<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended March 31, 1998
Commission File No.: 0-25504
WEST TOWN BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 36-3962962
(State or other jurisdiction of (I.R.S. Employer Id. No.)
incorporation or organization)
4852 West 30th Street, Cicero, Illinois 60804
(Address of principal executive offices)
Registrant's telephone number, including area code: (708) 652-2000
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
---
As of May 31, 1998 there were issued and outstanding 224,303 shares of the
Registrant's common stock which is traded over the counter through the National
Daily Quotation System "Pink Sheet" published by the National Quotation Bureau,
Inc. The aggregate market value of the voting stock held by non-affiliates of
the Registrant based on the estimated value of the stock on May 31, 1998 was
$2,691,636 (224,303 shares at $12 per share). For purposes of this calculation
directors and officers of the Registrant are considered non-affiliates of the
Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The Annual Report to Stockholders for the year ended March 31, 1998 is
incorporated by reference into Part II of this Form 10-K.
The Proxy Statement for the 1998 Annual Meeting of Stockholders is
incorporated by reference into Part III of this Form 10-K.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I PAGE
----
<S> <C> <C>
Item 1. Business................................................... 1
Additional Item. Executive Officers of the Registrant............... 26
Item 2. Properties................................................. 26
Item 3. Legal Proceedings.......................................... 26
Item 4. Submission of Matters to a Vote of Security Holders........ 26
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 26
Item 6. Selected Financial Data.................................... 26
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 26
Item 8. Financial Statements and Supplementary Data................ 26
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant......... 27
Item 11. Executive Compensation..................................... 27
Item 12. Security Ownership of Certain Beneficial
Owners and Management...................................... 27
Item 13. Certain Relationships and Related Transactions............. 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K........................................ 28
Item 15. SIGNATURES................................................. 29
</TABLE>
<PAGE>
PART I
Item I. Business.
- -----------------
General
West Town Bancorp, Inc. (also referred to as the "Company") was
incorporated under Delaware law on May 6, 1994. On March 1, 1995, the
Registrant acquired West Town Savings Bank (the "Bank") as a part of the Bank's
conversion from a mutual to a stock state chartered savings bank. The
Registrant is a savings bank holding company and is subject to regulation by the
Office of the Illinois Commissioner of Banks and Real Estate (the "OBRE"), 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 Bank and West Town Insurance
Agency, the Bank's wholly-owned subsidiary. The Registrant received conversion
proceeds amounting to $1.9 million, of which $944,000 was utilized to acquire
all of the capital stock of the Bank. At March 31, 1998, the Company had total
assets of $29.5 million and stockholders' equity of $4.0 million (13.7% of total
assets).
West Town Savings was originally organized in 1922 as an Illinois-chartered
savings and loan association. In 1992 it converted to an Illinois chartered
savings bank. The Bank 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 Bank's principal business has been and continues to be attracting
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
Bank'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 Bank's primary sources of funds are deposits,
principal and interest payments on loans and mortgage-backed securities.
Market Area
The Bank has been, and continues to be, a community-oriented savings
institution offering a variety of financial sources to meet the needs in the
community it serves. The Bank's deposit-gathering area is concentrated in the
neighborhoods surrounding its office which is located in the Chicago suburb of
Cicero, in Cook County. The Bank's lending base primarily covers the same area.
Management believes that its office is located in a community that can generally
be characterized as a stable, residential neighborhood of predominately one-to-
four family residences, mixed with a commercial segment of a diverse group of
retail service businesses.
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 March 31, 1998, the total loans outstanding were
$19.2 million, of which $17.1 million were one-to-four family residential
mortgage loans, or 89.2% of the loan portfolio. At that same date, multi-family
residential mortgage loans totaled $440,000, or 2.3% of the loan portfolio.
The Bank currently is participating in a $2,000,000 construction loan for
the purpose of constructing one-to-four family dwellings in Morton Grove,
Illinois. It is anticipated that this project will be completed by December 31,
1998.
The remainder of the mortgage loans, which totaled $89,000, or 0.5% of
total loans outstanding at March 31, 1998, consisted of commercial real estate
loans. Other loans were $180,000, consisting of loans on deposit accounts and
home improvement loans, or .9% of total loans. At March 31, 1998, purchased
mortgage loans totaled $13.3 million, or 69.3% of the loan portfolio. All
purchased mortgage loans were originated in the Chicago metropolitan area.
-1-
<PAGE>
The Company and its subsidiaries also invest in mortgage-backed securities.
At March 31, 1998, the amortized cost of total mortgage-backed securities
aggregated $1.6 million, or 5.5% of total assets, of which 14.4% were backed by
adjustable rate mortgage ("ARM") loans and 85.6% were backed by fixed-rate
loans. All of the mortgage-backed securities at March 31, 1998 were insured or
guaranteed by either the Government National Mortgage Bank ("GNMA"), the Federal
National Mortgage Bank ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC").
Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 1 - Description of Business that are not historical facts
are forward-looking statements subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. The Company cautions readers of this
Annual Report on form 10-K that a number of important factors could cause the
Company's actual results in 1998 and beyond to differ materially from those
expressed in any such forward-looking statements. These factors include,
without limitation the general economic and business conditions affecting the
Company's customers; changes in interest rates; the adequacy of the Bank's
allowance for loan losses; competition from, among others, commercial banks,
savings and loan associations, mutual funds, money market funds, finance
companies, credit unions, mortgage companies, and the United States Government;
limited partnership activities; federal and state legislation, regulation and
supervision of the Bank and its subsidiaries; the risk of defaults on loans; and
contractual, statutory and regulatory restrictions on the Bank's ability to pay
dividends to the Company.
-2-
<PAGE>
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 fair
value.
<TABLE>
<CAPTION>
At March 31,
------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- -----------------
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 $17,141 89.20% 14,525 85.45 12,183 93.72 8,165 88.05 9,069 83.78
Multi-family 440 2.29 524 3.08 620 4.77 721 7.78 906 8.37
Commercial real estate 88 .46 95 .56 138 1.06 337 3.63 794 7.33
Construction 1,368 7.12 1,700 10.00 - - - -
------- ------ ------ ------ ------ ------ ----- ------ ------ ------
Total mortgage loans 19,037 99.07 16,844 99.09 12,941 99.55 9,223 99.46 10,769 99.48
Other loans 180 .93 154 .91 58 .45 50 .54 56 .52
------- ------ ------ ------ ------ ------ ----- ------ ------ ------
Total loans receivable 19,217 100.00% 16,998 100.00 12,999 100.00 9,273 100.00 10,825 100.00
------- ====== ------ ====== ------ ====== ----- ====== ------ ======
Less:
Loans in process 626 1,348 9 - -
Unearned discounts and
deferred loan fees 88 57 27 41 20
Allowance for loan losses 46 40 30 15 63
Allowance for
uncollected interest 5 - - - -
------- ------ ------ ----- ------
Loans receivable, net $18,452 15,553 12,933 9,217 10,742
======= ====== ====== ===== ======
Mortgage-backed securities:
FHLMC $ 664 40.46% 1,140 45.54% 1,490 48.11 1,727 48.09 2,020 49.35
FNMA 636 38.76 916 36.60 1,112 35.96 1,273 35.45 1,418 34.64
GNMA 341 20.78 447 17.86 490 15.85 591 16.46 655 16.01
------- ------ ------ ------ ------ ------ ----- ------ ----- ------
Total mortgage-backed
securities 1,641 100.00% 2,503 100.00% 3,092 100.00% 3,591 100.00 4,093 100.00
====== ====== ====== ====== ======
Net premiums (discounts) (9) (9) (6) (7) (5)
------- ------ ------ ------ ------
Net mortgage-backed
securities $ 1,632 2,494 3,086 3,584 4,088
======= ====== ====== ===== ======
</TABLE>
-3-
<PAGE>
The following tables set forth the Company and its subsidiaries' loan
originations and loan and mortgage-backed securities purchases, sales and
principal repayments for periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of period $16,844 12,941 9,223
------- ------ ------
Mortgage loans originated:
One-to-four family 202 398 735
Multi-family - - -
Commercial real estate - - -
------- ------ ------
Total mortgage loans originated 202 398 735
------- ------ ------
Mortgage loans purchased:
One-to-four family 5,976 3,639 5,131
Construction - 2,000 -
------- ------ ------
Total mortgage loans purchased 5,976 5,639 5,131
------- ------ ------
Total mortgage loans originated and
purchased 6,178 6,037 5,866
------- ------ ------
Participation loans sold (2,128) (300) -
Transfer of loans to foreclosed real estate - - -
Principal repayments (1,857) (1,834) (2,148)
------- ------ ------
At end of period $19,037 16,844 12,941
======= ====== ======
Other loans (gross):
At beginning of period $ 154 58 50
Other loans originated 146 271 34
Principal repayments (120) (175) (26)
------- ------ ------
At end of period $ 180 154 58
======= ====== ======
Mortgage-backed securities (gross):
At beginning of period $ 2,503 3,092 3,591
Mortgage-backed securities purchased - - -
Mortgage-backed securities sold - - -
Amortization and repayments (862) (589) (499)
------- ------ ------
At end of period $ 1,641 2,503 3,092
======= ====== ======
</TABLE>
-4-
<PAGE>
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 March 31, 1998. Mortgage-backed securities are
shown at amortized cost, not fair 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
loans and mortgage-backed securities totaled $6.9 million, $2.6 million and $2.7
million for the years ended March 31, 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
At March 31, 1998
------------------------------------------------------------------------------------------
Totals
--------------------------------
One-to- Total Mortgage-
Four Multi- Commercial Other Loans Backed
Family Family Real Estate Construction Loans Receivable Securities Total
------- ------ ----------- ------------ ----- ---------- ---------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year $ 3,762 - - 1,368 6 5,136 244 5,380
------ ----- ----- ----- ---- ------ ----- ------
After one year:
One to three years 23 - - - 30 53 1,040 1,093
Three to five years 362 283 - - 29 674 341 1,015
Five to ten years 10,705 157 16 - 44 10,922 - 10,922
Ten to twenty years 1,063 - 72 - 71 1,206 16 1,222
Over twenty years 1,226 - - - - 1,226 - 1,226
------ ----- ----- ---- ---- ------ ------ ------
Total due or
repricing after one year 13,379 440 88 - 174 14,081 1,397 15,478
------- ----- ---- ----- --- -------- ----- ------
Total amount due or repricing $17,141 440 88 1,368 180 19,217 1,641 20,858
======= === ==== ===== ===
Less:
Loans in process (626) - (626)
Unearned discounts, premiums, and
deferred loan fees, net (88) (9) (97)
Allowance for loan losses (46) - (46)
Allowance for uncollected interest (5) - (5)
------- ----- ----
Loans receivable and mortgage-
backed securities, net $18,452 1,632 20,084
======= ===== ======
</TABLE>
-5-
<PAGE>
The following table sets forth at March 31, 1998, the dollar amount of all
loans and mortgage-backed securities due or repricing after March 31, 1999, and
whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due or Repricing after
March 31, 1999
--------------------------------------
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
<S> <C> <C> <C>
Mortgage loans:
One-to-four family $13,379 - 13,379
Other 528 - 528
Other loans 174 - 174
------ ---------- ------
Total loans receivable 14,081 - 14,081
Mortgage-backed securities 1,397 - 1,397
------ ---------- ------
Total loans receivable and
mortgage-backed securities $15,478 - 15,478
====== ========== ======
</TABLE>
One-to-Four Family Mortgage Lending. The Bank offers first mortgage loans
secured by one-to-four family residences, including townhouse and condominium
units, in the Bank'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 Bank's area.
The Bank offers fixed-rate loans and adjustable-rate loans on one-to-four
family residential properties. The Bank'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 Bank's standard underwriting
guidelines conform to FHLMC guidelines with periodic exceptions granted to
customers with long-standing relationships on a case-by-case basis, which are
approved by the President.
The Bank makes one-to-four family residential mortgage loans in amounts up
to 80% of the appraised value of the secured property. Originated mortgage loans
in the Bank's portfolio generally include due-on-sale clauses which provide the
Bank with the contractual right to deem the loan immediately due and payable in
the event that the borrower transfers ownership of the property without the
Bank's consent. It is the Bank's policy to enforce due-on-sale provisions.
The Bank also purchases pools of one-to-four family mortgage loans from
area lenders. These purchased loans are subject to the Bank's underwriting
standards. Interest rates on a substantial portion of these loans adjust
annually. Purchased loans totaled $13.3 million at March 31, 1998, representing
69.3% of the loan portfolio. Adjustable rate pools totaled $3.5 million, with
fixed rate pools totaling $9.8 million at March 31, 1998.
Multi-Family Lending. In the Chicago metropolitan area, the Bank originates
fixed-rate multi-family loans with terms of 15 to 20 years. These loans are
amortized over the term of the loan. These loans are generally made in amounts
up to 75% of the appraised value of the secured property. Most of the Bank's
multi-family loans are not owner-occupied. In making such loans, the Bank bases
its underwriting decision primarily on the net operating income generated by the
real estate to support the debt service, the financial resources and income
level of the borrower, the borrower's experience in owning or managing similar
property, the marketability of the property and the Bank's lending experience
with the borrower. The Bank also receives a personal guarantee from the
borrower. An origination fee of 1% to 2% is usually charged on such loans. The
largest multi-family loan at March 31, 1998 is in the Bank's primary market area
and had an outstanding balance of $125,000. This loan is secured by a six-unit
apartment building located in the Chicago metropolitan area.
-6-
<PAGE>
Commercial Real Estate Lending. All of the Bank's commercial real estate
loans are secured by improved property such as office buildings, retail store
buildings, and other small businesses, all of which are located in the Chicago
metropolitan area. The largest commercial real estate loan at March 31, 1998,
was a $72,000 loan on a three unit commercial office center to a borrower with
whom the Bank has a long-standing business relationship. The underwriting
criteria for commercial real estate is similar to the criteria for multi-family
residential properties, except that loans on commercial real estate are not made
in excess of 70% of the appraised value.
Construction Lending. The Bank currently is participating in a $2,000,000
construction loan for the purpose of constructing single family residences in
Morton Grove, Illinois. It is anticipated that this project will be completed by
December 31, 1998.
Other Lending. The Bank also offers home improvement loans, secured by
second mortgages on collateralized single-family residences. Other loans also
include loans made to depositors and are collaterized by the related deposit
accounts. Home improvement and loans against deposit accounts comprised only
.93% of the Bank's total loans receivable at March 31, 1998.
Loan Approval Procedures. All loan applications are considered by the
Bank's President, who has the authority to approve all loans, except those in
excess of the FNMA/FHLMC loan limits, which loans may only be approved by the
Bank's Board of Directors. The Bank's Board of Directors ratifies all loans
approved by the Bank's President.
The Bank's loan originations are subject to its written underwriting
standards and loan origination procedures. The Bank is an equal opportunity
lender. Decisions on loan applications are made on the basis of detailed
applications and property valuations (consistent with the Bank's written
appraisal policy) by qualified independent appraisers. The loan applications are
designed primarily to determine the borrower's ability to repay and the more
significant items on the application are verified through use of credit reports,
financial statements, tax returns and/or confirmations.
The Bank requires evidence of marketable title and lien position (generally
consisting of a title survey and legal opinion) as well as fire and extended
coverage casualty insurance in amounts at least equal to the principal amount of
the loan or the value of improvements on the property, depending on the type of
loan. The Bank also requires flood insurance to protect the property securing
its interest when the property is located in a flood plain or otherwise deemed
prudent by management.
Mortgage-Backed Securities. The Company and its subsidiaries had
significant investments in mortgage-backed securities and have, at times,
utilized such investments to complement its mortgage lending activities. At
March 31, 1998, the amortized cost of mortgage-backed securities totaled $1.6
million, or 5.52% of total assets, of which all were designated as held to
maturity and are carried at amortized cost. The fair value of such securities
totaled approximately $1.6 million at March 31, 1998. See Note 3 to the
Consolidated Financial Statements in the 1998 Annual Report to Stockholders. At
March 31, 1998, the Company and its subsidiaries' entire mortgage-backed
securities portfolio was directly insured by the GNMA, the FNMA or the FHLMC.
