847
Interest-bearing deposits.................. 5,182 198 -- -- -- -- -- 5,380
Mortgage-backed securities................. 19,190 1,076 2,455 1,962 3,320 4,719 776 33,498
Investment securities...................... 20,126 8,400 10,004 8,130 11,000 -- -- 57,660
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets.............. 72,401 32,078 63,487 50,115 79,708 56,302 8,039 362,130
- - ------------------------------------------------------------------------------------------------------------------------------------
LESS:
Unearned discount and deferred fees........ (274) (290) (660) (516) (845) (667) (93) (3,345)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net interest-earning assets................ $ 72,127 31,788 62,827 49,599 78,863 55,635 7,946 358,785
====================================================================================================================================
INTEREST-BEARING LIABILITIES:
Passbook accounts.......................... $ 732 2,154 2,772 2,599 2,437 2,285 34,338 47,317
NOW accounts............................... 2,253 5,583 6,905 1,844 2,476 1,357 242 20,660
Money market accounts...................... 1,479 4,217 5,073 4,325 3,688 3,144 17,844 39,770
Certificate accounts....................... 48,842 65,197 58,648 -- -- -- -- 172,687
Borrowed funds............................. 9,708 13,600 28,200 3,650 -- -- -- 55,158
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities......... $ 63,014 90,751 101,598 12,418 8,601 6,786 52,424 335,592
====================================================================================================================================
Interest sensitivity gap................... $ 9,113 (58,963) (38,771) 37,181 70,262 48,849 (44,478) 23,193
Cumulative interest sensitivity gap........ $ 9,113 (49,850) (88,621) (51,440) 18,822 67,671 23,193
Cumulative interest sensitivity gap as a
percentage of total assets............... 2.38% (13.04) (23.18) (13.45) 4.92 17.70 6.07
Cumulative net interest-earning
assets as a percentage of
interest-sensitive liabilities........... 114.46% 67.58 65.30 80.79 106.81 123.90 106.91
- - ------------------------------------------------------------------------------------------------------------------------------------
(1) For purposes of the gap analysis, mortgage and other loans are reduced for
non-performing loans and undisbursed loan proceeds but are not reduced
by the allowance for loan losses. At December 31, 1996, non-performing
loans and undisbursed loan proceeds totalled $811,000 and $7.2 million,
respectively.
</TABLE>
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 Association'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 the 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 Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
Compared to Year Ended Compared to Year Ended Compared to Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
----------------------- ------------------------ -----------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
In Net Interest Income In Net Interest Income In Net Interest Income
----------------------- ------------------------ -----------------------
Due to Due to Due to
---------------- ----------------- ----------------
Volume Rate Net Volume Rate Net Volume Rate Net
----------------------- ------------------------ -----------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans, net....... $ 708 (316) 392 1,632 292 1,924 2,580 (1,688) 892
Other loans............... 276 (16) 260 58 16 74 13 (5) 8
Mortgage-backed securities (69) (36) (105) (127) 195 68 (847) 62 (785)
Interest-earning deposits. 88 67 155 75 (3) 72 (31) 87 56
Investment securities..... (371) 29 (342) 341 (94) 247 650 (39) 611
Trading account securities -- -- -- (104) -- (104) (358) (39) (397)
- - ------------------------------------------------------------------------------------------------------------
Total................. $ 632 (272) 360 1,875 406 2,281 2,007 (1,622) 385
- - ------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits.................. $ 416 76 492 2,738 481 3,219 (63) 54 (9)
Borrowed funds............ 351 43 394 1,048 79 1,127 1,001 218 1,219
- - ------------------------------------------------------------------------------------------------------------
Total................ $ 767 119 886 3,786 560 4,346 938 272 1,210
- - ------------------------------------------------------------------------------------------------------------
Net change in net
interest income.... $(135) (391) (526) (1,911) (154) (2,065) 1,069 (1,894) (825)
============================================================================================================
</TABLE>
10
<PAGE> 9
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Company's
consolidated statement of financial condition at December 31, 1996, and
consolidated statements of financial condition and the consolidated statements
of earnings for the years ended December 31, 1996, 1995 and 1994 and reflects
the average yield on assets and 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 monthly balances. Management
does not believe that the use of month-end balances instead of average daily
balances has caused any material differences in the information presented. The
yields and costs include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- - ---------------------------------------------------------------------------------------------------------------- At December 31,
1996 1995 1994 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Average Yield/ Average Yield/ Average Yield/ Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost Balance Cost
- - ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net............ $248,717 $ 21,311 8.57% 240,500 20,919 8.70 221,706 18,995 8.57 255,584 8.09
Other loans.................... 4,199 363 8.64 1,025 103 10.05 407 29 7.13 6,847 8.70
Mortgage-backed securities..... 31,939 2,110 6.61 32,977 2,215 6.72 34,968 2,147 6.14 33,374 6.67
Interest-bearing deposits...... 5,929 405 6.83 4,518 250 5.53 3,160 178 5.63 5,380 5.27
Investment securities.......... 53,319 3,041 5.70 59,847 3,383 5.65 53,897 3,136 5.82 57,660 5.87
Trading account securities..... -- -- -- -- -- -- 1,852 104 5.62 -- --
====================================================================================================================================
Total interest-earning
assets................... 344,103 27,230 7.91 338,867 26,870 7.93 315,990 24,589 7.78 358,845 7.57
Non-interest earning assets........ 20,274 -- -- 19,458 -- -- 21,322 -- -- 23,516 --
- - ------------------------------------------------------------------------------------------------------------------------------------
Total assets............... $364,377 -- -- 358,325 -- -- 337,312 -- -- 382,361 --
====================================================================================================================================
LIABILITIES AND RETAINED EARNINGS:
Interest-bearing liabilities:
Deposits:
Passbook..................... $ 47,124 $ 1,441 3.06% 48,072 1,466 3.05 55,485 1,700 3.06 47,317 3.01
Certificate.................. 155,745 8,630 5.54 144,268 8,037 5.57 109,897 4,269 3.88 172,687 5.61
NOW and money
market accounts............. 60,549 1,817 3.00 61,759 1,893 3.07 73,628 2,208 3.00 60,430 3.08
Borrowed funds:
FHLB advances and other...... 52,620 3,389 6.44 47,132 2,995 6.35 38,995 1,868 4.79 55,158 6.36
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing liabilities....... 316,038 15,277 4.83 301,231 14,391 4.78 278,005 10,045 3.61 335,592 4.91
Other liabilities.................. 6,615 -- -- 8,128 -- -- 9,235 -- -- 6,910 --
- - ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities.......... 322,653 -- -- 309,359 -- -- 287,240 -- -- 342,502 --
Stockholders' equity .............. 41,724 -- -- 48,966 -- -- 50,072 -- -- 39,859 --
- - ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders'
equity................... $364,377 -- -- 358,325 -- -- 337,312 -- -- 382,361 --
====================================================================================================================================
Net interest income/interest
rate spread (1).............. -- $ 11,953 3.08% -- 12,479 3.15 -- 14,544 4.17 -- 2.66
Net earning assets/net
interest margin (2).......... $ 28,065 -- 3.47% 37,636 -- 3.68 37,985 -- 4.60 -- 2.99
====================================================================================================================================
Ratio of interest-earning assets to
interest-bearing liabilities. 1.09x -- -- 1.12 -- -- 1.14 -- -- 1.07 --
====================================================================================================================================
(1) Interest rate spread represents the difference between the average rate
on interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income before the provision for
loan losses divided by average interest-earning assets.
</TABLE>
11
<PAGE> 10
FINANCIAL CONDITION
Total consolidated assets of the Company at December 31, 1996 increased $22.9
million, or 6.36%, to $382.4 million from $359.5 million at December 31, 1995.
The increase in assets is essentially related to the increase in net loans
receivable of $19.6 million and the $4.6 million increase in U.S. Government and
agency obligations, available for sale. The funding for the increase in assets
was provided primarily by increased deposits.
Total cash and cash equivalents decreased $4.2 million, or 26.39%, to $11.7
million at December 31, 1996 from $15.9 million at December 31, 1995. This
decrease is the result of funds being more fully invested at year end 1996 over
1995.
U.S. Government and agency obligations, available for sale, at December 31, 1996
of $46.6 million, increased $4.6 million, or 10.98%, from $42.0 million at
December 31, 1995 as a result of securities purchased during the year exceeding
maturities.
Mortgage-backed securities, available for sale, increased $1.6 million, or
5.03%, to $32.8 million at December 31, 1996 from $31.3 million at December 31,
1995.
Loans receivable increased $19.6 million, or 8.06%, to $262.4 million at
December 31, 1996 from $242.9 million at December 31, 1995. The loan portfolio
represents 68.63% of total assets at December 31, 1996.
Other investments, available for sale, decreased $575,000, or 7.19%, to $7.4
million at December 31, 1996 from $8.0 million at December 31, 1995. This
decrease is primarily the result of the partial liquidation of the
adjustable-rate mortgage portfolio fund.
Investment in joint ventures increased $1.4 million, or 24.21%, to $7.1 million
at December 31, 1996 from $5.7 million at December 31, 1995. This increase
provided funding for an additional joint venture project and the investment in a
low-income senior housing project.
Office properties and equipment increased $257,000, or 9.13%, to $3.1 million at
December 31, 1996 from $2.8 million at December 31, 1995. This increase is the
result of the final equipment and furnishings for the Orland Park office which
opened in February, 1996.
Prepaid expenses and other assets increased $285,000, or 5.22%, to $5.7 million
at December 31, 1996 from $5.5 million at December 31, 1995. The increase
primarily resulted from a $109,000 overpayment of current Federal and State
income taxes, a $68,000 increase in the cash surrender value of corporate-owned
key person recovery insurance and a $103,000 increase in accounts receivable and
other assets.
Deposits increased $25.1 million, or 9.84%, to $280.4 million at December 31,
1996 from $255.3 million at December 31, 1995. The Association promoted special
eighteen and 36 month CDs during the year and certificate balances increased
$27.2 million while balances in passbook, NOW and money market accounts
decreased $2.1 million at year end 1996 from the previous year.
Borrowed money, including FHLB advances and other borrowed money, increased $2.5
million, or 4.75%, to $55.2 million at December 31, 1996 from $52.7 million at
December 31, 1995. This resulted as additional funds were required to provide
for operating liquidity.
Advance payments by borrowers for taxes and insurance were increased by
$246,000, or 11.76%, at December 31, 1996 to $2.3 million from $2.1 million the
previous year. This resulted primarily from the increase in the mortgage loan
portfolio.
12
<PAGE> 11
Other liabilities increased $968,000, or 26.84%, at year end December 31, 1996
to $4.6 million from $3.6 million at December 31, 1995, primarily as a result of
a note payable to fund a new limited partnership which will provide low income
senior citizen housing.
Total stockholders' equity was reduced $6.0 million, or 13.01%, to $39.9 million
at December 31, 1996 from $45.8 million at December 31, 1995. This decrease in
stockholders' equity reflects the $8.0 million decrease related to the purchase
of additional treasury stock during 1996, along with the payment of $2.0 million
in dividends during the year which are partially offset by net income of $2.6
million and a $957,000 increase in paid-in capital.
COMPARISON OF OPERATING
RESULTS FOR THE YEARS
ENDED DECEMBER 31, 1996
AND DECEMBER 31, 1995
GENERAL
Net income for the year ended December 31, 1996 decreased by $1,904,000, or
42.01%, to $2,628,000 from $4,532,000 for the year ended December 31, 1995. This
decrease is primarily attributable to the FDIC special assessment to
recapitalize the Savings Association Insurance Fund (the "SAIF") paid in the
third quarter of 1996, as well as an increase in other non-interest expense.
INTEREST INCOME
Interest income for the year ended December 31, 1996 was $27.2 million compared
to $26.9 million the previous year, an increase of $360,000, or 1.34%. This
increase was a result of the average balance of interest-earning assets
increasing by $5.2 million, to $344.1 million in 1996 from $338.9 million in
1995, a 1.55% increase. This was partially offset by the average yield on
interest-earning assets decreasing 0.02% to 7.91% from 7.93% the previous year.
The slight increase in mortgage loan interest to $21.3 million for the year
ended December 31, 1996 from $21.0 million the previous year was the result of
the increase in the average mortgage loan portfolio of $8.2 million to $248.7
million in 1996 as compared to $240.5 million in 1995, a 3.42% increase. Yields
decreased to 8.57% in 1996 from 8.70% in 1995. Interest income on
mortgage-backed securities decreased $105,000, or 4.73%, to $2.1 million for the
year ended December 31, 1996 from $2.2 million of the prior year. The average
balance of mortgage-backed securities declined $1.0 million, or 3.15%, to $31.9
million in 1996 from $33.0 million in 1995, while the average yield on the
mortgage-backed securities portfolio decreased to 6.61% for 1996 from 6.72% the
previous year, a decrease of 0.11%. Total interest earned on investment
securities, other financial assets, trading account securities and dividends on
FHLB stock of $3.4 million for the year ended December 31, 1996 decreased
$187,000, or 5.15%, from the $3.6 million the previous year. The average balance
of the time deposit and securities portfolios decreased $5.1 million to $59.2
million for 1996 from $64.4 million in 1995, a 7.95% decrease. This average
balance decrease of the time deposit and securities portfolio is the result of
the proceeds of maturities of U.S. Government securities being invested in other
interest-earning assets.
