<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [FEE REQUIRED] For the Year Ended December 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED]
For the transition period from to
------------- ----------------
Commission File Number: 0-26184
FIRST MUTUAL BANCORP, INC.
--------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 37-1339075
-------- ----------------
(State or Other Jurisdiction of Inc. or Orgn.) (I.R.S. Employer ID No.)
135 EAST MAIN STREET, DECATUR, ILLINOIS 62523
--------------------------------------- -----
(Address of Principal Executive Office) (Zip Code)
(217) 429-2306
--------------
(Registrant's telephone number)
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 $0.10 PER SHARE
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
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 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 March 26, 1997, there were issued and outstanding 3,741,670 shares of
the Registrant's Common Stock.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the average bid and ask price of such
stock as of March 26, 1997 was approximately $56.125 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Parts II and III of Form 10-K--Portions of Annual Report to Stockholders
for the year ended December 31, 1996.
2. Part III of Form 10-K--Portions of Proxy Statement for 1997 Annual Meeting
of Stockholders.
<PAGE>
PART I
ITEM 1. BUSINESS
FIRST MUTUAL BANCORP, INC.
First Mutual Bancorp, Inc. (the "Company") is a Delaware corporation that
was organized in December 1994. On June 30, 1995, the Company acquired 100% of
the capital stock of First Mutual Bank, S.B. (the "Bank"), and sold 4,700,000
shares of common stock in a subscription offering for a purchase price of $10.00
per share (the "Offering"). Net proceeds from the Offering were $41.6 million.
The Company retained 50% of the net Offering proceeds and used a portion of the
proceeds to originate a loan to the Bank's Employee Stock Ownership Plan, and
used the balance of the net proceeds to purchase all of the common stock of the
Bank. Immediately following the Offering, the only significant assets of the
Company were the common stock of the Bank, the loan to the ESOP, and $18.9
million in cash, cash equivalents, and certificates of deposit.
The business of the Company and its subsidiaries will be discussed herein
as activities of the Company (on a consolidated basis), and references to the
Company's historical investment activities include the activities of the Bank
prior to June 30, 1995 unless otherwise noted.
The Company employs executive officers and a support staff if and as the
need arises. Such personnel are provided by the Bank and are paid separate
remuneration for such services. At December 31, 1996, the Company had total
consolidated assets of $331.8 million, total consolidated deposits of $202.9
million, and consolidated stockholders' equity of $62.2 million. The Company's
executive office is located at 135 East Main Street, Decatur, Illinois 62523
and its telephone number is (217) 429-2306.
FIRST MUTUAL BANK, S.B.
First Mutual Bank, S.B. is an Illinois-chartered savings bank headquartered
in Decatur, Illinois. The Bank's deposits are insured by the FDIC under the
SAIF. The Bank has been a member of the Federal Home Loan Bank System since
1953.
The Bank is primarily engaged in the business of attracting deposits from
the general public in the Bank's market area and using such funds, together with
borrowings and funds from other sources, to originate mortgage loans secured by
one- to four-family residential real estate. The Bank also originates
commercial and multi-family loans, and consumer loans. At December 31, 1996,
residential one- to four-family loans represented 75.3% of the Bank's net loan
portfolio, and commercial and multi-family loans represented 12.1% of the Bank's
net loan portfolio.
The Bank also invests in mortgage-backed securities primarily issued or
guaranteed by the United States Government or agencies thereof and maintains a
portion of its assets in liquid investments, such as overnight funds at the FHLB
of Chicago, and deposits in other financial institutions. At December 31, 1996,
such liquid investments, which included interest-earning deposits in other
financial institutions, and United States Government and federal agency
obligations, totalled $29.7 million, or 9.0% of total assets.
The Bank's principal sources of funds are deposits, funds received from the
sale, amortization and prepayment of loans and advances from the FHLB of
Chicago. Principal sources of income are interest income on mortgage loans,
consumer loans, commercial loans and investment securities, investment sales
commissions, deposit service fee income, fees for mortgage loan servicing and
gain on sale of loans. The Bank's principal expenses are interest paid on
deposits and employee compensation and benefits.
2
<PAGE>
The Bank is headquartered in Decatur, Illinois and operates nine offices in
its market area of Central Illinois consisting of Macon, DeWitt, Shelby and
Champaign Counties.
MARKET AREA/LOCAL ECONOMY
The Company conducts operations through its main office in Decatur,
Illinois, which is located in Central Illinois, and through eight branch offices
in three nearby counties. The population of Decatur is approximately 85,000 and
the population of the Company's primary market area is approximately 332,000 as
of the 1990 census. Most employment in the Company's primary market area is in
the agriculture and agriculture-related industries, but also includes
significant construction equipment, automotive, manufacturing and service
businesses. At December 31, 1996, the unemployment rate in Macon County was
8.1%, Shelby County was 6.0%, DeWitt County was 5.4%, and Champaign County was
3.1% compared to the national rate of 5.4%. Major employers in the Company's
primary market area include Caterpillar Tractor Co., Inc., A.E. Staley Co.,
Inc., The Archer Daniels Midland Company, The University of Illinois, Firestone
Tire & Rubber Company, and Illinois Power Company.
The Company's business and operating results are significantly affected by
the general economic conditions prevalent in its primary market area. The
Bank's primary market area is projected to experience only moderate population
growth for the foreseeable future.
The Company faces significant competition in attracting deposits from
commercial banks, other savings institutions and credit unions. The Company
also faces significant competition in the origination of loans from savings
institutions, mortgage banking companies, insurance companies and commercial
banks, many of which have greater financial and marketing resources.
Notwithstanding the foregoing, the Company's deposit market share has remained
stable.
RECENT DEVELOPMENTS
On January 3, 1997, the Bank completed an acquisition of three branch
offices from First of America Bank-Illinois, N.A. ("FOA"). The branch offices,
located in Lincoln, Taylorville and Pontiac, Illinois included an aggregate of
approximately $146 million in deposits, certain real estate and personal
property associated with the branches, and certain loans associated with the
branches. The consideration paid to the Company for the assumption of deposits
in excess of assets acquired was approximately $120.5 million. The Bank intends
to continue to operate the acquired branches as banking branches in a manner
previously operated by FOA.
3
<PAGE>
ANALYSIS OF LOAN PORTFOLIO
Set forth below is selected data relating to the composition of the
Company's loan portfolio, including loans held for sale, by type of loan as of
the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------- ------------------- -------------------- -------------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- --------- -------- --------- -------- --------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential one- to
four-family (1). . . $213,082 75.25% $187,381 85.32% $179,578 90.29% $176,424 88.32% $164,579 87.29%
Commercial and
multi-family . . . . 34,306 12.11 23,168 10.55 16,992 8.55 21,713 10.87 22,177 11.76
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
Total real estate
loans. . . . . . . . 247,388 87.36 210,549 95.87 196,570 98.84 198,137 99.19 186,756 99.05
Commercial loans . . . . 7,775 2.75 4,289 1.95 -- -- -- -- -- --
Consumer loans:
Auto . . . . . . . . . 29,111 10.28 3,390 1.55 1,429 .72 1,201 .60 744 .39
Home improvement . . . 931 0.33 795 .36 595 .30 459 .23 453 .24
Home equity. . . . . . 1,149 0.41 1,233 .56 1,337 .67 1,415 .71 876 .46
Passbook . . . . . . . 256 0.09 222 .10 249 .12 305 .15 367 .20
Student. . . . . . . . -- -- -- -- 246 .12 392 .20 189 .10
Other. . . . . . . . . 2,153 0.76 1,338 .61 1,026 .52 1,032 .52 1,450 .77
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans. 33,600 11.87 6,978 3.18 4,882 2.45 4,804 2.41 4,079 2.16
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable 288,763 101.98 221,816 101.00 201,452 101.29 202,941 101.60 190,835 101.21
Less:
Undisbursed loan proceeds 4,656 1.65 1,139 .52 1,480 .74 2,080 1.04 1,152 .61
Unearned discount and net
deferred loan fees/(costs) (306) (0.11) (121) (.05) (62) (.03) (13) (.01) 19 .01
Allowance for loan losses 1,244 0.44 1,172 .53 1,148 .58 1,129 .57 1,112 .59
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable,
net. . . . . . . . $283,169 100.00% $219,626 100.00% $198,886 100.00% $199,745 100.00% $188,552 100.00%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
</TABLE>
____________________________________
(1) Including loans held for sale.
4
<PAGE>
ORIGINATIONS, PURCHASES AND SALES OF LOANS
Set forth below is a table showing the Company's loan originations,
purchases, sales and repayments for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
---------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans receivable at beginning of period . . . . . . . $221,816 $201,452 $202,941
Originations:
Real estate:
Residential one- to four-family:
ARM loans . . . . . . . . . . . . . . . . . . . . 41,234 15,790 25,586
Fixed rate loans. . . . . . . . . . . . . . . . . 28,658 23,387 23,021
Commercial and multi-family:
ARM loans . . . . . . . . . . . . . . . . . . . . 13,082 6,653 1,733
Fixed rate loans. . . . . . . . . . . . . . . . . 3,707 538 --
Commercial. . . . . . . . . . . . . . . . . . . . . . 19,778 7,198 --
Consumer:
Auto. . . . . . . . . . . . . . . . . . . . . . . . 32,261 2,826 939
Home improvement. . . . . . . . . . . . . . . . . . 615 588 412
Home equity . . . . . . . . . . . . . . . . . . . . 1,085 1,206 1,158
Student . . . . . . . . . . . . . . . . . . . . . . -- 71 266
Other . . . . . . . . . . . . . . . . . . . . . . . 4,668 1,963 1,929
-------- -------- --------
Total originations . . . . . . . . . . . . . . . 145,088 60,220 55,044
Purchases:
Real estate:
Residential 1-4 family:
ARM loans. . . . . . . . . . . . . . . . . . . . 17,147 14,254 3,645
-------- -------- --------
Total purchases . . . . . . . . . . . . . . . 17,147 14,254 3,645
Transfer of mortgage loans
to foreclosed real estate. . . . . . . . . . . . . 87 144 114
Repayments. . . . . . . . . . . . . . . . . . . . . 82,410 42,374 48,825
Loan sales. . . . . . . . . . . . . . . . . . . . . 12,791 11,592 11,239
-------- -------- --------
Total loans receivable at end of period. . . . . . $288,763 $221,816 $201,452
-------- -------- --------
-------- -------- --------
</TABLE>
LENDING ACTIVITIES
GENERAL. The Company's loan portfolio consists primarily of conventional
mortgage loans secured by one- to four-family residences. At December 31, 1996,
the Company's net loan portfolio totalled $283.2 million, of which $213.1
million, or 75.3%, consisted of one- to four-family residential mortgage loans.
The remainder of the Company's net loan portfolio at such date consisted of
commercial real estate and multi-family real estate loans (12.1%), consumer
loans (11.9%), and commercial loans (2.8%). Historically, the principal lending
activity of the Company has been the origination of mortgage loans for the
purpose of financing or refinancing one- to four-family residential properties
in the Company's primary market area. While the Company expects to continue
this emphasis in the future, management is also attempting to increase the
origination of commercial real estate and commercial business loans, as well as
consumer loans, particularly as necessary to supplement one- to four-family
residential mortgage lending.
The Company has worked to make its interest-earning assets more interest
rate sensitive by, among other things, originating and purchasing variable rate
loans, such as ARM loans, by originating medium-term consumer loans and
adjustable-rate commercial loans, and by investing primarily in short- and
medium-term securities. The Company continues to actively originate fixed rate
mortgage loans secured by one- to four-family residential properties with terms
ranging from 10 to 30 years. One- to four-family fixed rate loans of greater
than 15-year maturities are generally originated with the expectation that they
will be sold in the secondary mortgage market. The Company generally
5
<PAGE>
retains servicing on its sold mortgage loans and receives monthly servicing fee
income. In the past, the Company has had a relatively small portfolio of
mortgage-backed securities. At December 31, 1996, however, the Company had no
investments in mortgage-backed securities. The ability of the Company to
originate ARM loans is substantially affected by market interest rates and
consumer preference for fixed rate loans in lower market interest rate
environments. At December 31, 1996, approximately $154.8 million, or 62.6% of
the Company's mortgage loan portfolio consisted of loans with adjustable
interest rates.
For the years ended December 31, 1996, 1995 and 1994, respectively, the
Company purchased $17.1 million, $14.3 million and $3.6 million of residential
one- to four-family loans. For such periods, the Company did not purchase any
commercial real estate and multi-family real estate loans. Such purchases in
the aggregate represented less than 6.0% of the Company's total loans receivable
as of December 31, 1996.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Company's primary
lending activity is the origination of one- to four-family, owner-occupied,
residential mortgage loans secured by property located in the Company's primary
market area. Mortgage loans originated by the Company are almost entirely
secured by properties located in the Company's primary market area. If local
loan demand is insufficient to meet desired levels of mortgage loan
originations, the Company may originate loans in parts of central Illinois
outside the Company's primary market area. The Company also purchases
single-family mortgage loans from other lenders, which purchases totalled $17.1
million in 1996. The Company may continue such purchases to supplement local
mortgage loan originations to the extent market conditions dictate and to the
extent attractive purchases are identified. The Company uses the same
underwriting criteria in evaluating the credit quality of purchased residential
mortgage loans as it does for residential mortgage loans that it originates
directly. As a result, there have been no significant differences in the
delinquency rate of purchased versus originated residential mortgage loans. At
December 31, 1996, the Company had $213.1 million, or 75.3%, of its net loan
portfolio invested in mortgage loans secured by one- to four-family residences.
The Company currently offers residential mortgage loans for terms ranging
from 10 to 30 years, and with adjustable or fixed interest rates. The
origination of fixed rate mortgage loans versus ARM loans is monitored on an
ongoing basis and is affected significantly by the level of market interest
rates, customer preference, the Company's interest rate gap position and loan
products offered by the Company's competitors. Particularly in a relatively low
interest rate environment, borrowers typically prefer fixed rate loans to ARM
loans. Therefore, even if management's strategy is to emphasize ARM loans,
market conditions may be such that there is greater demand for fixed rate
mortgage loans. For the year ended December 31, 1996, the Company originated
$28.7 million of fixed rate residential mortgage loans and $41.2 million of
residential ARM loans. During 1995, the Company originated $23.4 million of
fixed rate residential mortgage loans and $15.8 million of residential ARM
loans. During 1994, the Company originated $23.0 million of fixed rate
residential mortgage loans and $25.6 million of residential ARM loans.
The Company offers fixed rate loans for terms ranging from 10 to 30 years.
The Company's fixed rate loans generally are originated and underwritten for
resale in the secondary mortgage market. Whether the Company can or will sell
fixed rate loans to the secondary market, however, depends on a number of
factors including the yield on the loan and the term of the loan, market
conditions and the Company's current interest rate risk position. For example,
15-year fixed rate loans with above market yields are likely to be retained by
the Company. The Company's fixed rate mortgage loans are amortized on a monthly
basis with principal and interest due each month. Residential real estate loans
often remain outstanding for significantly shorter periods than their
contractual terms because borrowers may refinance or prepay loans at their
option.
The primary purpose of offering ARM loans is to make the Company's loan
portfolio more interest rate sensitive. However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans do not offer the
Company as predictable cash flows as long-term, fixed rate loans. ARM loans
carry increased credit risk associated with potentially higher monthly payments
by borrowers as market interest rates increase. It is possible, therefore,
during periods of rising interest rates, that the risk of default on ARM loans
may increase due to the upward adjustment of interest costs to the borrower.