-7-
<PAGE>
Delinquencies and Classified Assets
Delinquent Loans. When a loan becomes between 30 and 45 days delinquent,
the Bank contacts the borrower either by telephone, in person or by mail. If a
delinquency continues and a loan is delinquent 90 days, several courses of
action are possible including directing the Bank's attorney to send a 30-day
letter advising the borrower of possible legal action or an authorization to
accommodate the special needs of the borrower in the case of hardship. A
physical inspection is ordered to evaluate the condition of the property. When a
loan is four or more months delinquent, arrangements are made to obtain title,
begin foreclosure, or both, unless a written repayment plan has been signed by
both the borrower and the Bank. The Board of Directors reviews a complete list
of all delinquent loans that are 60 days or more delinquent and is apprised of
the action taken to bring the loan current.
The remedies available to the Bank in the event of a default or delinquency
with respect to certain residential mortgage loans, and the procedures by which
such remedies may be exercised, are governed by the loan documents and Illinois
law. Under the lending documents used by the Bank, the Bank is prohibited from
accelerating the maturity of a residential mortgage loan, commencing any legal
action (including foreclosure proceedings) to the collect on such loan, or
taking possession of any loan collateral until the lender has first provided the
delinquent borrower with at least 30 days' prior written notice specifying the
nature of the delinquency and the borrowers's right to correct such delinquency.
In the event default is not cured on or before the date required in the notice,
the Bank may, at its option, require immediate payment in full of all sums
secured by the mortgage without further demand and may institute foreclosure
proceedings.
Assuming the foreclosure is uncontested, the Bank can complete the
foreclosure and obtain a deed to the collateral property within eight to ten
months of filing the complaint in Illinois. Under Illinois law, the mortgagor
has a Right of Reinstatement. Specifically, the mortgagor has the right to cure
all defaults that existed had no acceleration occurred provided that such cure
is made prior to the expiration of 90 days from the date the court obtains
jurisdiction over the mortgagor.
Loans are placed on non-accrual status when, in the judgement of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
As a matter of policy, the Bank does not accrue interest on loans past due 90
days or more. All previously accrued but unpaid interest is deducted from
interest income. Consumer loans more than 120 days delinquent are generally
written-off.
Classified Assets. Regulations of the FDIC and OBRE require that each
insured institution review and classify its assets on a regular basis. The Bank
has adopted a Classification of Assets Policy and has made the
President/Managing Officer of the Bank responsible for approving classifications
and valuation allowances and for making appropriate recommendations as to the
changes in procedures and policies to the Board for approval. In addition, in
connection with examinations of insured institutions, OBRE and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets must have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. Doubtful assets
have the weaknesses of substandard assets with the additional characteristic
that the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified as loss is considered
uncollectible and of such little value that its continuance as an asset of the
institution is not warranted. The Bank's Classification of Assets Policy also
contains a special mention category, described as assets which do not currently
expose the Bank to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's close
attention. Assets classified as substandard or doubtful require the institution
to establish general allowances for loan losses. If an asset or portion thereof
is classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified as a loss or charge-off such amount. A portion of general loss
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses
generally do not qualify as regulatory capital.
-8-
<PAGE>
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired, it is recorded at the lower of cost
or fair value at the date of acquisition and any write-down resulting therefrom
is charged to the allowance for losses on loans. All incidental costs, such as
insurance and real estate taxes, incurred in maintaining the Bank's lien on the
collateral property are capitalized between the date the loan becomes delinquent
and the date of acquisition. After the date of acquisition, all costs incurred
in maintaining the property are expensed and costs incurred for the improvement
or development of such property are capitalized. The Bank had no foreclosed real
estate owned on its books at March 31, 1998.
Delinquent Loans. At March 31, 1998, 1997 and 1996, delinquencies in the
Bank's loan portfolio were as follows:
<TABLE>
<CAPTION>
At March 31, 1998
--------------------------------------------------
60-89 Days 90 Days or More
------------------- -------------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
------ --------- ------ ---------
(In Thousands)
<S> <C> <C> <C> <C>
One-to-four family 1 $102 1 $ 96
Multi-family - - - -
Commercial real estate - - - -
Land and Construction - - - -
---- ---- --- -----
Total loans 1 $102 1 $ 96
==== ==== === =====
Delinquent loans to total loans .53% .50%
==== =====
At March 31, 1997
-----------------------------------------------------
60-89 Days 90 Days or More
------------------- -------------------------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
------ ---------- ------------- ---------------
(In Thousands)
One-to-four family - $ - - $ -
Multi-family - - - -
Commercial real estate - - - -
Land and Construction - - - -
---- ----- ---- -----
Total loans - $ - - $ -
==== ===== ==== =====
Delinquent loans to total loans -% -%
===== =====
At March 31, 1996
-----------------------------------------------------
60-89 Days 90 Days or More
------------------- -------------------------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
------ ---------- ------------- ---------------
(In Thousands)
One-to-four family - $ - - $ -
Multi-family - - - -
Commercial real estate - - - -
Land and Construction - - - -
---- ----- ---- -----
Total loans - $ - - $ -
==== ===== ==== =====
Delinquent loans to total loans -% -%
===== =====
</TABLE>
-9-
<PAGE>
Non-performing Assets. The following table sets forth information
regarding loans which are 90 days or more delinquent. The Bank 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
March 31, 1998 there were no other known problem assets except as described
above or as included in the table below.
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In Thousands)
Non-accrual delinquent mortgage loans $ 96 - - - 387
Total real estate owned, net of
related allowance for losses - - 212 224
---- ---- ---- ---- ----
Total non-performing assets $ 96 - 212 224 387
==== ==== ==== ==== ====
Non-performing loans to total loans .50% - - - 3.58
Total non-performing assets to total
assets .33% - .84 1.00 1.61
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 collectibility 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 Bank's allowance for loan losses at the
dates indicated.
At March 31,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
Balance at beginning of period $ 40 30 15 63 48
Provision for loan losses 6 10 15 45 15
Allowance transferred from (to)
real estate owned - - - (93)
---- ---- ---- ---- ---
Balance at end of year $ 46 40 30 15 63
==== ==== ==== ==== ===
Ratio of allowance for loan losses
to net loans receivable at the
end of period .25% .26 .23 .16 .59
Ratio of allowance for loan losses
to total non-performing assets at
the end of period 48.05 N/A 14.15 6.70 16.28
Ratio of allowance for loan losses
to non-performing loans at the end
of the period 48.05 N/A N/A N/A 16.28
</TABLE>
-10-
<PAGE>
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 Bank's lending activities. State 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, state chartered savings
institutions may also invest a portion of their assets in commercial paper,
corporate debt securities and asset-backed securities. At March 31, 1998, the
Company and its subsidiaries had investment securities in the aggregate amount
of $777,000. The investment portfolio is classified as held to maturity.
The following table sets forth certain information regarding the amortized
cost of the Company and its subsidiaries' investment securities portfolio at the
dates indicated.
<TABLE>
<CAPTION>
At March 31,
---------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Interest-bearing deposits:
Certificates of deposit $4,447 4,987 5,677
FHLB daily investment 2,321 1,437 1,040
Other 107 102 -
------ ----- -----
Total interest-bearing deposits $6,875 6,526 6,717
====== ===== =====
Investment securities:
U.S. Government securities
and obligations (1) $ 500 1,100 1,102
FHLB-Chicago stock 177 121 121
Other equity investments (2) 100 - -
------ ----- -----
Total investment securities $ 777 1,221 1,223
====== ===== =====
</TABLE>
- ---------------
(1) For a complete description, see Note 2 to the "Notes to Consolidated
Financial Statements" in the 1998 Annual Report to Stockholders.
(2) For a complete description, see Note 5 to the "Notes to Consolidated
Financial Statements" in the 1998 Annual Report to Stockholders.
-11-
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yield and maturities of the Company and its
subsidiaries' investment securities at March 31, 1998.
<TABLE>
<CAPTION>
At March 31, 1998
------------------------------------------------------------------------
One Year or Less One to Five Years Total Investment Securities
------------------ ----------------- ------------------------------------------
Average
Weighted Weighted Remaining Approximate Weighted
Carrying Average Carrying Average Years to Carrying Market Average
Value Yield Value Yield Maturity Value Value Yield
-------- -------- -------- -------- --------- -------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government securities
and agency obligations $ 500 4.20% - - .4 500 498 4.20
FHLB-Chicago stock 177 6.63 - - - 177 177 6.63
Other equity investments 100 N/A - - - 100 100 N/A
-------- -------- -------- -------- --------- -------- ----------- --------
Total $ 777 4.84% - - .4 777 775 4.84
======== ======== ======== ======== ========= ======== =========== ========
</TABLE>
-12-
<PAGE>
Sources of Funds
General. Deposits, repayments on loans and mortgage-backed securities and
stockholders' equity are the primary sources of the Bank's funds for use in
lending, investing and for other general purposes.
Deposits. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits consist of passbook savings,
demand deposits, 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 Bank's deposits are obtained
primarily from the area in which its office is located. The Bank 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 Bank nor does the Bank use brokers to obtain
deposits. Management constantly monitors the Bank'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 Bank for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Deposits $11,431 9,763 9,883
Withdrawals (9,752) (8,756) (8,757)
------- ------ ------
Net deposits 1,679 1,007 1,126
Interest credited on deposits 769 600 584
------- ------ ------
Total increase in deposits $ 2,448 1,607 1,710
======= ====== ======
</TABLE>
At March 31, 1998, the Bank had outstanding $5.5 million in deposit
accounts in amounts of $100,000 or more maturing as follows:
Maturity Period Amount
--------------- ------
(In Thousands)
Three months or less $ 2,014
Over three through six months 323
Over six through twelve months 2,686
Over twelve months 526
-----
Total $ 5,549
=====
-13-
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts at the dates indicated and the weighted average interest rates on
deposits presented.
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------------------------
1998 1997 1996
------------------ ----------------- ----------------
Percent Percent Percent
of Total of Total of Total
Amount Deposits Amount Deposits Amount Deposits
-------- -------- ------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Passbook accounts $ 6,317 25.00% 6,992 30.65 7,916 37.32
-------- -------- ------- --------- ------ --------
Demand deposit accounts 55 .22 - - - -
-------- -------- ------- --------- ------ --------
Certificate accounts
Ninety-one day 120 .47 104 .46 - -
Six month 1,763 6.98 2,366 10.37 2,602 12.27
Twelve month 5,432 21.50 5,953 26.09 5,096 24.03
Eighteen month 991 3.92 1,811 7.93 2,096 9.88
Thirty months 712 2.82 798 3.50 983 4.63
Sixty months 7,450 29.49 2,671 11.70 496 2.34
IRA and Keogh 2,420 9.58 2,117 9.28 1,984 9.35
Other 4 .02 4 .02 36 .18
-------- ------ ----- ------ ----- -----
Total 18,892 74.78 15,824 69.35 13,293 62.68
-------- ------ ------ ------ ------ -----
Total deposits $ 25,264 100.00% 22,816 100.00 21,209 100.00%
======== ====== ====== ====== ====== ======
Weighted average rate 4.97% 4.56% 4.27%
==== ==== ====
</TABLE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at March 31, 1998, 1997, and 1996 and the
periods to maturity of the certificate accounts outstanding at March 31, 1998.
<TABLE>
<CAPTION>
Period to Maturity
from March 31, 1998
At March 31, ------------------------------
------------------------ Within One to
1998 1997 1996 One Year Five Years(1) Total
---- ---- ---- -------- ------------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
4.99 or less $ 540 3,281 4,472 398 142 540
5.00 to 5.99 7,928 6,807 4,968 6,108 1,820 7,928
6.00 to 6.99 10,424 5,722 3,839 9,874 550 10,424
7.00 and over - 14 14 - - -
------ ------ ------ ------ ----- ------
Total $ 18,892 15,824 13,293 16,380 2,512 18,892
====== ====== ====== ====== ===== ======
</TABLE>
- ---------------
(1) The Bank does not offer certificate accounts with a period to maturity
exceeding five years.
-14-
<PAGE>
Borrowings
Deposits are the primary source of funds of the Bank's lending and
investment activities and for its general business purposes. The Bank may obtain
advances from the FHLB of Chicago to supplement its supply of lendable funds,
although the Bank has not generally utilized this funding source. Advances from
the FHLB of Chicago would typically be secured by a pledge of the Bank's stock
in the FHLB of Chicago and a portion of the Bank's first mortgage loans and
certain other assets. At March 31, 1998 and 1997, the Bank had no advances
outstanding from the FHLB of Chicago or borrowings of any kind.
In connection with the conversion, the ESOP purchased 8% of the Common
Stock issued in the Conversion (17,755 shares). Such purchase was funded by the
Company thru a 10-year loan to the ESOP in the amount of $177,550. The Bank is
making annual contributions to the ESOP to enable the ESOP to pay principal and
interest.
Subsidiary Activities
OBRE regulations permit a state-chartered savings bank to invest up to 10%
of its assets in the capital stock, paid-in surplus and unsecured obligations of
subsidiary corporations or service corporations. As of March 31, 1998, the Bank
was authorized to invest approximately $2,871,000 in the capital stock and other
securities of service corporation subsidiaries. As of that date, the Bank had an
equity investment of $4,466 in its wholly-owned service corporation, West Town
Insurance Agency, Inc. This company is a full-service licensed insurance agency.
Competition
The Bank faces significant competition in attracting deposits. Its most
direct competition for deposits has historically come from commercial banks and
savings institutions located in its market area, many of which are substantially
larger than the Bank. The Bank also faces additional significant competition for
investors' funds from short-term money market mutual funds and issuers of
corporate and government securities. The Bank competes for deposits principally
by offering depositors a variety of deposit programs, a convenient location and
hours and other services. The Bank does not rely upon any individual group or
entity for a material portion of its deposits.
The Bank's competition for real estate loans comes principally from
mortgage banking companies, commercial banks and savings institutions. The Bank
competes for loan originations primarily through the interest rates and loan
fees it charges, and the efficiency and quality of services it provides
borrowers, real estate brokers and builders. Factors which affect competition
include the general and local economic conditions, current interest rate levels
and volatility in the mortgage markets.
Personnel
As of March 31, 1998, the Bank had 5 full-time employees and 2 part-time
employees. The employees are not represented by a collective bargaining unit,
and the Bank considers its relationship with its employees to be excellent. Year
2000 Compliance
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
include those developed and maintained by the Company's third-party data
processing vendor and purchased software which is run on in-house computer
networks. During the current year, the Company initiated a review and assessment
of all hardware and software to confirm that it will function properly in the
year 2000. To date, those vendors which have been contacted have indicated that
their hardware or software is or will be Year 2000 compliant in time frames that
meet regulatory requirements. The costs associated with the compliance efforts
are not expected to have a significant impact on the Company's ongoing results
of operations.
-15-
<PAGE>
REGULATION OF WEST TOWN BANCORP, INC.
The Company is a savings bank holding company within the meaning of the
Home Owners' Loan Act of 1933 ("HOLA"), as amended by FIRREA. As such, the
Company is registered with the OBRE, and is subject to Illinois regulation,
examinations, supervision and reporting requirements. Furthermore, the Holding
Company is permitted to engage in activities prescribed by the Commissioner.
Per Regulation Y, the Company is also registered with the Federal Reserve
as a Bank Holding Company. The principal purposes of Regulation Y are to
regulate the acquisition of control of banks by companies and individuals, to
define and regulate the nonbanking activities in which bank holding companies
and foreign banking organizations with United States operations may engage, and
to set forth the procedures for securing approval for such transactions and
activities. The Company does not anticipate that the regulatory activities of
either the OBRE or the Federal Reserve Board will adversely affect the
activities of the Holding Company.
Affiliate Restrictions
The affiliate restrictions contained in Sections 23A and 23B of the Federal
Reserve Act apply to all federally insured savings associations and any such
"affiliate". A savings and loan holding company, its subsidiaries and any other
company under common control are considered affiliates of the subsidiary savings
association under HOLA. Generally, Sections 23A and 23B: (i) limit the extent to
which the insured institution or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to ten percent (10%) of such
institution's capital and surplus, and contain an aggregate limit on all such
transactions with all affiliates to an amount equal to twenty percent (20%) of
such capital and surplus, and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "Covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. Also, a savings institution may not make
any loan to an affiliate unless the affiliate is engaged only in activities
permissible for bank holding companies. Only the Federal Reserve Board may grant
exemptions from the restrictions of Sections 23A and 23B. The Commissioner,
however, may impose more stringent restrictions on savings associations for
reasons of safety and soundness.
Qualified Thrift Lender Test
The regulations require that any savings bank holding company that controls
a savings institution that fails the qualified thrift lender test, as explained
under "Regulation of West Town Savings Bank - Qualified Thrift Lender Test,"
must, within one year after the date on which the institution ceases to be a
qualified thrift lender, register as and be deemed a bank holding company
subject to all applicable laws and regulations.