INTEREST EXPENSE
Deposit interest expense for the year ended December 31, 1996 of $11.9 million
increased by $492,000, or 4.32% from the same period in 1995, primarily as a
result of the $9.3 million increase in the average balance of deposit accounts
and the 0.03% increase in the cost of savings. The average certificate deposit
base increased $11.5 mil-
13
<PAGE> 12
lion in 1996 to $155.7 million from $144.3 million in 1995 as the Association
promoted special rate eighteen and 36 month CDs during 1996. Interest expense on
borrowed funds increased $394,000, or 13.16%, to $3.4 million for the year ended
December 31, 1996 from $3.0 million the previous year. The average balance of
total borrowings increased $5.5 million to $52.6 million for the year ended
December 31, 1996, an 11.64% increase from $47.1 million for the year ended
December 31, 1995. This increase was due to funding requirements for new
mortgage loans and normal operating liquidity. The average balance of total
interest-bearing liabilities increased for the year ended December 31, 1996 by
$14.8 million, or 4.92%, to $316.0 million from $301.2 million the previous
year, while total interest expense increased by $886,000, or 6.16%, to $15.3
million from $14.4 million. The overall increase of 0.05% in the average cost of
funds is attributed to the slight increase in overall market interest rates in
general during the period.
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES
Net interest income before provision for loan losses decreased $526,000 to $12.0
million, or 4.22%, for the year ended December 31, 1996 from $12.5 million for
the year ended December 31, 1995. The average net interest rate spread for the
year ended December 31, 1996 of 3.08% decreased from the 3.15% level for the
year ended December 31, 1995. The average yield on interest-earning assets
decreased to 7.91% for the year ended December 31, 1996 from 7.93% the previous
year combined with the increase in the average cost of deposits and borrowed
funds to 4.83% for 1996 from 4.78% the previous year to reflect the narrowing
spread created by the overall general market increase in interest rates
experienced during 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses of $24,000 for the year ended December 31, 1996 is
an increase from a provision of $16,000 for the previous year. The cumulative
allowance for loan losses at year end is $751,000 with the allowance for loan
losses to non-performing loans being 92.60% on December 31, 1996, as compared to
98.69% at December 31, 1995. The Association charged off $26,000 of loan losses
in 1996. Non-performing loans totalled $811,000, or .30% of total loans
receivable at December 31, 1996 as compared to $764,000, or .30% of total loans
receivable at December 31, 1995. The provision reflects management's policy to
maintain a loan loss allowance based on its evaluation of the risks inherent in
the loan portfolio and the general economy. Although the Association believes
its allowance for losses is at a level which it considers to be adequate to
provide for losses, there can be no assurance that such losses will not exceed
the estimated amounts.
NON-INTEREST INCOME
Non-interest income for the year ended December 31, 1996 increased slightly, by
$40,000, or 3.15%, to $1,307,000 from $1,267,000 for the year ended December 31,
1995. The increase in joint venture income of $198,000 was partially offset by
the $110,000 decrease in gain on sale of securities, available for sale, and the
$48,000 decrease in miscellaneous income.
NON-INTEREST EXPENSE
Non-interest expense for the year ended December 31, 1996 increased $2.4
million, or 33.85%, from the previous year. The major factor for the large
increase in non-interest expense is insurance premium expense for the special
FDIC assessment of $1.7 million. The $392,000, or 10.00%, increase in
compensation and benefit expenses from the previous year resulted
14
<PAGE> 13
from salary adjustments in 1996 which produced modest benefit cost increases
along with an adjustment increasing the SERP funding. Advertising and promotion
expenses increased $84,000, or 106.48%, which relates to the promotion of the
Orland Park office and special rate CDs in 1996. Slight increases in data
processing of $20,000 and other operating expenses of $31,000 relate to the
operational costs of the expanded office network.
INCOME TAX EXPENSE
Income tax for the year ended December 31, 1996 decreased $1.0 million, or
44.54%, to $1.2 million from $2.2 million in 1995, as a result of a decrease in
pre-tax earnings.
COMPARISON OF OPERATING
RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1995
AND DECEMBER 31, 1994
GENERAL
Net income for the year ended December 31, 1995 decreased by $1,535,000, or
25.30%, to $4,532,000 from $6,067,000 for the year ended December 31, 1994. This
decrease is primarily attributable to the Association's narrowing interest
margins and management believes that interest margins may have stabilized in
this current interest rate environment. However, there can be no assurance how
long this stabilization will continue.
INTEREST INCOME
Interest income for the year ended December 31, 1995 was $26.9 million compared
to $24.6 million the previous year, an increase of $2.3 million, or 9.35%. This
increase was a result of the average balance of interest-earning assets
increasing by $22.9 million, to $338.9 million in 1995 from $316.0 million in
1994, a 7.25% increase. In addition, the average yield on interest-earning
assets increased .15% to 7.93% from 7.78% the previous year. The increase in
mortgage loan interest to $21.0 million for the year ended December 31, 1995
from $19.0 million the previous year was the result of the increase in the
average mortgage loan portfolio of $18.8 million to $240.5 million in 1995 as
compared to $221.7 million in 1994, an 8.48% increase. Yields also increased to
8.70% in 1995 from 8.57% in 1994. Interest income on mortgage-backed securities
of $2.2 million for the year ended December 31, 1995 equalled the $2.2 million
of the prior year. The average balance of mortgage-backed securities declined
$2.0 million, or 5.69%, to $33.0 million in 1995 from $35.0 million in 1994,
while the average yield on the mortgage-backed securities portfolio increased to
6.72% for 1995 from 6.14% the previous year, an increase of .58%. The total
interest earned on investment securities, other financial assets, trading
account securities and dividends on FHLB stock of $3.6 million for the year
ended December 31, 1995 slightly exceeded the $3.4 million from the previous
year. The average balance of the time deposit and securities portfolios
increased $5.5 million to $64.4 million for 1995 from $58.9 million in 1994, a
9.26% increase. This average balance increase is the result of investing a
portion of the proceeds from maturities of mortgage-backed securities. The
average yield on total earning assets increased to 7.93% in 1995 from 7.78% in
1994.
INTEREST EXPENSE
Deposit interest expense for the year ended December 31, 1995 of $11.4 million
increased by $3.2 million, or 39.37% from the same period in 1994, primarily as
a result of the increase of $15.1 million in the average balance of deposit
accounts and an increase of 1.06% in the cost of savings. The average
certificate deposit base increased
15
<PAGE> 14
$34.4 million in 1995 to $144.3 million from $109.9 million in 1994 as the
Association promoted a special rate eight month CD during 1995. Interest expense
on borrowed funds increased $1.1 million, or 60.33%, to $3.0 million for the
year ended December 31, 1995 from $1.9 million the previous year. The average
balance of FHLB advances increased $8.1 million to $47.1 million for the year
ended December 31, 1995, a 20.87% increase from $39.0 million for the year ended
December 31, 1994. This increase was due to funding requirements for new
mortgage loans and normal operating liquidity. The average balances of total
interest-bearing liabilities increased for the year ended December 31, 1995 by
$23.2 million, or 8.35%, to $301.2 million from $278.0 million the previous
year, while total interest expense increased by $4.4 million, or 43.27%, to
$14.4 million from $10.0 million. The overall increase of 1.17% in the average
cost of funds is attributed to the rising overall market interest rates in
general during the period.
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES
Net interest income before provision for loan losses decreased $2.0 million to
$12.5 million, or 14.20%, for the year ended December 31, 1995 from $14.5
million for the year ended December 31, 1994. The average net interest rate
spread for the year ended December 31, 1995 of 3.15% decreased from the 4.17%
level for the year ended December 31, 1994. The average yield on
interest-earning assets increased to 7.93% for the year ended December 31, 1995
from 7.78% the previous year while the increase in the average cost of deposits
and borrowed funds to 4.78% for 1995 from 3.61% the previous year combined to
reflect the narrowing spread created by the overall general market increase in
interest rates experienced during 1995.
PROVISION FOR LOAN LOSSES
The provision for loan losses of $16,000 for the year ended December 31, 1995 is
a decrease from a provision of $30,000 for the previous year. The cumulative
allowance for loan losses at year end is $754,000 with the allowance for loan
losses to non-performing loans being 98.69% on December 31, 1995, as compared to
125.30% at December 31, 1994. The Association charged off no losses in 1995.
Non-performing loans totalled $764,000, or .30% of total loans receivable at
December 31, 1995 as compared to $589,000, or .24% of total loans receivable at
December 31, 1994. The provision reflects management's policy to maintain a loan
loss allowance based on its evaluation of the risks inherent in the loan
portfolio and the general economy. Although the Association believes its
allowance for losses is at a level which it considers to be adequate to provide
for losses, there can be no assurance that such losses will not exceed the
estimated amounts.
NON-INTEREST INCOME
The decrease in non-interest income for the year ended December 31, 1995 of
$270,000, or 17.57%, is primarily the result of the absence of gains on the sale
of mortgage-backed securities, available for sale, in 1995 as compared to a gain
of $271,000 recorded in 1994. Increases in joint venture income of $22,400,
gains on the sale of loans, available for sale, of $13,700, miscellaneous income
of $52,300 and the absence of recording unrealized gains or losses on trading
account securities of $22,000 in 1994 were partially offset by the decrease in
fees and service charges of $64,200, insurance commissions of $5,500, and the
gain on sale of investment securities, available for sale of $36,100. The
increase in miscellaneous income for 1995 was primarily because of an increase
in insurance income on the SERP.
16
<PAGE> 15
NON-INTEREST EXPENSE
Non-interest expense for the year ended December 31, 1995 increased $269,000, or
3.98%, from the previous year. This increase in non-interest expense is
primarily a result of the $150,000, or 16.82%, increase in occupancy and
equipment expense which is primarily related to the new leasehold improvements
at the Hometown and 103rd and Central offices and the $117,000, or 3.07%,
increase in compensation and benefit expenses from the previous year which
includes the ESOP loan repayments, partial funding of the RRP approved with the
stock conversion and modest salary and benefit increases. Slight increases in
data processing of $17,800 and other operating expenses of $82,800 relate to the
operational costs of the expanded office network. Advertising and promotion
expenses were reduced in 1995 by $52,800 and expenses for insurance premiums and
legal, audit and examination services for the year were also reduced from the
1994 level by $40,600 and $5,200, respectively.
INCOME TAX EXPENSE
Income tax for the year ended December 31, 1995 decreased $1.0 million, or
32.68%, to $2.2 million from $3.2 million in 1994, as a result of a decrease in
pre-tax earnings.
LIQUIDITY AND CAPITAL
RESOURCES
The Company's primary sources of funds are the Association's deposits and
proceeds from principal and interest payments on loans and mortgage-backed
securities, advances from the FHLB-Chicago and proceeds from the maturity of
investments. While maturities and scheduled amortization of loans and
mortgage-backed securities are predictable sources of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition. As of December 31, 1996, the Association had
outstanding loan commitments of $8.0 million, of which the majority were
fixed-rate loans with an average interest rate of 8.66%. The Association is also
committed to fund adjustable-rate loan participation purchases totalling $1.1
million. Management anticipates that it will have sufficient funds available to
meet its current loan commitments. Certificates of deposit which are scheduled
to mature in one year or less from December 31, 1996 totalled $114.0 million.
Based upon the Association's experience, management believes that a significant
portion of such deposits will remain with the Association.
The Company's cash flows are comprised of three primary classifications: cash
flows from operating activities, investing activities and financing activities.
Cash flows from operating activities were $4.8 million for the year ended
December 31, 1996 as compared to $5.7 million for the same period in 1995. Net
cash provided for investing activities was $27.4 million for the year ended
December 31, 1996 as compared to $3.2 million provided by investing activities
in the comparable period in 1995. Net cash provided by financing activities was
$18.5 million for the year ended December 31, 1996 as compared to $157,000 for
the year ended December 31, 1995.
The primary investment activity of the Association is the origination of
mortgage loans and the purchase of mortgage-backed and mortgage-related
securities. The Association originated $66.6 million in mortgage loans for the
year ended December 31, 1996 as compared to $50.6 million for the same period of
1995. The Company invested $5.0 million in adjustable-rate mortgage-backed
securities during the year ended December 31, 1996 while no such investments
were made in 1995. Other investing activities include primarily invest-
17
<PAGE> 16
ing in U.S. Government and agency obligations which totalled $21.3 million and
$7.2 million for the years ended December 31, 1996 and 1995, respectively.
The Association is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which may be varied at the
direction of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings. The required
ratio is currently 5%. The Association's liquidity ratio was 14.74% at December
31, 1996.
The Association's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term investments. The levels of
these assets are dependent on the Association's operating, financing, lending
and investing activities during any given period. At December 31, 1996, cash and
cash equivalents totalled $11.7 million.
The OTS capital regulations require savings institutions to meet three capital
standards: a 1.5% tangible capital standard; a 3% leverage (core capital) ratio;
and an 8% risk-based capital standard. Core capital is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in equity accounts of
consolidated subsidiaries less intangibles other than certain qualifying
supervisory goodwill and certain purchased mortgage servicing rights. The core
capital requirement was effectively increased to 4% since OTS regulations
stipulate that an institution with less than 4% core capital will be deemed to
be "undercapitalized". As of December 31, 1996, the Association's actual capital
percentages for tangible capital of 7.60%, core capital of 7.60%, and current
risk-based capital of 15.71% significantly exceed the regulatory requirement for
each category. In addition, under the OTS's prompt corrective action
regulations, the Association is considered a "well capitalized" institution.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
CAPTIAL LEVELS (AT DECEMBER 31, 1996)
[The following table is representative of the bar graph shown in the middle of
page 18 of the Annual Report to Stockholders.]
Required Actual
Capital Capital
--------- ---------
<S> <C> <C>
Tangible 1.5% 7.6%
Core 3.0 7.6
Current Risk-
Based 8.0 15.7
- - --------------------------------------------------------------------------------
</TABLE>
On August 23, 1993, the OTS issued a final rule which sets forth the methodology
for calculating an interest rate risk component that would be incorporated into
the OTS risk-based regulatory capital rule effective January 1, 1994. However,
the effective date has been delayed by the OTS. This regulation is not expected
to have a material impact on the financial condition of the Association.