6
<PAGE>
The Company currently offers ARM loans that adjust every 1, 3 or 5 years
from the date of origination, with interest rate adjustment limitations
generally of up to two percentage points per year and with a cap of up to 6
percentage points on total interest rate increases over the life of the loan.
The Company has used different interest indexes for ARM loans in the past, and
currently uses the Constant Maturity Treasury Index. The Company also has
purchased ARM loans with various interest rate indexes. Consequently, the
interest rate adjustments on the Company's portfolio of ARM loans do not reflect
changes in a particular interest rate index. ARM loans secured by residential
real estate totalled $125.7 million, or 59.0%, of the Company's total
residential real estate loan portfolio at December 31, 1996.
The Company's residential first mortgage loans customarily include
due-on-sale clauses, which are provisions giving the Company the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the underlying real property
serving as security for the loan. Due-on-sale clauses are an important means of
adjusting the rates on the Company's fixed rate mortgage loan portfolio, and the
Company has generally exercised its rights under these clauses.
COMMERCIAL REAL ESTATE AND MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS.
The Company originates, and to a lesser extent purchases, commercial real estate
and multi-family residential real estate loans typically secured by apartment
buildings, nursing homes and commercial buildings. At December 31, 1996, $34.3
million, or 12.1%, of the Company's net loan portfolio consisted of commercial
and multi-family real estate loans. At December 31, 1996, all of the Company's
commercial real estate loans and multifamily residential real estate loans were
secured by properties located within the State of Illinois. At that date, the
largest commercial real estate loan had a principal balance of $777,000, and the
largest multi-family residential real estate loan had a principal balance of
$1.6 million. At December 31, 1996, no commercial or multi-family real estate
loans in the Company's loan portfolio were delinquent or had been placed on
non-accrual status. The Company expects to expand its investment in commercial
real estate loans, subject to market conditions and the availability of
attractive investment opportunities.
Loans secured by commercial and multi-family real estate generally involve
a greater degree of credit risk than one- to four-family residential mortgage
loans and carry larger loan balances. This increased credit risk is a result of
several factors, including the concentration of principal in a limited number of
loans and borrowers, the effects of general economic conditions on income
producing properties and the increased difficulty of evaluating and monitoring
these types of loans. Furthermore, the repayment of loans secured by commercial
and multi-family real estate is typically dependent upon the successful
operation of the related business and real estate property. If the cash flow
from the project is reduced, the borrower's ability to repay the loan may be
impaired.
COMMERCIAL BUSINESS LOANS. The Company intends to continue to increase its
investment in commercial business loans, subject to market conditions, the
Company's underwriting guidelines, and the availability of attractive lending
opportunities in the Company's market area. The Company employs an experienced
senior commercial lending officer for this purpose. Such commercial business
loans include working capital lines of credit, inventory and accounts receivable
loans, equipment financing and term loans. Maximum loan-to-value ratios range
from 50% (if used equipment is pledged) to 100% (if deposits at the Company are
pledged). Loan terms vary from one year for lines of credit to 10 years for
equipment, term and business acquisition loans. The interest rates on such
loans can be fixed or variable.
Commercial real estate and commercial business lending typically involve
larger average loan balances and greater credit risk as compared to residential
lending. In order to attempt to reduce risks related to the expected increase
in the Company's commercial lending, the Company employs an experienced
commercial lending officer. The Company also intends to limit its commercial
business lending to small- and medium-sized businesses in its market area.
CONSUMER LOANS. As of December 31, 1996, consumer loans totalled $33.6
million, or 11.9%, of the Company's net loans receivable. The principal types
of consumer loans offered by the Company are automobile loans, home improvement
loans, home equity loans and passbook loans. Consumer loans are offered on a
fixed interest rate
7
<PAGE>
and variable interest rate basis. The Company's originations of automobile
loans are primarily through its participation in the indirect dealer loan
market. The Company's home improvement loans and home equity loans are generally
secured by the borrower's principal residence.
The Company's underwriting standards for consumer loans include a
determination of the applicant's credit history and an assessment of ability to
meet existing obligations and payments on the proposed loan. The stability of
the applicant's monthly income may be determined by verification of gross
monthly income from primary employment, and additionally from any verifiable
secondary income. Creditworthiness of the applicant is a primary consideration;
however, the underwriting process also includes a comparison of the value of the
collateral in relation to the proposed loan amount.
Consumer loans tend to have higher interest rates than residential mortgage
loans, but also tend to have a higher risk of default than residential mortgage
loans. See "--Delinquent Loans and Non-Performing Assets" and "--Allowances for
Loan Losses" for information regarding the Company's loan loss experience and
reserve policy.
LOAN MATURITY SCHEDULE. The following table sets forth certain information
at December 31, 1996 regarding the dollar amount of loans maturing in the
Company's portfolio based on their contractual terms to maturity. Scheduled
principal repayments are included in the maturity category in which the payment
is due. Demand loans, loans having no stated schedule of repayments, and
overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
4 6 11
THROUGH THROUGH THROUGH BEYOND
YEAR 1 YEAR 2 YEAR 3 5 YEARS 10 YEARS 15 YEARS 15 YEARS TOTAL
------ ------ ------ ------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential one- to
four-family . . . . . . . $13,170 $9,886 $10,083 $21,283 $54,478 $33,529 $70,653 $213,082
Commercial real estate. . . 7,757 1,481 1,310 2,390 16,689 2,711 1,968 34,306
Commercial loans. . . . . . . 6,282 424 513 506 50 -- -- 7,775
Consumer loans. . . . . . . . 9,388 7,099 6,971 9,639 503 -- -- 33,600
----- ----- ----- ----- --- -- -- ------
Total. . . . . . . . . . $36,597 $18,890 $18,877 $33,818 $71,720 $36,240 $72,621 $288,763
------- ------- ------- ------- ------- ------- ------- --------
------- ------- ------- ------- ------- ------- ------- --------
</TABLE>
The following table sets forth the dollar amount of all loans at December 31,
1996 that are scheduled to mature after December 31, 1997 and that have
predetermined interest rates and floating or adjustable interest rates.
<TABLE>
<CAPTION>
FLOATING OR
FIXED RATE ADJUSTABLE RATE TOTAL
---------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
Residential one- to four-family . . . $ 77,225 $122,687 $199,912
Commercial real estate. . . . . . . . 855 25,694 26,549
Commercial loans. . . . . . . . . . . . 1,394 99 1,493
Consumer loans. . . . . . . . . . . . . 24,206 6 24,212
-------- -------- --------
Total. . . . . . . . . . . . . . . $103,680 $148,486 $252,166
-------- -------- --------
-------- -------- --------
</TABLE>
LOAN SOLICITATION AND PROCESSING. Loan originations are derived from a
number of sources such as real estate broker referrals, existing customers,
borrowers, builders, attorneys and walk-in customers. Upon receipt of a loan
application, a credit report is made to verify specific information relating to
the applicant's employment, income, and credit standing. In the case of a real
estate loan, an appraisal of the real estate intended to secure the proposed
loan is undertaken by an independent appraiser approved by the Company. A loan
application file is first reviewed by an underwriter in the Company's loan
department who checks applications for accuracy and
8
<PAGE>
completeness, and verifies the information provided. Loans with principal
balances of $500,000 or less must be approved by the Company's management.
Loans with principal balances between $500,001 and $2.0 million must be approved
by the President and two non-employee directors of the Company. Loans with
principal balances over $2.0 million and up to $3.0 million must be approved by
the President and three non-employee directors of the Company. Finally, loans
with principal balances in excess of $3.0 million must be approved by the
Company's full Board of Directors. Fire and casualty insurance are required at
the time the loan is made and throughout the term of the loan. Once the loan is
approved a loan commitment is promptly issued to the borrower.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property serving as collateral, which insurance must be
maintained during the full term of the loan. Title insurance or an attorney's
opinion based on a title search of the property is required on all loans secured
by real property.
LOAN ORIGINATION FEES. In addition to interest earned on loans, the
Company may charge loan origination fees. The ability of the Company to impose
loan origination fees is influenced by the demand for mortgage loans and
competition from other lenders in the Company's market area. In recent years,
the Company has generally not charged loan origination fees. To the extent that
loans are originated or acquired for the Company's portfolio, Statement of
Financial Accounting Standards No. 91 ("Statement 91") requires that the Company
defer loan origination fees and costs, and amortize such amounts as an
adjustment of yield over the life of the loan by use of the level yield method.
Fees deferred under Statement 91 are recognized into income immediately upon the
sale of the related loan. At December 31, 1996, the Company had $306,000 of net
deferred loan costs. Loan origination fees (costs) vary with the volume and
type of loans and commitments made and purchased and with competitive conditions
in the mortgage markets, which in turn respond to the demand and availability of
money.
In addition to loan origination fees, the Company also receives loan
servicing fees. The Company recognized fees of $123,000, $115,000 and $111,000
for the years ended December 31, 1996, 1995, and 1994, respectively.
LOANS TO ONE BORROWER. The Bank is subject to the same
loans-to-one-borrower limits as those applicable to national banks, which under
current regulations limit loans to one borrower to an amount equal to 15% of
unimpaired capital and unimpaired surplus on an unsecured basis, and an
additional amount equal to 10% of unimpaired capital and unimpaired surplus if
the loan is secured by readily marketable collateral (generally, financial
instruments and bullion, but not real estate). Illinois law regarding loans to
one borrower is similar to federal law. At December 31, 1996, the Bank's
largest real estate related borrower had an aggregate principal outstanding
balance of $3.5 million, which balance did not exceed the Bank's loans-to-one
borrower limit of $7.8 million at December 31, 1996.
REAL ESTATE LENDING GUIDELINES
Regulations limit the amount that a savings institution may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Such regulations permit a maximum
loan-to-value ratio of 97% for residential property (100% for loans guaranteed
by the Veterans Administration) and 90% for all other real estate loans. The
Company's lending policies limit the maximum loan-to-value ratio on both fixed
rate mortgage loans and ARM loans to 80% of the lesser of the appraised value or
the purchase price of the property to serve as security for the loan without
private mortgage insurance. The Company also makes real estate loans with
loan-to-value ratios in excess of 80%. For real estate loans with loan-to-value
ratios of between 80% and 90%, the Company requires the first 25% of the loan to
be covered by private mortgage insurance. For real estate loans with
loan-to-value ratios between 90% and 97%, the Company requires the first 30% of
the loan to be covered by private mortgage insurance. The Company requires fire
and casualty insurance, as well as title insurance or an opinion of counsel
regarding good title, on all properties securing real estate loans made by the
Company.
9
<PAGE>
Effective December 19, 1993, all financial institutions were required to
adopt and maintain comprehensive written real estate lending policies that are
consistent with safe and sound banking practices. These lending policies must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Guidelines") adopted by the Federal banking agencies, including
the FDIC. The Guidelines set forth uniform regulations prescribing standards
for real estate lending. Real estate lending is defined as extension of credit
secured by liens on interests in real estate or made for the purpose of
financing the construction of a building or other improvements to real estate,
regardless of whether a lien has been taken on the property.
The policies must address certain lending considerations set forth in the
Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also be
appropriate based upon the size of the institution and the nature and scope of
its operations, and must be reviewed and approved by the institution's board of
directors at least annually. The LTV ratio framework, with an LTV ratio being
the total amount of credit to be extended divided by the appraised value of the
property at the time the credit is originated, must be established for each
category of real estate loans. If not a first lien, the lender must combine all
senior liens when calculating this ratio. The Guidelines, among other things,
establish the following supervisory LTV limits: raw land (65%); land development
(75%); construction (commercial, multi-family and nonresidential) (80%);
improved property (85%); and owner occupied one- to four-family residential (no
maximum ratio, however, any LTV ratio in excess of 90% requires appropriate
insurance or readily marketable collateral).
Certain institutions are permitted to make real estate loans that do not
conform to the established LTV ratio limits up to 100% of the institution's
total capital. Within this aggregate limit, total loans for all commercial,
agricultural, multi-family and other non-one- to four-family residential
properties should not exceed 30% of total capital. An institution will come
under increased supervisory scrutiny as the total of such loans approaches these
levels. Certain loans are exempt from the LTV ratios (E.G., those guaranteed by
a government agency, loans to facilitate the sale of real estate owned, and
loans renewed, refinanced or restructured by the original lender(s) to the same
borrower(s) where there is no advancement of new funds, etc.).
MORTGAGE-BACKED SECURITIES
The Company occasionally invests in mortgage-backed securities issued or
guaranteed by the United States Government or agencies thereof. Investments in
mortgage-backed securities are made either directly or by exchanging mortgage
loans for such securities. These securities consist primarily of adjustable
rate mortgage-backed securities issued or guaranteed by the Federal National
Mortgage Administration ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC"), and the Government National Mortgage Administration ("GNMA"). Total
mortgage-backed securities decreased to zero at December 31, 1996 from $933,000
at December 31, 1992, due to repayments.
The Company's objective in investing in mortgage-backed securities varies
from time to time depending upon market interest rates, local mortgage loan
demand, and the Company's level of liquidity. Mortgage-backed securities also
have lower credit risk because principal and interest on these securities are
either insured or guaranteed by the United States Government or agencies
thereof.
10
<PAGE>
Set forth below is a table showing the Company's purchases, sales and
repayments of mortgage-backed securities for the periods indicated.
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
Mortgage-backed securities at
beginning of period . . . . . . . . $ -- $ -- $ 103
Repayments. . . . . . . . . . . . . -- -- (103)
Discount (premium) amortization . . . -- -- --
----- ----- ------
Mortgage-backed securities at end
of period . . . . . . . . . . . . . $ -- $ -- $ --
----- ----- ------
----- ----- ------
The Bank had no mortgage-backed securities at December 31, 1996, 1995 and
1994.
DELINQUENCIES, NON-PERFORMING AND CLASSIFIED ASSETS
The Company's collection procedures provide that when a mortgage loan is 15
days past due, a computer-generated late charge notice is sent to the borrower
requesting payment plus the late charge. During the first 30 days a telephone
call is made or a letter is sent to the borrower, stressing the importance of
reinstating the loan and obtaining reasons for the delinquency. If the
delinquency continues for 60 days, a property inspection is generally made. The
contact with the borrower becomes more urgent and frequent, with a demand for a
definite payment plan. When a loan continues in a delinquent status for 90 days
or more, and a repayment schedule has not been made or kept by the borrower, a
notice of intent to foreclose is then sent to the borrower, giving 30 days to
cure the delinquency. If not cured, foreclosure proceedings are initiated.
Commercial and consumer loan customers are assessed a late charge when
payment is not received within 10 days of the due date. Telephone contact is
initiated within 20 days of the payment due date to request the payment and to
determine if additional collection action will be needed. If a plan to remedy
the delinquency cannot be carried out, legal remedies such as repossession,
foreclosure and deficiency judgments are initiated.
NON-PERFORMING ASSETS
Loans are reviewed on a regular basis and are placed on a non-accrual
status when, in the opinion of management, the collection of additional interest
is doubtful. Mortgage loans are placed on non-accrual status generally when
either principal or interest is 90 days or more past due and management
considers the interest uncollectible. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Real estate acquired by the Company as a result of foreclosure or by deed
in lieu of foreclosure is classified as REO until such time as it is sold. When
REO is acquired, it is recorded at the lower of the unpaid principal balance of
the related loan plus accrued interest, or its fair market value, less estimated
selling expenses. Any further write-down of REO is charged against earnings.