-16-
<PAGE>
REGULATION OF WEST TOWN SAVINGS BANK
As a state-chartered and federally insured savings bank, West Town Savings
Bank is subject to extensive regulation. Lending activities and other
investments must comply with various statutory and regulatory capital
requirements. The Bank is regularly examined by its federal and state regulators
and files periodic reports concerning the Bank's activities and financial
condition. The Bank's relationship with its depositors and borrowers also is
regulated to a great extent by both federal and state laws, especially in such
matters as the ownership of savings accounts and the form and content of the
Bank's mortgage documents.
The Effects of FDICIA
In December, 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was enacted into law. FDICIA provides for, among other
things, the recapitalization of the Bank Insurance Fund; enhanced federal
supervision of depository institutions, including greater authority for the
appointment of a conservator or receiver for undercapitalized institutions; the
adoption of safety and soundness standards by the federal banking regulators, on
matters such as loan underwriting and documentation, interest rate risk exposure
and compensation and other employee benefits; the establishment of risk-based
deposit insurance premiums; liberalization of the qualified thrift lender test;
greater restrictions of the qualified thrift lender test; greater restrictions
on transactions with affiliates; and mandated consumer protection disclosures
with respect to deposit accounts. See "-Insurance of Accounts and Regulation by
the FDIC," "-Regulatory Capital Requirements" and "-Qualified Thrift Lender
Test."
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the Savings Association Insurance Fund ("SAIF")
which is administered by the FDIC. Savings deposits are insured up to $100,000
per insured member (as defined by law and regulation) by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examination of and to require reporting by the FDIC-
insured institutions. It also may prohibit any FDIC-insured institution from
engaging in any activity the FDIC determines by regulation or order to pose a
serious risk to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings associations, after giving the OBRE an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged or is engaging in unsafe or unsound
practices, or is in an unsafe or unsound condition.
Federal law requires that the FDIC maintain reserves at both the Savings
Association Insurance Fund ("SAIF") and the Bank Insurance Fund ("BIF") of at
least 1.25% of insured deposits. The reserves are funded through the payment of
insurance premiums by the insured institution members of each fund. The BIF
reached this level during 1995. Accordingly, the FDIC reduced insurance
premiums applicable to BIF-insured institutions to a range of 0% to .27% of
deposits with an annual statutory minimum payment of $2,000. As of January 1,
1997, deposit insurance premiums for highly rated institutions insured by SAIF,
such as the Bank, were substantially reduced. The Bank, 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 be 1.52
cents per $100 of deposits until the year 2000 when the assessment will be
imposed at the same rate on all FDIC insured institutions.
The legislation required a special one-time assessment of 65.7 cents per
$100 of SAIF insured deposits held by the Bank at March 31, 1995. The one-time
special assessment resulted in a charge to earnings of approximately $128,000
during the year ended March 31, 1997. The after-tax effect of this one-time
charge to earnings totaled approximately $83,000. The legislation was intended
to fully recapitalize the SAIF fund so that commercial bank and thrift deposits
would be charged the same FDIC premiums beginning January 1, 1997.
Since the Bank is a state-chartered savings bank, the FDIC is its primary
federal regulator.
-17-
<PAGE>
Office of Banks and Real Estate
The OBRE is the Bank's primary state regulator. As regulator, the OBRE has
extensive authority over the operations of the Bank and other state-chartered
savings banks. As part of this authority, the Bank is required to file periodic
reports with the OBRE and is subject to periodic examination by the OBRE.
The OBRE established regulations affecting the operations of the Bank,
including regulations that affect the Bank's lending and investment activities.
The OBRE also has extensive enforcement authority, including the issuance of
cease-and-desist and removal orders and the initiation of injunctive actions.
The OBRE assesses quarterly fees based upon asset size and charges its
regulated institutions for periodic examinations.
Federal Home Loan Bank System
The FHLB System, consisting of twelve FHLBs, is under the jurisdiction of
the Federal Housing Finance Board ("FHFB"). The designated duties of the FHFB
are to: supervise the FHLBs; ensure that the FHLBs carry out their housing
finance missions; ensure that the FHLBs remain adequately capitalized and able
to raise funds in the capital markets; and ensure that the FHLBs operate in a
safe and sound manner.
While the Bank is no longer required to be a member since its conversion to
a state-chartered savings bank in 1995, the Bank has chosen to remain a member.
Among other benefits, the FHLB provides a central credit facility primarily for
member institutions. It is funded primarily from proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB of Chicago. At March 31, 1998, the Bank had no advances
from the FHLB of Chicago. See "Sources of Funds - Borrowings."
Qualified Thrift Lender Test
Under FIRREA and state savings bank regulations, a state-chartered savings
bank must maintain at least 60% of its total tangible assets in "qualified
thrift investments" on an average basis in three out of every four quarters and
two out of every three years. Under the QTL statutory and regulatory provisions,
all forms of home mortgages, home improvement loans, home equity loans and loans
on the security of other residential real estate and mobile homes, as well as
shares of FHLB stock, investments or deposits in other insured institutions,
securities issued by the FNMA, FHLMC, GNMA and other mortgage-related
securities, are considered qualified thrift investments. Investments in non-
subsidiary corporations or partnerships whose activities include servicing
mortgages or real estate development are also considered qualified thrift
investments in proportion to the amount of primary revenue such entities derive
from housing-related activities. Also included in qualified thrift investments
are mortgage servicing rights, whether such rights are purchased by the insured
institution or created when the institution sells loans and retains the right to
service such loans.
A savings bank that fails to become or maintain a qualified thrift lender
shall either become a commercial bank (other than a savings bank) or be subject
to restrictions specified in FIRREA. A savings bank that converts to a
commercial bank must pay applicable exit and entrance fees involved in
converting from the SAIF fund to the BIF fund of the FDIC. A savings bank that
fails to meet the QTL test and does not convert to a commercial bank will be:
(1) prohibited from making any new investment or engaging in activities that
would not be permissible for national banks; (2) prohibited from establishing
any new branch office where a national bank located in the savings institutions
home state would not be able to establish a branch office; (3) ineligible to
obtain new advances from any FHLBs; and (4) subject to limitations on the
payment of dividends comparable to the statutory and regulatory dividend
restrictions applicable to a national bank. Also, beginning three years after
the date on which the savings bank ceases to be a qualified thrift lender, the
savings bank would be prohibited from retaining any investment or engaging in
any activity not permissible for a national bank and would be required to repay
any outstanding advances to any FHLB. A savings bank may requalify as a
qualified thrift lender if it thereafter complies with the QTL test.
As of March 31, 1998, the Bank was in compliance with the QTL test with a
QTL ratio of 88.57%.
-18-
<PAGE>
Capital Requirements
Under OBRE regulations, a savings bank must satisfy two minimum capital
requirements: core capital and risk-based capital. Savings banks must meet both
of the standards in order to comply with the capital requirements.
The minimum core capital requirement is three percent of adjusted total
assets (the "leverage limit" requirement). Core capital is defined to include
common stockholders' equity, non-cumulative perpetual preferred stock and any
related surplus, and minority interests in equity accounts of consolidated
subsidiaries, less (i) any unidentifiable intangible assets (other than
purchased mortgage servicing rights); (ii) the amount by which purchased
mortgage servicing rights exceed the lower of 90% of determinable fair market
value, 90% of original costs, or current amortized book value; and (iii) equity
and debt investments in subsidiaries that are not "includable subsidiaries,"
which is defined as subsidiaries engaged solely in activities not impermissible
for a national bank, engaged in activities impermissible for a national bank but
only as an agent for its customers, or engaged solely in mortgage-banking
activities.
In calculating adjusted total assets, adjustments are made to total assets
to give effect to the exclusion of certain assets from capital and to
appropriately account for the investment in and assets of both includable and
nonincludable subsidiaries.
The FDIC is required to evaluate capital before approving various
applications by depository institutions. The FDIC also must evaluate capital as
an essential component in determining the safety and soundness of state
nonmember banks it insures and supervises and in determining whether depository
institutions are in any unsafe or unsound condition. Generally, all FDIC insured
banks must maintain "core" or "Tier I" capital of at least 3.0% of total assets.
The rule further provides that a bank operating at or near the 3.0% capital
level is expected to have well diversified risks, including no undue interest
rate risk exposure, excellent control systems, good earnings, high asset
quality, high liquidity and well managed on - and off - balance sheet
activities, and in general, be considered a strong banking organization with
composite 1 rating under the CAMEL rating system for banks. For all but the most
highly rated banks meeting the above conditions, the minimum core capital ratio
will be increased to not less than 4.0% of total assets. Under the regulations
of the OBRE, savings banks are required to maintain a core capital ratio of at
least 3.0%.
Savings banks must also maintain capital equal to at least 8.0% of risk-
weighted assets. Total capital consists of the sum of core and supplementary
capital, provided that supplementary capital cannot exceed core capital, as
previously defined.
Supplementary capital includes (i) permanent capital instruments such as
cumulative perpetual preferred stock, perpetual subordinated debt, and mandatory
convertible subordinated debt, (ii) maturing capital instruments such as
subordinated debt, intermediate-term preferred stock and mandatory redeemable
preferred stock, subject to an amortization schedule, and (iii) general
valuation loan and lease allowances. Supplementary capital may not exceed the
Bank's core capital for purposes of calculating the Bank's compliance with
regulatory capital requirements.
The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not included
for purposes of calculating capital are not included in calculating risk-
weighted assets. The categories range from 0% for cash and U.S. Government
securities that are backed by the full faith and credit of the U.S. Government
up to 100%. Qualifying residential mortgage loans (including multi-family
mortgage loans) are assigned a 50% risk weight.
The book value of assets in each category is multiplied by the weighing
factor (from 0% to 100%) assigned to that category. These products are then
totaled to arrive to total risk-weighted assets. Off-balance sheet items are
included in risk-weighted assets by converting them to an approximate balance
sheet "credit equivalent amount" base on a conversion schedule. These credit
equivalents are then assigned to risk categories in the same manner as balance
sheet assets and are included in risk-weighted assets.
-19-
<PAGE>
The FDIC has been considering adopting a proposed rule for adding an
interest rate risk component to the regulatory capital rule. The proposal would
require, if adopted, that an institution hold capital against interest rate risk
exposure in an amount equal to 50% of the market value of portfolio equity
(i.e., aggregate net market value of assets, liabilities, and off-balance sheet
items) that would result from a immediate 200 basis point increase or decrease
in interest rates. If adopted, this component of the risk-based capital
requirement would require that an institution maintain additional capital
related to the amount of risk attendant to its interest rate position.
At March 31, 1998 and 1997, the Bank met all of its capital requirements.
See Note 14 to the Consolidated Financial Statements in the 1998 Annual Report
to Stockholders.
Dividend Limitations
OBRE regulations require the Bank to give the OBRE thirty days advance
notice of any proposed declaration of dividends to the Holding Company, and the
OBRE has the authority under its supervisory powers to prohibit the payment of
dividends to the Holding Company. In addition, a Bank may not declare or pay a
cash dividend on its capital stock if the effect thereof would be to reduce the
regulatory capital of the Bank below the amount required for the liquidation
account established pursuant to the Bank's Plan of Conversion. The OBRE imposes
uniform limitations on the ability of savings banks to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. The regulations utilize a three-tiered approach which permits various
level of distributions based primarily upon the savings bank's capital level.
In the first tier, a savings bank that has capital in excess of the capital
requirements (both before and after the proposed capital distribution) and that
has not been notified by the OBRE that it is in need of more than normal
supervision, may make (without application) capital distributions during a
calendar year up to 100% of its net income to date during the calendar year,
plus one-half its surplus capital ratio at the beginning of the calendar year.
Capital distributions in excess of such amount require advance approval from the
OBRE.
In the second tier, a savings bank that meets or exceeds its minimum
capital requirement (both before and after the proposed capital distribution),
but which has been notified by the OBRE that it shall be treated as a tier 2
bank because it is in need of more than normal supervision, may make (without
application) capital distributions ranging between 25% and 75% of its net income
during the previous four quarters.
In the third tier, a savings bank with either capital below its minimum
capital requirements (either before and after the proposed capital
distribution), or a savings bank that meets or exceeds its capital requirement
but which has been notified by the OBRE that it shall be treated as a tier 3
bank because it is in need of more than normal supervision, may not make any
capital distributions without prior approval from the OBRE.
The Bank has met the criteria to be in the first tier, and consequently,
would be able to distribute up to 100% of its net income during any calendar
year, plus 50% of its surplus capital ratio at the beginning of the calendar
year less any distributions previously paid during the year.
Investment Rules, Loans to One Borrower, and Aggregate Loan Limits
Under OBRE regulations, the permissible amount of loans-to-one borrower for
state-chartered savings banks is 20% of its unimpaired capital and surplus (25%
if the security for such a loan has a "readily ascertainable" value or 30% for
certain residential development loans) or $500,000. At March 31, 1998, the
lending limitations, in essence, imposed a $614,000 limit on the Bank's
loans-to-one borrower.
Savings banks and their subsidiaries may not acquire or retain investments
in corporate debt securities that, at the time of acquisition, were not rated in
one of the four highest rating categories by at least one nationally recognized
rating organization. At March 31, 1998, the Bank did not have any corporate debt
securities below investment grade.
-20-
<PAGE>
Restrictions on Loans to Insiders
FIRREA applies Section 22(h) of the Federal Reserve Act to non-member
savings banks and authorizes the FDIC to impose additional loan-to-insider
restrictions upon savings banks on a case-by-case basis. In general, Section
22(h) prohibits a bank from making loans or extending credit: (i) to any of its
executive officers or any person who directly or indirectly controls more than
10% of any class of voting securities of the bank where the loan amount or
extension of credit, when aggregated with other loans to that person and all
related interests of that person, would exceed 15% of a bank's unimpaired
capital and surplus for loans that are not fully secured by "readily marketable
collateral" and an additional 10% of such capital and surplus for loans fully
secured by such collateral; and (ii) to any of its executive officers, directors
or principal shareholders in an amount exceeding the higher of $25,000 or 5% of
the Bank's unimpaired capital and surplus, unless the loan or extension of
credit is preapproved by a majority of the entire board of directors with the
interested party abstaining from participating directly or indirectly in the
voting.
Section 22(h) also requires that all such insider loans or extensions of
credit be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and do not involve more than the normal risk of repayment or
present other unfavorable features. Additionally, with certain exceptions,
Section 22(h) prohibits a member bank from paying an overdraft on an account at
such bank of an executive officer or director. At March 31, 1998, the Bank was
in compliance with restrictions on loans to insiders.
Regulations issued by the FHLB Board prior to the enactment of FIRREA, in
relevant part, restricted a savings bank's loans to "affiliated persons" to ones
made in the "ordinary course of business" involving not more that the "normal
risks of collectibility" and not exceeding the loan amount that would be
available to members of the general public of similar credit status. According
to former FHLB Board regulations, loans secured by the principal residence of an
affiliated person, home improvement loans for affiliated persons and education,
consumer and credit card loans for affiliated persons must have been pre-
approved by at least a majority of the board of directors of the Bank. The Bank
was authorized, generally, to make such loans (and those secured by the
affiliated person's savings accounts at the Bank) with an interest rate not
below its current cost of funds.
Activities of Savings Bank and Their Subsidiaries
FDIC and OBRE regulations provide that, when a savings bank establishes or
acquires a subsidiary or elects to conduct any new activity through a subsidiary
that the bank controls, the savings bank shall notify the FDIC and OBRE thirty
days in advance and provide the information each agency may, by regulation,
require. Savings banks also must conduct the activities of subsidiaries in
accordance with existing regulations and orders.
The FDIC or the OBRE may determine that the continuation by a savings bank
of its ownership control, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness, or stability of the bank or is
inconsistent with sound banking practices or with the purposes of the FDIC Act.
Based upon that determination, the FDIC or the OBRE has the authority to order
the savings bank to divest itself of control of the subsidiary. The FDIC also
may determine by regulation or order that any specific activity poses a serious
threat to the SAIF. If so, it may require that no SAIF member engage in that
activity directly. At March 31, 1998, the Bank had West Town Insurance Agency as
a wholly-owned subsidiary.
Brokered Deposits
FIRREA states that no insured depository institution that fails to meet the
applicable minimum capital requirement may accept funds obtained directly or
indirectly by or through a deposit broker for deposit into one or more deposit
accounts. The FDIC is authorized to waive this prohibition on a case-by-case
basis, but only upon finding that such use of brokered deposits does not
constitute an unsafe or unsound practice. At March 31, 1998, the Bank had no
brokered deposits.