DIVIDENDS
The declaration of dividends by the Board of Directors will depend upon a number
of factors including; investment opportunities available to the Company or the
Association, capital requirements, regulatory limitations, the Company's and the
Association's results of operations and financial condition, tax considerations
and general economic conditions. The Association is not permitted to pay
dividends on its capital stock if its stockholders' equity would be reduced
below the amount required for the liquidation account or applicable regulatory
capital requirements. The Board of Directors initiated
18
<PAGE> 17
a program of quarterly dividends in November, 1994 and declared a quarterly cash
dividend of 161/2 cents per share. This amount was paid for the fourth quarter
1994 and the first, second and third quarters of 1995. The dividend for the
fourth quarter of 1995 was increased to 18 cents per share and was paid in
December, 1995, and the first, second and third quarters of 1996. A dividend of
19 cents per share was declared and paid in the fourth quarter of 1996. Although
the Board expects to declare regular quarterly dividends in the future, no
assurance can be given, however, that any dividends will continue to be paid.
The Company continued its stock repurchase program by purchasing 446,117 shares
(after restatement for the 3-for-2 stock split) of its common stock during 1996.
IMPACT OF INFLATION AND
CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with Generally Accepted Accounting Principles (the
"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 of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
IMPACT OF
PENDING LEGISLATION
Thrift Rechartering Legislation. The Deposit Insurance Funds Act, passed in
September, 1996, provides that the Bank Insurance Fund (the "BIF") and SAIF will
merge on January 1, 1999 if there are no more savings associations as of that
date. That legislation also requires that the Department of Treasury submit a
report to Congress by March 31, 1997 that makes recommendations regarding a
common financial institutions charter, including whether the separate charters
for thrifts and banks should be abolished. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The bills would require
federal savings institutions to convert to a national bank or some type of state
charter by a specified date (January 1, 1998 in one bill, June 30, 1998 in the
other) or they would automatically become national banks. Converted federal
thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. Holding companies for savings institutions
would become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for unitary savings and
loan holding company activities. The Company is unable to predict whether such
legislation would be enacted, the extent to which the legislation would restrict
or disrupt its operations or whether the BIF and SAIF funds will eventually
merge.
19
<PAGE> 18
IMPACT OF NEW
ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 121 (the "SFAS No. 121"),
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of" is effective for fiscal years beginning after December 15, 1995.
The statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss is recognized if the sum of the
expected future cash flows is less than the carrying amount of the asset. The
Company adopted SFAS No. 121 effective January 1, 1996, resulting in no material
impact on the Company's consolidated financial position or results of
operations.
Accounting for Mortgage Servicing Rights. In May 1995, the Federal Accounting
Standards Board (the "FASB") issued Statement of Financial Accounting Standards
No. 122 (the "SFAS No. 122"), "Accounting for Mortgage Servicing Rights". This
statement amends Statement of Financial Accounting Standards No. 65 (the "SFAS
No. 65"), "Accounting for Certain Mortgage Banking Activities" to require that a
mortgage banking enterprise recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired. SFAS No.
122 requires that a mortgage banking enterprise assess its capitalized mortgage
servicing rights for impairment based on the fair value of those rights. SFAS
No. 122 is effective for fiscal years beginning after December 15, 1995. The
Company adopted SFAS No. 122 effective January 1, 1996, resulting in no material
impact on the Company's consolidated financial position or results of
operations.
Accounting for Stock-Based Compensation. In October, 1995 the FASB issued
Statement of Financial Accounting Standards No. 123 (the "SFAS No. 123"),
"Accounting for Stock-Based Compensation". This statement establishes a fair
value-based method of accounting for stock options which encourages employers to
account for stock compensation awards based on their fair value at the date the
awards are granted. The resulting compensation award would be shown as an
expense on the income statement.
SFAS No. 123 also permits entities to continue to use the intrinsic value
method, allowing them to continue to apply current accounting requirements,
which generally result in no compensation cost for most fixed stock option
plans. If the intrinsic value method is retained, SFAS No. 123 requires
significantly expanded disclosure, including disclosure of the pro forma amount
of net income and earnings per share as if the fair value-based method were used
to account for stock-based compensation. SFAS No. 123 is effective for fiscal
years beginning after December 15, 1995, however, employers will be required to
include in that year's financial statements, information about options granted
in 1995. The Company has determined that it will continue to apply the APB
Opinion #25 method in preparing its consolidated financial statements. No
options were granted by the Company during 1996 or 1995.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125 (the "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
20
<PAGE> 19
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.
In December 1996, the FASB issued Statement of Financial Accounting Standards
No. 127 (the "SFAS No. 127"), "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125". The statement delays for one year the
implementation of SFAS No. 125, as it relates to (1) secured borrowings and
collateral, and (2) for the transfers of financial assets that are part of
repurchase agreement, dollar-roll, securities lending and similar transactions.
The Company has adopted portions of SFAS No. 125 (those not deferred by SFAS No.
127) effective January 1, 1997. Adoption of these portions did not have a
significant effect on the Company's financial condition or results of
operations. Based on its review of SFAS No. 125, management does not believe
that adoption of the portions of SFAS No. 125 which have been deferred by SFAS
No. 127 will have a material effect on the Company.
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.
STOCK DATA
Southwest Bancshares, Inc.'s common stock is listed under the trading symbol
"SWBI" and is traded on the Nasdaq National Market. As of February 11, 1997, the
Company had 375 stockholders of record (not including the number of persons or
entities holding stock in nominee or street name through various brokerage
firms) and 2,639,141 outstanding shares of common stock (excluding treasury
shares).
<TABLE>
<CAPTION>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
- - -----------------------------------------------------------------------------------------------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
- - -------------------------------------------------------------------------------- ------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income........................ $6,659 6,629 6,840 7,102 6,601 6,719 6,763 6,787
Interest expense....................... 3,640 3,595 3,904 4,138 3,273 3,591 3,766 3,761
- - -----------------------------------------------------------------------------------------------------------------------------
Net interest income before provision
for loan losses...................... 3,019 3,034 2,936 2,964 3,328 3,128 2,997 3,026
Provision for loan losses ............. 6 6 6 6 -- 4 6 6
- - -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses...................... 3,013 3,028 2,930 2,958 3,328 3,124 2,991 3,020
Gain on sale of assets................. -- -- -- 4 82 4 37 6
Income (loss) from real estate operations -- 6 -- -- -- (9) -- 6
Other income .......................... 268 392 366 271 162 279 272 428
Non-interest expense .................. 1,962 1,936 3,636 1,868 1,781 1,726 1,730 1,787
- - -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense 1,319 1,490 (340) 1,365 1,791 1,672 1,570 1,673
Income tax expense..................... 444 503 (196) 455 640 550 556 428
- - -----------------------------------------------------------------------------------------------------------------------------
Net income (loss)...................... $ 875 987 (144) 910 1,151 1,122 1,014 1,245
=============================================================================================================================
Primary earnings (loss) per share...... $ 0.29 0.34 (0.05) 0.33 0.32 0.31 0.29 0.39
Fully diluted earnings (loss) per share 0.29 0.34 (0.05) 0.33 0.32 0.31 0.29 0.39
Dividends declared per common share.... 0.18 0.18 0.18 0.19 0.17 0.17 0.17 0.18
=============================================================================================================================
</TABLE>
21
<PAGE> 20
COBITZ, VANDENBERG & FENNESSY
CERTIFIED PUBLIC ACCOUNTANTS
7800 WEST 95th STREET - SUITE 301
HICKORY HILLS, ILLINOIS 60457
------
(708) 430-4106
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Southwest Bancshares, Inc.
Hometown, Illinois
We have audited the consolidated statements of financial condition of Southwest
Bancshares, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, changes in stockholders' equity,
and cash flows for each of the three years in the period ending December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Southwest
Bancshares, Inc. and its subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ending December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Cobitz, Vandenberg & Fennessy
COBITZ, VANDENBERG & FENNESSY
January 31, 1997
Hickory Hills, Illinois
22
<PAGE> 21
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION
December 31,
- - ------------------------------------------------------------------------------------------------
1996 1995
- - ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions............... $ 6,299,645 8,294,161
Interest-bearing deposits....................................... 5,379,942 7,573,736
- - -----------------------------------------------------------------------------------------------
Total cash and cash equivalents................................. 11,679,587 15,867,897
U.S. Government and agency obligations,
available for sale, at fair value (note 2).................... 46,591,063 41,983,359
Mortgage-backed securities, available for sale,
at fair value (note 3)........................................ 32,840,347 31,267,842
Loans receivable (net of allowance for
loan losses: 1996 - $751,443;
1995 - $753,797) (note 4)..................................... 262,430,839 242,858,914
Foreclosed real estate.......................................... 117,258 47,258
Stock in Federal Home Loan Bank of Chicago...................... 3,108,000 3,318,700
Other investments, available for sale, at fair value (note 6)... 7,427,738 8,003,176
Investment in joint ventures (note 7)........................... 7,071,757 5,693,555
Accrued interest receivable (note 8)............................ 2,274,205 2,164,595
Office properties and equipment - net (note 9).................. 3,079,874 2,822,128
Prepaid expenses and other assets (note 10)..................... 5,740,370 5,455,371
- - ------------------------------------------------------------------------------------------------
Total assets............................................. 382,361,038 359,482,795
================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (note 11).............................................. 280,433,964 255,308,374
Federal Home Loan Bank advances (note 12)....................... 54,158,265 52,658,265
Other borrowed money (note 13).................................. 1,000,000 --
Advance payments by borrowers for taxes and insurance........... 2,334,913 2,089,182
Other liabilities (note 14)..................................... 4,575,098 3,606,788
- - ------------------------------------------------------------------------------------------------
Total liabilities........................................ 342,502,240 313,662,609
- - ------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized
1,000,000 shares; none outstanding............................ -- --
Common stock, $.01 par value; authorized 5,000,000
shares; 4,437,720 shares issued and 2,637,461 shares
outstanding at December 31, 1996 and 4,347,155
shares issued and 2,993,013 shares outstanding at
December 31, 1995............................................. 44,377 43,471
Additional paid-in capital...................................... 29,140,212 28,182,964
Retained earnings, substantially restricted..................... 40,256,461 39,517,900
Unrealized loss on securities available for sale,
net of income taxes........................................... (637,191) (425,487)
Treasury stock, at cost (1,800,259 and 1,354,142 shares
at December 31, 1996 and 1995)................................ (28,182,790) (20,171,848)
Common stock acquired by Employee Stock Ownership Plan.......... (640,000) (960,000)
Common stock awarded by Association Recognition
and Retention Plan............................................ (122,271) (366,814)
- - ------------------------------------------------------------------------------------------------
Total stockholders' equity (notes 19 and 20)............. 39,858,798 45,820,186
- - ------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 21 and 22)
Total liabilities and stockholders' equity............... $382,361,038 359,482,795
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 22
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31,
- - ------------------------------------------------------------------------------------------------
1996 1995 1994
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans........................................... $21,674,082 21,022,304 19,024,909
Mortgage-backed securities...................... 2,110,016 2,214,700 2,146,572
Investment securities........................... 2,835,102 3,163,818 3,031,619
Other financial assets.......................... 404,476 250,731 141,080
Trading account securities...................... -- -- 104,810
Dividends on FHLB stock......................... 206,091 218,386 139,308
- - ------------------------------------------------------------------------------------------------
Total interest income...................... 27,229,767 26,869,939 24,588,298
- - -----------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits........................................ 11,887,516 11,395,669 8,177,291
Borrowings...................................... 3,388,984 2,994,820 1,867,622
- - ------------------------------------------------------------------------------------------------
Total interest expense..................... 15,276,500 14,390,489 10,044,913
- - ------------------------------------------------------------------------------------------------
Net interest income before provision
for loan losses......................... 11,953,267 12,479,450 14,543,385
Provision for loan losses.......................... 24,000 16,000 30,000
- - ------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses......................... 11,929,267 12,463,450 14,513,385
- - ------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Fees and service charges........................ 179,243 181,760 245,974
Insurance commissions........................... 147,759 139,549 145,044
Income from joint ventures (note 7)............. 675,114 477,447 455,014
Gain on sale of loans, held for sale (note 5)... -- 13,689 --
Gain on sale of mortgage-backed securities,
available for sale........................... -- -- 271,040
Gain on sale of investment securities,
available for sale........................... 4,313 114,744 150,890
Unrealized loss on trading account securities... -- -- (22,018)
Gain (loss) on sale of real estate owned - net.. 6,021 (2,691) 610
Miscellaneous income............................ 294,644 342,625 290,294
- - ------------------------------------------------------------------------------------------------
Total non-interest income.................. 1,307,094 1,267,123 1,536,848
- - ------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Compensation, employee benefits and related
expenses (notes 15, 16 and 17)............... 4,320,335 3,927,849 3,809,943
Advertising and promotion....................... 163,069 78,976 131,726
Occupancy and equipment expense (note 9)........ 1,208,062 1,042,449 891,549
Data processing................................. 262,471 242,553 224,790
Insurance expense............................... 265,311 267,238 323,511
Federal insurance premiums...................... 561,133 573,692 557,984
SAIF special assessment (note 23)............... 1,698,492 -- --
Legal, audit and examination services........... 187,105 186,162 191,368
Other operating expenses........................ 736,711 705,753 623,000
- - ------------------------------------------------------------------------------------------------
Total non-interest expense................. 9,402,689 7,024,672 6,753,871