At December 31, 1996, 1995, and 1994, the Company owned approximately $77,000,
$51,000 and $67,000, respectively, net of valuation reserves, of property
acquired as a result of foreclosure or by deed in lieu of foreclosure and
classified as REO. In recent years, the Company has worked aggressively to
reduce REO by improving collection procedures and tightening loan underwriting
standards.
11
<PAGE>
DELINQUENT LOANS AND NON-PERFORMING ASSETS
The following table sets forth information regarding loans delinquent for
90 days or more and real estate owned by the Company at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
DELINQUENT LOANS - NON-ACCRUAL:
- ------------------------------
<S> <C> <C> <C> <C> <C>
One- to four-family residential . . . . . . . . . . . . $ 30 $179 $ 57 $249 $199(1)
Commercial. . . . . . . . . . . . . . . . . . . . . . . 74 -- -- -- --
Consumer. . . . . . . . . . . . . . . . . . . . . . . . 4 -- -- -- --
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ---- ----- ---- ---- ------
Total delinquent loans-non-accruing. . . . . . . . . 108 179 57 249 199
DELINQUENT LOANS - 90 DAYS OR MORE ACCRUING: (2)
- -------------------------------------------
One- to four-family residential . . . . . . . . . . . . 268 526 431 295 367
Consumer loans. . . . . . . . . . . . . . . . . . . . . 124 11 6 -- 14
---- ---- ---- ---- ----
Total delinquent loans accruing. . . . . . . . . . . 392 537 437 295 381
---- ---- ---- ---- ----
Total non-performing loans. . . . . . . . . . . . . . . . 500 716 494 544 580
Total real estate owned (3) . . . . . . . . . . . . . . . 77 51 67 72 125
---- ---- ---- ---- ----
Total non-performing assets. . . . . . . . . . . . $577 $767 $561 $616 $705
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Total non-performing loans to net loans receivable. . . . .18% .33% .25% .27% .31%
Total non-performing loans to total loans . . . . . . . . .17% .32% .25% .27% .30%
Total non-performing loans to total assets. . . . . . . . .15% .26% .20% .24% .24%
Total non-performing loans and REO to total assets. . . . .17% .28% .22% .27% .30%
</TABLE>
__________________________________
(1) Includes one restructured loan with a principal balance of $30,258 at
December 31, 1992.
(2) Represents loans that are well secured and in the process of collection,
with collection expected within 30 days.
(3) Represents property acquired by the Company through foreclosure or deed in
lieu of foreclosure. Upon acquisition, this property is recorded at fair
value.
The following table sets forth information with respect to loans past due
60-89 days in the Company's portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans past due 60-89 days:
One- to four-family residential . . . . . . . . $821 $596 $696 $799 $749
Commercial real estate. . . . . . . . . . . . . -- 18 48 54 71
Consumer loans. . . . . . . . . . . . . . . . . 260 -- 23 -- 2
---- ---- ---- ---- ----
Total past due 60-89 days . . . . . . . . . $1,081 $614 $767 $853 $822
------ ---- ---- ---- ----
------ ---- ---- ---- ----
</TABLE>
12
<PAGE>
The following table sets forth information with respect to the Company's
delinquent loans and other problem assets at December 31, 1996.
AT DECEMBER 31, 1996
--------------------------
BALANCE NUMBER
--------------- ------
(IN THOUSANDS)
Residential real estate:
Loans 60 to 89 days delinquent. . . . . . . . . . $821 27
Loans 90 days or more delinquent - Accruing . . . 268 7
Loans - Not Accruing. . . . . . . . . . . . . . . 30 2
Commercial loans:
Loans not accruing. . . . . . . . . . . . . . . . 74 1
Commercial real estate:
Loans 60 to 89 days delinquent. . . . . . . . . . 260 21
Loans 90 days or more delinquent. . . . . . . . . 124 11
Consumer loans (60 days or more delinquent) . . . . 4 1
Foreclosed real estate and repossessions. . . . . . 77 1
Loans to facilitate sale of real estate owned . . . 94 4
ALLOWANCE FOR LOAN LOSSES
Management's policy is to provide for estimated losses on the Company's
loan portfolio based on management's evaluation of the potential losses that may
be incurred. The Company regularly reviews its loan portfolio, including
problem loans, to determine whether any loans require classification or the
establishment of appropriate reserves or allowances for losses. Such
evaluation, which includes a review of all loans of which full collectability of
interest and principal may not be reasonably assured, considers, among other
factors, the estimated net realizable value of the underlying collateral, the
size and risk exposure of each segment of the loan portfolio, present indicators
such as delinquency rates, the borrower's current financial condition, and the
potential for losses in future periods. Management calculates the general
allowance for loan losses in part based on past experience, and in part based on
specified percentages of loan balances. While both general and specific loss
allowances are charged against earnings, general loan loss allowances are added
back to capital in computing risk-based capital under federal and state
regulations.
During the year ended December 31, 1996, the Company provided $113,000 for
loan losses. During the years ended December 31, 1995, 1994 and 1993, no
provision for loan losses was required. During the year ended December 31,
1992, the Company provided $825,000 for loan losses. The Company's allowance
for loan losses totalled $1.2 million at each of December 31, 1996 and 1995, and
$1.1 million at each of December 31, 1994 and 1993. The provision for the year
ended December 31, 1992 reflected, among other factors, the uncertainties in the
local real estate market, the uncertainties in the local economy, the continued
effects of the recent recession in the local economy, the general deterioration
of real estate values locally and nationally, and the increase in loan balances.
Although the Company maintains its allowance for losses on loans at a level
which it considers to be adequate to provide for potential losses, there can be
no assurance that such losses will not exceed the estimated amounts or that the
Company will not be required to make additions to the allowance for loan losses
in the future. Future additions to the Company's allowance for loan losses and
changes in the related ratio of the allowance for loan losses to non-performing
loans are dependent upon the economy, changes in real estate values and interest
rates, changes in the mix of the loan portfolio, increases or decreases to the
loan portfolio, the view of the regulatory authorities toward adequate reserve
levels, and inflation. Management will continue to review the entire loan
portfolio to determine the extent, if any, to which further additional loan loss
provisions may be deemed necessary.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 114 (SFAS No. 114), "Accounting by Creditors for
Impairment of a Loan," which became effective on January 1, 1995.
13
<PAGE>
SFAS No. 114 specifies that allowances for losses on impaired loans should be
determined using the present value of estimated future cash flows of the loan,
discounted at the loan's effective interest rate. The adoption of SFAS No. 114
did not have a material effect on the Company's financial position, results of
operations or capital.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The following table sets forth the breakdown of the allowance for loan
losses for the periods indicated. Management believes that the allowance can be
allocated by category only on an approximate basis. The allocation of the
allowance by category is not necessarily indicative of future losses and does
not restrict the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total loans outstanding . . . . . . . . . . . . . . $288,763 $221,816 $201,452 $202,941 $190,835
Average gross loans outstanding . . . . . . . . . . 255,242 211,413 200,853 197,885 186,597
Allowance balances (at beginning of period) . . . . $ 1,172 $ 1,148 $ 1,129 $ 1,112 $ 276
Provision for losses:
Real estate . . . . . . . . . . . . . . . . . . . 113 -- -- -- 825
Charge-offs:
Real estate . . . . . . . . . . . . . . . . . . . 3 2 39 45 9
Consumer. . . . . . . . . . . . . . . . . . . . . 63 4 1 -- --
Commercial. . . . . . . . . . . . . . . . . . . . 19 -- -- -- --
-------- -------- -------- -------- --------
85 6 40 45 9
Recoveries:
Real estate . . . . . . . . . . . . . . . . . . . 40 30 59 60 19
Consumer. . . . . . . . . . . . . . . . . . . . . 4 -- -- 2 1
-------- -------- -------- -------- --------
44 30 59 62 20
-------- -------- -------- -------- --------
Net (charge-offs) recoveries. . . . . . . . . . (41) 24 19 17 11
-------- -------- -------- -------- --------
Allowance balance (at end of period). . . . . . . . $ 1,244 $ 1,172 $ 1,148 $ 1,129 $ 1,112
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Allowance for loan losses as a percent
of total loans outstanding. . . . . . . . . . . . .43% .53% .57% .56% .58%
Net (charge-offs) recoveries as a percent
of average gross loans outstanding. . . . . . . . (.02)% .01% .01% .01% .01%
Ratio of allowance for loan losses
to total non-performing loans
at end of period. . . . . . . . . . . . . . . . . 248.80% 163.69% 232.39% 207.54% 191.72%
Ratio of allowance for loan losses
to total non-performing loans
and REO at end of period. . . . . . . . . . . . . 215.60% 152.80% 204.63% 183.28% 157.73%
</TABLE>
14
<PAGE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth the
allocation of allowance for loan losses by loan category for the periods
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- ------------------ --------------------- ------------------- ----------------
% OF LOANS % OF LOANS % OF LOANS % OF LOANS % OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
One- to four-family
residential mortgages $580 73.79% $606 84.48% $640 89.14% $512 86.93% $504 86.24%
Multi-family
residential mortgages 258 8.02 366 7.54 334 5.30 453 6.99 437 7.52
Commercial real estate 74 3.86 121 2.90 150 3.14 140 3.71 148 4.10
Commercial business. . 78 2.69 44 1.93 -- -- -- -- -- --
Other. . . . . . . . . 254 11.64 35 3.15 24 2.42 24 2.37 23 2.14
----- ------ ---- ------ ---- ------ ------ ------ ---- -----
Total allowance for
loan losses . . . . $1,244 100.00% $1,172 100.00% $1,148 100.00% $1,129 100.00% $1,112 100.00%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
15
<PAGE>
INVESTMENT ACTIVITIES
The Company's securities portfolio consists of United States Government and
agency obligations, corporate debt issues, cash equivalents (including
interest-earning deposits in other financial institutions), and FHLB stock.
Securities totalled $32.9 million, $44.6 million and $41.6 million at
December 31, 1996, 1995 and 1994, respectively. The Company's portfolio of
interest-earning deposits totalled $6.7 million at December 31, 1996, compared
to $13.7 million at December 31, 1995 and $15.2 million at December 31, 1994,
representing a decrease of $7.0 million and $8.5 million, respectively. The
Company's securities portfolio is expected to continue to change based on
liquidity needs associated with loan origination activities.
The Company's liquidity levels may be increased or decreased depending upon
the yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of the level of yield that will be available in the future,
as well as management's projections as to the short term demand for funds to be
used in the Company's loan origination and other activities.
SECURITIES PORTFOLIO. The following table sets forth, at the dates
indicated, the carrying and market values of the Company's investment securities
portfolio, short-term investments and FHLB stock. At December 31, 1996, the
market value of the Company's securities, interest-earning deposits in other
financial institutions, and FHLB stock was $33.0 million.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------
1996 1995 1994
----------------------- ------------------------ -----------------------
CARRYING MARKET CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE VALUE VALUE
----------- ---------- ----------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Securities:
Held to maturity:
U.S. Government and agency obligations . . $19,007 $19,063 $19,953 $20,075 $24,580 $24,345
Available for sale:
U.S. Government and agency obligations . . 3,983 3,983 9,029 9,029 -- --
Other. . . . . . . . . . . . . . . . . . . 17 17 9 9 -- --
------- ------- ------- ------- ------- -------
Total investment securities. . . . . . . 23,007 23,063 28,991 29,113 24,580 24,345
Interest-earning deposits in
other institutions . . . . . . . . . . . . . 6,730 6,730 13,735 13,735 15,174 15,174
FHLB stock . . . . . . . . . . . . . . . . . . 3,200 3,200 1,920 1,920 1,891 1,891
------- ------- ------- ------- ------- -------
Total investments. . . . . . . . . . . . . $32,937 $32,993 $44,646 $44,768 $41,645 $41,410
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
16
<PAGE>
SECURITIES PORTFOLIO MATURITIES. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Company's securities at December 31, 1996. The average yields are based on
amortized cost.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
------------------------------------------
ANNUALIZED
AVERAGE WEIGHTED
LIFE IN CARRYING MARKET AVERAGE
YEARS VALUE VALUE YIELD
--------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities:
Held to maturity:
U.S. Government agency securities. . . . 1.1 $4,967 $4,979 5.86%
U.S. Government treasury securities. . . 0.9 14,040 14,084 5.88
Available for sale:
U.S. Government treasury securities. . . 1.3 3,983 3,983 5.55
------- -------
Total. . . . . . . . . . . . . . . . . 1.0 $22,990 $23,046 5.82%
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS
------------------------ -------------------
ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD TOTAL
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Securities:
Held to maturity:
U.S. Government agency securities. . . . $3,466 5.61% $1,501 6.42% $4,967
U.S. Government treasury securities. . . 6,754 5.60 7,286 6.13 14,040
Available for sale:
U.S. Government treasury securities. . . -- -- 3,983 5.55 3,983
------ ------- -------
Total. . . . . . . . . . . . . . . . . $10,220 5.61% $12,770 5.99% $22,990
------- ------- -------
------- ------- -------
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Company's funds for lending
and other investment purposes. In addition to deposits, the Company derives
funds from the sale, amortization, and prepayment of loans and mortgage-backed
securities, operations, and the sale or maturity of securities. Scheduled loan
principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are influenced significantly by
general interest rates and market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources or on a longer term basis for general business purposes. The
Company is permitted to obtain advances from the FHLB upon the security of the
capital stock of the FHLB it owns and certain of its home mortgage loans and
other assets, provided certain credit standards have been met.
DEPOSITS. Consumer and commercial deposits are attracted principally from
within the Company's primary market area through the offering of a broad
selection of deposit instruments including non-interest-bearing, NOW, Super NOW,
passbook savings, money market deposit, term certificate accounts and individual
retirement accounts. The Company occasionally accepts deposits of $100,000 or
more and may offer negotiated interest rates on such deposits. Deposit account
terms vary according to the minimum balance required, the time periods the funds
must remain on deposit and the interest rate, among other factors. The Company
regularly evaluates its internal cost of funds, surveys rates offered by
competing institutions, reviews the Company's cash flow requirements for lending
and liquidity and executes rate changes when deemed appropriate. The Company
does not obtain funds through brokers,
17
<PAGE>
nor does it solicit funds outside its market area. In recent years the
Company's total deposits have remained relatively stable.
SAVINGS PORTFOLIO. Deposits in the Company as of December 31, 1996, were
represented by the various types of deposit programs described below.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE PERCENTAGE
INTEREST MINIMUM MINIMUM OF TOTAL
RATE TERM CHECKING AND SAVINGS AMOUNT BALANCES SAVINGS
- --------- ---------- -------------------- -------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT MINIMUM AMOUNTS)
<S> <C> <C> <C> <C> <C>
None Non interest-bearing $200 $2,634 1.30%
NOW accounts and
2.86% None Super NOW 0 - 5,000 24,416 12.03
2.50 None Passbooks 0-100 14,140 6.97
4.23 None Money market accounts (2) 2,500-5,000 17,394 8.57
<CAPTION>
CERTIFICATES OF DEPOSIT(1)
-----------------------
<S> <C> <C> <C> <C> <C>
4.25 1-5 months Fixed term, fixed rate 2,500 1,060 0.52
4.69 6-11 months Fixed term, fixed rate 1,000-2,500 14,209 7.00
5.38 12-17 months Fixed term, fixed rate 500-5,000 50,462 24.87
5.34 18-23 months Fixed term, fixed rate 100 8,304 4.09
6.31 24-29 months Fixed term, fixed rate 500 - 2,500 17,247 8.50
5.95 30-35 months Fixed term, fixed rate 100 11,069 5.46
5.76 36-47 months Fixed term, fixed rate 500 12,354 6.09
6.01 48-59 months Fixed term, fixed rate 100 1,530 0.75
6.01 60 months
or greater Fixed term, fixed rate 500-2,500 24,478 12.06
7.55 Various Fixed term, fixed rate 1,000 100 0.05
5.62 Various Negotiated jumbo/Special (2) 100,000 3,526 1.74
-------- -------
$202,923 100.00%
-------- -------
-------- -------
</TABLE>
_________________________
(1) IRA and Keogh accounts have balances outstanding of $22,808,114.