-21-
<PAGE>
Investment Portfolio Policy
Under OBRE regulations, savings banks are required to adopt and maintain an
investment policy which demonstrates the exercise of prudence in making
investment decisions. Per regulations and generally accepted accounting
principles, a financial institution is required to classify its securities into
one of three categories: securities purchased or held to maturity, securities
available for sale, and securities held for trading. Securities held in the
investment portfolio may be carried at amortized cost if the bank has documented
the intent and ability to hold the securities until maturity. Those being held
for sale or trading are to be carried at fair value. All of the Bank's
investment securities and mortgage-backed securities (with the exception of
investments in equity securities) are classified as held to maturity, since the
Bank had both the intent and ability to hold these investment securities and
mortgage-backed securities to maturity, in accordance with Statement of
Financial Accounting Standards 115. See "Notes to Consolidated Financial
Statements #1 - Accounting Policies - Investment Securities" in the Annual
Report.
Transactions with Affiliates
Pursuant to FIRREA, all financial institutions must comply with Section 23A
and 23B of the Federal Reserve Act relative to transactions with affiliates in
the same manner and to the same extent as if all were Federal Reserve member
banks. Generally, Sections 23A and 23B: (i) limit the extent to which the
insured institution or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus and place an aggregate limit on all such transactions with
affiliates to an amount equal to 20%of such capital and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a non-
affiliate. The term "covered transaction" includes the making of loan, purchases
of assets, issuance of a guaranty and similar other types of transactions.
-22-
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year
basis using 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 Bank's addition to its 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 Bank or the Company. For its taxable year ending March 31,
1998, the Bank was subject to a maximum federal income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
savings 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. Savings institutions that would be treated as small banks
are allowed to utilize the Experience Method applicable to such institutions,
while savings institutions that are treated as large banks (those generally
exceeding $500 million in assets) are required to use only the specific charge-
off method. Thus, the PTI Method of accounting for bad debts is no longer
available for any financial institution.
A savings 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 Bank's current taxable year, in which the Bank originates a
minimum of certain residential loans based upon the average of the principal
amounts of such loans made by the Bank during its six taxable years preceding
its current taxable year.
Under the 1996 Act, for its current and future taxable years, the Bank is
not permitted to make additions to its tax bad debt reserves. In addition, the
Bank 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 March 31, 1996
other than its supplemental reserve for losses on loans, over the balance of
such reserves as of March 31, 1988. As a result of such recapture, the Bank will
incur an additional income tax liability of approximately $46,000 over the
recapture period.
-23-
<PAGE>
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of March 31, 1988) to the extent thereof, and then
from the Bank'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 Bank's income. Non-dividend
distributions include distributions in excess of the Bank'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 Bank's current or accumulated earnings
and profits will not be so included in the Bank'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 Bank makes a non-dividend distribution
to the Company, approximately one and one-half times the amount of such
distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 34% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.
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). The Company and its
subsidiaries were not subject to this tax for the year ended March 31, 1998.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank 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 Bank will not file a consolidated tax return,
except that if the Company or the Bank own more than 20% of the stock of a
corporation distributing a dividend 80% of any dividends received may be
deducted.
Illinois Taxation. The Company and the Bank file Illinois income tax
returns. For Illinois income tax purposes, corporations 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.
-24-
<PAGE>
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 Company keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of sonic of the recent pronouncements made by the
Financial Accounting Standards Board ("FASB") which are of particular interest
to financial institutions.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). This statement
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, losses) in a full set of general-purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Management does not believe that adoption of SFAS No. 130
will have a material impact on the Company's consolidated financial statements
or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131") which becomes effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments and requires
enterprises to report selected information about operating segments in interim
financial reports. Management does not believe that adoption of SFAS No. 131
will have a material impact on the Company's consolidated financial statements
or results of operations.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132 alters current
disclosure requirements regarding pensions and other postretirement benefits in
the financial statements of employers who sponsor such benefit plans. The
revised disclosure requirements are designed to provide additional information
to assist readers in evaluating future costs related to such plans.
Additionally, the revised disclosures are designed to provide changes in the
components of pension and benefit costs in addition to the year end components
of those factors in the resulting asset or liability related to such plans. The
statement is effective for fiscal years beginning after December 15, 1997 with
earlier application available. Management does not believe that adoption of SFAS
No. 132 will have a material impact on the Company's consolidated financial
statements or results of operations.
-25-
<PAGE>
Additional Item. Executive Officers of the Registrant.
- -------------------------------------------------------
The following table sets forth certain information regarding the executive
officers of the Company and the Bank who are not also directors.
Age at Position with the Company and Bank
Name 03/31/98 and Past Five Years Experience
- ---- -------- ----------------------------------
Jeffrey P. Kosobucki 32 Chief Financial Officer of the Company.
Vice President and Chief Financial
Officer of the Bank.
Item 2. Properties.
The Company is located and conducts its business at the Bank's office in
Cicero, located at 4852 West 30th Street, Cicero, Illinois. See Note 7 to the
Notes to Consolidated Financial Statements for the net book value of the Bank's
premises and equipment.
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 the Registrant's common equity and
related stockholder matters appears in the Registrant's 1998 Annual Report to
Stockholders on page 29 and is incorporated herein by reference. On May 29,
1998, the Company had 91 registered shareholders.
Item 6. Selected Financial Data.
The above-captioned information appears under "Selected Consolidated
Financial and Other Data of the Company" in the Registrant's 1998 Annual Report
to Stockholders on pages 10 through 12 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
1998 Annual Report to Stockholders on pages 13 through 29 and is incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements of West Town Bancorp, Inc. and its
subsidiaries, together with the report thereon by Cobitz, VandenBerg & Fennessy
appear in the Registrant's 1998 Annual Report to Stockholders on pages F-1
through F-24 and are incorporated herein by reference.
-26-
<PAGE>
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 July 8, 1998, on
pages 3 through 6. 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 July 8, 1998, on pages 8 and 9
(excluding the Compensation Committee Report and the Stock Performance Graph).
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 July 8, 1998, on
pages 2 through 4.
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 July 8, 1998, on page 14.
-27-
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
1. Independent Auditors' Report*
2. All Financial Statements*
(a) Consolidated Statements of Condition as of March 31, 1998 and 1997.
(b) Consolidated Statements of Income for the Years Ended March 31, 1998,
1997 and 1996.
(c) Consolidated Statements of Stockholders' Equity for Years Ended March
31, 1998, 1997 and 1996.
(d) Consolidated Statements of Cash Flows for the Years Ended March 31,
1998, 1997 and 1996.
(e) Notes to Consolidated Financial Statements
All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial Statements.
3. Exhibits
(3)(a) Certificate of Incorporation of West Town Bancorp, Inc.**
(3)(b) Bylaws of West Town Bancorp, Inc.**
13 1998 Annual Report to Stockholders
22 Subsidiaries of the Registrant
24 Consent of Independent Auditors
* Incorporated by reference to the Annual Report to Stockholders for the
fiscal year ended March 31, 1998, attached as an exhibit hereto.
** Incorporated by reference to the Registration Statement on Form S-1,
and amendments thereto, filed with the Securities and Exchange
Commission.
-28-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
WEST TOWN BANCORP, INC.
By: /s/ Dennis B. Kosobucki
-------------------------------------
Dennis B. Kosobucki
DATED: June 5, 1998 Chairman of the Board,
President and Chief Executive Officer
(Duly Authorized Representative)
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/ Dennis B. Kosobucki Chairman of the Board June 5, 1998
- -------------------------- President, Chief Executive Officer
Dennis B. Kosobucki (Principal Executive Officer)
/s/ Jeffrey P. Kosobucki Vice President and Chief June 5, 1998
- -------------------------- Financial Officer
Jeffrey P. Kosobucki (Principal Financial Officer
and Principal Accounting Officer)
/s/ Edward J. Hradecky Director June 5, 1998
- --------------------------
Edward J. Hradecky
/s/ John A. Storcel Director June 5, 1998
- --------------------------
John A. Storcel
/s/ James Kucharczyk Director June 5, 1998
- --------------------------
James Kucharczyk
/s/ James J. Kemp, Jr. Director June 5, 1998
- --------------------------
James J. Kemp, Jr.
-29-
<PAGE>
WEST TOWN BANCORP, INC.
AND SUBSIDIARIES
----------------
Audited Financial Statements
March 31, 1998
--------------
<PAGE>
WEST TOWN BANCORP, INC.
AND SUBSIDIARIES
Contents
--------
Page
----
Independent Auditors' Report............................................... 1
Consolidated Statements of Financial Condition, as of
March 31, 1998 and 1997.................................................. 2
Consolidated Statements of Income, years ended
March 31, 1998, 1997 and 1996............................................ 3
Consolidated Statements of Changes in Stockholders' Equity,
three years ended March 31, 1998......................................... 4
Consolidated Statements of Cash Flows, years ended
March 31, 1998, 1997 and 1996............................................ 5
Notes to Consolidated Financial Statements................................. 6-24
<PAGE>
COBITZ, VANDENBERG & FENNESSY
CERTIFIED PUBLIC ACCOUNTANTS
9944 SOUTH ROBERTS ROAD - SUITE 202
PALOS HILLS, ILLINOIS 60465
(708) 430-4106 - Fax (708) 430-4499
INDEPENDENT AUDITORS' REPORT
The Board of Directors
West Town Bancorp, Inc.
Cicero, Illinois
We have audited the consolidated statements of financial condition of West
Town Bancorp, Inc. and subsidiaries as of March 31, 1998 and 1997 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended March 31, 1998. 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 West Town
Bancorp, Inc. and subsidiaries at March 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ending March 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Cobitz, VandenBerg & Fennessy
---------------------------------
Cobitz, VandenBerg & Fennessy
May 8, 1998
Palos Hills, Illinois
<PAGE>
WEST TOWN BANCORP, INC.
AND SUBSIDIARIES
----------------
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
March 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Assets
- ------
Cash and amounts due from depository institutions $ 302,484 718,157
Interest-bearing deposits 6,875,094 6,525,626
----------- ----------
Total cash and cash equivalents 7,177,578 7,243,783
U.S. Government and agency obligations, held to maturity
(fair value: 1998 - $498,000;
1997 - $1,082,000) (note 2) 500,000 1,100,315
Mortgage-backed securities, held to maturity
(fair value: 1998 - $1,646,000;
1997 - $2,465,000) (note 3) 1,631,621 2,494,292
Loans receivable (net of allowance for loan losses:
1998 - $46,171; 1997 - $40,171) (note 4) 18,451,630 15,552,545
Stock in Federal Home Loan Bank of Chicago 177,400 121,000
Other investments, available for sale,
at fair value (note 5) 100,000 -
Accrued interest receivable (note 6) 201,047 110,380
Office properties and equipment - net (note 7) 202,365 199,529
Prepaid expenses and other assets (note 8) 1,103,875 176,939
----------- ----------
Total assets 29,545,516 26,998,783
=========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities
- -----------
Deposits (note 9) 25,263,850 22,816,474
Borrowed money (note 10) - -
Advance payments by borrowers for taxes
and insurance 34,550 41,914
Other liabilities (note 11) 199,298 176,834
----------- ----------
Total liabilities 25,497,698 23,035,222
----------- ----------
Stockholders' Equity
- --------------------
Preferred stock, $.01 par value; authorized
100,000 shares; none outstanding - -
Common stock, $.01 par value; authorized
400,000 shares; 231,928 shares issued and 224,303 shares
outstanding at March 31, 1998 and 231,928
shares issued and outstanding at March 31, 1997 2,319 2,319
Additional paid-in capital 1,987,127 1,986,077
Retained earnings, substantially restricted 2,279,662 2,137,485
Treasury stock, at cost (7,625 shares at March 31, 1998) (81,906) -
Common stock acquired by Employee Stock Ownership Plan (139,384) (153,001)
Common stock awarded by Management Recognition Plan - (9,319)
----------- ----------
Total stockholders' equity (notes 14 and 15) 4,047,818 3,963,561
----------- ----------
Commitments and contingencies (notes 16 and 17)
Total liabilities and stockholders' equity $29,545,516 26,998,783
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
WEST TOWN BANCORP, INC.
AND SUBSIDIARIES
----------------
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Interest income:
Loans $1,393,895 1,084,447 831,579
Mortgage-backed securities 126,074 168,400 206,993
Investment securities 35,368 59,019 66,647
Interest-bearing deposits 347,285 373,258 455,679
Dividends on FHLB stock 11,938 8,238 8,915
---------- --------- ---------
Total interest income 1,914,560 1,693,362 1,569,813
---------- --------- ---------
Interest expense:
Deposits 1,168,346 939,598 793,828
---------- --------- ---------
Net interest income before provision
for loan losses 746,214 753,764 775,985
Provision for loan losses (note 4) 6,000 10,302 14,604
---------- --------- ---------
Net interest income after provision
for loan losses 740,214 743,462 761,381
---------- --------- ---------
Non-interest income:
Loan fees and service charges 12,282 5,899 16,731
Rental income 7,810 9,240 9,290
Gain on sale of investment securities,
available for sale - 3,178 -
Loss on sale of real estate owned - (5,282) -
Deposit related fees and other income 19,307 15,730 14,590
---------- --------- ---------
Total non-interest income 39,399 28,765 40,611
---------- --------- ---------
Non-interest expense:
Compensation, employee benefits, and
related expenses (note 12) 299,366 298,911 324,117
Advertising and promotion 14,786 13,938 11,805
Occupancy and equipment expenses (note 7) 74,277 77,082 74,649
Data processing 39,458 34,044 34,296
Federal deposit insurance premiums (note 18) 14,669 26,461 45,331
SAIF special assessment (note 18) - 127,578 -
Legal, audit, and examination services 58,690 48,865 44,938
Provision for loss on real estate owned - - 15,000
Other operating expenses 51,148 46,079 67,954
---------- --------- ---------
Total non-interest expense 552,394 672,958 618,090
---------- --------- ---------
Net income before income taxes 227,219 99,269 183,902
Provision for income taxes (note 13) 85,042 25,320 71,194
---------- --------- ---------
Net income $ 142,177 73,949 112,708
========== ========= =========
Earnings per share - basic $ .67 .34 .53
---------- --------- ---------
Earnings per share - diluted $ .67 .34 .53
---------- --------- ---------
Dividends declared per common share $ - - -
---------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
WEST TOWN BANCORP, INC.
AND SUBSIDIARIES
----------------
Consolidated Statements of Changes in Stockholders' Equity
Three Years Ended March 31, 1998
----------------
<TABLE>
<CAPTION>
Common Common
Additional Stock Stock
Common Paid-In Retained Treasury Acquired Awarded
Stock Capital Earnings Stock by ESOP by MRP Total
------- ---------- --------- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995 $ 2,219 1,886,297 1,950,828 - (176,658) - 3,662,686
Additions for the year ended
March 31, 1996:
Net income 112,708 112,708
Common stock issued to MRP 89 88,691 (88,780) -
Amortization of award of MRP 55,341 55,341
Contribution to fund ESOP loan 11,269 11,269
------- --------- --------- ------- -------- ------- ---------
Balance at March 31, 1996 2,308 1,974,988 2,063,536 - (165,389) (33,439) 3,842,004
Additions for the year ended
March 31, 1997:
Net income 73,949 73,949
Exercise of stock options 11 11,089 11,100
Amortization of award of MRP 24,120 24,120
Contribution to fund ESOP loan 12,388 12,388
------- --------- --------- ------- -------- ------- ---------
Balance at March 31, 1997 2,319 1,986,077 2,137,485 - (153,001) (9,319) 3,963,561
Additions for the year ended
March 31, 1998:
Net income 142,177 142,177
Purchase of treasury stock
(7,625 shares) (81,906) (81,906)
Amortization of award of MRP 9,319 9,319
Contribution to fund ESOP loan 1,050 13,617 14,667
------- --------- --------- ------- -------- ------- ---------
Balance at March 31, 1998 $ 2,319 1,987,127 2,279,662 (81,906) (139,384) - 4,047,818
======= ========= ========= ======= ======== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
WEST TOWN BANCORP, INC.