- - ------------------------------------------------------------------------------------------------
Net income before income taxes..................... 3,833,672 6,705,901 9,296,362
Provision for federal and state income
taxes (note 18)................................. 1,205,811 2,174,336 3,229,836
- - ------------------------------------------------------------------------------------------------
Net income................................. $ 2,627,861 4,531,565 6,066,526
================================================================================================
Earnings per share - primary....................... $.91 1.31 1.61
- - ------------------------------------------------------------------------------------------------
Earnings per share - fully diluted................. .91 1.30 1.61
- - ------------------------------------------------------------------------------------------------
Dividends declared per common share................ $.73 .68 .17
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 23
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
UNREALIZED
LOSS ON COMMON COMMON
ADDITIONAL SECURITIES STOCK STOCK
COMMON PAID-IN RETAINED AVAILABLE TREASURY ACQUIRED AWARDED
STOCK CAPITAL EARNINGS FOR SALE STOCK BY ESOP BY RRP TOTAL
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993....... $28,332 27,155,293 31,924,138 (34,700) (7,140,539) (1,600,000) (855,900) 49,476,624
3 for 2 stock split on
November 13, 1996................ 14,166 (14,166) -- -- -- -- -- --
Restated balance at
December 31, 1993................ 42,498 27,141,127 31,924,138 (34,700) (7,140,539) (1,600,000) (855,900) 49,476,624
ADDITIONS (DEDUCTIONS) FOR THE YEAR ENDED DECEMBER 31, 1994:
Net income......................... -- -- 6,066,526 -- -- -- -- 6,066,526
Adjustment of securities to fair
value, net of tax effect......... -- -- -- (3,690,464) -- -- -- (3,690,464)
Exercise of stock options.......... 600 399,400 -- -- -- -- -- 400,000
Tax benefit related to
employee stock plans............. -- 242,490 -- -- -- -- -- 242,490
Purchase of treasury stock
(259,509 shares)................. -- -- -- -- (4,069,024) -- -- (4,069,024)
Amortization of award
of RRP stock..................... -- -- -- -- -- -- 244,543 244,543
Contribution to fund
ESOP loan........................ -- -- -- -- -- 320,000 -- 320,000
Payment of dividends............... -- -- (581,180) -- -- -- -- (581,180)
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994....... $43,098 27,783,017 37,409,484 (3,725,164) (11,209,563) (1,280,000) (611,357) 48,409,515
ADDITIONS (DEDUCTIONS) FOR THE YEAR ENDED DECEMBER 31, 1995:
Net income......................... -- -- 4,531,565 -- -- -- -- 4,531,565
Adjustment of securities to fair
value, net of tax effect......... -- -- -- 3,299,677 -- -- -- 3,299,677
SFAS 87 adjustment of non-
qualified pension plan,
net of tax effect................ -- -- (201,991) -- -- -- -- (201,991)
Exercise of stock options.......... 373 248,627 -- -- -- -- -- 249,000
Tax benefit related to
employee stock plans............. -- 151,320 -- -- -- -- -- 151,320
Purchase of treasury stock
(495,367 shares)................. -- -- -- -- (8,962,285) -- -- (8,962,285)
Amortization of award
of RRP stock..................... -- -- -- -- -- -- 244,543 244,543
Contribution to fund
ESOP loan........................ -- -- -- -- -- 320,000 -- 320,000
Payment of dividends............... -- -- (2,221,158) -- -- -- -- (2,221,158)
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995....... $43,471 28,182,964 39,517,900 (425,487) (20,171,848) (960,000) (366,814) 45,820,186
ADDITIONS (DEDUCTIONS) FOR THE YEAR ENDED DECEMBER 31, 1996:
Net income......................... -- -- 2,627,861 -- -- -- -- 2,627,861
Adjustment of securities to fair
value, net of tax effect......... -- -- -- (211,704) -- -- -- (211,704)
SFAS 87 adjustment of non-
qualified pension plan,
net of tax effect................ -- -- 107,510 -- -- -- -- 107,510
Exercise of stock options.......... 906 602,867 -- -- -- -- -- 603,773
Tax benefit related to
employee stock plans............. -- 354,381 -- -- -- -- -- 354,381
Purchase of treasury stock
(446,117 shares)................. -- -- -- -- (8,010,942) -- -- (8,010,942)
Amortization of award
of RRP stock..................... -- -- -- -- -- -- 244,543 244,543
Contribution to fund
ESOP loan........................ -- -- -- -- -- 320,000 -- 320,000
Payment of dividends............... -- -- (1,995,943) -- -- -- -- (1,995,943)
3 for 2 stock split related to
fractional shares................ -- -- (867) -- -- -- -- (867)
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996....... $44,377 29,140,212 40,256,461 (637,191) (28,182,790) (640,000) (122,271) 39,858,798
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 24
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
- - --------------------------------------------------------------------------------------------------------------
1996 1995 1994
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................... $2,627,861 4,531,565 6,066,526
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation.............................................. 388,966 300,571 248,213
Amortization of cost of stock benefit plans............... 564,543 564,543 564,543
Net gain on sale of mortgage-backed securities,
available for sale..................................... -- -- (271,040)
Net gain on sale of investment securities, available
for sale.............................................. (4,313) (114,744) (150,890)
Net gain on sale of loans, held for sale.................. -- (13,689) --
Net (gain) loss on sale of real estate owned.............. (6,021) 2,691 (610)
Provision for loan losses................................ 24,000 16,000 30,000
Unrealized loss on trading account securities............. -- -- 22,018
Decrease in prepaid and deferred federal and state
income taxes........................................... 352,071 457,283 488,291
(Increase) decrease in accrued interest receivable........ (109,610) 132,467 (274,596)
Increase (decrease) in accrued interest payable........... (15,776) 56,187 243,374
Federal Home Loan Bank stock dividend..................... -- (49,900) --
Increase in other assets.................................. (273,368) (404,902) (561,210)
Increase (decrease) in other liabilities.................. 1,229,387 181,723 (372,073)
Proceeds from maturities of trading account securities.... -- -- 414,854
- - ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities........................ 4,777,740 5,659,795 6,447,400
- - ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage-backed securities.................... -- -- (12,161,227)
Purchase of mortgage-backed securities, available
for sale............................................... (4,969,275) -- --
Purchase of investment securities, available for sale... (21,314,377) (7,213,279) (11,731,497)
Purchase of stock in Federal Home Loan Bank of Chicago.... (476,000) (100,000) (1,176,500)
Proceeds from sale of mortgage-backed securities,
available for sale..................................... -- -- 5,397,576
Proceeds from maturities of mortgage-backed securities.... -- 728,867 1,303,079
Proceeds from maturities of mortgage-backed securities,
available for sale..................................... 2,992,376 1,852,007 7,761,181
Proceeds from sale of investment securities, available
for sale............................................... 4,065,375 3,782,625 8,887,203
Proceeds from maturities of investment securities,
available for sale..................................... 13,266,627 10,377,440 1,042,076
Proceeds from Federal Home Loan Bank of Chicago
stock redemption....................................... 686,700 -- 217,400
Proceeds from sale of loans, held for sale................ -- 3,182,400 --
Loan disbursements........................................ (66,239,478) (49,912,726) (67,183,513)
Loan repayments........................................... 50,498,285 40,205,529 36,513,514
Participation loans purchased............................. (6,006,504) -- --
Participation loans sold.................................. 2,008,115 1,610,958 --
Property and equipment expenditures....................... (646,712) (1,620,558) (463,336)
Proceeds from sale of real estate owned................... 79,678 241,789 29,458
Investment in joint ventures.............................. (1,378,202) 84,527 327,378
- - ---------------------------------------------------------------------------------------------------------------
Net cash provided by (for) investing activities.................. (27,433,392) 3,219,579 (31,237,208)
- - ---------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 25
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31,
- - ------------------------------------------------------------------------------------------------------------
1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options.................. $ 603,773 249,000 400,000
Deposit receipts......................................... 379,691,186 346,859,169 304,166,123
Deposit withdrawals...................................... (365,339,561) (337,572,123) (316,791,000)
Interest credited to deposit accounts.................... 10,773,965 10,342,591 7,459,755
Proceeds of borrowed money............................... 20,500,000 72,758,265 70,175,000
Repayment of borrowed money.............................. (18,000,000) (80,475,000) (36,100,000)
Increase (decrease) in advance payments by borrowers
for taxes and insurance............................... 245,731 (821,040) 184,926
Purchase of treasury stock............................... (8,010,942) (8,962,285) (4,069,024)
Dividends paid on common stock........................... (1,996,810) (2,221,158) (581,180)
- - ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities...................... 18,467,342 157,419 24,844,600
- - ------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents............... (4,188,310) 9,036,793 54,792
Cash and cash equivalents at beginning of year................. 15,867,897 6,831,104 6,776,312
- - ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year....................... $ 11,679,587 15,867,897 6,831,104
============================================================================================================
CASH PAID DURING THE YEAR FOR:
Interest................................................. $ 15,292,276 14,334,302 9,801,539
Income taxes............................................. 853,736 1,717,461 2,694,628
NON-CASH INVESTING ACTIVITIES:
Transfer of loans to foreclosed real estate.............. $ 134,356 155,505 162,060
============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 26
SOUTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Southwest Bancshares, Inc. (the "Company") is a Delaware corporation
incorporated on February 11, 1992 for the purpose of becoming the savings and
loan holding company for Southwest Federal Savings and Loan Association of
Chicago (the "Association"). On June 23, 1992, the Association converted from a
mutual to a stock form of ownership, and the Company completed its initial
public offering, and, with a portion of the net proceeds acquired all of the
issued and outstanding capital stock of the Association.
The accounting and reporting policies of the Company and its subsidiaries
conform to generally accepted accounting principles and to general practice
within the thrift industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The following is a description of the more significant policies which the
Company follows in preparing and presenting its consolidated financial
statements.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statementsist of the accounts ofthe
Company, and its wholly-owned subsidiaries, Southwest Bancshares
Development Corporation and Southwest Federal Savings and Loan Association of
Chicago, and the Association's wholly-owned subsidiary, Southwest Service
Corporation. Significant intercompany balances and transactions have been
eliminated in consolidation.
INVESTMENT SECURITIES, AVAILABLE FOR SALE
Investment securities available for sale are recorded in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities". SFAS 115 requires the use of
fair value accounting for securities available for sale or trading and retains
the use of the amortized cost method for investments the Company has the
positive intent and ability to hold to maturity.
SFAS 115 requires the classification of debt and equity securities into one of
three categories: held to maturity, available for sale, or trading. Held to
maturity securities are measured at amortized cost. Unrealized gains and losses
on trading securities are included in income. Unrealized gains and losses on
available for sale securities are excluded from income and reported net of taxes
as a separate component of stockholders' equity.
The Company has designated its investments in U.S. Government and agency
obligations, mortgage-backed securities, and equity securities as available for
sale, and has recorded these investments at their current fair values.
Unrealized gains and losses are recorded in a valuation account which is
included, net of income taxes, as a separate component of stockholders' equity.
Gains and losses on the sale of available for sale securities are determined
using the specific identification method and are reflected in earnings when
realized.
28
<PAGE> 27
LOANS RECEIVABLE AND RELATED FEES
Loans are stated at the principal amount outstanding, net of loans in process,
deferred fees and the allowance for losses. Interest on loans is credited to
income as earned and accrued only if deemed collectible. Loans are placed on
nonaccrual status when, in the opinion of management, the full timely collection
of principal or interest is in doubt. As a general rule, the accrual of interest
is discontinued when principal or interest payments become 90 days past due or
earlier if conditions warrant. When a loan is placed on nonaccrual status,
previously accrued but unpaid interest is charged against current income.
Loan origination fees are being deferred in accordance with SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases". This statement requires
that loan origination fees and direct loan origination costs for a completed
loan be netted and then deferred and amortized into interest income as an
adjustment of yield.
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 January 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.
Under these statements, of the remaining loans which are evaluated for
impairment (a loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement), there were no
material amounts of loans which met the definition of an impaired loan during
the year ended December 31, 1996 and no loans to be evaluated for impairment at
December 31, 1996.
ALLOWANCE FOR LOAN LOSSES
The determination of the allowance for loan losses involves material estimates
that are susceptible to significant change in the near term. The allowance for
loan losses is maintained at a level adequate to provide for losses through
charges to operating expense. The allowance is based upon past loss experience
and other factors which, in management's judgement, deserve current recognition
in estimating losses. Such other factors considered by management include growth
and composition of the loan portfolio, the relationship of the allowance for
losses to outstanding loans, and economic conditions.
Management believes that the allowance is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgements about information available to them at the time of their examination.
LOANS RECEIVABLE, HELD FOR SALE
That portion of loans receivable designated as held for sale are recorded at the
lower of cost or fair value in accordance with SFAS No. 65 "Accounting for
Certain Mortgage
29
<PAGE> 28
Banking Activities". Unrealized declines in fair value are reflected as a
component of current earnings.
FORECLOSED REAL ESTATE
Real estate acquired through foreclosure or deed in lieu of foreclosure is
carried at the lower of fair value minus estimated costs to sell or the
acquisition cost. Valuations are periodically performed by management and an
allowance for loss is established by a charge to operations if the carrying
value of a property exceeds its fair value minus estimated costs to sell.
DEPRECIATION
The office buildings are being depreciated on a straight-line basis. All other
items are being depreciated on either a straight-line or accelerated basis
depending on the nature of the items.
INCOME TAXES
The Company files a consolidated federal income tax return with its
subsidiaries. The provision for federal and state taxes on income is based on
earnings reported in the financial statements. Deferred income taxes arise from
the recognition of certain items of income and expense for tax purposes in years
different from those in which they are recognized in the consolidated financial
statements. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the purpose of reporting cash flows, the Company has defined cash and cash
equivalents to include cash on hand, amounts due from depository institutions,
and interest-bearing deposits in other financial institutions.
EARNINGS PER SHARE
Earnings per share for the year ended December 31, 1996 was determined by
dividing net income for the year by 2,872,858 and 2,873,112, the weighted
average number of primary and fully diluted shares of common stock and common
stock equivalents outstanding. Stock options are regarded as common stock
equivalents and are therefore considered in both primary and fully diluted
earnings per share calculations. Common stock equivalents are computed using the
treasury stock method.