(2) Minimum negotiable.
18
<PAGE>
DEPOSIT FLOWS. The following table sets forth the change in dollar amount of
deposits in the various types of deposit accounts offered by the Company between
the dates indicated.
<TABLE>
<CAPTION>
BALANCE DEPOSIT INCR. BALANCE DEPOSIT INCR. BALANCE DEPOSIT INCR.
12/31/96 % (DECR) 12/31/95 % (DECR) 12/31/94 % (DECR)
-------- ------- ------ -------- ------- ------ -------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non interest-bearing demand $2,634 1.30% $1,200 $1,434 .75% $241 $ 1,193 .60% $ (100)
NOW accounts and
Super NOW . . . . . . . . 24,416 12.03 4,243 20,173 10.48 84 20,089 10.03 549
Passbooks . . . . . . . . . 14,140 6.97 (3,922) 18,062 9.39 (2,444) 20,506 10.24 (3,489)
Money market deposit
accounts. . . . . . . . . 17,394 8.57 9,425 7,969 4.14 (2,014) 9,983 4.99 (1,752)
Certificates of deposit
which mature:
within 12 months . . . . 95,127 46.88 15,325 79,802 41.46 (25,097) 104,899 52.39 11,916
within 12-36 months. . . 34,572 17.04 (14,706) 49,278 25.60 20,499 28,779 14.37 (11,514)
beyond 36 months . . . . 14,640 7.21 (1,110) 15,750 8.18 954 14,796 7.38 3,438
-------- ------ -------- -------- ------ -------- -------- ------ --------
Total deposits . . . . $202,923 100.00% $ 10,455 $192,468 100.00% $ (7,777) $200,245 100.00% $ (952)
-------- ------ -------- -------- ------ -------- -------- ------ --------
-------- ------ -------- -------- ------ -------- -------- ------ --------
<CAPTION>
BALANCE DEPOSIT INCR. BALANCE
12/31/93 % (DECR) 12/31/9
--------- ------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non interest-bearing demand $1,293 .64% $ (95) $ 1,388
NOW accounts and
Super NOW . . . . . . . . 19,540 9.71 395 19,145
Passbooks . . . . . . . . . 23,995 11.93 1,556 22,439
Money market deposit
accounts. . . . . . . . . 11,735 5.83 1,193 10,542
Certificates of deposit
which mature:
within 12 months . . . . 92,983 46.22 (22,771) 115,754
within 12-36 months. . . 40,293 20.03 3,127 37,166
beyond 36 months . . . . 11,358 5.64 6,370 4,988
-------- ------ -------- --------
Total deposits . . . . 201,197 100.00% $(10,225) $211,422
-------- ------ -------- --------
-------- ------ -------- --------
</TABLE>
<PAGE>
CERTIFICATES OF DEPOSIT BY RATES. The following table sets forth the
certificates of deposit in the Company classified by rates as of the dates
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
3.99% or less . . . . . . . . . . . $ -- $ -- $ 21,264
4.00-5.99%. . . . . . . . . . . . . 96,816 97,966 115,062
6.00-7.99%. . . . . . . . . . . . . 47,523 46,851 11,136
8.00-9.99%. . . . . . . . . . . . . -- 13 1,012
--------- --------- ---------
$ 144,339 $ 144,830 $ 148,474
--------- --------- ---------
--------- --------- ---------
</TABLE>
CERTIFICATES OF DEPOSIT MATURITY SCHEDULE. The following table sets forth
the amounts and maturities of certificates of deposit at December 31, 1996.
<TABLE>
<CAPTION>
AMOUNT DUE
----------------------------------------------------------------------------------
LESS THAN 1-2 2-3 3-4 AFTER 4
RATE 1 YEAR YEARS YEARS YEARS YEARS TOTAL
- ---- -------- ----- ----- ----- ------- ---------
(IN THOUSANDS)
<C> <C> <C> <C> <C> <C> <C>
4.00- 5.99%. . . . . . . . . . . . $70,573 $18,596 $ 6,560 $ 348 $ 739 $ 96,816
6.00- 7.99%. . . . . . . . . . . . 24,554 3,907 5,509 11,073 2,480 47,523
------- ------- ------ ------ ------ --------
$95,127 $22,503 $12,069 $ 11,421 $3,219 $144,339
------- ------- ------ ------ ------ --------
------- ------- ------ ------ ------ --------
</TABLE>
LARGE CERTIFICATES OF DEPOSIT. The following table indicates the amount
of the Company's certificates of deposit of $100,000 or more by time remaining
until maturity as of December 31, 1996.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------- ------------
(IN THOUSANDS)
Three months or less. . . . . . . . . . . . . . . $2,688
Three through six months. . . . . . . . . . . . . 2,632
Six through twelve months . . . . . . . . . . . . 3,034
Over twelve months. . . . . . . . . . . . . . . . 3,739
------
Total . . . . . . . . . . . . . . . . . . . . . . $12,093
-------
-------
DEPOSIT ACTIVITY. The following table sets forth the change in total
deposits of the Company for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . $346,917 $321,466 $252,519
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . (344,292) (336,381) (259,967)
-------- -------- --------
Net increase (decrease) before interest credited. . . . . 2,625 (14,915) (7,448)
Interest credited . . . . . . . . . . . . . . . . . . . . . 7,830 7,138 6,496
-------- -------- --------
Net increase (decrease) in deposits . . . . . . . . . . . $10,455 $(7,777) $(952)
-------- -------- --------
-------- -------- --------
</TABLE>
20
<PAGE>
BORROWINGS
Savings deposits are the primary source of funds of the Company's lending
and investment activities and for its general business purposes. If the need
arises, the Company may also rely upon advances from the FHLB of Chicago to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB are typically secured by the Company's
one- to four-family mortgage loans on improved residential property which are
not more than 90 days delinquent. At December 31, 1996, the Company had $62.8
million in advances outstanding from the FHLB. The Company does not have any
other short-term or long-term borrowings outstanding.
The FHLB functions as a central reserve bank providing credit for the
Company and other member savings associations and financial institutions. As a
member, the Company is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally securities which are
obligations of, or guaranteed by, the United States Government) provided certain
standards related to creditworthiness have been met. The FHLB has established
advance limitations based on three factors: total borrowings to assets, FHLB
stock holdings and available eligible collateral. Under the
total-borrowings-to-assets limitation, FHLB advances, when combined with other
borrowings, may not exceed 35% of the Company's total assets. Under the FHLB
capital stock holdings limitation, FHLB advances are limited to twenty times the
Company's current amount of FHLB capital stock holdings. Finally, under the
available eligible capital limitation, FHLB advances are limited to 60% of the
unpaid principal of eligible one- to four-family mortgage loans.
SUBSIDIARY ACTIVITIES
In addition to the Bank, the Company has one indirect subsidiary, First
Mutual Corporation, an Illinois corporation. First Mutual Corporation is
engaged in the business of selling, on an agency basis, investment products
(consisting primarily of fixed annuities and mutual funds, but including equity
securities) as well as property and casualty insurance to retail customers. At
December 31, 1996, the Company had a $127,000 equity investment in the
subsidiary. For the year ended December 31, 1996, First Mutual Corporation had
a net loss of $36,000.
COMPETITION
The Company encounters strong competition both in attracting deposits and
in originating real estate and other loans. Its most direct competition for
deposits has come historically from commercial banks, other savings banks,
savings associations and credit unions in its market area, and the Company
expects continued strong competition from such financial institutions in the
foreseeable future. The Company's market area includes branches of several
commercial banks. Many of these institutions are larger than the Company in
terms of total deposits and number of branches. As of June 30, 1996, the
Company held approximately 8.4% of all financial institution deposits in Macon
County, where approximately 69.3% of the Company's deposits were located as of
that date. The Company competes for savings by offering depositors a high level
of personal service and expertise together with a wide range of financial
services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies and other savings banks and savings
associations. This competition for loans has increased substantially in recent
years as a result of the large number of institutions competing in the Company's
market area as well as the increased efforts by commercial banks to expand
mortgage loan originations.
The Company competes for loans 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 that affect competition
include general and local economic conditions, current interest rate levels and
the volatility of the mortgage markets.
21
<PAGE>
PERSONNEL
As of December 31, 1996, the Company and its direct and indirect
subsidiaries had 125 full-time and 28 part-time employees. None of the
Company's employees is represented by a collective bargaining group. The
Company believes its relationship with its employees to be good.
REGULATION AND SUPERVISION
GENERAL
The Bank is an Illinois-chartered savings bank and its deposit accounts are
insured up to applicable limits by the Federal government under the Savings
Association Insurance Fund of the FDIC. The Bank is subject to extensive
regulation by the Illinois Commissioner of Savings and Residential Finance and
the FDIC. The Bank must file reports with the Commissioner and the FDIC
concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with or acquisitions of other depository institutions. There are periodic
examinations of the Bank by the Commissioner and the FDIC to examine the Bank's
compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which a
savings bank can engage and is intended primarily for the protection of the SAIF
and depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulation, whether by the
Commissioner, the FDIC or Congress could have a material impact on the Bank, the
Company and their operations. The Company, as a bank holding company, will also
be required to file certain reports with, and otherwise comply with the rules
and regulations of the Board of Governors of the Federal Reserve System and the
Commissioner. Certain of the regulatory requirements applicable to the Bank
and to the Company are referred to below or elsewhere herein.
ILLINOIS SAVINGS BANK AND SAVINGS BANK HOLDING COMPANY LAW AND REGULATION
In August 1990, Illinois enacted the Savings Bank Act ("SBA"), which
establishes Illinois-chartered savings banks. Under the SBA, savings banks are
chartered and regulated by the Commissioner and possess all of the powers of
federal and Illinois-chartered savings and loan associations. The SBA permits
Illinois-chartered savings and loan associations, as well as federally chartered
savings and loan associations and commercial banks, to merge with or convert
directly into an Illinois-chartered savings bank. Pursuant to this authority,
in December 1992 the Bank converted from an Illinois-chartered savings and loan
association into an Illinois-chartered mutual savings bank.
As an Illinois-chartered savings bank, the Bank is subject to regulation
and supervision by the Commissioner. This regulation covers, among other
things, the Bank's internal organization (I.E., charter, bylaws, capital
requirements, examination, supervision, merger transactions, additional offices,
transactions with directors and officers, and composition of the board of
directors). The Bank is required to file periodic reports with and is subject
to periodic examinations by the Commissioner. The lending and investment
authority of the Bank is prescribed by Illinois law and regulations, as well as
applicable federal law and regulations, and the Bank is prohibited from engaging
in any activities not permitted by such law and regulations.
Under Illinois law and Commissioner regulation, savings banks are required
to maintain a minimum core capital to adjusted total assets ratio of 3%. 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 cost, 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 that are permissible for a
22
<PAGE>
national bank, activities impermissible for a national bank but only as an agent
for its customers, or 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
investments in and assets of both includable and nonincludable subsidiaries.
The Commissioner is authorized to require a savings bank to maintain a
higher minimum capital level if the Commissioner determines that the savings
bank's financial condition or history, management or earnings prospects are not
adequate. If a savings bank's capital ratio falls below the required level, the
Commissioner may direct the savings bank to adhere to a specific written plan
established by the Commissioner to correct the savings bank's capital
deficiency, as well as a number of other restrictions on the savings bank's
operations, including a prohibition on the declaration of dividends by the
savings bank's board of directors. At December 31, 1996, the Bank's capital
ratio as calculated under Illinois law was 16.0% of total assets, which
substantially exceeded the required amount.
Under Illinois law, a savings bank may make both secured and unsecured
loans. However, loans for business, corporate, commercial or agricultural
purposes, whether secured or unsecured, may not in the aggregate exceed 15% of a
savings bank's total assets unless authorized by the Commissioner. Savings
banks, with the prior written consent of the Commissioner, may also engage in
real estate development activities, provided that the total investment in any
one project may not exceed 15% of total capital, and the total investment in all
projects may not exceed 50% of total capital. The total loans and extensions of
credit, both direct and indirect, by a savings bank to any person outstanding at
one time may not exceed 15% of the savings bank's total capital. At
December 31, 1996, the Bank did not have any loans to one borrower that exceeded
this limitation. For information about the largest borrowers of the Bank, see
"Business of the Company--Lending Activities--Loans to One Borrower."
The Board of Directors of a savings bank may declare dividends on its
capital stock based upon the savings bank's annualized net profits except that
until the paid-in surplus of the savings bank equals its capital stock, a
dividend may not be declared unless there has been transferred to paid-in
surplus not less than 10% of the net profits of the preceding half year in the
case of quarterly or semiannual dividends, or not less than 10% of the net
profits for the preceding year in the case of annual dividends. Dividends may
not be declared if a savings bank fails to meet its minimum capital
requirements. Further written approval of the Commissioner is required before
any dividends exceeding 50% of a savings bank's profits for any calendar year
may be declared. A dividend may be declared out of retained earnings at any
time.
Illinois-chartered savings banks may not make a loan to a person owning 10%
or more of its stock, an affiliated person, agent or attorney of the savings
bank, either individually or as an agent or partner of another, except under the
rules of the Commissioner and regulations of the FDIC. In addition,
Illinois-chartered savings banks generally may not, directly or indirectly, make
a mortgage loan to a director, officer or employee or any partnership, joint
venture, corporation or similar entity employing any such person. This
restriction does not apply, however, to loans made (i) on the security of
single-family residential property used by the borrower as his or her residence
and (ii) to a non-profit, religious, charitable or fraternal organization or a
corporation in which the savings bank has been authorized to invest by the
Commissioner. Furthermore, a savings bank may not purchase, lease or acquire a
site for an office building or an interest in real estate from an officer,
director, employee or the holder of more than 10% of the savings bank's stock or
certain affiliated persons as set forth in Illinois law, unless the prior
written approval of the Commissioner is obtained.
Any depository institution may merge into a savings bank operating under
the SBA. The Board of Directors of each merging institution must approve a plan
of merger by resolution adopted by majority vote of all members of the
respective boards. After such approval, the plan of merger must be submitted to
the Commissioner for approval. The Commissioner may make an examination of the
affairs of each merging institution (and their affiliates). The Commissioner
shall not approve a merger agreement unless he finds that, among other things:
(i) the resulting institution meets all requirements of the SBA; (ii) the merger
agreement is fair to all persons affected; and (iii) the resulting institution
will be operated in a safe and sound manner. If approved by the Commissioner,
the plan of merger must be submitted to stockholders of the depository
institution for approval, and may be required to be
23
<PAGE>
submitted to members if a mutual savings bank is one of the constituent
entities. A two-thirds affirmative vote is required for approval of the plan of
merger.
The SBA permits an Illinois savings bank holding company to control or own
more than 5% of the voting shares or rights of a savings bank only if the
principal place of business of the savings bank is located in those states in
which a savings bank holding company is permitted to acquire an Illinois savings
bank. When requested, the Commissioner will review the laws of the state to
determine whether the laws of that state expressly authorize an Illinois savings
bank holding company to acquire a savings bank in that state.