AND SUBSIDIARIES
----------------
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 42,177 73,949 112,708
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 24,188 24,316 23,144
Amortization of cost of stock benefit plans 23,986 36,508 66,610
Amortization of investment premiums and discounts 315 1,425 1,425
Gain on sale of investment securities,
available for sale - (3,178) -
Loss on sale of real estate owned - 5,282 -
Provision for loan losses 6,000 10,302 14,604
Provision for loss on real estate owned - - 15,000
Increase (decrease) in deferred income 30,979 29,308 (13,531)
(Increase) decrease in current and deferred federal
and state income taxes 625 (25,899) 38,148
(Increase) decrease in accrued interest receivable (90,667) 33,682 (56,130)
Increase in accrued interest payable 38,820 17,278 34,286
Change in prepaid and accrued items, net (943,917) (22,707) (50,935)
----------- --------- ----------
Net cash provided by (for) operating activities (767,494) 180,266 185,329
----------- --------- ----------
Cash flows from investing activities:
Purchase of investment securities, available for sale (100,000) (47,790) -
Proceeds from maturities of investment securities,
held to maturity 600,000 - 300,000
Proceeds from repayments of mortgage-backed securities,
held to maturity 862,671 591,968 497,732
Purchase of Federal Home Loan Bank stock (56,400) - -
Proceeds from Federal Home Loan Bank stock redemption - - 12,300
Proceeds from sale of investment securities,
available for sale - 50,968 -
Disbursements for loans originated or purchased (11,065,754) (4,967,597) (5,918,457)
Loan repayments 6,001,999 2,008,974 2,200,744
Participation loans sold 2,127,691 299,608 -
Property and equipment expenditures (27,024) (5,837) (6,124)
Real estate owned expenditures - - (2,876)
Proceeds from sale of real estate owned - 206,594 -
----------- --------- ----------
Net cash provided for investing activities (1,656,817) (1,863,112) (2,916,681)
----------- --------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options - 11,100 -
Purchase of treasury stock (81,906) - -
Deposit receipts 11,430,518 9,762,829 9,882,824
Deposit withdrawals (9,752,245) (8,755,715) (8,757,271)
Interest credited to deposit accounts 769,103 600,641 583,881
Decrease in advance payments by
borrowers for taxes and insurance (7,364) (6,119) (32,337)
----------- --------- ----------
Net cash provided by financing activities 2,358,106 1,612,736 1,677,097
----------- --------- ----------
Decrease in cash and cash equivalents (66,205) (70,110) (1,054,255)
Cash and cash equivalents at beginning of year 7,243,783 7,313,893 8,368,148
----------- --------- ----------
Cash and cash equivalents at end of year $ 7,177,578 7,243,783 7,313,893
=========== ========= ==========
Cash paid during the year for:
Interest $ 1,129,526 922,320 759,542
Income taxes 83,827 51,219 33,046
=========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
WEST TOWN BANCORP, INC.
AND SUBSIDIARIES
----------------
Notes to Consolidated Financial Statements
1) Summary of Significant Accounting Policies
West Town Bancorp, Inc. (the "Company") is a Delaware corporation
incorporated on May 6, 1994 for the purpose of becoming the savings bank
holding company for West Town Savings Bank (the "Bank"). On March 1, 1995,
the Bank 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 Bank.
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 statements include the accounts of
the Company, and its wholly owned subsidiary, West Town Savings Bank and
the Bank's wholly owned subsidiary, West Town Insurance Agency, Inc.
Significant intercompany balances and transactions have been eliminated in
consolidation.
United States Government and Agency Obligations, Held to Maturity
These securities are carried at cost, and adjusted for amortization of
premiums and accretion of discounts. Premiums and discounts are amortized
and accreted into income using the level yield method. These securities are
not carried at fair value because the Company has both the ability and the
intent to hold them to maturity.
Mortgage Backed Securities, Held to Maturity
Mortgage backed securities are carried at cost, and adjusted for
amortization of premiums and accretion of discounts. Premiums and discounts
are amortized and accreted into income using the level yield method. These
securities are not carried at fair value because the Company has both the
ability and the intent to hold them to maturity.
-6-
<PAGE>
1) Summary of Significant Accounting Policies (continued)
Other Investments, Available for Sale
Investment securities are recorded in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". SFAS 115 requires the use of
fair value accounting for securities 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 certain equity investments 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 securities are determined using the
specific identification method.
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 non-accrual 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 over the contractual life of the loan.
The Company has 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".
These statements apply to all loans that are identified for evaluation
except for large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment. These loans include, but are not
limited to, credit card, residential mortgage and consumer installment
loans. Substantially all of the Company's lending is excluded from the
provisions of SFAS 114 and SFAS 118.
Under these statements, of the remaining loans which are evaluated for
impairment (a loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement), there were no material amounts of loans which met the
definition of an impaired loan during the year ended March 31, 1998 and no
loans to be evaluated for impairment at March 31, 1998.
-7-
<PAGE>
1) Summary of Significant Accounting Policies (continued)
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.
Real Estate Owned
Real estate acquired through foreclosure or deed in lieu of foreclosure is
carried at the lower of fair value minus estimated costs to sell or the
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
Depreciation of office properties and equipment are accumulated on the
straight-line basis over estimated lives of the various assets. Estimated
lives are 15 to 30 years for office buildings, 30 years for parking lot
improvements, and 5 to 7 years for furniture, fixtures and equipment.
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 for the period that includes the
enactment date.
Consolidated Statements of Cash Flows
For the purposes of reporting cash flows, the Company has defined cash and
cash equivalents to include cash on hand, amounts due from depository
institutions, and interest-bearing deposits in other financial
institutions.
Reclassification
Certain 1997 and 1996 amounts have been reclassified to conform with the
1998 presentation.
-8-
<PAGE>
1) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
Earnings per Share
------------------
The Company computes its earnings per share (EPS) in accordance with SFAS
No. 128 "Earnings per Share". This statement simplifies the standards for
computing EPS previously found in Accounting Principles Board Opinion No. 5
"Earnings per Share" and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation
of basic EPS and fully diluted EPS with diluted EPS.
Basic EPS, unlike primary EPS, excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity.
The following presentation illustrates basic and diluted EPS in accordance
with the provisions of SFAS 128:
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Weighted average number of
common shares outstanding used
in basic EPS calculation 212,602 215,491 211,210
Add common stock equivalents
for shares issuable under
Stock Option Plans 1,026 - -
-------- ------- -------
Weighted average number of shares
outstanding adjusted for common
stock equivalents 213,628 215,491 211,210
======== ======= =======
Net income $142,177 73,949 112,708
Basic earnings per share $ .67 .34 .53
Diluted earnings per share $ .67 .34 .53
</TABLE>
EPS for prior periods has been restated to comply with the provisions of
SFAS 128.
-9-
<PAGE>
2) United States Government and Agency Obligations, Held to Maturity
-----------------------------------------------------------------
These securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
March 31, 1998
--------------
FHLB Note $ 500,000 - 2,000 498,000
=========== ====== ====== =========
Weighted average interest rate 4.20%
====
March 31, 1997
--------------
FHLB Notes $ 699,933 724 19,545 681,112
U.S. Treasury Note 400,382 506 - 400,888
----------- ------ ------ ---------
$ 1,100,315 1,230 19,545 1,082,000
=========== ====== ====== =========
Weighted average interest rate 5.44%
====
</TABLE>
The contractual maturity of the above investments are summarized as
follows:
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
------------------- --------------------
Amortized Fair Amortized Fair
Term to Maturity Cost Value Cost Value
---------------- ---------- ------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less $500,000 498,000 600,315 601,545
Due after one year through
five years - - 500,000 480,455
-------- ------- --------- ---------
$500,000 498,000 1,100,315 1,082,000
======== ======= ========= =========
</TABLE>
-10-
<PAGE>
3) Mortgage-Backed Securities, Held to Maturity
--------------------------------------------
Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
March 31, 1998
--------------
Participation Certificates:
FHLMC $ 665,996 3,017 4,713 664,300
GNMA 329,595 24,705 - 354,300
FNMA 636,030 - 8,630 627,400
---------- ---------- ---------- ---------
$1,631,621 27,722 13,343 1,646,000
========== ========== ========== =========
Weighted average interest rate 6.35%
====
March 31, 1997
--------------
Participation Certificates:
FHLMC $1,145,089 3,475 21,764 1,126,800
GNMA 433,356 26,244 - 459,600
FNMA 915,847 - 37,247 878,600
---------- ---------- ---------- ---------
$2,494,292 29,719 59,011 2,465,000
========== ========== ========== =========
Weighted average interest rate 6.33%
====
</TABLE>
-11-
<PAGE>
4) Loans Receivable
----------------
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------
1998 1997
----------- ----------
<S> <C> <C>
Mortgage loans:
One-to-four family $17,140,686 14,525,099
Multi-family 439,859 523,713
Nonresidential 88,514 95,429
Construction 1,367,965 1,700,392
----------- ----------
Total mortgage loans 19,037,024 16,844,633
----------- ----------
Other loans:
Loans on deposit accounts 22,759 21,277
Consumer 157,289 132,358
----------- ----------
Total other loans 180,048 153,635
----------- ----------
Total loans receivable 19,217,072 16,998,268
----------- ----------
Less:
Loans in process 626,010 1,348,677
Deferred loan fees and discounts,
net of premiums 87,854 56,875
Allowance for loan losses 46,171 40,171
Allowance for uncollected interest 5,407 -
----------- ----------
Loans receivable, net $18,451,630 15,552,545
=========== ==========
Weighted average interest rate 7.78% 7.74%
==== ====
</TABLE>
There was one loan delinquent three months or more and non-accruing
totaling approximately $96,100, or .5% of total loans in force at March 31,
1998. There were no loans delinquent three months or more at March 31,
1997. The Bank has established a loan loss reserve of $46,171 as required
by its internal policies.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Balance, beginning of year $40,171 29,869 15,265
Provision for loan losses 6,000 10,302 14,604
Charge-offs - - -
------- ------ ------
Balance, end of year $46,171 40,171 29,869
======= ====== ======
</TABLE>
The Bank has pledged $547,804 in single-family mortgage loans as collateral
to secure deposits in excess of Federal Deposit Insurance Corporation
insurance limitations. The balances of these loans are at least 110% of the
non-insured deposits at March 31, 1998, in accordance with the terms of the
executed collateralization agreements with various depositors.
-12-
<PAGE>
5) Other Investments, Available for Sale
-------------------------------------
During the current period, the Company invested $100,000 in 10,000 common
shares of FBA Bancorp, Inc. This investment has been designated as
available for sale and is recorded at its fair value of $100,000 in
accordance with SFAS 115.
6) Accrued Interest Receivable
---------------------------
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
March 31,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Interest-bearing deposits $ 16,755 11,669
U.S. Government and agency obligations 1,687 12,265
Mortgage-backed securities 12,148 19,081
Loans receivable 167,559 65,351
Other 2,898 2,014
-------- -------
$201,047 110,380
======== =======
</TABLE>
7) Office Properties and Equipment
-------------------------------
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
March 31,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Cost:
Land $ 25,532 25,532
Office Building 360,689 360,689
Parking lot 65,942 65,942
Furniture, fixtures and equipment 124,851 115,684
Automobile 17,858 16,865
-------- -------
594,872 584,712
Less accumulated depreciation 392,507 385,183
-------- -------
$202,365 199,529
======== =======
</TABLE>
Depreciation of office properties and equipment for the years ended March
31, 1998, 1997 and 1996 amounted to $24,188, $24,316, and $23,144
respectively.
8) Prepaid Expenses and Other Assets
---------------------------------
Prepaid expenses and other assets consist of the following:
<TABLE>
<CAPTION>
March 31,
---------------------
1998 1997
---------- -------
<S> <C> <C>
Prepaid insurance $ 17,828 18,058
Other prepaid expenses 6,175 6,214
Cash surrender value of corporate-owned
life insurance 32,881 21,338
Amounts due on loans serviced by others 1,033,012 113,335
Current federal and state income tax
overpayment - net 13,979 12,589
Other - 5,405
---------- -------
$1,103,875 176,939
========== =======
</TABLE>
-13-
<PAGE>
9) Deposits
--------
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
March 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Passbook accounts $ 6,317,284 6,992,005
Certificates 18,892,253 15,824,469
Demand deposit accounts 54,313 -
----------- ----------
Total $25,263,850 22,816,474
=========== ==========
</TABLE>
The composition of deposit accounts by interest rate is as follows:
<TABLE>
<CAPTION>
March 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Non-interest bearing $ 28,693 920
2.00 - 2.99% 6,342,904 6,991,085
3.00 - 3.99 43,755 54,291
4.00 - 4.99 496,339 3,227,071
5.00 - 5.99 7,927,752 6,807,620
6.00 - 6.99 10,424,407 5,721,704
7.00 - 8.00 - 13,783
----------- ----------
Total $25,263,850 22,816,474
=========== ==========
</TABLE>
The weighted average interest rate on deposit accounts at March 31, 1998
and 1997 was 4.97% and 4.56% respectively.
A summary of certificates of deposit that mature during the twelve-month
periods indicated is as follows:
<TABLE>
<CAPTION>
March 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Twelve month period ended March 31, 1998 $ - 13,457,530
Twelve month period ended March 31, 1999 16,380,302 1,695,293
Twelve month period ended March 31, 2000 2,036,082 415,516
Twelve month period ended March 31, 2001 141,385 53,770
Twelve month period ended March 31, 2002 165,163 201,848
Twelve month period ended March 31, 2003
and thereafter 169,321 512
----------- ----------
Total $18,892,253 15,824,469
=========== ==========
</TABLE>
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------
1998 1997 1996
---------- ------- -------
<S> <C> <C> <C>
Passbooks $ 172,313 191,399 214,908
Certificates 995,956 748,199 578,920
Demand deposit accounts 77 - -
---------- ------- -------
Total $1,168,346 939,598 793,828
========== ======= =======
</TABLE>
The aggregate amount of deposit accounts with a balance of $100,000 or
greater was approximately $5,549,000 and $4,306,000 at March 31, 1998 and
1997 respectively. Deposits in excess of $100,000 are not insured by the
Federal Deposit Insurance Corporation.
-14-
<PAGE>
10) Borrowed Money
--------------
In connection with the Company's initial public offering, the Bank
established an Employee Stock Ownership Plan (ESOP). The ESOP was funded by
the proceeds from a $177,550 loan from the Company. The loan carries an
interest rate of nine and one-half percent and matures in the year 2005.
The loan is secured by the shares of the Company purchased with the loan
proceeds. The Bank has committed to make contributions to the ESOP
sufficient to allow the ESOP to fund the debt service requirements of the
loan.
11) Other Liabilities
-----------------
Other liabilities include the following:
<TABLE>
<CAPTION>
March 31,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Accrued interest on deposits $134,541 95,721
Accrued real estate taxes 14,430 16,487
Accrued audit fees 7,755 18,255
Deferred income tax liability (a) 21,824 19,809
Other accounts payable 20,748 26,562
-------- -------
$199,298 176,834
======== =======
</TABLE>
(a) The approximate tax effect of temporary differences that give rise to
the Bank's net deferred tax liability at March 31, 1998 and 1997 under
SFAS 109 is as follows:
<TABLE>
<CAPTION>
Assets Liabilities Net
------- ----------- -------
<S> <C> <C> <C>
March 31, 1998
--------------
Loan fees deferred for
financial reporting purposes $ 2,980 - 2,980
Accelerated depreciation for
tax purposes - (5,339) (5,339)
Bad debt reserves established
for financial reporting purposes 16,600 - 16,600
Increases to tax bad debt reserves
since April 1, 1988 - (46,395) (46,395)
Nondeductible incentive plan expenses 10,330 - 10,330
------- ------- -------
Total $29,910 (51,734) (21,824)
======= ======= =======
March 31, 1997
--------------
Loan fees deferred for
financial reporting purposes $ 3,118 - 3,118
Accelerated depreciation for
tax purposes - (4,261) (4,261)
Bad debt reserves established
for financial reporting purposes 14,443 - 14,443
Increases to tax bad debt reserves
since April 1, 1988 - (46,395) (46,395)
Nondeductible incentive plan expenses 13,286 - 13,286
------- ------- -------
Total $30,847 (50,656) (19,809)
======= ======= =======
</TABLE>
-15-
<PAGE>
12) Officer, Director and Employee Plans
------------------------------------
Stock Option Plan
-----------------
On July 12, 1995, the stockholders of the Company approved the West Town
Bancorp, Inc. Stock Option Plan. This is an incentive stock option plan for
the benefit of the officers and employees of the Company and its affiliates
and a directors' stock option plan for the benefit of outside directors of
the Company. The number of shares authorized under the Plan is 22,194,
equal to 10.0% of the total number of shares issued in the Conversion. As
of March 31, 1998, 17,281 options had been granted, which are exercisable
at a rate of 20% per year and expire ten years from the date of grant. The
following is an analysis of the stock option activity for each of the years
in the three year period ended March 31, 1998 and the stock options
outstanding at the end of the respective periods:
<TABLE>
<CAPTION>
Exercise Price
-----------------------
Number
Options of Shares Per Share Total
------- --------- ------------ --------
<S> <C> <C> <C>
Outstanding at April 1, 1995 - $ - $ -
Granted 14,875 10.00 148,750
Exercised 0
Forfeited 0
------ ------------ --------
Outstanding at March 31, 1996 14,875 10.00 148,750
Granted 1,758 10.00 17,580
Exercised (1,110) 10.00 (11,100)
Forfeited 0
------ ------------ --------
Outstanding at March 31, 1997 15,523 10.00 155,230
Granted 648 11.00 7,128
Exercised -
Forfeited -
------ ------------ --------
Outstanding at March 31, 1998 16,171 $10.00-11.00 $162,358
====== ============ ========
Exercisable at March 31, 1998 6,209 $ 10.00 $ 62,090
====== ============ ========
Options available for future
grants at March 31, 1998 4,913
======
</TABLE>
The weighted average fair value of options granted during the years ended
March 31, 1998, 1997 and 1996 was $11.00, $10.00 and $10.00, respectively.