STOCKHOLDERS' EQUITY
On October 8, 1996, the Board of Directors of Southwest Bancshares, Inc.
approved a 3 for 2 stock split, effected in the form of a stock dividend which
was payable on November 13, 1996 to stockholders of record on October 22, 1996.
Accordingly, stockholders of record received 1 additional share for each 2
shares owned as of October 22, 1996. All prior share related information has
been restated to reflect the stock split effect, including earnings per share
data.
30
<PAGE> 29
2) UNITED STATES GOVERNMENT AND AGENCY OBLIGATIONS, AVAILABLE FOR SALE
Securities available for sale are recorded at fair value in accordance with SFAS
115. This portfolio is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- - ----------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DESCRIPTION COST GAINS LOSSES VALUE
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLB Notes....................... $47,295,638 26,027 730,602 46,591,063
====================================================================================================
Weighted average interest rate 5.83%
====================================================================================================
<CAPTION>
DECEMBER 31, 1995
- - ----------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DESCRIPTION COST GAINS LOSSES VALUE
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLB Notes....................... $40,691,866 26,854 736,611 39,982,109
FFCB Note........................ 2,000,000 1,250 -- 2,001,250
- - ----------------------------------------------------------------------------------------------------
$42,691,866 28,104 736,611 41,983,359
====================================================================================================
Weighted average interest rate 5.41%
====================================================================================================
</TABLE>
During the current period, the Company sold no securities from this portfolio.
During the year ended December 31, 1995, the Company sold securities realizing
gross proceeds of $3,003,750, and profits of $3,750. During the year ended
December 31, 1994, the Company sold securities realizing gross proceeds of
$8,037,656 and profits of $37,656. In addition, during the current period, the
decrease in net unrealized losses of $3,932, net of the tax effect of $1,612,
resulted in a $2,320 credit to stockholders' equity.
The contractual maturity of the above investments are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
- - -------------------------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
TERM TO MATURITY COST VALUE COST VALUE
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less................ $ 999,599 1,005,625 4,750,000 4,749,609
Due after one year
through five years................... 32,883,750 32,429,594 29,978,620 29,390,625
Due after five years
through ten years.................... 12,914,761 12,655,219 7,963,246 7,843,125
Due after ten years
through twenty years................. 497,528 500,625 -- --
- - -------------------------------------------------------------------------------------------------
$47,295,638 46,591,063 42,691,866 41,983,359
=================================================================================================
</TABLE>
31
<PAGE> 30
3) MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
Mortgage-backed securities available for sale are recorded at fair value in
accordance with SFAS 115. This portfolio is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- - ------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DESCRIPTION COST GAINS LOSSES VALUE
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC participation
certificates - fixed rate............... $ 2,674,560 116,848 37,381 2,754,027
GNMA participation
certificates - fixed rate............... 11,895,149 67,395 296,789 11,665,755
FHLMC participation
certificates - adjustable rate.......... 1,929,507 128 32,597 1,897,038
FNMA participation
certificates - adjustable rate.......... 7,679,426 75,433 13,190 7,741,669
CMOs - adjustable rate..................... 1,218,251 -- 30,456 1,187,795
REMICs - adjustable rate (a)............... 7,978,864 -- 384,801 7,594,063
- - ------------------------------------------------------------------------------------------------------
$33,375,757 259,804 795,214 32,840,347
======================================================================================================
Weighted average interest rate 6.61%
======================================================================================================
<CAPTION>
DECEMBER 31, 1995
- - ------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DESCRIPTION COST GAINS LOSSES VALUE
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC participation
certificates - fixed rate............... $ 3,226,336 99,990 30,658 3,295,668
GNMA participation
certificates - fixed rate............... 12,961,425 100,696 10,996 13,051,125
FHLMC participation
certificates - adjustable rate.......... 2,242,344 -- 14,926 2,227,418
FNMA participation
certificates - adjustable rate.......... 3,449,914 19,755 -- 3,469,669
CMOs - adjustable rate..................... 1,542,702 -- 14,990 1,527,712
REMICs - adjustable rate................... 7,976,137 -- 279,887 7,696,250
- - ------------------------------------------------------------------------------------------------------
$31,398,858 220,441 351,457 31,267,842
======================================================================================================
Weighted average interest rate 6.75%
======================================================================================================
(a) Mortgage-backed securities with an amortized cost basis of $1,100,000 and a fair value of
$1,042,250 are collateral for repurchase agreements totaling $1,000,000 (see note 13).
</TABLE>
There were no sales from this portfolio during the years ended December 31, 1996
and 1995. During the year ended December 31, 1994, the Company sold
mortgage-backed securities realizing gross proceeds of $5,397,576, and profits
of $271,040. In addition, during the current period, the increase in net
unrealized losses of $404,394, net of the tax effect of $165,799, resulted in a
$238,595 charge to stockholders' equity.
32
<PAGE> 31
4) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- - -----------------------------------------------------------------
1996 1995
- - -----------------------------------------------------------------
<S> <C> <C>
MORTGAGE LOANS:
One- to Four- family........ $167,303,458 157,374,437
Multi- family............... 50,504,361 48,452,815
Commercial.................. 26,533,773 24,075,423
Construction and land
acquisition and
improvement
projects................ 21,966,870 22,775,464
- - -----------------------------------------------------------------
Total mortgage loans........ 266,308,462 252,678,139
- - -----------------------------------------------------------------
OTHER LOANS:
Secured lines of credit..... 7,215,168 1,008,285
Loans on deposits........... 112,799 78,459
Other....................... -- 142,055
- - ------------------------------------------------------------------
Total other loans........... 7,327,967 1,228,799
- - ------------------------------------------------------------------
Total loans receivable...... 273,636,429 253,906,938
- - ------------------------------------------------------------------
LESS:
Loans in process............ 7,187,535 6,825,767
Deferred loan fees
and discounts............ 3,266,612 3,468,460
Allowance for
loan losses.............. 751,443 753,797
- - ------------------------------------------------------------------
Loans receivable, net....... $262,430,839 242,858,914
==================================================================
Weighted average
interest rate............ 8.14% 8.36%
==================================================================
</TABLE>
There were ten loans delinquent three months or more and non-accruing totaling
$811,463, .3% of total loans in force as of December 31, 1996. Comparable
figures for 1995 were nine loans totaling $764,324, .3% of total loans. The
Association has established a general loan loss reserve of $751,443 as required
by its internal policies.
For the years ended December 31, 1996 and 1995, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to approximately $18,600 and $22,500,
respectively.
A summary of changes in the allowance for losses on loans is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- - -----------------------------------------------------------------
1996 1995 1994
- - -----------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning
of year..................... $753,797 737,797 707,797
Provision for
loan losses................. 24,000 16,000 30,000
Charge-offs.................... (26,354) -- --
- - -----------------------------------------------------------------
Balance, end
of year..................... $751,443 753,797 737,797
=================================================================
</TABLE>
The Association is required to maintain qualifying collateral for the Federal
Home Loan Bank of Chicago (the "Bank") representing approximately 170 percent of
current Bank credit. At December 31, 1996, the Association met this requirement.
Qualifying collateral is defined as fully disbursed, whole first mortgage loans
on improved residential property. The mortgages must not be past due more than
90 days. They must not be otherwise pledged or encumbered as security for other
indebtedness, and the documents must be in the physical possession or control of
the Association. The documents that govern the determination of the qualifying
mortgage collateral are the (a) Federal Home Loan Bank of Chicago's Credit
Policy Statement, dated February 1, 1993, and (b) the Advances, Collateral
Pledge and Security Agreement between the Association and the Federal Home Loan
Bank of Chicago.
33
<PAGE> 32
5) LOANS RECEIVABLE, HELD FOR SALE
During the year ended December 31, 1995, the Association entered into
agreements to sell 100% interests in approximately $3,000,000 in fixed rate
mortgage loans to the Federal Home Loan Mortgage Corporation, with the
Association retaining servicing for such loans. The Association realized profits
of $13,689 on these transactions. No such activity took place during the year
ended December 31, 1996. Loans serviced for others totaled approximately
$7,559,200, $10,473,900 and $7,345,000 at December 31, 1996, 1995 and 1994
respectively.
6) OTHER INVESTMENTS, AVAILABLE FOR SALE
These investments have been designated as available for sale and are recorded at
fair value in accordance with SFAS 115. This portfolio is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
- - ------------------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
DESCRIPTION COST VALUE COST VALUE
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment in common stock of
various entities................. $ 485,006 662,629 550,006 641,288
Municipal bonds..................... 130,000 130,000 160,000 160,000
Agency for International
Development certificates......... 3,934 3,934 5,287 5,287
Adjustable Rate Mortgage
Portfolio Fund................... 6,648,796 6,631,175 7,169,527 7,196,601
- - ------------------------------------------------------------------------------------------
$7,267,736 7,427,738 7,884,820 8,003,176
==========================================================================================
</TABLE>
During the current period, the Company sold securities realizing gross proceeds
of $4,065,375, and profits of $4,313. During the year ended December 31, 1995,
the Company sold securities realizing gross proceeds of $778,875, and profits of
$113,694 offset by losses of $2,700. During the year ended December 31, 1994,
the Company sold securities realizing gross proceeds of $849,547, and profits of
$113,234. In addition, the increase in net unrealized gains of $41,646, net of
the tax effect of $17,075, resulted in a $24,571 credit to stockholders' equity.
34
<PAGE> 33
7) INVESTMENT IN JOINT VENTURES
The Company's subsidiaries participate in unconsolidated joint ventures with
third parties engaged primarily in the purchase of undeveloped land for
improvement, and construction of residential or low-income housing properties
for sale or investment. The investments in unconsolidated joint ventures are
accounted for using the equity method. These ventures are summarized as follows:
<TABLE>
<CAPTION>
December 31,
- - -----------------------------------------------------------------
1996 1995
- - -----------------------------------------------------------------
<S> <C> <C>
HSW Partners, L.P.................. $2,450,342 1,881,174
Hartz-Southwest
Partnership..................... 2,907,538 3,016,939
Woodlawn
Limited Partnership............. -- 1,205
Churchview Limited
Partnership..................... 694,788 794,237
Kedzie Limited
Partnership..................... 1,019,089 --
- - -----------------------------------------------------------------
$7,071,757 5,693,555
- - -----------------------------------------------------------------
</TABLE>
The Company's subsidiaries have realized net profits from joint ventures of
$675,114, $477,447, and $455,014 for the years ended December 31, 1996, 1995 and
1994 respectively. Such profits are credited to the partners based upon the
various joint venture agreements, and generally range from 18% to 28% of gross
profits.
Combined statements of financial condition and earnings of the unconsolidated
joint ventures as of December 31, 1996 follow:
<TABLE>
<CAPTION>
- - -----------------------------------------------------
COMBINED STATEMENT OF
FINANCIAL CONDITION
- - -----------------------------------------------------
<S> <C>
ASSETS:
Cash................................ $ 1,234,611
Receivables......................... 2,703,174
Land and development costs.......... 20,102,518
Other assets........................ 19,971
- - -----------------------------------------------------
Total assets........................... 24,060,274
=====================================================
LIABILITIES:
Borrowings.......................... 6,113,018
Other liabilities................... 173,392
- - -----------------------------------------------------
Total liabilities...................... 6,286,410
- - -----------------------------------------------------
PARTNERS' CAPITAL:
Company's subsidiaries.............. 7,071,757
Coventurer.......................... 10,702,107
- - -----------------------------------------------------
Total partners' capital................ 17,773,864
- - -----------------------------------------------------
Total liabilities and partners' capital $24,060,274
=====================================================
- - -----------------------------------------------------
COMBINED STATEMENT OF EARNINGS
- - -----------------------------------------------------
Sales of real estate................... $ 3,485,524
Cost of sales.......................... 1,893,652
- - -----------------------------------------------------
Gross profit........................... 1,591,872
Other income........................... 363,262
Other expense.......................... 719,059
- - -----------------------------------------------------
Net income............................. $ 1,236,075
=====================================================
</TABLE>
35
<PAGE> 34
8) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- - ---------------------------------------------------------------
1996 1995
- - ---------------------------------------------------------------
<S> <C> <C>
U.S. Government and
agency obligations.............. $ 689,794 638,289
Mortgage-backed
securities...................... 185,900 184,457
Loans receivable................... 1,412,091 1,362,719
Other investments.................. 5,069 1,615
Allowance for uncollected
interest........................ (18,649) (22,485)
- - ---------------------------------------------------------------
$2,274,205 2,164,595
===============================================================
</TABLE>
9) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are
summarized as follows:
<TABLE>
<CAPTION>
December 31,
- - ---------------------------------------------------------------
1996 1995
- - ---------------------------------------------------------------
<S> <C> <C>
Land............................... $1,215,336 927,116
Buildings.......................... 1,355,092 1,420,368
Parking lot improvements........... 12,165 12,165
Leasehold improvements............. 963,577 988,701
Furniture, fixtures, and
equipment....................... 1,086,002 740,866
Automobiles........................ 73,545 88,824
- - ---------------------------------------------------------------
4,705,717 4,178,040
Less accumulated
depreciation.................... 1,625,843 1,355,912
- - ---------------------------------------------------------------
$3,079,874 2,822,128
===============================================================
</TABLE>
Depreciation of office properties and equipment for the years ended December 31,
1996, 1995 and 1994 amounted to $388,966, $300,571 and $248,213, respectively.
At December 31, 1996, the minimum rental commitments under the current leases
for office space at the Hometown and Oak Lawn branch locations are approximately
as follows:
<TABLE>
<CAPTION>
- - -------------------------------------------
<C> <C>
1997........................ $ 290,375
1998........................ 298,867
1999........................ 307,625
Thereafter through 2006..... 2,422,940
- - -------------------------------------------
$3,319,807
- - -------------------------------------------
</TABLE>
The above amounts are exclusive of future escalation charges for real estate
taxes, insurance, and other costs of occupancy relating to common areas shared
with other tenants.