A savings bank holding company may invest in the stock of or other form of
equity ownership of any company which the board of directors determines to be in
the best interests of stockholders and depositors and such investment must be
documented in the holding company's minutes with reference to such items as
price/earning ratios, future prospects, sources of income and compatibility with
the overall business plan of the holding company.
REGULATION BY THE FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits 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 examinations of and to require reporting by 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
institutions, after giving the Commissioner 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.
The FDIC's deposit insurance premiums for SAIF-insured institutions are
assessed through a risk-based system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (I.E., a core capital
ratio of at least 5%, a ratio of core capital to risk-weighted assets of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
would pay the lowest premium while institutions that are less than adequately
capitalized (I.E., a core capital or core capital to risk-based capital ratios
of less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern would pay the highest premium. Risk
classification of all insured institutions will be made by the FDIC for each
semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
In September 1996, Congress enacted legislation to recapitalize the SAIF by
a one-time assessment on all SAIF-insured deposits held as of March 31, 1995.
The assessment was 65.7 basis points per $100 in deposits, payable on November
30, 1996. For the Bank, the assessment amounted to $1.3 million (or $805,000
when adjusted for taxes), based on the Bank's deposits on March 31, 1995. In
addition, beginning January 1, 1997, pursuant to the legislation, interest
payments on FICO bonds issued in the late 1980's by the Financing Corporation to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation will
be paid jointly by BIF-insured institutions and SAIF-insured institutions. The
FICO assessment will be 1.29 basis points per $100 in BIF deposits and 6.44
basis points per $100 in SAIF deposits. Beginning January 1, 2000, the FICO
interest payments will be paid pro rata by banks and thrifts based on deposits
(approximately 2.4 basis points per $100 in deposits). The BIF and SAIF will be
merged on January 1, 1999, provided the bank and savings institution charters
are merged by that date. In that event, pro rata FICO sharing will begin on
January 1, 1999.
24
<PAGE>
While the legislation has reduced the disparity between premiums paid on
BIF deposits and SAIF deposits, and has relieved the thrift industry of a
portion of the contingent liability represented by the FICO bonds, the premium
disparity between SAIF-insured institutions, such as the Bank, and BIF-insured
institutions will continue until at least January 1, 1999. Under the
legislation, the Bank anticipates that its ongoing annual SAIF premiums will be
approximately $133,000 (prior to the consummation of the Bank's branch
acquisitions on January 3, 1997). See "Business--Recent Developments."
PROMPT CORRECTIVE ACTION
Under Section 38 of the Federal Deposit Insurance Act, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency is required to implement a system of prompt corrective
action for institutions which it regulates. In 1992, the federal banking
agencies adopted regulations which are intended to implement the system of
prompt corrective action established by Section 38 of the FDIA. Under the
regulations, an institution shall be deemed to be (i) "well capitalized" if it
has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-based
capital ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or
more and is not subject to specified requirements to meet and maintain a
specific capital ratio of 8.0% or more, (ii) "adequately capitalized" if it has
a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage capital
ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized," (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a Tier I leverage capital ratio that is less
than 4.0% (3.0% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
Section 38 of the FDIA and the implementing regulations also provide that a
federal banking agency may, after notice and an opportunity for a hearing,
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized institution
to comply with supervisory actions as if it were in the next lower category if
the institution is in an unsafe or unsound condition or engaging in an unsafe or
unsound practice. The FDIC may not, however, reclassify a significantly
undercapitalized institution as critically undercapitalized.
An institution generally must file a written capital restoration plan which
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to the provisions of Section 38 of the FDIA,
which sets forth various mandatory and discretionary restrictions on its
operations.
At December 31, 1996, the Bank was a "well capitalized" institution under
the prompt corrective action regulations of the FDIC.
STANDARDS FOR SAFETY AND SOUNDNESS
The FDICIA requires the federal banking regulatory agencies to prescribe,
by regulation, standards for all insured depository institutions and depository
institution holding companies relating to: (i) internal controls, information
systems and internal audit systems; (ii) loan documentation; (iii) audit
underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi)
compensation, fees and benefits. The compensation standards would prohibit
employment contracts, compensation or benefit arrangements, stock options plans,
fee arrangements or other compensatory arrangements that would provide excess
compensation, fees or benefits or could lead to material financial loss. In
addition, the federal banking regulatory agencies would be required to prescribe
by regulation standards specifying: (i) maximum classified assets to capital
ratios; (ii) minimum earnings sufficient to absorb losses
25
<PAGE>
without impairing capital; and (iii) to the extent feasible, a minimum ratio of
market value to book value for publicly traded shares of depository institutions
and depository institution holding companies.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to maintain
reserves against their transaction accounts (primarily NOW and Super NOW
checking accounts) and non-personal time deposits. Currently, reserves of 3%
must be maintained against total transaction accounts of $54.0 million or less
(after a $4.2 million exemption), and an initial reserve of $1.6 million plus
10% (subject to adjustment by the Federal Reserve Board to a level between 8%
and 14%) must be maintained against that portion of total transaction accounts
in excess of such amount. At December 31, 1996, the Bank was in compliance with
applicable requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy applicable liquidity requirements.
Because required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the Bank's earning assets.
REGULATORY ENFORCEMENT AUTHORITY
The enforcement powers available to federal banking regulators is
substantial and includes, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions must be initiated
for violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities. Applicable
law also requires public disclosure of final enforcement actions by the federal
banking agencies.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), as implemented by FDIC
regulations, a savings institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the FDIC, in connection
with its examination of a savings institution, to assess the institution's
record of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications by such institution. The CRA
requires public disclosure of an institution's CRA rating and requires the FDIC
to provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system. Failure to achieve a satisfactory CRA
rating may impair the Bank's ability to acquire other financial institutions or
branches. As of December 31, 1996, the Bank had an "outstanding" CRA rating.
UNIFORM LENDING STANDARD
Under FDICIA, the federal banking agencies are required to adopt uniform
regulations prescribing standards for extensions of credit that are secured by
liens on interests in real estate or made for the purpose of financing the
construction of a building or other improvements to real estate. Insured
depository institutions must adopt and maintain written policies that establish
appropriate limits and standards for extensions of credit that are secured by
liens or interests in real estate or are made for the purpose of financing
permanent improvements to real estate. These policies must establish loan
portfolio diversification standards, prudent underwriting standards (including
loan-to-value limits) that are clear and measurable, loan administration
procedures, and documentation, approval and reporting requirements. The real
estate lending policies must reflect consideration of the Interagency Guidelines
for Real Estate Lending Policies (the "Interagency Guidelines") that have been
adopted by the federal banking regulators.
26
<PAGE>
The Interagency Guidelines, among other things, require depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by undeveloped land, the supervisory loan-to-value limit is 65% of the
value of the collateral; (ii) for land development loans, the supervisory limit
is 75%; (iii) for loans for the construction of commercial, multi-family or
other nonresidential property, the supervisory limit is 80%; (iv) for loans for
the construction of one- to four- family properties, the supervisory limit is
85%; and (v) for loans secured by other improved property (E.G., farmland,
commercial property and other income-producing property including
non-owner-occupied, one- to four- family property) the supervisory limit is 85%.
The Interagency Guidelines indicate that on a case-by-case basis it may be
appropriate to originate or purchase loans with loan-to-value ratios in excess
of the supervisory loan-to-value limits, based on the support provided by other
credit factors. The aggregate amount of loans in excess of the supervisory
loan-to-value limits, however, should not exceed 100% of total capital and the
total of such loans secured by commercial, agricultural, multi-family and other
non-one- to four- family residential properties should not exceed 30% of total
capital.
The supervisory loan-to-value limits do not apply to certain categories of
loans including loans insured or guaranteed by the United States Government and
its agencies or by financially capable state, local or municipal governments or
agencies, loans backed by the full faith and credit of state governments, loans
that are to be sold promptly after origination without recourse to a financially
responsible party, loans that are renewed, refinanced or restructured in
connection with a workout, loans to facilitate sales of real estate acquired by
the institution in the ordinary course of collecting a debt previously
contracted and loans where the real estate is not the primary collateral.
CAPITAL MAINTENANCE
Under FDIC regulations the Bank must maintain minimum levels of capital.
The regulations establish a minimum leverage capital requirement (Tier 1 capital
to total average assets) for banks in the strongest financial and managerial
condition, with a CAMEL Rating of 1 (the highest rating of the federal
regulators for banks). For all other banks, the minimum leverage capital
requirement is between 4% and 5% of total assets. Tier 1 capital is composed of
the sum of common stockholders' equity, noncumulative perpetual preferred stock
(including any related surplus) and minority interests in consolidated
subsidiaries, minus all intangible assets (other than qualifying mortgage
servicing rights and qualify supervisory intangible core deposits), identified
losses and investments in certain subsidiaries. At December 31, 1996, the
Bank's ratio of Tier 1 capital to total average assets was 16.0%, which exceeded
the minimum leverage requirement.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as Tier 1 and supplementary capital) to risk-weighted
assets of 8.0%. In determining the amount of risk-weighted assets, all assets,
including certain off balance sheet assets, are multiplied by a risk-weight of
0% to 100%, based on the risks the federal regulators believe are inherent in
the type of asset. The components of Tier 1 capital are equivalent to those
discussed earlier under the 3% leverage requirement. The components of
supplementary capital currently include cumulative perpetual preferred stock,
long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and allowance for loan and
lease losses. Allowance for loan and lease losses includable in supplementary
capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the
amount of capital counted toward supplementary capital cannot exceed 100% of
core capital. At December 31, 1996, the Bank met its risk-based capital
requirements on a fully phased-in basis.
The FRB has issued regulations that require the Company also to maintain a
minimum level of capital. In general, the regulations require a leverage
capital ratio of 4% of total assets and a risk-based capital level that is the
same as the Company's risk-based capital requirement. The FRB also has adopted
a risk-based capital policy that imposes an additional capital standard on bank
holding companies. Under this regulation, the Company must classify its assets
and certain off-balance sheet activities into categories, and maintain specified
levels of capital for each category. At December 31, 1996, the Company met all
of its minimum capital requirements.
27
<PAGE>
LOANS-TO-ONE-BORROWER LIMITATIONS
Savings banks are subject to the same loans-to-one-borrower limits as those
applicable to national banks, which under current regulations limit loans to one
borrower to an amount equal to 15% of unimpaired capital and unimpaired surplus
on an unsecured basis, and an additional amount equal to 10% of unimpaired
capital and unimpaired surplus if the loan is secured by readily marketable
collateral (generally, financial instruments and bullion, but not real estate).
Illinois law regarding loans to one borrower is similar to federal law. At
December 31, 1996, the Company's largest real estate related borrower had an
aggregate principal outstanding balance of $3.5 million, which balance did not
exceed the Company's loans-to-one borrower limit of $7.8 million at December 31,
1996.
DIVIDEND LIMITATIONS
Unless otherwise required by the Commissioner, the Bank may from time to
time declare and pay dividends to the Company, provided that no dividends may be
declared when the Bank's total capital is less than 3% of total assets. In
addition, written approval of the Commissioner is required before a savings bank
having total capital less than 6% of total assets may pay dividends on capital
stock that exceed 50% of such savings bank's net profits of that year. Finally,
the Board of Directors of the Bank may quarterly, semi-annually, or annually
declare a dividend on capital stock of so much of the net profits of the Bank
that they shall determine expedient, except that until the paid- in surplus of
the Bank equals its capital stock, no dividend may be declared unless there has
been transferred to paid- in surplus not less than 10% of the net profits of the
preceding half year in the case of quarterly or semi-annual dividends, or not
less than 10% of the net profits for the preceding 2 half year periods in the
case of annual dividends. The Bank may not declare dividends in excess of its
net profit in any year without the approval of the Commissioner; however, a
stock dividend may be declared out of retained earnings at any time.
ACTIVITIES OF SAVINGS BANKS AND THEIR SUBSIDIARIES
FDIC and Commissioner regulations provide that, when a savings bank
establishes or acquires a subsidiary or elects to conduct any new activity
through a subsidiary that the savings bank controls, the savings bank must
notify the FDIC and the Commissioner thirty days in advance and provide the
information each agency may, by regulation, require. Prior Commissioner
approval may be required for certain activities by a savings bank subsidiary.
Savings banks also must conduct the activities of subsidiaries in accordance
with existing regulations and orders.
The FDIC or the Commissioner may determine that the continuation by a
savings bank of its ownership control of, 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 Federal
Deposit Insurance Act. Based upon that determination, the FDIC or the
Commissioner 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 December 31,
1996, the Bank had an investment of $127,000 in its wholly owned subsidiary.
SECURITIES PORTFOLIO POLICY
Under Commissioner regulations, savings banks are required to adopt and
maintain an investment policy which demonstrates the exercise of prudence in
making investment decisions. Pursuant to applicable regulations and generally
accepted accounting principles, a financial institution is required to classify
its securities in one of three categories: securities held to maturity,
securities available for sale or securities held for trading. Securities held
to maturity may be carried at amortized cost if the bank has documented the
intent and ability to hold the securities until maturity. Securities available
for sale must be carried at market value. Securities held for trading must be
valued at market value. The Bank's Investment Portfolio Policy does not permit
the Bank to maintain a trading portfolio.
28
<PAGE>
TRANSACTIONS WITH AFFILIATES
Savings banks must comply with Sections 23A and 23B of the Federal Reserve
Act ("Sections 23A and 23B") relative to transactions with affiliates in the
same manner and to the same extent as if they were Federal Reserve member banks.
Generally, Sections 23A and 23B: (i) limit the extent to which an 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 loans, purchase of assets, issuance
of a guaranty and similar types of transactions.
HOLDING COMPANY REGULATION
As an Illinois savings bank holding company, the Company must register with
the Commissioner within 90 days after becoming a holding company. Thereafter,
the Company will be required to file reports as required by the Commissioner, to
maintain books and records as required by the Commissioner, to pay fees and
charges assessed by the Commissioner and to be subject to examinations by the
Commissioner. Furthermore, the Company will be permitted to engage only in
those activities prescribed by the Commissioner. Dividends declared by a stock
savings bank subsidiary payable to an Illinois savings bank holding company must
not result in the total capital of the subsidiary decreasing below the minimum
capital requirements set forth by the Commissioner. Cash dividends may be
declared as often as quarterly by the savings bank subsidiary, after payment or
provision has been made for all expenses, losses, required reserves and
dividends on withdrawable capital. A stock dividend, however, may be declared
out of undivided profits at any time.
The Company was also required to file an application with the FRB for
approval to become a bank holding company. FRB regulations govern the
acquisition of control of banks by companies and individuals, prescribe and
regulate the permissible nonbanking activities in which bank holding companies
may engage (which activities must be closely related and a proper incident to
banking), and set forth the procedure for securing approval for such
transactions and activities. It is not anticipated that the restrictions on
activities of the Company under regulations of either the Commissioner or the
FRB will adversely affect the activities of the Company.
FEDERAL SECURITIES LAWS
At the time of the Offering, the Company filed with the Securities and
Exchange Commission (the "SEC") a registration statement under the Securities
Act for the registration of the Common Stock to be issued pursuant to the
Conversion. Upon completion of the Conversion, the Company's Common Stock was
registered with the SEC under the Exchange Act. The Company is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock
that were issued in the Conversion did not cover the resale of such shares.