As of March 31, 1998, the weighted average exercise price for options
outstanding was $10.04 with a weighted average remaining contractual life
of 8.2 years.
The Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company implemented SFAS No. 123 "Accounting for Stock-Based
Compensation" during the year ended March 31, 1997. The Company will retain
its current accounting method for its stock based compensation plans. This
statement will only result in additional disclosures for the Company, and
as such, its adoption did not, nor is it expected to have, a material
impact on the Company's financial condition or its results of operations.
-16-
<PAGE>
12) Officer, Director and Employee Plans (continued)
------------------------------------------------
The following summarizes the pro forma net income as if the fair value
method of accounting for stock-based compensation plan had been utilized:
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------
1998 1997 1996
-------- ------ -------
<S> <C> <C> <C>
Net income (as reported) $142,177 73,949 112,708
Pro forma net income 139,387 73,949 112,708
Earnings per share - diluted (as reported) $ .67 .34 .53
Pro forma diluted earnings per share .65 .34 .53
</TABLE>
The pro forma results presented above may not be representative of the
effects reported in pro form net income for future years.
The fair value of the option grants for the years ended March 31, 1998,
1997 and 1996 was estimated using the Black Scholes Method, using the
following assumptions: expected volatility of 10.0%, risk free interest
rate of 6.33%, and an expected life of approximately 10 years during all
periods.
Employee Stock Ownership Plan
-----------------------------
In conjunction with the Conversion, the Bank 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 $177,550 from the Company and purchased 17,755 common shares
issued in the Conversion. The Bank 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
Bank to the ESOP which were used to fund principal and interest payments on
the ESOP debt totaled $27,569, $27,569 and $27,569 for the years ended
March 31, 1998, 1997 and 1996, respectively.
On November 22, 1993, the AICPA issued Statement of Position No. 93-6,
"Employers' Accounting for Employee Stock Ownership Plans" ("SOP No. 93-
6"). SOP No. 93-6 provides guidance for accounting for all ESOPs. SOP No.
93-6 requires that the issuance or sale of treasury shares to the ESOP be
reported when the issuance or sale occurs and that compensation expense be
recognized for shares committed to be released to directly compensate
employees equal to the fair value of the shares committed. In addition, SOP
No. 93-6 requires that leveraged ESOP debt and related interest expense be
reflected in the employer's financial statements. Prior practice was to
recognize compensation expenses based on the amount of the employer's
contributions to the ESOP. SOP No. 93-6 is effective for fiscal years
beginning after December 31, 1992. The application of SOP No. 93-6 results
in fluctuations in compensation expense as a result of changes in the fair
value of the Company's common stock; however, any such compensation expense
fluctuations will result in an offsetting adjustment to additional paid-in
capital. Additional compensation expense, recognized as a result of the
implementation of this accounting principle, was $1,050, -0-, and -0- for
the years ended March 31, 1998, 1997 and 1996 respectively.
-17-
<PAGE>
12) Officer, Director and Employee Plans (continued)
------------------------------------------------
Management Recognition Plan
---------------------------
In conjunction with the Conversion, the Company formed a Management
Recognition Plan ("MRP"), which was authorized to issue 4% of the total
number of shares of common stock issued in the Conversion. Such additional
shares, totaling 8,878, were issued from authorized but previously unissued
shares. The MRP was established to award shares 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. On July 12, 1995, 6,149 shares were
awarded, and vested at a rate of 33.3% per year, while 2,729 shares were
reserved for future awards.
The fair value of the shares issued to the MRP in July of 1995 totaled
$88,780. Such amount is being amortized to compensation expense as the plan
participants become vested in those shares. For the years ended March 31,
1998, 1997 and 1996, $9,319, $24,120 and $55,341 was amortized to expense
respectively. The unamortized amount, which is comparable to deferred
compensation, is reflected as a reduction of stockholders' equity.
-18-
<PAGE>
13) Income Taxes
The Company has adopted SFAS No. 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 for years beginning after 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 March 31, 1998 includes approximately
$412,000 for which no deferred federal income tax liability has been
recognized.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------
1998 1997 1996
------- ------ -------
<S> <C> <C> <C>
Current $83,027 28,893 79,028
Deferred (benefit) 2,015 (3,573) (7,834)
------- ------ -------
$85,042 25,320 71,194
======= ====== =======
</TABLE>
A reconciliation of the statutory federal income tax rate to effective
income tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------
1998 1997 1996
------- ------ -------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0 34.0
Surtax exemption (2.8) (11.2) (3.0)
State income tax 4.3 2.4 3.9
Other 1.9 .3 3.8
------- ------ -------
Effective income tax rate 37.4% 25.5 38.7
======= ====== =======
</TABLE>
Deferred income tax expense (benefit) consists of the following tax effects
of timing differences:
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------
1998 1997 1996
------- ------ -------
<S> <C> <C> <C>
Loan fees $ 138 1,478 4,441
Book loan loss provision in excess
of tax bad debt deduction (2,157) (3,704) (1,569)
Compensation related expenses 2,956 (763) (12,523)
Other 1,078 (584) 1,817
------- ------ -------
$ 2,015 (3,573) (7,834)
======= ====== =======
</TABLE>
-19-
<PAGE>
14) Stockholders' Equity and Capital Requirements
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum total
requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt correction
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
quantitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios, set forth in the
table below, of the total risk-based and core capital, as defined in the
regulations. Management believes, as of March 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
The Bank, according to federal regulatory standards, is well-capitalized
under the regulatory framework for prompt corrective action. To be
categorized as adequately capitalized, the Bank must maintain minimum total
risk-based and core ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
At March 31, 1998 and 1997, the Bank's regulatory equity capital was as
follows:
<TABLE>
<CAPTION>
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1998
- --------------
Risk-based $3,115,725 24.38% $1,022,640 8.00% $1,278,300 10.00%
Core 3,069,554 10.69 861,270 3.00 1,435,450 5.00
March 31, 1997
- --------------
Risk-based $2,964,500 28.15% $ 842,480 8.00% $1,053,100 10.00%
Core 2,924,329 11.20 783,580 3.00 1,305,970 5.00
</TABLE>
15) Stockholders' Equity
As part of the Conversion, the Bank established a liquidation account for
the benefit of all eligible depositors who continue to maintain their
deposit accounts in the Bank after conversion. In the unlikely event of a
complete liquidation of the Bank, 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 Bank's
capital stock. The Bank 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 Bank to be reduced below the
amount required for the liquidation account. Except for such restrictions,
the existence of the liquidation account does not restrict the use or
application of retained earnings.
In addition the Bank may not declare or pay cash dividends on or repurchase
any of its shares of common stock if the effect thereof would cause
stockholder's equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements.
Unlike the Bank, 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 Bank.
-20-
<PAGE>
16) Financial Instruments with Off-Balance Sheet Risk
The Company is a party to various transactions with off-balance sheet risk
in the normal course of business. These transactions are primarily
commitments to originate and to purchase loans. These financial
instruments carry varying degrees of credit and interest-rate risk in
excess of amounts recorded in the consolidated financial statements.
Outstanding commitments to originate or purchase mortgage loans amounted to
$1,591,000 at March 31, 1998 at fixed rates ranging from 6.75% to 9.50%.
Because the credit worthiness of each customer is reviewed prior to
extension of a commitment, the Bank adequately controls their credit risk
on their commitments, as it does for loans recorded on the balance sheet.
The Bank conducts all of its lending activities in the Chicagoland area.
Management believes the Bank 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 Federal Home Loan Bank of Chicago has issued an irrevocable letter of
credit for $510,000 to the State of Illinois on behalf of the Bank in order
to secure deposits totaling $502,502.
17) Contingencies
The Bank 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 Bank are not engaged in any legal proceedings of a material
nature at the present time.
18) SAIF Special Assessment and its Impact on SAIF Insurance Premiums
The deposits of West Town Savings Bank 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 were experiencing substantially lower deposit insurance
premiums because the BIF had achieved its required level of reserves while
the SAIF had not yet achieved its required reserves. In order to help
eliminate this disparity and any competitive disadvantage due to disparate
deposit insurance premium schedules, legislation to recapitalize the SAIF
was enacted in September, 1996.
The legislation required a special one-time assessment of 65.7 cents per
$100 of SAIF insured deposits held by the Bank at March 31, 1995. The one-
time special assessment resulted in a charge to earnings of approximately
$128,000 during the year ended March 31, 1997. The after-tax effect of
this one-time charge to earnings totaled approximately $83,000. The
legislation was intended to fully recapitalize the SAIF fund so that
commercial bank and thrift deposits would be charged the same FDIC premiums
beginning January 1, 1997. As of such date, deposit insurance premiums for
highly rated institutions, such as the Bank, have been substantially
reduced.
The Bank, however, will continue to be subject to an assessment to fund
repayment of the Financing Corporation's ("FICO") obligations. The FICO
assessment for SAIF insured institutions will be 6.48 cents per $100 of
deposits while BIF insured institutions will pay 1.52 cents per $100 of
deposits until the year 2000 when the assessment will be imposed at the
same rate on all FDIC insured institutions.
-21-
<PAGE>
19) Disclosures About the Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash and cash equivalents: For cash and interest-bearing deposits, the
carrying amount is a reasonable estimate of fair value.
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 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.
Other investments: Fair values for other investments are based on quoted
market prices received from third-party sources.
Deposit liabilities: The fair value of savings accounts 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.
Financial instruments with off-balance sheet risk: Fair values of the
Company's off-balance sheet financial instruments, which consist of loan
commitments, 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 fair value of the Company's off-balance-sheet instruments is nominal.
The estimated fair values of the Company's financial instruments as of
March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
March 31, 1998
-----------------------
Carrying Fair
Amount Value
----------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 7,177,578 7,177,578
U.S. Government and agency obligations 500,000 498,000
Mortgage-backed securities 1,631,621 1,646,000
Loans receivable, gross 19,217,072 19,381,500
Other investments, available for sale 100,000 100,000
Financial liabilities:
Deposits 25,263,850 25,547,200
</TABLE>
<TABLE>
<CAPTION>
March 31, 1998
-----------------------
Carrying Fair
Amount Value
----------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 7,243,783 7,243,783
U.S. Government and agency obligations 1,100,315 1,082,000
Mortgage-backed securities 2,494,292 2,465,000
Loans receivable, gross 16,998,268 17,103,000
Financial liabilities:
Deposits 22,816,474 22,879,000
</TABLE>
-22-
<PAGE>
20) Condensed Parent Company Only Financial Statements
The following condensed statements of financial condition, as of March 31,
1998 and 1997, and condensed statements of income and cash flows for the
years ended March 31, 1998, 1997 and 1996 for West Town Bancorp, Inc.
should be read in conjunction with the consolidated financial statements
and the notes thereto.
Statements of Financial Condition
------------------
<TABLE>
<CAPTION>
March 31,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Assets
- ------
Cash and cash equivalents $ 552,282 805,037
Loans receivable 297,393 227,903
Other investments, available for sale 100,000 -
Accrued interest receivable 17,414 1,079
Equity investment in subsidiaries 3,212,354 3,081,825
Other assets 19,134 13,286
---------- ---------
4,198,577 4,129,130
========== =========
Liabilities and Stockholders' Equity
- ------------------------------------
Accrued taxes and other liabilities 12,425 12,568
Common stock 2,319 2,319
Additional paid-in capital 1,986,077 1,986,077
Retained earnings 2,279,662 2,137,485
Treasury stock, at cost (81,906) -
Common stock awarded by Management
Recognition Plan - (9,319)
---------- ---------
$4,198,577 4,129,130
========== =========
</TABLE>
Statements of Income
--------------------
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income $ 63,746 60,081 62,359
Loan fees and service charges 1,208 - -
Gain on sale of investment securities,
available for sale - 3,178 -
Non-interest expense (43,498) (45,341) (85,990)
-------- ------- -------
Net income (loss) before income taxes
and equity in earnings of subsidiaries 21,456 17,918 (23,631)
Benefit of (provision for) income taxes (9,808) (9,384) 7,915
-------- ------- -------
Net income (loss) before equity
in earnings of subsidiaries 11,648 8,534 (15,716)
Equity in earnings of subsidiaries 130,529 65,415 128,424
-------- ------- -------
Net income $142,177 73,949 112,708
======== ======= =======
</TABLE>
-23-
<PAGE>
20) Condensed Parent Company Only Financial Statements (continued)
Statements of Cash Flows
-------------
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 142,177 73,949 112,708
Equity in earnings of subsidiaries (130,529) (65,415) (128,424)
Gain on sale of investment securities,
available for sale - (3,178) -
(Increase) decrease in accrued
interest receivable (16,335) 3,002 (4,081)
Change in prepaid and accrued items, net (5,991) (1,947) (12,571)
Cost of stock benefit plan 9,319 24,120 55,341
--------- ------- --------
Net cash provided by (for)
operating activities (1,359) 30,531 22,973
--------- ------- --------
Investing activities:
Purchase of investment securities,
available for sale (100,000) (47,790) -
Proceeds from sale of investment
securities, available for sale - 50,968 -
Loan disbursements (531,923) (74,902) -
Loan repayments 462,433 12,388 11,269
--------- ------- --------
Net cash provided by (for)
investing activities (169,490) (59,336) 11,269
-------- ------- --------
Financing activities:
Proceeds from exercise of stock options - 11,100 -
Purchase of treasury stock (81,906) - -
--------- ------- --------
Net cash provided by (for)
financing activities (81,906) 11,100 -
--------- ------- --------
(Decrease) increase in cash and
cash equivalents (252,755) (17,705) 34,242
Cash and cash equivalents at
beginning of period 805,037 822,742 788,500
--------- ------- --------
Cash and cash equivalents at
end of period $ 552,282 805,037 822,742
========= ======= ========
</TABLE>
-24-
<PAGE>
EXHIBIT 11
----------
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
Year Ended
March 31, 1998
--------------
Weighted average number of common shares outstanding
used in basic EPS calculation 212,602
Add common stock equivalents for shares issuable under
Stock Option Plans 1,026
-------
Weighted average number of shares outstanding
adjusted for common stock equivalents 213,628
=======
Net income $ 142,177
Basic earnings per share $ .67
Diluted earnings per share $ .67
<PAGE>
WEST TOWN BANCORP, INC.
ANNUAL REPORT
MARCH 31, 1998
<PAGE>
TABLE OF CONTENTS
Financial Highlights 2
Letter to Our Stockholders 3
Directors and Officers 6
Our Commitment To You 7
Selected Financial Data 10
Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Stock Data 28
Stockholder Information 29
Report of Independent Auditors and Financial
Statements of West Town Bancorp, Inc. and F-1
Subsidiaries
Notes to Financial Statements F-6
1
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At or for the year ended March 31,
(Dollars in Thousands) 1998 1997 1996
---- ---- ----
- -------------------------------------------------------------------------------
FOR THE YEAR:
- -------------
<S> <C> <C> <C>
Net interest income 746 754 776
Net income 142 74 113
Return on average equity 3.56% 1.90% 3.00%
Return on average assets 0.50% 0.29% 0.48%
AT YEAR END:
- ------------
Total Assets 29,546 26,999 25,276
Loans Receivable, net 18,452 15,553 12,933
Interest earning assets 27,636 25,794 23,959
Interest bearing liabilities 25,264 22,816 21,209
Non-performing assets 96 0 212
Allowance for loan losses 46 40 30
Book Value Per Share 18.05 17.09 16.57
- -------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
To Our Shareholders
The management, directors, and employees of West Town Bancorp, Inc. (the
"Company") met the challenges presented by the year's economy and delivered
another year of profitable performance. Our fiscal year ended March 31, 1998 was
our fourth year as a productive public company and our subsidiary West Town
Savings Bank's (the "Bank") seventy-sixth year in the financial services
industry. Shareholder value as well as our book value remains at an all-time
high.