Rent expense, including real estate taxes, insurance and other costs of
occupancy, for the years ended December 31, 1996, 1995 and 1994 totaled
$312,058, $304,062 and $245,777 respectively.
During the period under review, the Association commenced operations at its
branch office in Orland Park, Illinois. Total costs for land, building,
furniture and equipment amounted to approximately $1,900,000, of which
approximately $600,000 was expended in 1996 to complete construction and
equipment purchases.
36
<PAGE> 35
10) PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
- - --------------------------------------------------------------------------------------------
1996 1995
- - --------------------------------------------------------------------------------------------
<S> <C> <C>
Prepaid pension costs.............................................. $ 597,558 579,944
Current federal and state income tax overpayment-- net............. 137,276 28,046
Deferred federal and state income tax benefit-- net (a)............ 831,010 865,529
Other prepaid expenses............................................. 140,591 114,712
Deferred premium on sale of loans.................................. 37,303 42,539
Cash surrender value of corporate-owned
Key Person recovery insurance................................... 3,618,179 3,549,503
Accounts receivable and other assets............................... 378,453 275,098
- - --------------------------------------------------------------------------------------------
$5,740,370 5,455,371
============================================================================================
(a) The approximate tax effect of temporary differences that give rise to the Company's net
deferred tax asset at December 31, 1996 and 1995 under SFAS 109 is as follows:
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996 ASSETS LIABILITIES NET
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loan fees deferred for financial
reporting purposes........................... $ 900,971 -- 900,971
Bad debt reserves established for financial
reporting purposes........................... 364,900 -- 364,900
Increases to tax bad debt reserves since
January 1, 1988.............................. -- 1,575,140 (1,575,140)
Non-qualified pension plan expense.............. 906,875 -- 906,875
Nondeductible incentive plan expense............ 66,052 -- 66,052
Deferred compensation........................... 2,863 -- 2,863
Prepaid pension contribution.................... -- 163,533 (163,533)
Accelerated depreciation for tax purposes....... -- 97,933 (97,933)
Unrealized loss on securities available for sale 442,792 -- 442,792
Other items..................................... -- 16,837 (16,837)
------------------------------------------------------------------------------------------
$2,684,453 1,853,443 831,010
==========================================================================================
<CAPTION>
DECEMBER 31, 1995 ASSETS LIABILITIES NET
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loan fees deferred for financial
reporting purposes........................... $1,062,423 -- 1,062,423
Bad debt reserves established for financial
reporting purposes........................... 355,060 -- 355,060
Increases to tax bad debt reserves since
January 1, 1988.............................. -- 1,575,215 (1,575,215)
Non-qualified pension plan expense.............. 902,724 -- 902,724
Nondeductible incentive plan expense............ 62,072 -- 62,072
Deferred compensation........................... 151 -- 151
Prepaid pension contribution.................... -- 130,449 (130,449)
Accelerated depreciation for tax purposes....... -- 87,850 (87,850)
Unrealized loss on securities available for sale 295,680 -- 295,680
Other items..................................... -- 19,067 (19,067)
------------------------------------------------------------------------------------------
$2,678,110 1,812,581 865,529
==========================================================================================
</TABLE>
37
<PAGE> 36
11) DEPOSITS
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- - -----------------------------------------------------------------
1996 1995
- - -----------------------------------------------------------------
<S> <C> <C>
Passbooks............................. $ 47,317,170 47,294,890
Certificates.......................... 172,686,390 145,447,301
NOW and money
market accounts.................... 60,430,404 62,566,183
- - -----------------------------------------------------------------
Total................................. $280,433,964 255,308,374
=================================================================
</TABLE>
The composition of deposit accounts by interest rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- - -----------------------------------------------------------------
1996 1995
- - -----------------------------------------------------------------
<S> <C> <C>
Non-interest bearing.................. $ 2,128,609 3,483,326
2.00 - 3.99%.......................... 105,618,965 106,379,293
4.00 - 4.99........................... 3,739,345 16,577,158
5.00 - 5.99........................... 118,665,425 109,855,200
6.00 - 6.99........................... 50,281,620 18,633,397
7.00 - 7.99........................... -- 380,000
- - -----------------------------------------------------------------
Total................................. $280,433,964 255,308,374
=================================================================
</TABLE>
The weighted average interest rate on deposit accounts at December 31, 1996 and
1995 was 4.62% and 4.45% respectively.
A summary of certificates of deposit that mature during the twelve-month periods
indicated is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- - -----------------------------------------------------------------
1996 1995
- - -----------------------------------------------------------------
<S> <C> <C>
Twelve-month period ended
December 31, 1996.................. $ -- 122,417,944
Twelve-month period ended
December 31, 1997.................. 114,038,513 17,119,481
Twelve-month period ended
December 31, 1998.................. 45,714,995 5,909,876
Twelve-month period ended
December 31, 1999.................. 12,932,882 --
- - -----------------------------------------------------------------
Total................................. $172,686,390 145,447,301
=================================================================
</TABLE>
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- - ------------------------------------------------------------------
1996 1995 1994
- - ------------------------------------------------------------------
<S> <C> <C> <C>
Passbooks $ 1,440,999 1,466,245 1,699,928
Certificates 8,583,706 8,036,392 4,268,533
NOW and
money
market
accounts 1,862,811 1,893,032 2,208,830
- - ------------------------------------------------------------------
Total $11,887,516 11,395,669 8,177,291
==================================================================
</TABLE>
The aggregate amount of deposit accounts with a balance of $100,000 or greater
was approximately $36,600,000 and $23,400,000 at December 31, 1996 and 1995,
respectively. Deposits in excess of $100,000 are not insured by the Federal
Deposit Insurance Corporation.
38
<PAGE> 37
12) FEDERAL HOME LOAN BANK ADVANCES
Advances consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
MATURITY INTEREST
DATE RATE 1996 1995
----------------------------------------------------
<C> <C> <C> <C>
1/30/96 7.86% $ -- 3,000,000
1/03/97 5.55 2,000,000 --
2/10/97 4.80 (a) 1,408,265 1,408,265
2/11/97 4.80 (a) 3,000,000 3,000,000
3/01/97 6.97 (a) 2,300,000 2,300,000
4/18/97 6.57 (a) 2,300,000 2,300,000
5/02/97 6.75 (a) 1,300,000 1,300,000
5/10/97 6.39 3,000,000 3,000,000
6/02/97 5.77 3,000,000 3,000,000
11/21/97 5.66 4,000,000 4,000,000
5/08/98 6.68 3,000,000 3,000,000
5/27/98 5.74 2,000,000 --
6/21/98 6.37 (a) 500,000 --
9/07/98 6.18 5,000,000 5,000,000
9/29/98 7.32 (a) 3,700,000 3,700,000
11/15/98 5.94 3,000,000 3,000,000
12/01/98 5.60 3,000,000 3,000,000
1/22/99 8.19 3,000,000 3,000,000
9/16/99 7.40 5,000,000 5,000,000
5/16/00 6.76 2,000,000 2,000,000
8/28/00 6.26 (a) 450,000 450,000
9/10/01 7.00 (a) 1,200,000 1,200,000
----------------------------------------------------
$54,158,265 52,658,265
====================================================
Weighted average interest rate 6.37% 6.51%
====================================================
(a) Subject to terms and conditions of the Affordable Housing and Community
Investment Programs.
</TABLE>
Interest is accrued on advances and recorded in other liabilities. Interest
expense on advances totaled $3,363,461, $2,994,820 and $1,867,622 for the years
ended December 31, 1996, 1995 and 1994 respectively. See note 4 of the
consolidated financial statements for collateral securing this indebtedness.
13) Other Borrowed Money
Other borrowed money is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- - -------------------------------------------------------------
1996 1995
- - -------------------------------------------------------------
<S> <C> <C>
Securities sold under agree-
ments to repurchase;
maturing 1/15/97................. $ 1,000,000 --
=============================================================
Weighted average interest rate 5.70% --
=============================================================
</TABLE>
During the current period, the Company entered into sales of securities under
agreements to repurchase (repurchase agreements). These transactions are
accounted for as financings, and the obligation to repurchase securities sold
are reflected as borrowed money in the consolidated statements of financial
condition, while the securities sold continue to be accounted for as assets. The
securities sold under agreements to repurchase consisted of mortgage-backed
securities (see note 3), and were held in the Company's account with the broker
who arranged the transaction. Interest expense incurred on this type of
transaction amounted to $25,523 for the year ended December 31, 1996.
39
<PAGE> 38
Activity in repurchase agreements is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- - -----------------------------------------------------------
1996 1995
- - -----------------------------------------------------------
<S> <C> <C>
Average balance during
the year....................... $ 458,333 --
Maximum month-end
balance during the year........ 1,000,000 --
===========================================================
Average interest rate during
the year 5.53% --
===========================================================
</TABLE>
Mortgage-backed securities underlying the agreements at year end:
<TABLE>
<CAPTION>
DECEMBER 31,
- - -----------------------------------------------------------
1996 1995
- - -----------------------------------------------------------
<S> <C> <C>
Amortized cost.................... $ 1,100,000 --
Fair value........................ 1,042,250 --
===========================================================
</TABLE>
In addition, in connection with the Company's initial public offering, the
Association established an Employee Stock Ownership Plan (ESOP). The ESOP was
funded by the proceeds from a $2,240,000 loan from an unaffiliated third-party
lender. During 1994, the Company assumed this loan on essentially the same terms
as the original lender. The loan carries an interest rate of one-eighth of one
percent under prime rate, and matures in the year 1999. The loan is secured by
the shares of the Company purchased with the loan proceeds. The Association has
committed to make contributions to the ESOP sufficient to allow the ESOP to fund
the debt service requirements of the loan.
14) OTHER LIABILITIES
Other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
- - -----------------------------------------------------------
1996 1995
- - -----------------------------------------------------------
<S> <C> <C>
Accrued interest on
deposits....................... $ 104,000 124,000
Accrued interest on
borrowed money................. 299,351 295,127
Accrued real estate taxes......... 184,287 129,243
Accrued audit fees................ 31,250 48,750
Accrued cost of non-
qualified supplemental
retirement plan................ 2,410,586 2,463,541
Deferred and accrued
compensation................... 6,982 369
Promissory note for capital
contribution due
Churchview Limited
Partnership.................... 275,000 275,000
Promissory note for capital
contribution due
Kedzie Limited
Partnership.................... 994,089 --
Payments received, not yet
remitted, on loans
serviced for others............ 57,054 46,869
Loan fees paid by borrowers
on pending loan
applications................... 11,008 10,561
Accounts payable --
insurance companies............ 13,088 36,256
Miscellaneous accounts
payable........................ 188,403 177,072
- - -----------------------------------------------------------
$4,575,098 3,606,788
===========================================================
</TABLE>
40
<PAGE> 39
15) RETIREMENT PLAN
The Association has established a qualified defined benefit pension plan which
covers all full-time employees having a minimum of one year of service, and who
are at least twenty-one years of age. The present funding policy is to make the
maximum annual contribution allowed by applicable regulations. The plan is
currently being funded by the purchase of non-insurance investments.
Contributions to the plan for the years ended December 31, 1996, 1995 and 1994
amounted to $149,394, $173,517, and $152,654 respectively. As of December 31,
1996, no unfunded accumulated benefit obligation exists, and therefore, no
additional liability is required. The following table sets forth the plan's
funded status at December 31:
<TABLE>
<CAPTION>
1996 1995 1994
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Projected benefit obligation........................... $ 2,933,900 2,768,600 2,285,400
Less plan assets at market value....................... 3,434,400 3,169,300 2,561,400
- - ---------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefits............ 500,500 400,700 276,000
Unrecognized net assets................................ (216,700) (229,500) (242,200)
Unrecognized net loss.................................. 115,100 147,000 188,300
- - ----------------------------------------------------------------------------------------------------
Prepaid pension costs.................................. $ 398,900 318,200 222,100
====================================================================================================
</TABLE>
Net pension expense for the years ended December 31, 1996, 1995 and 1994 is
being accounted for per Financial Accounting Standards Board Statement No. 87,
"Employers' Accounting for Pensions" and includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the year........... $ 154,000 135,300 188,200
Interest cost on projected benefit obligation.......... 186,200 165,000 140,000
Actual return on plan assets........................... (258,700) (210,200) (190,400)
Net amortization and deferrals......................... (12,800) (12,700) (12,800)
- - ----------------------------------------------------------------------------------------------------
Net periodic pension cost.............................. $ 68,700 77,400 125,000
====================================================================================================
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligation at the beginning of the year to determine the net
periodic pension cost and at the end of the year for the present value of the
benefit obligation during 1996 and 1995 was 7.25% and 6.75% respectively. The
expected long-term rate of return on assets was 8.0% during 1996 and 1995, and
the rate of increase in future compensation was 4.5% in 1996 and 1995.
41
<PAGE> 40
16) OTHER EMPLOYEE BENEFITS
The Association has established a non-qualified supplemental retirement plan for
the benefit of certain key officers. This plan was effective October 1, 1988,
and is being funded through the purchase of life insurance contracts. The funded
status of the Association's non-qualified supplemental retirement plan is shown
below as of December 31:
<TABLE>
<CAPTION>
1996 1995 1994
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Projected benefit obligation
(actuarial present value of projected
benefits attributed to key officers'
service to date based on future
compensation levels)................................ $2,410,586 2,463,541 1,971,684
Plan assets at market value............................ -- -- --
- - ---------------------------------------------------------------------------------------------------
Funded status.......................................... 2,410,586 2,463,541 1,971,684
Unrecognized prior service cost........................ (198,696) (261,776) (153,361)
Unrecognized net loss.................................. (160,137) (342,358) (107,119)
- - ---------------------------------------------------------------------------------------------------
Accrued pension cost................................... 2,051,753 1,859,407 1,711,204
Additional minimum liability........................... 358,833 604,134 79,602
- - ---------------------------------------------------------------------------------------------------
Minimum liability...................................... $2,410,586 2,463,541 1,790,806
===================================================================================================
</TABLE>
The additional minimum liability required to be recognized currently exceeds
unrecognized net obligation and prior service costs. As a result, this excess
has been charged to retained earnings, net of the applicable tax benefit.