Shares of the Common Stock purchased by persons who are not affiliates of the
Company may be resold without registration. Shares purchased by an affiliate of
the Company are subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the Company
who complies with the other conditions of Rule 144 (including those that require
the affiliate's sale to be aggregated with those of certain other persons) is
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
29
<PAGE>
FEDERAL AND STATE TAXATION
GENERAL
The Company and its subsidiaries file a consolidated federal income tax
return on a December 31, calendar year basis. Consolidated returns have the
effect of eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur. The following discussion of tax matters is intended only
as a summary, and while it does not purport to be a comprehensive description of
all tax rules applicable to the Company or the Bank, all matters deemed material
by management have been discussed.
FEDERAL TAXATION
FEDERAL TAXATION. Savings institutions such as the Bank that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), are
permitted to establish reserves for bad debts and to make annual additions
thereto which may, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes. The amount of the bad
debt reserve deduction for "non-qualifying loans" is computed under the
experience method. For tax years beginning before December 31, 1995, the amount
of the bad debt reserve deduction for "qualifying real property loans"
(generally, loans secured by improved real estate) may be computed under either
the experience method or the percentage of taxable income method (based on an
annual election). If a savings institution elected the latter method, it could
claim, each year, a deduction based on a percentage of taxable income, without
regard to actual bad debt experience.
Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
Under recently enacted legislation, the percentage of taxable income method
has been repealed for years beginning after December 31, 1995, and "large"
banks, i.e., the quarterly average of the bank's total assets or of the
consolidated group of which it is a member, exceeds $500 million for the year,
may no longer be entitled to use the experience method of computing additions to
their bad debt reserve. A "large" bank must use the direct write-off method for
deducting bad debts, under which charge-offs are deducted and recoveries are
taken into taxable income as incurred. If the Bank is not a "large" bank, the
Bank will continue to be permitted to use the experience method. The Bank will
be required to recapture (I.E., take into income) over a six-year period its
applicable excess reserves, I.E, the balance of its reserves for losses on
qualifying loans and nonqualifying loans, as of the close of the last tax year
beginning before January 1, 1996, over the greater of (a) the balance of such
reserves as of December 31, 1987 (pre-1988 reserves) or (b) in the case of a
bank which is not a "large" bank, an amount that would have been the balance of
such reserves as of the close of the last tax year beginning before January 1,
1996, had the bank always computed the additions to its reserves using the
experience method. Postponement of the recapture is possible for a two-year
period if an institution meets a minimum level of mortgage lending for 1996 and
1997. As of December 31, 1996, the Bank's bad debt reserve subject to recapture
over a six-year period totaled approximately $893,000.
If an institution ceases to qualify as a "bank" (as defined in Code Section
581) or converts to a credit union, the pre-1988 reserves and the supplemental
reserve are restored to income ratably over a six-year period, beginning in the
tax year the institution no longer qualifies as a bank. The balance of the
pre-1988 reserves are also subject to recapture in the case of certain excess
distributions to (including distributions on liquidation and dissolution), or
redemptions of, shareholders.
The Bank files federal income tax returns on a calendar year basis using
the accrual method of accounting. Savings institutions, such as the Bank, that
file federal income tax returns as part of a consolidated group are required by
applicable Treasury regulations to reduce their taxable income for purposes of
computing the percentage bad debt
30
<PAGE>
deduction for losses attributable to activities of the non-savings institution
members of the consolidated group that are functionally related to the
activities of the savings institution member.
The Bank has not been audited by the IRS recently with respect to federal
income tax returns. In the opinion of management, any examination of still open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of the Bank.
DELAWARE TAXATION. As a Delaware holding company, the Company is exempted
from Delaware corporate income tax but is required to file an annual report with
and pay an annual fee to the State of Delaware. The Company is also subject to
an annual franchise tax imposed by the State of Delaware.
CORPORATE ALTERNATIVE MINIMUM TAX. For taxable years beginning after
December 31, 1986, the Code imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. The excess of the tax bad debt reserve deduction
using the percentage of taxable income method over the deduction that would have
been allowable under the experience method is treated as a preference item for
purposes of computing AMTI. Only 90% of AMTI can be offset by net operating
losses. For taxable years beginning after December 31, 1989, the adjustment to
AMTI based on book income is an amount equal to 75% of the amount by which a
corporation's adjusted current earnings exceeds its AMTI (determined without
regard to this preference and prior to reduction for net operating losses). In
addition, for taxable years beginning after December 31, 1986, and before
January 1, 1996, an environmental tax of .12% of the excess of AMTI (with
certain modifications) over $2.0 million is imposed on corporations, including
the Company, whether or not an alternative minimum tax is paid. The Company
does not expect to be subject to the alternative minimum tax.
DISTRIBUTIONS. To the extent that (i) the Bank's tax bad debt reserve for
losses on qualifying real property loans exceeds the amount that would have been
allowed under the experience method and (ii) the Company makes "non-dividend
distributions" to stockholders that are considered to result in distributions
from the excess tax bad debt reserve or the supplemental reserve for losses on
loans ("Excess Distributions"), then an amount based on the amount distributed
will be included in the Company's taxable income. Non-dividend distributions
include distributions in excess of the Company's current and accumulated
earnings and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. However, dividends paid out of the Company's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from the
Company's tax bad debt reserves.
The amount of additional taxable income created from an Excess Distribution
is an amount that when reduced by the tax attributable to the income is equal to
the amount of the distribution. Thus, if certain portions of the Bank's
accumulated tax bad debt reserve are used for any purpose other than to absorb
qualified tax bad debt loans, such as for the payment of dividends or other
distributions with respect to the Company's capital stock (including
distributions upon redemption or liquidation), approximately one and one-half
times the amount so used would be includable in gross income for federal income
tax purposes, assuming a 35% corporate income tax rate (exclusive of state
taxes). At December 31, 1996, the Bank's accumulated tax bad debt reserve
totalled approximately $10.6 million. See "Regulation and Supervision" and
"Dividend Policy" for limits on the payment of dividends of the Bank.
ILLINOIS TAXATION. The State of Illinois imposes a tax on the Illinois
taxable income of corporations, including savings banks, at the rate of 7.2%.
Illinois taxable income is generally similar to federal taxable income except
that interest from state and municipal obligations is taxable, no deduction is
allowed for state income taxes and a deduction is allowed for certain United
States Government and agency obligations. The Bank's state income tax returns
were last audited in June 1996 by the Illinois tax authorities.
31
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
Listed below is information, as of December 31, 1996, concerning the
Company's executive officers. There are no arrangements or understandings
between the Company and any of persons named below with respect to which he or
she was or is to be selected as an officer.
The following individuals hold positions as executive officers of the
Company as is set forth below opposite their names.
EXECUTIVE OFFICERS
NAME AGE CURRENT POSITION
Paul K. Reynolds 48 President and Chief Executive
Officer
Philip J. Duffy 48 Senior Vice President and Senior
Lending Officer
David G. Weber 48 Senior Vice President
Retail Banking/Operations Officer
G. Lynn Brinkman 56 Vice President, Secretary,
Treasurer and Chief Financial
Officer
Gary M. Walters 57 Vice President - Residential
Lending
Jimmy W. Goatley 47 Vice President - Retail
Banking/Operations
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation or removal by the Board of Directors.
Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company.
ITEM 2. PROPERTIES
The Company conducts its business through its main office located in
Decatur, Illinois and six branch offices located in four counties. The
following table sets forth certain information concerning the main office and
each branch office of the Company at December 31, 1996. At December 31, 1996,
the Company's premises and equipment had an aggregate net book value of
approximately $4.1 million. The Company believes that its current facilities
are adequate to meet the present and immediately foreseeable needs of the Bank
and the Company.
LOCATION YEAR OPENED OWNED OR LEASED
Main Office 1926 Owned
135 East Main St.
Decatur, IL 62525
32
<PAGE>
Fairview Office 1976 Leased (1)
855 N. Fairview Ave.
Decatur, IL 62522
Spring Creek Office 1980 Leased (2)
701 W. Pershing Rd.
Forsyth, IL 62526
Forsyth Office 1991 Owned
U.S. Route 51 North
Forsyth, IL 62526
Clinton Office 1982 Owned
211 S. Quincy St.
Clinton, IL 61727
Urbana Office 1983 Owned
602 S. Vine St.
Urbana, IL 61801
Shelbyville Office 1973 Owned
318 W. Main
Shelbyville, IL 62565
Brettwood Village
Kroger Money Mart 1996 Leased (3)
3070 N. Water St.
Decatur, IL 62526
Airport Plaza Kroger
Money Mart 1996 Leased (4)
1818 S. Airport Plaza Rd.
Decatur, IL 62521
_____________________________
(1) The lease for the Fairview Office expires on February 28, 2001.
(2) The lease for the Spring Creek Office was entered into on June 14, 1979 and
has a term of 20 years. The Company has four options to renew for five
years each.
(3) The lease for the Brettwood Village Kroger Money Mart was entered into on
March 1, 1996 and terminates on February 28, 2001.
(4) The lease for the Airport Plaza Kroger Money Mart was entered into on
August 1, 1996 and terminates on July 31, 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
proceedings in the aggregate are believed by management to be immaterial to the
Company's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the year ended December 31, 1996.
33
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Page 12 of the 1996 Annual Report to Stockholders, included herewith as
Exhibit 13 (the "Annual Report"), is herein incorporated by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Pages 13 to 15 of the Annual Report are herein incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pages 16 to 31 of the Annual Report are herein incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS
Pages 32 to 57 of the Annual Report are herein incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NOT APPLICABLE.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Information concerning Directors and Executive Officers of the Company is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders scheduled to be held on April 24, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on April 24, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on
April 24, 1997.
34
<PAGE>
ITEM 13. TRANSACTIONS WITH CERTAIN RELATED PERSONS
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders scheduled to be held on April 24, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following information appearing in the Company's Annual Report to
Stockholders for each of the three years in the period ended December 31, 1996
is incorporated herein by reference in this Form 10-K Annual Report as Exhibit
13.
PAGE IN
ANNUAL
ANNUAL REPORT SECTION REPORT
--------------------- -------
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Financial Condition. . . . . . . . . . . . 35
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . 36
Consolidated Statements of Changes in Stockholders' Equity. . . . . . 37
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . 38-39
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 39-57
(a)(2) FINANCIAL STATEMENT SCHEDULES - All financial statement schedules
have been omitted as the information is either inapplicable or not required
under the related instructions.
(a)(3) EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
REFERENCE TO PRIOR NUMBER WHERE
FILING OR EXHIBIT ATTACHED EXHIBITS
REGULATION S-K NUMBER ATTACHED ARE LOCATED IN THIS
EXHIBIT NUMBER DOCUMENT HERETO FORM 10-K REPORT
-------------- -------- ------------------ -------------------
<S> <C> <C> <C>
2 Plan of Reorganization None Not Applicable
3(i) Certificate of Incorporation (1) Not Applicable
3(ii) Bylaws (2) Not Applicable
4 Instruments defining the (1) Not Applicable
rights of security holders,
including debentures
9 Voting trust agreement None Not Applicable
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
10(i) Employment Agreement (1) Not Applicable
with Paul K. Reynolds,
President and Chief
Executive Officer
10(ii) Employee Stock Ownership Plan (1) Not Applicable
11 Statement re: computation None Not Applicable
of per share earnings
12 Statement re: computation Not Not Applicable
of ratios Required
13 Annual Report to Stockholders _____ Exhibit 13
16 Letter re: change in None Not Applicable
certifying
accountants
</TABLE>
_____________________________
(1) Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-1, filed with the Commission on December 23, 1994 (File
No. 33-87886), as amended.
(2) Incorporated by reference to Exhibit 3.2 of the Registrant's Registration
Statement on Form S-1, filed with the Commission on December 23, 1994 (File
No. 33-87886), as amended.
36
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
REFERENCE TO PRIOR NUMBER WHERE
FILING OR EXHIBIT ATTACHED EXHIBITS
REGULATION S-K NUMBER ATTACHED ARE LOCATED IN THIS
EXHIBIT NUMBER DOCUMENT HERETO FORM 10-K REPORT
-------------- -------- ------------------ -------------------
<S> <C> <C> <C>
18 Letter re: change in
accounting principles None Not Applicable
21 Subsidiaries of Registrant _______ Exhibit 21
22 Published report regarding None Not Applicable
matters submitted to vote of
security holders
23 Consent of Experts and _______ Exhibit 23
Counsel
24 Power of Attorney None Not Applicable
27 Financial Data Schedule _______ Exhibit 27
28 Information from reports None Not Applicable
furnished to state
insurance regulatory
authorities
99 Additional Exhibits None Not Applicable
(b) Reports on Form 8-K:
</TABLE>
The Registrant has not filed a Current Report on Form 8-K during the
quarter ended December 31, 1996.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST MUTUAL BANCORP, INC.
Date: March 28, 1996 By: /s/ Paul K. Reynolds
------------------------------------
Paul K. Reynolds, President
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ C. Robert Chastain By: /s/ G. Lynn Brinkman
--------------------------------- -------------------------------
C. Robert Chastain, Chairman of the Board G. Lynn Brinkman, Vice and
Director President, Secretary,
Treasurer and Chief Financial
Officer
Date: March 28, 1996 Date: March 28, 1996
By: /s/ Richard J. Welsh By: /s/ Roy M. Ousley
--------------------------------- -------------------------------
Richard J. Welsh, Vice Chairman Roy M. Ousley, Director
and Director
Date: March 28, 1996 Date: March 28, 1996
By: /s/ Richard L. Jacobs By: /s/ Robert D. Nichols
--------------------------------- -------------------------------
Richard L. Jacobs, Director Robert D. Nichols, Director
Date: March 28, 1996 Date: March 28, 1996
By: /s/ Glen J. Whitney
---------------------------------
Glen J. Whitney, Director
Date: March 28, 1996
<PAGE>
EXHIBIT 13
ANNUAL REPORT OF STOCKHOLDERS
<PAGE>
[EXCERPTS FROM ANNUAL REPORT TO STOCKHOLDERS]
MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ National Market under
the symbol "FMBD." The table below shows the reported high and low bid
information for the Common Stock during 1996 and 1995. The Common Stock began
trading on June 30, 1995. Therefore, prices for the first and second quarter in
1995 are not applicable. The information presented may not represent actual
transactions and does not reflect inter-dealer prices, retail markups,
markdowns, or commissions.
1996 1995
------------------ ------------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $14 1/4 $12 3/8 N/A N/A
Second Quarter 13 11 3/4 N/A N/A
Third Quarter 13 3/8 11 5/8 $13 $11 1/8
Fourth Quarter 15 1/2 13 14 3/4 12 1/4
As of December 31, 1996, the Company had approximately 733 stockholders of
record. This does not reflect the number of persons whose stock is in nominee
or "street" name.
The table below shows the frequency and amount of cash dividends paid by
the Company on the Company's Common Stock in 1996 and 1995.
1996 1995
-------------- ----
First Quarter $.07 per share N/A
Second Quarter $.07 per share N/A
Third Quarter $.07 per share N/A
Fourth Quarter $.08 per share $.07 per share
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected historical financial and other data
of the Company for the periods and at the dates indicated. The information
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto of the Company contained elsewhere herein.