Total assets increased to $29,545,516 at March 31, 1998 from $26,998,783 at
March 31, 1997, an increase of $2,546,733. Loans receivable, primarily
mortgages, increased $2,899,085 to $18,451,630 at the end of fiscal year 1998,
from $15,552,545 at the end of 1997. Even with this increased lending activity,
the Bank had one loan totalling $96,100 that was delinquent three months or more
at March 31, 1998.
Net income for fiscal 1998 was $142,177 compared to $73,949 for fiscal
1997. The net income for fiscal 1998 also benefited from a $11,792 reduction in
FDIC premium for insurance of accounts which resulted from the recapitalization
of SAIF during fiscal 1997.
As of March 31, 1998, the Bank exceeded all regulatory capital standards.
The Bank's regulatory core capital at March 31, 1998 was $3,069,554 or 10.69% of
total assets. The Bank has a regulatory core capital in excess of the regulatory
requirements at March 31, 1998. The Company's stockholders' equity increased
$84,257 to $4,047,818 for the year ended March 31, 1998 as compared to
$3,963,561 at March 31, 1997. The Bank has a regulatory risk-
3
<PAGE>
based capital in excess of the regulatory requirements at March 31, 1998.
Although the financial services industry has changed dramatically since the
Bank's beginnings as a local building and loan in 1922, our focus has not.
Safety and security of our customer's funds is our primary responsibility. Our
customers look to us for guidance and assistance in attaining specific goals,
whether those goals are to purchase a home, secure a comfortable retirement, or
save for their children's education.
Our service to the community changes as the needs of the people evolve.
We are continually looking to offer products and services to keep our
current customers satisfied and at the same time to attract new customers. In
fiscal 1998 we instituted a checking account program which offers various
options to our customers. The School Thrift Program which was instituted in 1996
through a local grammar school continues to draw favorable response from our
student depositors.
West Town Insurance Agency, Inc. is our full-service insurance agency and
offers all types of insurance to cover consumers' individual insurance needs. In
addition to the usual fire, commercial, general liability, auto and homeowners
coverage, the agency also offers business coverage insurance.
Looking ahead, to the Millennium, the Year 2000 is a major data processing
issue for all businesses. Our staff took on this challenge early and we feel we
will be prepared in facing the Year 2000.
4
<PAGE>
The directors, officers and employees of the Bank take a very active role
in various community and neighborhood organizations. Holding office on various
boards, giving of their time and effort to help others, enriches their own
worth. Some of the local organizations of the Bank are actively involved in
include the Cicero Chamber of Commerce, the United Way and The Hawthorne
Businessmen's Association. The Bank has, among many others, financially
supported the St. Mary's Social Center, Boys Club of Cicero and the Town of
Cicero Helping Hands and Higher Education Programs.
I am very proud of the hard work and dedication of all of our employees.
Their efforts make the difference and make West Town Savings Bank what it is
today. The loyalty and support we enjoy as a business is a direct result of the
commitment of our officers, directors and employees.
Looking to the future, we recognize that the financial services industry is
rapidly changing. We are specialists in the lending field and are dedicated to
retaining that position. Our savings accounts are changing with the needs of the
consumer - competitive rates are what our customers want and will receive; they
deserve it.
We are prepared to face the challenges ahead of us. We appreciate the trust
and confidence placed in West Town Bancorp and will work to keep your support
while increasing shareholder value.
Sincerely,
/s/ Dennis B. Kosobucki
Dennis B. Kosobucki
Chairman and
Chief Executive Officer
5
<PAGE>
DIRECTORS AND OFFICERS
West Town Bancorp, Inc.
West Town Savings Bank
DIRECTORS:
- ---------
Dennis B. Kosobucki
Chairman, President and Chief Executive Officer and Director
West Town Bancorp, Inc. and West Town Savings Bank
Edward J. Hradecky
Secretary and Director of West Town Bancorp, Inc. and Director of West Town
Savings Bank
John A. Storcel
Director of West Town Bancorp, Inc. and West Town Savings Bank
James J. Kemp, Jr.
Director of West Town Bancorp, Inc. and West Town Savings Bank
James Kucharczyk
Director of West Town Bancorp, Inc. and West Town Savings Bank
================================================================================
West Town Bancorp, Inc. West Town Savings Bank
Officers Officers
-------- --------
Dennis B. Kosobucki Dennis B. Kosobucki
President and Chief President and Chief
Executive Officer Executive Officer
Jeffrey P. Kosobucki Jeffrey P. Kosobucki
Vice President, Vice President,
Chief Financial Officer Secretary and Chief
and Assistant Secretary Financial Officer
Edward J. Hradecky
Secretary
6
<PAGE>
OUR COMMITMENT TO YOU
Since 1922, the Bank's primary mission has been and will continue to be
promoting savings and home ownership through sound financial products and the
highest quality and friendly professional service to our customers.
The Bank is positioned to remain strong. Its strong capital position allows
it the flexibility to grow as demand for its product permits. Its capital is
well above regulatory requirements, with core capital to assets of 10.69% (3.0%
required) and risk-based capital to risk-based assets of 24.38% (8.0% required).
West Town Savings Bank's customers enjoy the advantages of dealing with a
healthy financial institution with resources to meet their needs, and the
friendly, service-minded, highly professional atmosphere of the Bank is
reminiscent of the personal banking environment of earlier days.
Through its customer base, West Town Savings Bank reinvests in its
community, on a secure and profitable basis, to the benefit of both its
depositors and stockholders.
7
<PAGE>
SERVICES
SAVINGS
We consistently seek innovative ways to enhance our services. The Bank
offers a variety of FDIC insured savings plans to meet virtually any need. These
include passbook accounts with a low minimum balance of $100, and certificates
of deposit ranging in term from three months to five years.
West Town Savings Bank also offers Individual Retirement Accounts ("IRA's")
on a no-fee basis to its customers including the new tax free Roth IRA.
Investments may be made in certificates of deposit ranging in terms from three
months to five years. Direct deposit of social security and pension payments are
also available to our depositors. Beginning in January, 1998, various types of
personal checking accounts ranging from free, interest-bearing and preferred
became available. The School Thrift Program through a local grammar school which
was instituted in 1996 continues to draw favorable response from our student
depositors.
LOANS
West Town Savings Bank originates a variety of conventional mortgage and
consumer loans. The Bank through a correspondent relationship also offers FHA
and VA mortgage loans. Adjustable rate and fixed rate mortgage loans are
available for purchase or refinance of residential homes. Home improvement loans
and second mortgage loans may be secured for a variety of purposes including
repayment of other loans, college education, purchasing an automobile or
remodeling an existing residence.
Flexible terms and personalized service make securing a loan quick and easy
for credit worthy requests.
8
<PAGE>
OTHER SERVICES
Other services available include:
* Travelers Checks
* Cashiers Checks
* Free Notary Service
* Check cashing (for depositors)
* Photocopy
* Direct deposit of social security and pension payments
* Payment Agent for Town of Cicero water bills
* Application center for Town of Cicero vehicle tags
* Sale and redemption of U. S. Savings Bonds
* Commonwealth Edison bill paying agent offering light bulb service
* Coin counting for customers
* Various types of personal checking accounts
FUTURE OUTLOOK
All the products and services are offered by our consumer oriented
employees who will continue to satisfy both new and current loyal customers. We
believe that this is what it takes to build a financial institution that can
provide expert financial service for customers today and in the future. We
continue to investigate additional financial services to meet the needs of our
customers.
Successful implementation of this strategy ultimately benefits our
stockholders by creating stable capital and profitability.
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
March 31,
---------------------------
1998 1997 1996
(in thousands)
---------------------------
<S> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION
- ----------------------------------
Total assets $29,546 $26,999 $25,276
Loans receivable 18,452 15,553 12,933
Mortgage-backed securities 1,632 2,494 3,086
Investment securities 777 1,221 1,223
Deposits 25,264 22,816 21,209
Total borrowings 0 0 0
Stockholders' equity 4,048 3,964 3,842
</TABLE>
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------
1998 1997 1996
(in thousands)
---------------------------
SELECTED OPERATIONS DATA
- ------------------------
<S> <C> <C> <C>
Total interest income $ 1,914 $ 1,693 $ 1,570
Total interest expense 1,168 940 794
------- ------- -------
Net interest income 746 753 776
Provision for loan losses 6 10 15
------- ------- -------
Net interest income after
provision for loan losses 740 743 761
------- ------- -------
Loan fees and service charges 12 6 17
Other non-interest income 27 23 24
------- ------- -------
Total non-interest income 39 29 41
------- ------- -------
Total non-interest expense 552 673 618
Income tax expense 85 25 71
------- ------- -------
Net income $ 142 $ 74 $ 113
======= ======= =======
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------
1998 1997 1996
---------------------
<S> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND
OTHER DATA:
- -----------------------------
Performance Ratios:
Return on assets (ratio of net
income to average total
assets) 0.50% 0.29% 0.48%
Net interest rate spread
information:
Average during year 2.24% 2.54% 3.02%
End of year 2.14% 2.24% 2.56%
Net interest margin (1) 2.76% 3.05% 3.49%
Ratio of operating expense to
average total assets 1.93% 2.59% 2.62%
Return on stockholders' equity
(ratio of net income to
average equity) 3.56% 1.90% 3.00%
Short-term liquid assets
to total assets (2) 25.99% 29.05% 28.94%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.12% 1.13% 1.13%
Quality Ratios:
Non-performing assets to total
assets at end of year 0.33% 0.00% 0.84%
Allowance for loan losses to
non-performing loans 48.05% -0- -0-
Allowance for loan losses
to total loans 0.24% 0.24% 0.23%
Capital Ratios:
Stockholders' equity to total
assets at end of year 13.70% 14.68% 15.20%
Average stockholders' equity
to average assets 13.99% 15.01% 15.93%
Number of full service
offices 1 1 1
(Footnotes appear at bottom of page 12)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
March 31,
<S> <C> <C> <C>
-------------------------
1998 1997 1996
-------------------------
Weighted average yield on:
Loans receivable 7.78% 7.74% 7.72%
Mortgage-backed securities 6.35% 6.33% 6.33%
Investment securities (3) 4.84% 5.57% 5.42%
Other interest-earning assets 5.70% 4.96% 5.60%
Combined weighted average yield
on interest-earning assets 7.11% 6.80% 6.83%
Weighted average rate paid on:
Savings deposits 2.60% 2.60% 2.80%
Certificates 5.77% 5.43% 5.14%
Combined weighted average rate
paid on interest-bearing
liabilities 4.97% 4.56% 4.27%
Spread 2.14% 2.24% 2.56%
- -------------------------------
</TABLE>
(1) Net interest income dividend by average interest earning assets.
(2) Short-term liquid assets consist of cash, interest-bearing deposits and
U.S. Government and agency obligations maturing within one year.
(3) Includes U.S. Government and agency obligations and FHLB stock.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
West Town Bancorp, Inc. (the "Holding Company"), a Delaware corporation,
was organized on May 6, 1994 to acquire all of the capital stock issued by West
Town Savings Bank (the "Bank") upon its conversion from the mutual to stock form
of ownership. On March 1, 1995, the Company sold 221,940 shares of common stock
at $10 per share to depositors, employees, and other investors. Total proceeds
from the conversion in the amount of $1,888,516 (which is net of conversion and
issuance costs of $330,884) was recorded as common stock and additional paid-in-
capital in fiscal year 1995. The Company utilized $944,258 of the net proceeds
to acquire all the capital stock of the Bank.
Financial statements on a consolidated basis for both the Company and the
Bank are included in the Annual Report. The Company had no material assets or
liabilities until the conversion was completed on March 1, 1995.
The following table presents the Consolidated Statements of Changes in
Stockholders' Equity for the three years ended March 31, 1998.
13
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE YEARS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Common Common
Additional Stock Stock
Common Paid-In Retained Treasury Acquired Awarded
Stock Capital Earnings Stock by ESOP by MRP Total
------ --------- -------- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995 $2,219 1,886,297 1,950,828 - (176,658) - 3,662,686
Additions for the year ended
March 31, 1996:
Net income 112,708 112,708
Common stock issued to MRP 89 88,691 (88,780) -
Amortization of award of MRP 55,341 55,341
Contribution to fund ESOP loan 11,269 11,269
------ --------- --------- ------- -------- ------- ---------
Balance at March 31, 1996 2,308 1,974,988 2,063,536 - (165,389) (33,439) 3,842,004
Additions for the year ended
March 31, 1997:
Net income 73,949 73,949
Exercise of stock options 11 11,089 11,100
Amortization of award of MRP 24,120 24,120
Contribution to fund ESOP loan 12,388 12,388
------ --------- --------- ------- -------- ------- ---------
Balance at March 31, 1997 2,319 1,986,077 2,137,485 - (153,001) (9,319) 3,963,561
Additions for the year ended
March 31, 1998:
Net income 142,177 142,177
Purchase of treasury stock
(7,625 shares) (81,906) (81,906)
Amortization of award of MRP 9,319 9,319
Contribution to fund ESOP loan 1,050 13,617 14,667
------ --------- --------- ------- -------- ------- ---------
Balance at March 31, 1998 $2,319 1,987,127 2,279,662 (81,906) (139,384) - 4,047,818
====== ========= ========= ======== ========= ======= =========
</TABLE>
14
<PAGE>
WEST TOWN SAVINGS BANK
---GENERAL---
The Bank was organized in 1922 as an Illinois-chartered mutual savings and
loan association entitled "West Town Building and Loan Association". In 1992,
the association converted to an Illinois chartered savings bank and changed its
named to "West Town Savings Bank". The Bank is regulated by the Office of the
Illinois Commissioner for Banks and Real Estate (OCBRE) and its deposits are
insured up to applicable limits under the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). The Bank is a
member of the Federal Home Loan Bank ("FHLB") System.
The Bank's principal business consists of attracting deposits from the
public and investing those deposits, together with funds generated from
operations, primarily in one-to-four family mortgage loans. The Bank's deposit
accounts are insured to the maximum allowable amount by the Federal Deposit
Insurance Corporation ("FDIC").
The Bank's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on its loan,
mortgage-backed securities and investment securities portfolios and its cost of
funds, consisting of interest paid on its deposits and borrowings. The Bank's
operating results are also affected, to a lesser degree, on loan fees, customer
service charges and other income. Operating expenses of the Bank consist of
employee compensation and benefits, equipment and occupancy costs, federal
deposit insurance premiums, and other administrative expenses. The Bank's
results of operations are further affected by economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
15
<PAGE>
CONSOLIDATED FINANCIAL CONDITION
As of March 31, 1998, total assets increased approximately $2,500,000, or
9.4%, to $29,546,000 from $26,999,000 at March 31, 1997. The increase primarily
resulted from an increase in deposits, used to originate and purchase mortgage
loans.
Net loans receivable increased in 1998 by $2,899,000, or 18.6%, primarily
due to an increase in purchased loans and loan originations in excess of
principal repayments on existing loans. During the year ended March 31, 1998,
the Bank had loan originations and purchases of $11,066,000, compared to
$4,968,000 for the year ended March 31, 1997.
Stockholders' equity increased approximately $84,000, or 2.1%, for the year
ended March 31, 1998 as compared to March 31, 1997, primarily as a result of net
income for the year of $142,000 and the continuing amortization of the cost of
the stock benefit plans totaling approximately $24,000, partially offset by the
purchase of treasury stock at a cost of approximately $82,000.
The Bank's lending activities have been concentrated primarily in
residential real property secured by first liens on such property. At March 31,
1998 approximately 89.2% of the Bank's loans were secured by one-to-four family
dwellings. In addition, the Bank currently is participating in a construction
loan for the purpose of building one-to-four family dwellings. The remaining
loans were secured by commercial real estate and multi-family properties and
savings accounts. The Bank requires collateral on all loans and generally
maintains loan to value ratios on real estate loans no greater than 80%.