Included in the projected benefit obligation is an amount called the accumulated
benefit obligation. The accumulated benefit obligation represents the actuarial
present value of benefits attributed to employee service and compensation levels
to date. At December 31, 1996, the accumulated benefit obligation was
$2,410,586. The vested portion was $2,410,586.
Plan expense for the years ended December 31, 1996, 1995 and 1994 is being
accounted for per Financial Accounting Standards Board Statement No. 87,
"Employers' Accounting for Pensions" and includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the year................ $ -- -- --
Interest cost on projected benefit obligation............... 182,316 155,007 150,315
Net amortization and deferrals.............................. 69,937 51,647 54,943
- - ---------------------------------------------------------------------------------------------------
$ 252,253 206,654 205,258
===================================================================================================
</TABLE>
42
<PAGE> 41
17) OFFICER, DIRECTOR AND EMPLOYEE PLANS
STOCK OPTION PLANS
In conjunction with the Conversion, the Company adopted an incentive stock
option plan for the benefit of the officers and employees of the Company and its
affiliates and a director's stock option plan for the benefit of outside
directors of the Company. The number of shares of common stock authorized under
the Employees' Plan, after restatement for the 3 for 2 stock split, is 321,600,
equal to 7.66% of the total number of shares issued in the Conversion. As of
December 31, 1996, 306,600 options had been granted at $6.67 per share. Options
granted under the Employees' Plan are exercisable at a rate of 20% per year
commencing June 23, 1993. During 1996, 42,465 options had been exercised under
this Plan, and issued from authorized shares. As of December 31, 1996, stock
options to purchase 122,348 shares remain outstanding in the Employees' Plan.
The number of shares of common stock authorized under the Directors' Plan, after
restatement for the 3 for 2 stock split, is 98,400, equal to 2.34% of the total
number of shares issued in the Conversion. As of December 31, 1996, stock
options to purchase 92,400 shares had been granted at a price of $6.67 per share
and are exercisable immediately. During 1996, 48,100 options had been exercised
under this Plan, and issued from authorized shares. As of December 31, 1996,
stock options to purchase 33,800 shares remain outstanding in the Directors'
Plan. The term of the options issued under both Plans expires ten years from the
date of grant (June 23, 1992), or one year from the date of death, disability or
retirement of the optionee.
EMPLOYEE STOCK
OWNERSHIP PLAN
In conjunction with the Conversion, the Association formed an Employee Stock
Ownership Plan ("ESOP"). The ESOP covers substantially all employees with more
than one year of employment and who have attained the age of 21. The ESOP
borrowed $2,240,000 from an unaffiliated third-party lender and purchased, after
restatement for the 3 for 2 stock split, 336,000 common shares issued in the
Conversion. The debt was assumed by the Company in 1994. The Association will
make scheduled discretionary cash contributions to the ESOP sufficient to
service the amount borrowed. In accordance with generally accepted accounting
principles, the unpaid balance of the ESOP loan, which is comparable to unearned
compensation, is reported as a reduction of stockholders' equity. Total
contributions by the Association to the ESOP which were used to fund principal
and interest payments on the ESOP debt totaled $283,663, $290,390 and $255,401
for the years ended December 31, 1996, 1995 and 1994 respectively.
43
<PAGE> 42
ASSOCIATION RECOGNITION AND RETENTION PLAN
In conjunction with the Conversion, the Company formed an Association
Recognition and Retention Plan ("RRP"), which was authorized to acquire 4% of
the shares of common stock in the Conversion. The total shares authorized were
awarded to directors and to employees in key management positions in order to
provide them with a proprietary interest in the Company in a manner designed to
encourage such employees to remain with the Company.
Subsequent to the Conversion, the entire balance of shares of common stock
required to fund the RRP (168,000 shares after restatement for the 3 for 2 stock
split) were purchased by the RRP trustees in the open market. The RRP trustees
completed the purchase of the shares in the open market at prices ranging from,
after restatement for the 3 for 2 stock split, a low of $8.00 to a high of $8.17
per share.
The $1,353,178 contributed to the RRP is being amortized to compensation expense
as the plan participants become vested in those shares. For the years ended
December 31, 1996, 1995 and 1994 respectively, $244,543, $244,543 and $244,543
had been amortized to expense. The unamortized cost, which is comparable to
deferred compensation, is reflected as a reduction of stockholders' equity.
18) INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No. 109
(SFAS 109) which requires a change from the deferred method to the liability
method of accounting for income taxes. Under the liability method, deferred
income taxes are recognized for the tax consequences of "temporary differences"
by applying statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and tax bases of existing
assets and liabilities.
Among the provisions of SFAS 109 which impact the Company is the tax treatment
of bad debt reserves. SFAS 109 provides that a deferred tax asset is to be
recognized for the bad debt reserve established for financial reporting purposes
and requires a deferred tax liability to be recorded for increases in the tax
bad debt reserve since January 1, 1988, the effective date of certain changes
made by the Tax Reform Act of 1986 to the calculation of savings institutions'
bad debt deduction. Accordingly, retained earnings at December 31, 1996 includes
approximately $4,358,000 for which no deferred federal income tax liability has
been recognized.
44
<PAGE> 43
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- - ------------------------------------------------------------------
1996 1995 1994
- - ------------------------------------------------------------------
<S> <C> <C> <C>
Current...................... $1,098,891 1,937,573 2,615,173
Deferred..................... 106,920 236,763 614,663
- - ------------------------------------------------------------------
$1,205,811 2,174,336 3,229,836
==================================================================
</TABLE>
A reconciliation of the statutory federal income tax rate to effective income
tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- - ------------------------------------------------------------------------
1996 1995 1994
- - ------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate..... 34.0% 34.0 34.0
State income taxes.................... 2.2 3.4 4.5
Tax credits........................... (3.2) (1.8) (1.3)
Other................................. (1.5) (3.2) (2.5)
- - ------------------------------------------------------------------------
Effective income tax rate............. 31.5% 32.4 34.7
========================================================================
</TABLE>
Deferred income tax expense consists of the following tax effects of timing
differences:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- - ----------------------------------------------------------------------------------
1996 1995 1994
- - ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Loan fees................................. $ 161,452 103,041 179,343
Compensation related expenses............. (52,470) (4,836) 83,825
Depreciation.............................. 10,083 (17,564) 23,055
Statutory bad debt deduction in
excess of (less than) book provision... (9,915) 137,055 203,945
Unrealized loss on trading securities..... -- -- (8,468)
Joint venture income...................... -- -- 14,323
Other, net................................ (2,230) 19,067 118,640
- - ----------------------------------------------------------------------------------
$ 106,920 236,763 614,663
==================================================================================
</TABLE>
19) REGULATORY CAPITAL REQUIREMENTS
On August 9, 1989, the Financial Institution's Reform, Recovery and Enforcement
Act of 1989 ("FIRREA") was signed into law. FIRREA mandated that the OTS adopt
capital standards which require savings institutions to satisfy three separate
capital requirements. Under the standards, savings institutions must maintain
"tangible" capital equal to 1.5% of adjusted total assets, "core" capital equal
to 3% of adjusted total assets and a combination of core and "supplementary"
capital equal to 8.0% of "risk-weighted" assets.
For purposes of the regulation, the core and tangible capital of Southwest
Federal Savings and Loan Association of Chicago is defined as stockholders'
equity, adjusted for investments in non-includable subsidiaries and net
unrealized losses on securities available for sale, net of taxes. Adjusted total
assets are the Association's total assets as determined under generally accepted
accounting principles, adjusted for assets of non-includable subsidiaries and
net unrealized losses on securities available for sale, net of taxes.
In determining compliance with the risk-based capital requirement, the
Association is allowed to use both core capital and supplementary capital
provided the amount of supplementary capital used does not exceed the
Association's core capital.
45
<PAGE> 44
Supplementary capital of Southwest Federal Savings and Loan Association of
Chicago is defined to include all of the Association's general loss allowances.
The risk-based capital requirement is measured against risk-weighted assets
which equals the sum of each asset and the credit-equivalent amount of each
off-balance sheet item after being multiplied by an assigned risk weight.
At December 31, 1996 the Association's regulatory equity capital was as follows:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stockholders' equity................................ $30,715,043 30,715,043 30,715,043
Non-includable subsidiary........................... (3,162,471) (3,162,471) (3,174,471)
Unrealized losses on securities
available for sale, net of taxes................. 634,089 634,089 634,089
General loss allowances............................. -- -- 751,443
- - ---------------------------------------------------------------------------------------------
Regulatory capital computed......................... 28,186,661 28,186,661 28,926,104
Minimum capital requirement......................... 5,565,000 11,131,000 14,728,000
- - ---------------------------------------------------------------------------------------------
Regulatory capital excess........................ $22,621,661 17,055,661 14,198,104
=============================================================================================
Computed capital ratio.............................. 7.60% 7.60% 15.71%
Minimum capital ratio............................... 1.50 3.00 8.00
- - ---------------------------------------------------------------------------------------------
Regulatory capital excess........................ 6.10% 4.60% 7.71%
=============================================================================================
</TABLE>
20) STOCKHOLDERS' EQUITY
As part of the Conversion, the Association established a liquidation account for
the benefit of all eligible depositors who continue to maintain their deposit
accounts in the Association after conversion. In the unlikely event of a
complete liquidation of the Association, each eligible depositor will be
entitled to receive a liquidation distribution from the liquidation account, in
the proportionate amount of the then current adjusted balance for deposit
accounts held, before distribution may be made with respect to the Association's
capital stock. The Association may not declare or pay a cash dividend to the
Company on, or repurchase any of, its capital stock if the effect thereof would
cause the retained earnings of the Association to be reduced below the amount
required for the liquidation account. Except for such restrictions, the
existence of the liquidation account does not restrict the use or application of
retained earnings.
The Association's capital exceeds all of the fully phased-in capital
requirements imposed by FIRREA. OTS regulations generally provide that an
institution that exceeds all fully phased-in capital requirements before and
after a proposed capital distribution could, after prior notice but without the
approval by the OTS, make capital distributions during the fiscal year of up to
100% of its net income to date during the fiscal year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the fiscal year. Any
additional capital distributions would require prior regulatory approval.
Unlike the Association, the Company is not subject to these regulatory
restrictions on the payment of dividends to its stockholders. However, the
Company's source of funds for future dividends may depend upon dividends
received by the Company from the Association.
46
<PAGE> 45
21) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to various financial instruments with off-balance sheet
risk in the normal course of business. These instruments include commitments to
extend credit, credit enhancement agreements, and letters of credit. These
financial instruments carry varying degrees of credit and interest-rate risk in
excess of amounts recorded in the consolidated financial statements.
Commitments to originate mortgage loans of $8,020,650 at December 31, 1996
represent amounts which the Association plans to fund within the normal
commitment period of 60 to 90 days. Of this amount, $4,829,250 are in fixed rate
commitments with rates ranging from 7.25% to 9.75%, and $3,191,400 are in
adjustable rate commitments. In addition, the Association is committed to fund
an additional $1,119,000 in loan participation purchases at adjustable rates.
Because the credit worthiness of each customer is reviewed prior to extension of
the commitment, the Association adequately controls its credit risk on these
commitments, as it does for loans recorded on the balance sheet. The Association
conducts all of its lending activities in the Chicagoland area in which it
serves. Management believes the Association has a diversified loan portfolio and
the concentration of lending activities in these local communities does not
result in an acute dependency upon economic conditions of the lending region.
The Company and the Association have approved, but unused, equity lines of
credit of approximately $6,421,000 at December 31, 1996. Approval of lines of
credit is based upon underwriting standards and limitations similar to
conventional and construction lending. The Association is also committed to fund
an additional investment of $309,000 in notes secured by adjustable rate
mortgage loans issued by the Community Investment Corporation.
The Association has issued outstanding letters of credit totaling approximately
$4,574,000 to various municipalities regarding incomplete construction projects
on which the Association had originated mortgage loans, or regarding builders
with whom the Association has had long standing relationships.
The Federal Home Loan Bank of Chicago has issued a standby letter of credit for
$3,000,000 to the State of Illinois on behalf of the Association in order to
secure a deposit of $3,000,000.
22) CONTINGENCIES
The Association is, from time to time, a party to certain lawsuits arising in
the ordinary course of its business, wherein it enforces its security interest.
Management, based upon discussions with legal counsel, believes that the Company
and the Association are not engaged in any legal proceedings of a material
nature at the present time.
23) SAIF SPECIAL ASSESSMENT AND ITS IMACT ON SAIF INSURANCE PREMIUMS
The deposits of savings associations, such as Southwest Federal Savings and Loan
Association, are presently insured by the Savings Association Insurance Fund
("SAIF"), which together with the Bank Insurance Fund ("BIF"), are the two
insurance funds administered by the Federal Deposit Insurance Corporation
("FDIC"). Financial institutions which are members of the BIF are experiencing
substantially lower deposit insurance premiums because the BIF has achieved its
required level of reserves while the SAIF has not yet achieved
47
<PAGE> 46
its required reserves. In order to help eliminate this disparity and any
competitive disadvantage due to disparate deposit insurance premium schedules,
legislation to recapitalize the SAIF was enacted in September 1996.
The legislation required a special one-time assessment of 65.7 cents per $100 of
SAIF insured deposits held by the Association at March 31, 1995. The one-time
special assessment resulted in a charge to earnings of approximately $1,698,000
during the year ended December 31, 1996. The after-tax effect of this one-time
charge to earnings totaled approximately $1,002,000. The legislation is intended
to fully recapitalize the SAIF fund so that commercial bank and thrift deposits
will be charged the same FDIC premiums beginning January 1, 1997. As of such
date, deposit insurance premiums for highly rated institutions, such as the
Association, will be substantially reduced.