<TABLE>
<CAPTION>
SELECTED FINANCIAL CONDITION DATA AT DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total assets. . . . . . . . . . . . . . . . . . . . . $331,776 $275,676 $250,402 $231,211 $237,701
Securities available for sale . . . . . . . . . . . . 4,000 9,038 -- -- --
Securities held to maturity . . . . . . . . . . . . . 19,007 19,953 24,580 22,161 25,062
Interest-bearing deposits with financial institutions 6,730 13,735 15,174 727 14,346
FHLB stock. . . . . . . . . . . . . . . . . . . . . . 3,200 1,920 1,891 1,858 1,832
Cash and cash equivalents . . . . . . . . . . . . . . 4,350 3,005 2,180 1,646 2,221
Loans receivable, net:
Real estate . . . . . . . . . . . . . . . . . . . . 242,049 208,435 194,029 194,973 184,500
Commercial loans. . . . . . . . . . . . . . . . . . 7,696 4,245 -- -- --
Consumer and other loans. . . . . . . . . . . . . . 33,424 6,946 4,857 4,772 4,052
Total loans receivable, net (1). . . . . . . . . 283,169 219,626 198,886 199,745 188,552
Mortgage-backed securities. . . . . . . . . . . . . . -- -- -- 103 933
Deposits. . . . . . . . . . . . . . . . . . . . . . . 202,923 192,468 200,245 201,197 211,422
Borrowed funds. . . . . . . . . . . . . . . . . . . . 62,800 4,100 19,600 1,200 --
Stockholders' equity (2). . . . . . . . . . . . . . . 62,217 71,528 27,811 26,079 23,421
</TABLE>
____________________________________
(1) Includes loans held for sale.
(2) Retained earnings for years prior to 1995.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income . . . . . . . . . . . . . . . . . . . $21,742 $18,282 $15,819 $16,429 $18,462
Interest expense. . . . . . . . . . . . . . . . . . . 11,354 9,490 8,153 8,857 11,808
------ ------- ------- ------- -------
Net interest income before provision
for loan losses . . . . . . . . . . . . . . . 10,388 8,792 7,666 7,572 6,654
Provision for loan losses . . . . . . . . . . . . . . 113 -- -- -- 825
------ ------- ------- ------- -------
Net interest income after provision
for loan losses . . . . . . . . . . . . . . . 10,275 8,792 7,666 7,572 5,829
Non-interest income:
Loan servicing fees . . . . . . . . . . . . . . . 123 115 111 112 106
Gain (loss) on sale of loans and securities . . . 179 86 (14) 274 211
Investment sales commissions. . . . . . . . . . . 123 88 120 247 281
Deposit service fee income. . . . . . . . . . . . 357 292 294 188 134
Other income. . . . . . . . . . . . . . . . . . . 283 267 155 114 112
------ ------- ------- ------- -------
Total non-interest income . . . . . . . . . . . 1,065 848 666 935 844
Non-interest expense:
Salaries and employee benefits . . . . . . . . . . 4,562 3,153 2,868 2,521 2,251
Occupancy and equipment. . . . . . . . . . . . . . 876 682 615 642 641
Federal deposit insurance premiums . . . . . . . . 339 465 464 294 461
FDIC special assessment. . . . . . . . . . . . . . 1,314 0 0 0 0
Printing, postage, stationery and supplies . . . . 363 238 203 238 190
Net expense on foreclosed
real estate operations. . . . . . . . . . . . 8 11 10 18 21
Advertising and promotion. . . . . . . . . . . . . 425 239 295 259 203
Data processing. . . . . . . . . . . . . . . . . . 428 350 345 334 336
Net (gain) loss on sale of real estate owned,
including provision for losses on
foreclosed real estate. . . . . . . . . . . . 1 13 (4) 8 35
Other. . . . . . . . . . . . . . . . . . . . . . . 1,144 751 817 585 605
------ ------- ------- ------- -------
Total non-interest expense. . . . . . . . . . 9,460 5,902 5,613 4,899 4,743
------ ------- ------- ------- -------
Income before income taxes and cumulative
effect of a change in accounting principle. . . . 1,880 3,738 2,719 3,608 1,930
Income tax expense. . . . . . . . . . . . . . . . . . 709 1,340 987 1,351 894
------ ------- ------- ------- -------
Net Income before cumulative effect of a
change in accounting principle. . . . . . . . . . 1,171 2,398 1,732 2,257 1,036
Cumulative effect of adoption of a new
income tax accounting method. . . . . . . . . . . -- -- -- 401 --
------ ------- ------- ------- -------
Net income. . . . . . . . . . . . . . . . . . $1,171 $2,398 $1,732 $2,658 $1,036
------ ------- ------- ------- -------
------ ------- ------- ------- -------
</TABLE>
<PAGE>
KEY FINANCIAL RATIOS AND OTHER DATA
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Equity to assets at period end. . . . . . . . . . . . 18.75% 25.95% 11.11% 11.28% 9.85%
Net interest rate spread (difference between
average yield on interest earning assets
and average cost of interest bearing liabilities) . 2.54 2.60 2.99 2.91 2.33
Net interest margin (net interest income as a
percentage of average interest-earning assets). . . 3.56 3.55 3.39 3.32 2.82
Return on average assets (net income
divided by average total assets). . . . . . . . . . 0.38 .93 .74 1.13 .43
Return on average equity (net income
divided by average equity). . . . . . . . . . . . . 1.71 4.50 6.40 10.57 4.44
Stockholders' equity to average assets ratio
(average stockholders' equity divided by
average total assets) . . . . . . . . . . . . . . . 22.46 20.72 11.59 10.71 9.66
Non-interest income to average assets . . . . . . . . 0.35 .33 .29 .40 .35
Non-interest expense to average assets. . . . . . . . 3.11 2.30 2.40 2.09 1.96
Non-performing loans to total loans . . . . . . . . . 0.17 .32 .25 .27 .30
Non-performing assets to total assets . . . . . . . . 0.17 .28 .22 .27 .30
Average interest-earning assets to
average interest-bearing liabilities. . . . . . . . 126.15 124.51 111.11 110.51 109.79
Allowance for loan losses to non-performing loans . . 248.80 163.69 232.39 207.54 191.72
Allowance for loan losses to non-performing assets. . 215.60 152.80 204.63 183.28 157.73
Net interest income to non-interest expense . . . . . 109.81 148.97 136.58 154.56 140.29
Net interest income after provision for loan losses,
to total non-interest expense . . . . . . . . . . . 108.62 148.97 136.58 154.56 122.90
Number of offices . . . . . . . . . . . . . . . . . . 9 7 7 7 7
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ORGANIZATION
On June 30, 1995, First Mutual Bank, S.B. (the "Bank") converted from an
Illinois- chartered mutual savings bank to an Illinois- chartered stock savings
bank (the "Conversion"). In connection with the Conversion, the Bank issued all
of its common stock to First Mutual Bancorp, Inc. (the "Company") and
concurrently the Company issued 4,700,000 shares of Common Stock at $10.00 per
share. As part of the Conversion, approximately 50.0% of the net proceeds, or
$22.7 million, was used to purchase the Common Stock of the Bank.
GENERAL
The only business of the Company is the ownership of the Bank. The Bank's
net earnings are primarily dependent on its net interest income, which is the
difference between interest income earned on its loan, mortgage-backed
securities and investment portfolios, and its cost of funds consisting of
interest paid on deposits and borrowed money. The Bank's net earnings also are
significantly affected by its provision for loan losses, as well as the amount
of other income, including loan servicing fees and investment sales commissions,
deposit service fee income, and net gains on sale of loans. Earnings also are
affected by general, administrative and other expense, such as salaries and
employee benefits, deposit insurance premiums, occupancy and equipment costs and
income taxes. Earnings of the Bank also are affected significantly by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities.
<PAGE>
BUSINESS STRATEGY
The Company's current business strategy is to operate as a well
capitalized, profitable and independent community bank dedicated to financing
home ownership, retail consumer purchases and local businesses and providing
quality service to customers. The Bank has sought to implement this strategy in
recent years by: (i) emphasizing the origination of one- to four-family
residential mortgage loans; (ii) expanding the commercial and consumer loan
portfolios; (iii) maintaining a stable retail deposit base; (iv) managing
interest rate risk exposure; (v) increasing non-interest income; and
(vi) maintaining high loan underwriting standards and asset quality.
Highlights of the Company's business strategy are as follows:
- RESIDENTIAL MORTGAGE LENDING. The Company emphasizes the origination
of one- to four-family, owner-occupied, residential mortgages secured
by property located in the Bank's primary market area. The Company
generally has limited its real estate loan originations to properties
within its market area. At December 31, 1996, the Company had $213.1
million, or 75.3% of its net loan portfolio invested in mortgage loans
secured by one- to four-family residences. The Company originates
both adjustable rate mortgage loans and fixed rate mortgage loans.
- COMMERCIAL AND CONSUMER LENDING. The Company began originating
commercial business loans to supplement its origination of commercial
real estate loans. For this purpose, the Company hired an experienced
senior commercial lending officer. The Company currently is limiting
its commercial business lending to small- and medium-sized businesses
in its market area. The Company believes that the addition of such
loans to its loan portfolio will help diversify its interest-earning
assets. Commercial real estate and commercial business lending
typically involve larger average loan balances and greater credit risk
as compared to residential real estate lending. At December 31, 1996,
the Company had $7.8 million, or 2.8%, of its net loan portfolio
invested in commercial business loans, and $34.3 million, or 12.1%, of
its net loan portfolio, invested in commercial real estate loans. The
Company has also increased its automobile loan originations through
its entry into the indirect dealer loan market. Such loans typically
have an average life of less than three years with smaller average
loan balances and greater credit risk as compared to residential real
estate loans. At December 31, 1996, the Company had $26.5 million, or
9.2%, of its total loan portfolio invested in such loans.
- DEPOSIT BASE. The Company has had a relatively stable deposit base
that is drawn from its nine offices in its market area. The Bank does
not solicit or obtain brokered deposits. At December 31, 1996, 28.9%
of its deposit base of $202.9 million consisted of core deposits,
which included non-interest-bearing demand deposits, passbook
accounts, NOW accounts and money market accounts. The Company will
continue to emphasize its retail deposit base as a source of funds and
will seek to attract commercial deposits by maintaining its network of
offices and providing depositors a full range of services and
accounts. On June 3, 1997, the Bank acquired $146.2 million in
deposits from another financial institution. As of December 31, 1996,
the Company had outstanding borrowings of $62.8 million from the FHLB
of Chicago.
- INTEREST RATE RISK MANAGEMENT. At December 31, 1996, the Company's
one-year cumulative gap was a negative 21.8% of total assets and the
Company's cumulative three-year gap was a negative 5.5% of total
assets. The Company has attempted to reduce its interest rate risk
exposure by originating residential and commercial ARM loans,
originating and selling longer-term fixed rate loans, originating
commercial and consumer loans which typically have shorter maturities
than residential mortgage loans, and investing in short-term
securities. However, the ability of the Company to originate ARM
loans is substantially dependent on borrower preferences. In
relatively lower market interest rate environments, borrowers
typically prefer fixed rate mortgage loans. In addition, depending on
market conditions, the Company may consider the purchase of ARM loans
in the secondary market, if attractive purchase opportunities arise.
The Company's current practice
<PAGE>
is to originate for sale virtually all fixed rate mortgage loans
with terms of more than 15 years. Currently, adjustable rate
loans and fixed rate loans with terms of 15 years or less are
retained in the Bank's loan portfolio. At December 31, 1996,
$154.8 million, or 62.6%, of the Company's mortgage loan
portfolio consisted of ARM loans, and $92.6 million, or 37.4%, of
the Company's mortgage loan portfolio consisted of fixed rate
mortgage loans. The Company has focused its investments
primarily on short- and medium-term securities consisting
primarily of United States Government and agency securities, and
interest-bearing deposits in other financial institutions. With
respect to liabilities, the Company has attempted to maintain and
increase its passbook and transaction deposit accounts, which are
considered to be somewhat more resistant to changes in interest
rates than certificate accounts. As the Company's deposit
liabilities generally reprice more rapidly than its
interest-earning assets, the Company's earnings would likely be
adversely affected during periods of rising market interest
rates.
- INCREASING NON-INTEREST INCOME. Management has sought to increase
the Company's level of non-interest income, primarily through the
activities of First Mutual Corporation, the Company's full service
brokerage and insurance subsidiary, by increasing deposit service fee
income, and by the sale of mortgage loans. For the years ended
December 31, 1996, 1995 and 1994, investment sales commissions were
$123,000, $88,000 and $120,000, respectively. For 1996, the Company
recorded a gain on the sale of mortgage loans of $179,000, compared
with a gain of $86,000 and a loss of $14,000 for 1995 and 1994,
respectively. For the years ended December 31, 1996, 1995 and 1994,
deposit service fee income was $357,000, $292,000 and $294,000,
respectively. However, non-interest income as a percentage of
earnings currently is relatively low and the Company's earnings
currently are largely dependent on the Company's net interest income
and net interest margin.
- ASSET QUALITY. The Company has maintained asset quality by using
conservative underwriting standards and comprehensive collection
efforts, aggressively liquidating real estate owned ("REO"), and
originating primarily one- to four-family residential mortgage loans.
The Company's ratio of non-performing assets to total assets at
December 31, 1996, 1995 and 1994 was 0.17%, 0.28% and 0.22%,
respectively. The Company's ratio of the allowance for loan losses to
non-performing loans was 248.80%, 163.69% and 232.39% at December 31,
1996, 1995 and 1994, respectively.
FINANCIAL CONDITION
AT DECEMBER 31, 1996
Total assets increased $56.1 million, or 20.3%, to $331.8 million at
December 31, 1996 from $275.7 million at December 31, 1995. The increase was
primarily a result of the increase in loans receivable during 1996.
Loans receivable (excluding loans held for sale) increased $63.9 million,
or 29.3%, to $282.1 million at December 31, 1996 from $218.2 million at December
31, 1995. Automobile loans increased $25.7 million to $29.1 million at December
31, 1996 from $3.4 million at December 31, 1995, and residential one-to-four
family mortgage loans (excluding loans held for sale) increased $26.0 million,
or 14.0%, from the prior year. Loan growth was primarily attributable to
aggressive marketing and pricing of the Bank's loan products, particularly the
Bank's emphasis on originating automobile loans through its indirect dealer
program.
Loans held for sale decreased $344,000 from $1.4 million at December 31,
1995 to $1.1 million at December 31, 1996. During 1996, the Bank originated
$12.4 million of loans held for sale compared to $12.6 million originated during
1995. Proceeds from loan sales in 1996 increased to $13.0 million from $11.7
million in 1995.
Securities available-for-sale decreased $5.0 million, or 55.6%, to $4.0
million at December 31, 1996 from $9.0 million at December 31, 1995. The
decrease was a result of sales and maturity of securities available-for-sale of
$8.0 million, which exceeded purchases of $3.0 million in 1996.
<PAGE>
Securities held-to-maturity decreased $1.0 million, or 5.0%, to $19.0
million at December 31, 1996 from $20.0 million at December 31, 1995 as a result
of proceeds from maturities of $15.5 million exceeding purchases of $14.6
million.
Deposits increased $10.4 million, or 5.4%, to $202.9 million at December
31, 1996 from $192.5 million at December 31, 1995. The increase was primarily
due to offering new deposit products and more competitive rates in order to
attract additional depositors to fund the increase in loans receivable.
Advances from the Federal Home Loan Bank increased $58.7 million to $62.8
million at December 31, 1996 from $4.1 million at December 31, 1995 in order to
fund the increase in loans receivable.
Total equity decreased $9.3 million, or 13.0%, to $62.2 million at December
31, 1996 from $71.5 million at December 31, 1995. The decrease was primarily
attributable to the purchase of Company common stock at a cost of $10.3 million
during 1996; such shares are now held by the Company as treasury stock or have
been awarded through the Management Recognition and Retention Plan.