Virtually all of the Bank's mortgage loans are geographically located within a
thirty-mile radius of the Bank's office.
16
<PAGE>
CONSOLIDATED NET INTEREST INCOME
Net interest income decreased by $7,000, or 1.0%, during the year ended
March 31, 1998, as compared to the prior year. The increase in gross interest
income of $221,000 was the result of an increase of approximately $2,380,000 in
average interest earnings assets as well as an increase in the average yield to
7.07% at March 31, 1998 from 6.86% at March 31, 1997. The increase in interest
expense of $228,000 was attributable to an increase in the average interest
bearing liabilities of approximately $2,410,000 as well as an increase in the
average yield paid on deposits from 4.32% at March 31, 1997 to 4.83% at March
31, 1998.
Net interest income decreased by $23,000 or 2.9%, during the year ended
March 31, 1997 as compared to the prior year. Interest expense increased
$146,000, while interest income increased $123,000. The average yield on
deposits rose by .27% while the average balance of deposits increased by $2.1
million.
17
<PAGE>
The following table presents for the periods indicated the total dollar amount
of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield Outstanding Earned/ Yield
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------------ -------- ------ ---------- ---------- ----- --------- --------- -----
(Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable (1) $18,012 $1,394 7.74% $14,089 $1,085 7.70% $10,017 $ 832 8.31%
Mortgage-backed 2,030 126 6.21% 2,780 168 6.04% 3,322 207 6.23%
securities
Investment securities 777 35 4.50% 1,101 59 5.36% 1,342 67 4.99%
Other interest-earning
assets 6,068 347 5.72% 6,585 373 5.66% 7,402 456 6.16%
FHLB stock 173 12 6.94% 121 8 6.61% 131 8 6.11%
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-earning
assets(1) 27,060 1,914 7.07% 24,676 1,693 6.86% 22,214 1,570 7.07%
====== ==== ===== ==== ====== ====
Non-interest-earning
assets 1,491 1,267 1,405
------- ------- -------
Total Assets $28,551 $25,943 $23,619
======= ======= =======
Interest-Bearing Liabilities:
Savings deposits $ 6,651 172 2.59% $ 7,168 191 2.66% $ 8,049 215 2.67%
Certificate accounts 17,458 995 5.70% 14,585 749 5.14% 11,570 579 5.00%
Demand deposit accounts 54 1 1.85%
------- ------ ---- ------- ----- ---- ------- ------ ----
Total interest-bearing
liabilities 24,163 1,168 4.83% 21,753 940 4.32% 19,619 794 4.05%
====== ==== ====== ==== ====== ====
Non-interest bearing
liabilities 393 297 237
------- ------- -------
Total liabilities $24,556 $22,050 $19,856
Total Stockholders' Equity 3,995 3,893 3,763
------- ------- -------
Total liabilities and
Stockholders' Equity $28,551 $25,943 $23,619
======= ======= =======
Net interest income $ 746 $ 753 776
====== ======
Net interest rate
spread 2.24% 2.54% 3.02%
==== ==== ====
Net earning assets $ 2,897 $ 2,923 $ 2,595
======= ======= =======
Net yield on average
interest-earning assets 2.76% 3.05% 3.49%
==== ==== ====
Ratio of average interest
earning assets to
average interest-bearing
liabilities 1.12x 1.13x 1.13x
===== ===== =====
</TABLE>
- ----------------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
18
<PAGE>
RATE/VOLUME ANALYSIS
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to the unprecedented levels and
volatility of interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------
1997 v. 1998 1996 v. 1997
-------------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
---------- --------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loan receivable $ 302 $ 7 $ 309 $ 338 $ (85) $ 253
Mortgage-backed securities (45) 3 (42) (34) (5) (39)
Investment securities (17) (7) (24) (12) 4 (8)
Other interest-earning assets (29) 3 (26) (50) (33) (83)
FHLB stock 3 1 4 (1) 1 -
----- ----- ----- ----- ----- -----
Total interest-earning assets 214 7 221 241 (118) 123
Liabilities and Equity Capital:
Interest-bearing liabilities:
Savings deposits $ (14) $ (5) $ (19) $ (23) $ (1) $ (24)
Certificate accounts 158 88 246 151 19 170
Demand deposit accounts 1 - 1 - - -
----- ----- ----- ----- ----- -----
Total interest-bearing
liabilities $ 145 $ 83 $ 228 $ 128 $ 18 $ 146
Net interest income: $ (7) $ (23)
===== =====
</TABLE>
19
<PAGE>
ASSET/LIABILITY MANAGEMENT
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
anticipated, based upon certain assumptions, to mature or reprice within a
specific time period and the amount of interest-bearing liabilities anticipated,
based upon certain assumptions, to mature or reprice within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income. 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 March 31, 1998, total interest-bearing liabilities maturing, repricing
or repaying within one year exceeded total interest-bearing assets maturing,
repricing, or repaying in the same period by $1,902,000, representing a negative
one-year gap ratio of 6.44%.
During periods of rising interest rates, it is expected that the cost of
the Bank's interest-bearing liabilities would rise more quickly than the yield
on its interest-earning assets, which would adversely affect net interest
income. In periods of falling interest rates, the opposite effect on net
interest income is expected. However, heavy prepayments of
20
<PAGE>
mortgages could reduce the positive effect of the falling interest rates.
Management believes that currently the risk of substantial effect of changes in
interest rates on net interest income is minimal due to the positive gap
position and also due to the strong net worth position of the Bank and the
excess of its interest-earning assets over interest-bearing liabilities.
Nonetheless, the Bank closely monitors interest rate risk as such risk relates
to management's strategy.
As part of its Asset/Liability Management strategy, the Bank invests in
mortgage pools and mortgage backed securities to offset unexpected loan
prepayments and to supplement low loan origination volumes. In recent years the
Bank has purchased mortgage pools of loans with maturities or repricing accruing
within a 1 to 7 year period.
The following table sets forth the scheduled repricing or maturity of the
Bank's assets and liabilities as of March 31, 1998, based on the following
assumptions:
1. Fixed-rate certificate accounts will not be withdrawn prior to
maturity.
2. Passbook and Demand Deposit Accounts were assumed to withdraw at a
rate of 10% during the first year, a combined rate of 20% for years
two and three, and 20% for years four and five.
3. Adjustable-rate loans and mortgage-backed securities are calculated at
the earlier of maturity or the contractual repricing date.
4. Fixed-rate mortgage loans, other fixed-rate loans and fixed-rate
mortgage-backed securities are shown on the basis of contractual
amortization and management's estimate of annual prepayments based
upon past experience.
21
<PAGE>
The effect of these assumptions is to quantify the dollar amount of items
that are interest-sensitive and that can be repriced within each of the periods
specified. Such repricing can occur in one of three ways: (1) the rate of
interest to be paid on an asset or liability may adjust periodically on the
basis of an interest rate index; (2) an asset or liability, such as a mortgage
loan, may amortize, permitting reinvestment of cash flows at the then-prevailing
interest rates; or (3) an asset or liability may mature, at which time the
proceeds can be reinvested at the current market rates. Management believes
these prepayment and erosion rates represent reasonable estimates based on the
Bank's experience and are consistent with information provided by regulatory
agencies.
22
<PAGE>
The following table sets forth the interest rate sensitivity of the Bank's
assets and liabilities at March 31, 1998 on the basis of prepayments and decay
rates as calculated through historical analysis or as provided by regulatory
agencies.
<TABLE>
<CAPTION>
Maturing or Repricing
-----------------------------------------------------
Within Over 1-3 Over 3-5 Over
One Year Years Years 5 Years Total
Amount Amount Amount Amount Amount
-------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
Fixed rate mortgage loans(2)
(including mortgage-backed securities) $ 3,061 $ 4,745 $ 2,908 $ 4,591 $ 15,305
Adjustable rate mortgage loans(2)
(including mortgage-backed securities) 4,738 - - - 4,738
Consumer loans 36 58 35 51 180
Investment securities and other (1) 7,281 95 - - 7,376
-------- -------- -------- ------- --------
Total interest-earning assets 15,116 4,898 2,943 4,642 27,599
======== ======== ======== ======= ========
Savings deposits 632 1,264 1,264 3,157 6,317
Certificates 16,381 2,177 335 - 18,893
Demand deposit accounts 5 10 10 29 54
-------- -------- -------- ------- --------
Total interest-bearing liabilities 17,018 3,451 1,609 3,186 25,264
-------- -------- -------- ------- --------
Interest-earning assets less
interest-bearing liabilities (1,902) 1,447 1,334 1,456 2,335
Cumulative interest-rate sensitivity gap (1,902) (455) 879 2,335 2,335
Cumulative interest-rate gap as a
percentage of assets (6.44%) (1.54%) 2.98% 7.90%
- -----------------------------------------
</TABLE>
(1) Not including Federal Home Loan Bank Stock and other equity investments.
(2) Net of loans in process
23
<PAGE>
PROVISION 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. Management's evaluation includes a review of
all loans on which full collectibility may not be reasonably assured, the
estimated fair market value of the underlying collateral, economic conditions,
historical loan loss experience and the Bank's internal credit review process.
The Bank's allowance for general loan losses at March 31, 1998 was $46,171.
In the fiscal year ended March 31, 1998, the Bank provided $6,000 as an
additional allowance for loan losses. At March 31, 1998, the Bank's allowance
for loan losses, as a percentage of total loans outstanding was .24% as compared
to .24% at March 31, 1997.
OTHER INCOME
CONSOLIDATED
Total other income increased $11,000 to $39,000 during the period ended
March 31, 1998 as compared to the same period for 1997. The increase was
primarily the result of an increase in income recognized from loan origination
fees and deposit related fees.
Total other income decreased $12,000 to approximately $29,000 in 1997 as
compared to 1996. The increase was primarily the result of a decrease in loan
fees.
24
<PAGE>
CONSOLIDATED OPERATING EXPENSES
Operating expenses decreased by $121,000 in fiscal year 1998, as compared
to fiscal 1997. This decrease was primarily the result of the 1997 SAIF special
assessments and reduction in the federal deposit insurance premiums partially
offset by increases in data processing expenses and professional fees. As a
percentage of average assets, total operating expenses amounted to 1.9% for 1998
and 2.6% in 1997.
Operating expenses increased by $55,000 in 1997, as compared to 1996. As a
percentage of average assets, total operating expenses amounted to 2.6% for 1997
and 1996 respectively.
INCOME TAXES
The income tax provisions amounted to $85,000, $25,000 and $71,000 during
the fiscal years 1998, 1997 and 1996, respectively, which amounted to effective
tax rates of 37.4%, 25.5% and 38.7% during these respective periods. See
discussion of accounting and income tax issues in Note 13 in Notes to Financial
Statements.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, proceeds from principal
and interest payments on loans, mortgage-backed securities and investment
securities. Should the Bank need additional sources of funds, borrowing could be
utilized from the Federal Home Loan Bank. The Bank has not utilized borrowed
funds in the last five years. While maturities and scheduled amortization of
loans and mortgage-backed securities are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions, and competition.
The Bank's liquidity, represented by cash equivalents, is a product of its
operating, investing and financing activities. These activities for the years
ended March 31, 1998, 1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------
----------------------
1998 1997 1996
---- ---- ----
Consolidated Cash Flows (in thousands)
- -----------------------
<S> <C> <C> <C>
Operating activities
Net income $ 142 74 113
Adjustment to reconcile net income to net cash
provided by (used in) operating activities (909) 106 72
------ ------ ------
Net cash provided by (used in) operating activities (767) 180 185
Net cash provided by (used in) investing activities (1,657) (1,863) (2,916)
Net cash provided by (used in) financing activities 2,358 1,613 1,677
------ ------ ------
Net increase (decrease) in cash and cash equivalents (66) (70) (1,054)
Cash and cash equivalents at beginning of year 7,244 7,314 8,368
------ ------ ------
Cash and cash equivalents at end of year $7,178 $7,244 $7,314
====== ====== ======
</TABLE>
The primary investing activity of the Bank is the origination and purchase
of loans and the purchase of mortgage-backed and investment securities. During
the years ended March 31, 1998 and 1997 the Bank had a net increase in loans of
approximately $2,899,000 and $2,620,000, and for the year ended March 31, 1996,
the Bank had a net increase in loans of approximately $3,717,000 (after
principal repayments), respectively. Purchases of mortgage-backed and investment
securities (including Federal Home Loan Bank Stock) approximated $156,000,
$48,000, and $0 respectively, in those same periods.
26
<PAGE>
Financing activities in the years ended March 31, 1998 and 1997 consisted
of a net increase in total deposits of approximately $2,448,000 and $1,607,000,
and for year ended March 31, 1996 a net increase in total deposits of
approximately $1,710,000. The Bank had no borrowed funds during these years.
At March 31, 1998, the Bank had outstanding loan commitments of $1,591,000.
Regulations require a savings institution to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least 5% of
the average daily balance of its net withdrawable deposits and short-term
borrowings. In addition, short-term liquid assets currently must constitute 1%
of the sum of net withdrawable deposit accounts plus short-term borrowings.
Management's objectives and strategies for the Bank have consistently maintained
liquidity levels in excess of regulatory requirements. At March 31, 1998 and
1997, the Bank's liquidity level was in excess of 25%.
The Bank is also required to maintain specific amounts of capital pursuant
to federal regulations. As of March 31, 1998 the Bank was in compliance with all
regulatory capital requirements, with core (Tier 1) and risk-based (Tier 2)
ratios of 10.69%, and 24.38%, well above the required ratios.
EFFECT OF INFLATION AND CHANGING PRICES
The Financial Statements and related financial data presented herein have
been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollars, without
considering the changes in relative purchasing power of money over time due to
inflation. The primary impact of
27
<PAGE>
inflation on operations of the Bank is reflected in increased operating costs.
Unlike most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution's
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
STOCK DATA
West Town Bancorp, Inc.'s common stock is traded over-the-counter through
the National Daily Quotation System "Pink Sheet" published by the National
Quotation Bureau, Inc. At March 31, 1998, the Company had 224,303 shares
outstanding with a book value of $18.05 per share. The closing price of the
stock on March 31, 1998 was $12.00 per share, or 66.5% of book value. Earnings
per share for the year ended March 31, 1998 was $0.67.
28
<PAGE>
STOCKHOLDER INFORMATION
-----------------------
CORPORATE HEADQUARTERS
West Town Savings Bank
4852 West 30th Street
Cicero, Illinois 60804
(708) 652-2000
GENERAL COUNSEL
Kemp & Grzelakowski, Ltd.
Oak Brook, Illinois
STOCK TRANSFER AGENT AND REGISTRAR
First Bankers Trust Company
Broadway at 12th Street
P.O. Box 3566
Quincy, Illinois 62305-3566
(217) 228-8060
INDEPENDENT AUDITORS
Cobitz, Vandenberg & Fennessy
Palos Hills, Illinois
INVESTOR INFORMATION
Stockholders, investors, and analysts interested in additional
information may contact
Dennis B. Kosobucki, President and CEO,
at the corporate headquarters
ANNUAL MEETING OF STOCKHOLDERS
The Annual Meeting of the Stockholders of West Town Bancorp, Inc.
will be held at 1:00 p.m., July 8, 1998, at the following location:
Corporate Headquarters
4852 W. 30th Street
Cicero, Illinois 60804
All Stockholders are cordially invited to attend.
At April 30, 1998, the Corporation had 91 stockholders of record.
29
<PAGE>
EXHIBIT 22
----------
SUBSIDIARIES OF REGISTRANT
Parent
- ------
West Town Bancorp, Inc.
State of
Subsidiary Percentage Owned Incorporation
- ---------- ---------------- -------------
West Town Savings Bank 100% Illinois
West Town Insurance Agency, Inc. (1) 100% Illinois
- ---------------
(1) First tier subsidiary of West Town Savings Bank.
<PAGE>
COBITZ, VANDENBERG & FENNESSY
CERTIFIED PUBLIC ACCOUNTANTS
9944 SOUTH ROBERTS ROAD - SUITE 202
PALOS HILLS, ILLINOIS 60465
(708) 430-4106 - Fax (708) 430-4499
EXHIBIT 24
----------
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of West Town Bancorp, Inc. of our report dated May 8, 1998, included
in the 1998 Annual Report to Stockholders of West Town Bancorp, Inc.
/s/ Cobitz, VandenBerg & Fennessy
---------------------------------
Cobitz, VandenBerg & Fennessy
June 5, 1998
Palos Hills, Illinois
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