The Association, however, will continue to be subject to an assessment to fund
repayment of the Financing Corporation's ("FICO") obligations. The FICO
assessment for SAIF insured institutions will be 6.48 cents per $100 of deposits
while BIF insured institutions will pay 1.30 cents per $100 of deposits until
the year 2000 when the assessment will be imposed at the same rate on all FDIC
insured institutions. Accordingly, as a result of the reduction of the SAIF
assessment and the resulting FICO assessment, the annual after-tax decrease in
assessment costs is expected to be approximately $270,000 based upon a December
31, 1996 assessment base.
24) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS: For cash and interest-bearing deposits, the carrying
amount is a reasonable estimate of fair value.
U.S. GOVERNMENT AND AGENCY OBLIGATIONS: Fair values for securities are based on
quoted market prices as published in financial publications.
MORTGAGE-BACKED SECURITIES: Fair values for mortgage-backed securities are based
on average quotes received from a third-party broker.
LOANS RECEIVABLE: The fair values of fixed-rate one-to-four family residential
mortgage loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions. The fair values for other
fixed-rate mortgage loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms and
collateral to borrowers of similar credit quality. For adjustable-rate loans
which reprice monthly and with no significant change in credit risk, fair values
approximate carrying values.
48
<PAGE> 47
OTHER INVESTMENTS: Fair values for other investments are based on quoted market
prices received from third-party sources.
INVESTMENT IN JOINT VENTURES: The Company's subsidiaries are partners in real
estate ventures engaged primarily in the purchase of undeveloped land for
improvement, and construction of residential or low-income housing properties
for sale or investment. There are no quoted market prices for these venture
interests and no stated rate of return. It is not practicable to estimate the
fair value of the investment in these ventures because of the limited
information available to the Company's subsidiaries and because of the
significant cost involved to obtain an outside appraisal. These investments are
being accounted for using the equity method.
DEPOSIT LIABILITIES: The fair value of demand deposits, savings accounts and
money market deposits is the amount payable on demand at the reporting date. The
fair value of fixed maturity certificates of deposit is estimated by discounting
the future cash flows using the rates currently offered for deposits of similar
original maturities.
BORROWED MONEY: Rates currently available to the Company for debt with similar
terms and original maturities are used to estimate fair value of existing debt.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: Fair values of the Company's
off-balance sheet financial instruments, which consist of loan commitments and
letters of credit, are based on fees charged to enter into these agreements. As
the Company currently charges no fees on these instruments, no estimate of fair
value has been made.
The estimated fair values of the Company's financial instruments as of December
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
- - ----------------------------------------------------------------------
CARRYING FAIR
AMOUNT VALUE
- - ----------------------------------------------------------------------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and cash
equivalents........................ $ 11,679,587 11,679,587
U.S. Government
and agency
obligations,
available for sale................ 46,591,063 46,591,063
Mortgage-backed
securities,
available for sale............. 32,840,347 32,840,347
Loans receivable,
gross............................ 273,636,429 272,772,800
Other investments,
available for sale............. 7,427,738 7,427,738
- - ----------------------------------------------------------------------
FINANCIAL LIABILITIES:
Deposits........................... 280,433,964 281,467,600
Borrowed money..................... 55,158,265 55,422,000
- - ----------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1996
- - ----------------------------------------------------------------------
CARRYING FAIR
AMOUNT VALUE
- - ----------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and cash
equivalents....................... $ 15,867,897 15,867,897
U.S. Government
and agency
obligations,
available for sale................ 41,983,359 41,983,359
Mortgage-backed
securities,
available for sale............. 31,267,842 31,267,842
Loans receivable,
gross............................. 253,906,938 257,646,000
Other investments,
available for sale............. 8,003,176 8,003,176
- - ----------------------------------------------------------------------
FINANCIAL LIABILITIES:
Deposits........................... 255,308,374 255,250,100
Borrowed money..................... 52,658,265 53,986,000
- - ----------------------------------------------------------------------
</TABLE>
49
<PAGE> 48
25) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial condition, as of December 31,
1996 and 1995 and condensed statements of earnings and cash flows for the years
ended December 31, 1996, 1995 and 1994 for Southwest Bancshares, Inc. should be
read in conjunction with the consolidated financial statements and the notes
thereto.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------
STATEMENTS OF FINANCIAL CONDITION
- - --------------------------------------------------------------------------
DECEMBER 31,
- - --------------------------------------------------------------------------
1996 1995
- - --------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.................. $ 402,451 1,884,114
Securities available for sale.............. 4,971,446 5,220,208
Loans receivable........................... 4,713,515 4,900,134
Equity investment in subsidiaries.......... 31,704,547 35,406,284
Prepaid expenses and other assets.......... 76,913 71,031
- - --------------------------------------------------------------------------
$41,868,872 47,481,771
==========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued taxes and other liabilities........ $ 64,378 89,745
Borrowed money............................. 1,000,000 --
Common stock............................... 44,377 43,471
Additional paid-in capital................. 28,595,067 27,781,264
Retained earnings.......................... 40,350,942 39,719,890
Unrealized gain (loss) on securities
available for sale...................... (3,102) 19,249
Treasury stock............................. (28,182,790) (20,171,848)
- - -------------------------------------------------------------------------
$41,868,872 47,481,771
=========================================================================
<CAPTION>
- - -------------------------------------------------------------------------
STATEMENTS OF EARNINGS
- - -------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
- - -------------------------------------------------------------------------
1996 1995 1994
- - -------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in earnings
of subsidiaries.................. $2,298,262 3,989,933 5,638,260
Interest and dividend income........ 802,521 901,223 755,604
Interest expense.................... (25,523) -- --
Fees and service charges............ 38,650 -- --
Gain on sale of investment securities
available for sale............... 375 113,694 106,937
Unrealized loss on trading
account securities............... -- -- (22,018)
Non-interest expense................ (249,209) (197,894) (236,434)
Provision for federal and state
income taxes..................... (237,215) (275,392) (175,823)
- - --------------------------------------------------------------------------
Net income.......................... $2,627,861 4,531,564 6,066,526
==========================================================================
</TABLE>
50
<PAGE> 49
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- - ---------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
- - ---------------------------------------------------------------------------------------
1996 1995 1994
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income..................................... $2,627,861 4,531,564 6,066,526
Equity in earnings of subsidiaries............. (2,298,262) (3,989,933) (5,638,260)
Gain on sale of investment
securities, available for sale................ (375) (113,694) (106,937)
Unrealized loss on trading
account securities............................ -- -- 22,018
(Increase) decrease in accrued
interest receivable........................... (22,207) 123,283 (66,549)
(Increase) decrease in prepaid
taxes and other liabilities................... 189,653 65,180 (30,568)
Increase in accrued taxes
and other liabilities......................... 27,773 23,509 1,195
Proceeds from maturities of
trading account securities.................... -- -- 414,854
- - ---------------------------------------------------------------------------------------
Net cash provided by operating activities......... 524,443 639,909 662,279
- - ---------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of mortgage-
backed securities, available for sale......... 165,879 278,113 87,593
Proceeds from maturities of
investment securities, available for sale..... -- 4,000,000 --
Proceeds from sales of investment
securities, available for sale................ 45,375 778,875 843,250
Purchase of investment securities,
available for sale............................ -- (250,000) (3,657,500)
Loan disbursements............................. (1,610,147) (2,543,634) (1,510,000)
Loan repayments................................ 1,238,651 320,000 80,000
Participation loans sold....................... 558,115 300,000 --
- - ---------------------------------------------------------------------------------------
Net cash provided by (for) investing activities... 397,873 2,883,354 (4,156,657)
- - ---------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options........ 603,773 249,000 400,000
Proceeds of borrowed money..................... 1,000,000 -- --
Dividends paid on common stock................. (1,995,943) (2,221,158) (581,180)
Payment in lieu of issuing fractional shares... (867) -- --
Dividends received from subsidiary............. 6,000,000 8,000,000 8,000,000
Purchase of treasury stock..................... (8,010,942) (8,962,285) (4,069,024)
- - ---------------------------------------------------------------------------------------
Net cash provided by (for)
financing activities........................... (2,403,979) (2,934,443) 3,749,796
- - ---------------------------------------------------------------------------------------
Net change in cash and cash equivalents........... (1,481,663) 588,820 255,418
Cash and cash equivalents at beginning of year.... 1,884,114 1,295,294 1,039,876
- - ---------------------------------------------------------------------------------------
Cash and cash equivalents at end of year.......... $ 402,451 1,884,114 1,295,294
=======================================================================================
</TABLE>
51
<PAGE> 50
CORPORATE INFORMATION
STOCK PRICE INFORMATION
Southwest Bancshares, Inc. common stock is traded on The Nasdaq Stock Market
under the symbol "SWBI". Newspaper stock tables list the company as "SwBcsh" or
"SwBncsh". The table below shows the reported high and low sale prices of the
common stock for the periods indicated during the fiscal year ended December 31,
1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First quarter 18 1/2 17 11/32 16 1/2 13 27/32
Second quarter 18 11/32 17 27/32 18 11/32 15 27/32
Third quarter 18 11/32 17 27/32 19 14 21/32
Fourth quarter 18 3/4 17 59/64 18 27/32 17 21/32
</TABLE>
ANNUAL MEETING OF STOCKHOLDERS
The Annual Meeting of Stockholders of Southwest Bancshares, Inc. will be held at
9:30 a.m. on April 22, 1997, at The Oak Lawn Hilton Hotel, 9333 S. Cicero
Avenue, Oak Lawn, Illinois. All stockholders are cordially invited to attend.
ANNUAL REPORT ON FORM 10-K
Copies of Southwest Bancshares, Inc. Annual Report for year ended December 31,
1996, on Form 10-K filed with the Securities and Exchange Commission are
available without charge to stockholders upon written request to:
RONALD D. PHARES
VICE PRESIDENT
SOUTHWEST BANCSHARES, INC.
4062 SOUTHWEST HIGHWAY
HOMETOWN, ILLINOIS 60456
708/636-2700
INVESTOR INFORMATION
Shareholders, investors and analysts interested in additional information may
contact:
RONALD D. PHARES
VICE PRESIDENT
at the Corporate Office.
STOCK TRANSFER AGENT AND REGISTRAR
Harris Trust and Savings Bank is the transfer agent for Southwest Bancshares,
Inc. and maintains all stockholder records and can assist with stock transfer
and registration, address change, changes or corrections in social security or
tax identification numbers, and 1099 tax reporting questions. If you have
questions, please contact the stock transfer agent at the address below:
HARRIS TRUST AND SAVINGS BANK
111 W. MONROE STREET
POST OFFICE BOX 755
CHICAGO, ILLINOIS 60690
ATTENTION: CORPORATE TRUST OPERATIONS
WASHINGTON COUNSEL
MULDOON, MURPHY & FAUCETTE
5101 WISCONSIN AVENUE, N.W.
WASHINGTON, D.C. 20016
LOCAL COUNSEL
ROCK, FUSCO, REYNOLDS, CROWE &
GARVEY, LIMITED
350 N. LASALLE STREET, SUITE 900
CHICAGO, ILLINOIS 60610
INDEPENDENT AUDITORS
COBITZ, VANDENBERG & FENNESSY
7800 WEST 95TH STREET, SUITE 301
HICKORY HILLS, ILLINOIS 60457
CORPORATE OFFICE
SOUTHWEST BANCSHARES, INC.
4062 SOUTHWEST HIGHWAY
HOMETOWN, ILLINOIS 60456
52
<PAGE> 1
CONSENT OF COBITZ, VANDENBERG & FENNESSY
EXHIBIT 23.0
<PAGE> 2
COBITZ, VANDENBERG & FENNESSY
CERTIFIED PUBLIC ACCOUNTANTS
7800 WEST 95TH STREET, SUITE 301
HICKORY HILLS, ILLINOIS 60457
------
(708) 430-4106
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors
Southwest Bancshares, Inc.
We consent to incorporation by reference in the Registration Statement (No.
33-54112 - 1992 Stock Option Plan for Outside Directors) on Form S-8 and the
Registration Statement (No. 33-54114 - 1992 Incentive Stock Option Plan) on Form
S-8 of Southwest Bancshares, Inc. of our report dated January 31, 1997 relating
to the consolidated balance sheets of Southwest Bancshares, Inc. and
subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of earnings, changes in stockholders' equity, and cash flows for each
of the years in the three year period ended December 31, 1996, which report is
incorporated by reference in the December 31, 1996 Annual Report on Form 10-K of
Southwest Bancshares, Inc.
/s/ Cobitz, Vandenberg & Fennessy
Hickory Hills, Illinois
March 18, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted Form the Form 10-K and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000885942
<NAME> SOUTHWEST BANCSHARES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,300
<INT-BEARING-DEPOSITS> 5,380
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 89,967
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 263,182
<ALLOWANCE> 751
<TOTAL-ASSETS> 382,361
<DEPOSITS> 280,434
<SHORT-TERM> 55,158
<LIABILITIES-OTHER> 6,910
<LONG-TERM> 0
0
0
<COMMON> 44
<OTHER-SE> 39,815
<TOTAL-LIABILITIES-AND-EQUITY> 382,361
<INTEREST-LOAN> 21,674
<INTEREST-INVEST> 5,556
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 27,230
<INTEREST-DEPOSIT> 11,888
<INTEREST-EXPENSE> 15,277
<INTEREST-INCOME-NET> 11,953
<LOAN-LOSSES> 24
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 9,403
<INCOME-PRETAX> 3,834
<INCOME-PRE-EXTRAORDINARY> 2,628
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,628
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.91
<YIELD-ACTUAL> 7.91
<LOANS-NON> 811
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 754
<CHARGE-OFFS> 27
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 751
<ALLOWANCE-DOMESTIC> 751
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