On January 3, 1997, the Company purchased three branch offices in central
Illinois from another financial institution. In connection with the
acquisition, the Company assumed deposit balances totaling approximately $146.2
million along with related accrued interest of $1.6 million in return for loans,
office buildings and equipment with fair values of $9.8 million and $2.7
million, respectively, and cash totaling $121.3 million. The remaining goodwill
and deposit intangibles of $13.8 million will be amortized over a ten- to
fifteen-year period. Upon completion of the acquisition, the Company's assets
increased from $331.8 million at December 31, 1996 to approximately $479.6
million. The acquisition also reduced the Bank's total and Tier 1 capital
ratios.
AT DECEMBER 31, 1995
Total assets increased $25.3 million, or 10.1%, to $275.7 million at
December 31, 1995 from $250.4 million at December 31, 1994. The increase was
primarily attributable to the issuance of capital stock to fund an increase of
$20.7 million in loans and $4.4 million in securities and repay $15.5 million in
FHLB advances.
Loans receivable (excluding loans held for sale) increased $19.7 million,
or 9.9%, to $218.2 million at December 31, 1995 from $198.5 million at December
31, 1994. Loan growth was primarily attributable to the emphasis on commercial
real estate and commercial business lending, as well as the decrease in interest
rates during 1995 which increased loan origination and refinancing activity.
During 1995, the Bank originated and purchased $53.4 million of one- to
four-family residential mortgage loans as compared to $52.3 million of such
mortgage loans during 1994. In addition, the Bank originated $7.2 million of
commercial real estate loans during 1995 as compared to $2.0 million during
1994, and $7.2 million of commercial business loans as compared to $0 during
1994. Loan repayments decreased to $42.4 million from $48.8 million for 1994.
These decreases reflected a slow down in refinancing activity as a result of the
continued low interest rate environment.
Loans held for sale increased $1.0 million, or 250.0%, to $1.4 million at
December 31, 1995 from $0.4 million at December 31, 1994. During 1995 the Bank
originated $12.6 million of loans held for sale compared to $10.0 million
originated during 1994. Proceeds from loan sales in 1995 increased to $11.7
million from $11.2 million for the same period in 1994.
Securities increased $4.4 million, or 17.9%, to $29.0 million at December
31, 1995 from $24.6 million at December 31, 1994. The increase was funded with
a portion of the proceeds from the issuance of stock in the initial public
offering on June 30, 1995.
During 1994, the Bank purchased life insurance on the lives of its
directors and executive officers in order to fund a non-qualified deferred
compensation plan for directors and a supplemental retirement income plan for
executive officers. The plans became effective in July and August 1994,
respectively.
<PAGE>
Deposits decreased $7.7 million, or 3.8%, to $192.5 million at December 31,
1995 from $200.2 million at December 31, 1994. The decrease in deposits
primarily affected passbook and money market accounts and resulted from the
purchases of stock issued in the conversion from existing deposit accounts.
Advances from the Federal Home Loan Bank decreased $15.5 million, or 79.1%,
to $4.1 million at December 31, 1995 from $19.6 million at December 31, 1994.
The decrease resulted primarily from the utilization of a portion of the
proceeds of the capital raised in the stock offering.
RESULTS OF OPERATIONS
GENERAL. The earnings of the Company depend primarily on its net interest
income, which is the difference between interest income earned on the Company's
interest-earning assets and the interest paid on interest-bearing liabilities.
Net interest income is substantially affected by the Bank's interest rate
spread, which is the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities, as well as by the average balance of interest-earning assets as
compared to interest-bearing liabilities.
The Company had net income of $1.2 million, $2.4 million and $1.7 million
for the years ended December 31, 1996, 1995 and 1994, respectively. The
decrease in net income in 1996 as compared to 1995 was primarily attributable to
a one-time special assessment of $1.3 million on SAIF-insured deposits as of
March 31, 1995 resulting in an after-tax charge of approximately $805,000. The
increase in net income in 1995 as compared to 1994 was primarily attributable to
an increased net interest margin and increased loans sales in 1995.
INTEREST INCOME. Interest income totaled $21.7 million for 1996 as
compared to $18.3 million for 1995, representing an increase of $3.4 million, or
18.6% The increase in interest income was primarily due to an increase in
average interest-earning assets of $44.2 million combined with an increase in
the average yield on earning assets in 1996 to 7.44% from 7.37% in 1995. The
increase in the average balance of interest-earning assets was primarily a
result of the continued investment of proceeds from the initial stock offering
and the increase in loan originations during 1996. The increase in the average
yield resulted primarily from the increase in balances of loans at higher
yielding rates.
Interest income totaled $18.3 million for 1995 compared to $15.8 million
for 1994, representing an increase of $2.5 million, or 15.8%. The increase in
interest income was primarily due to an increase in average interest-earning
assets of $21.9 million combined with an increase in the average yield for 1995
to 7.37% from 7.00%. The increase in interest-earning assets was primarily a
result of the use of the proceeds from the initial stock offering. The increase
in the average yield on interest-earning assets reflected an increase in the
average yield on mortgage loans from 7.32% in 1994 to 7.63% in 1995. The
increase in the average yield also reflected an increase in the average yield
for interest-bearing deposits with financial institutions to 5.51% from 2.81%.
INTEREST EXPENSE. Interest expense totaled $11.4 million for 1996 compared
to $9.5 million for 1995, an increase of $1.9 million, or 20.0%. The increase
in interest expense was primarily due to an increase in the average balance of
interest-bearing liabilities of $32.4 million from $199.2 million in 1995 to
$231.6 million in 1996, and to a lesser extent, to the increase in the average
cost of funds to 4.90% for 1996 from 4.77% for 1995. The increase in the
average balance was primarily attributable to an increase in Federal Home Loan
Bank borrowings to fund loan growth. The average balance of borrowed funds
increased $27.0 million to $31.4 million in 1996 from $4.4 million in 1995. The
increase in the average cost of funds was primarily attributable to the increase
in deposit rates to attract additional depositors.
Interest expense totaled $9.5 million for 1995 as compared to $8.2 million
for 1994, an increase of $1.3 million, or 15.9%. The increase in interest
expense was primarily due to an increased average cost of interest-bearing
liabilities as a result of an increase in market interest rates on deposits
during 1995. This was partially offset by a decrease in average
interest-bearing liabilities. In addition, the cost of advances from the
Federal Home Loan Bank increased from 2.55% to 5.86% for the year ended December
31, 1994 and 1995, respectively.
<PAGE>
NET INTEREST INCOME. Net interest income totaled $10.4 million for 1996,
an increase of $1.6 million, or 18.2%, compared to $8.8 million in 1995. The
increase was primarily due to the $44.2 million increase in average earning
assets reflecting primarily the continued investment of proceeds from the
initial stock offering and the increase in loan originations from the earlier
period.
Net interest income totaled $8.8 million for 1995, an increase of $1.1
million or 14.3%, compared to $7.7 million for 1994. The increase in net
interest income reflected an increase in the Company's net interest margin from
3.39% to 3.55%. In addition, the ratio of average interest-earning assets to
average interest-bearing liabilities increased from 111.11% in 1994 to 124.51%
in 1995 primarily as a result of the $41.6 million in net proceeds from the
initial stock offering. Management utilized the proceeds from the issuance of
common stock to fund loan growth and securities purchases.
PROVISION FOR LOAN LOSSES. The Company maintains an allowance for loan
losses based upon management's periodic evaluation of known and inherent risks
in the loan portfolio, the Company's past loan loss experience, adverse
situations that may affect borrowers' ability to repay loans, estimated value of
underlying loan collateral, current and, to a lesser extent, expected future
economic conditions. The Company's allowance for loan losses was $1.2 million,
or .43%, of total loans outstanding at December 31, 1996 compared with $1.2
million, or .53%, of total loans outstanding at December 31, 1995. The
Company's ratio of the allowance for loan losses to non-performing loans was
248.8%, 163.7% and 232.4% at December 31, 1996, 1995 and 1994, respectively.
The ratio of non-performing loans to total loans was .17%, .32% and .25% at
December 31, 1996, 1995 and 1994, respectively. During 1996, the Company
provided $113,000 to the allowance for loan losses due to the increased loan
volume and change to the portfolio mix. The provision is indicative of
management's assessment of the adequacy of the allowance for loan losses, given
the trends in historical loss experience of the portfolio and current economic
conditions as well as the continued recovery of loans previously charged off.
Although the Company maintains its allowance for losses on loans at a level
which it considers to be adequate to provide for potential losses, there can be
no assurance that such losses will not exceed the estimated amounts or that the
Company will not be required to make additions to allowance for losses on loans
in the future. Future additions to the Company's allowance for loan losses and
any changes in the related ratio of the allowance for loan losses to
non-performing loans are dependent upon the economy, changes in real estate
values and interest rates, changes in the mix of the loan portfolio, increases
or decreases to the loan portfolio, the view of the regulatory authorities
toward adequate reserve levels, and inflation.
NON-INTEREST INCOME. Non-interest income totaled $1.1 million for 1996
compared to $848,000 for 1995, an increase of $217,000, or 25.6%. The increase
reflected an increase in gains on sale of loans of $179,000 in 1996 as compared
to $86,000 in 1995. The primary reason for the increased gains was the result
of adopting a new accounting standard to record mortgage servicing rights. In
addition, deposit service fee income increased $65,000 from $292,000 in 1995 to
$357,000 in 1996 as a result of the increase in total deposits and related
activity.
Non-interest income totaled $848,000 for 1995 compared to $666,000 for
1994, an increase of $182,000 or 27.3%. The increase reflected net gains on
sales of loans of $86,000 for 1995 as compared to net losses totalling $14,000
for 1994. In addition, other income increased primarily as a result of the
increase in cash surrender value of life insurance.
NON-INTEREST EXPENSE. Non-interest expense totaled $9.5 million for 1996
as compared to $5.9 million in 1995, an increase of $3.6 million, or 61.0%. The
increase is primarily a result of the one-time special assessment of $1.3
million on all SAIF-insured deposits as of March 31, 1995, as well as an
increase in compensation and benefits of $1.4 million, or 44.7%. The increase
in compensation and benefits was primarily a result of the increase in the total
number of employees and the adoption of the Company's 1996 Recognition and
Retention Plan.
Non-interest expense totaled $5.9 million for 1995 as compared to $5.6
million for 1994, an increase of $300,000 or 5.4%. The increase is primarily a
result of increased salaries of $285,000. Salaries increased primarily as a
result of the Company hiring additional personnel to start-up the commercial
deposit and lending activity and indirect lending activities after the Bank's
conversion to a stock institution. These increases in expense were partially
offset by decreases in advertising and promotion and other expenses.
<PAGE>
INCOME TAXES. Income taxes totaled $709,000 for the year ended December
31, 1996, compared to $1.3 million for the year ended December 31, 1995. The
decrease was due to a decrease in income before income taxes of $1.9 million, or
51.2%.
Income taxes totaled $1.3 million for the year ended December 31, 1995,
compared to $987,000 for the year ended December 31, 1994. The increase was due
to an increase in income before taxes in 1995.
<PAGE>
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, and
annualizing the result for the periods presented. Average balances are monthly
averages. The average balances of loans receivable include loans on which the
Company has discontinued accruing interest. The yields and costs include fees
which are considered adjustments to yields.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1996 1995 1994
------------------------- --------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans . . . . . . . . . . . $224,277 $16,952 7.56% $201,897 $15,399 7.63% $192,840 $14,125 7.32%
Mortgage-backed securities . . . . . -- -- -- -- -- -- 10 -- --
Commercial loans . . . . . . . . . . 5,493 497 9.05 1,442 122 8.46 -- -- --
Consumer and other loans . . . . . . 21,989 1,930 8.78 5,246 486 9.26 4,774 407 8.53
Securities . . . . . . . . . . . . . 28,166 1,663 5.90 25,353 1,481 5.84 23,310 1,084 4.65
Interest-bearing deposits with
financial institutions . . . . . . 9,951 551 5.54 12,116 667 5.51 3,241 91 2.81
FHLB stock . . . . . . . . . . . . . 2,262 149 6.59 1,913 127 6.64 1,885 112 5.94
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning assets. . . 292,138 21,742 7.44 247,967 18,282 7.37 226,060 15,819 7.00
Non-interest-earning assets. . . . . . 12,157 9,188 7,656
-------- -------- --------
Total assets . . . . . . . . . . $304,295 $257,155 $233,716
-------- -------- --------
-------- --------
Interest-bearing liabilities:
Deposits . . . . . . . . . . . . . . 200,226 9,671 4.83 $194,774 9,233 4.74 $200,435 8,076 4.03
Borrowed funds . . . . . . . . . . . 31,350 1,683 5.37 4,383 257 5.86 3,025 77 2.55
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing liabilities 231,576 11,354 4.90 199,157 9,490 4.77 203,460 8,153 4.01
Non-interest-bearing liabilities . . . 4,376 4,728 3,173
-------- -------- --------
Total liabilities . . . . . . . 235,952 203,885 206,633
Stockholders' equity . . . . . . . . . 68,343 53,270 27,083
-------- -------- --------
Total liabilities and
stockholders' equity . . . . . $304,295 $257,155 $233,716
-------- -------- --------
-------- -------- --------
Net interest income. . . . . . . . . . $10,388 $ 8,792 $ 7,666
------- ------- -------
Net interest rate spread(1). . . . . . 2.54% ------- 2.60% ------- 2.99%
------ ------ ------
Interest earning assets and ------ ------
net interest margin(2). . . . . . . . $292,138 3.56% $247,967 3.55% $226,060 3.39%
-------- ------ -------- ------ -------- ------
-------- ----- -------- ------ -------- ------
Ratio of average interest-earning
assets to average interest-bearing
liabilities. . . . . . . . . . . . . 126.15% 124.51% 111.11%
------ ------ ------
------ ------ ------
</TABLE>
_________________________________________
(1) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
<PAGE>
AT DECEMBER 31, 1996
-----------------------
BALANCE YIELD/COST
-------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Mortgage loans (1). . . . . . . . . . . . . . . . $242,049 7.66%
Commercial loans (1). . . . . . . . . . . . . . . 7,696 8.90
Consumer and other loans (1). . . . . . . . . . . 33,424 8.96
Securities. . . . . . . . . . . . . . . . . . . . 23,007 5.82
Interest-bearing deposits with
financial institutions . . . . . . . . . . . . 6,730 5.68
FHLB stock. . . . . . . . . . . . . . . . . . . . 3,200 7.00
--------
Total interest-earning assets. . . . . . . . . 316,106 7.64
Non-interest-earning assets . . . . . . . . . . . . 15,670
Total assets. . . . . . . . . . . . . . . . . $331,776
--------
--------
Interest-bearing liabilities:
Deposits. . . . . . . . . . . . . . . . . . . . . $202,923 4.87
Borrowed funds. . . . . . . . . . . . . . . . . . 62,800 6.00
--------
Total interest-bearing liabilities. . . . . . . 265,723 5.14
Non-interest-bearing liabilities. . . . . . . . . . 3,836
--------
Total liabilities . . . . . . . . . . . . . . 269,559
Stockholders' equity. . . . . . . . . . . . . . . . 62,217
--------
Total liabilities and stockholders' equity. . $331,776
--------
--------
Net interest rate spread (2). . . . . . . . . . . . 2.50%
------
------
Ratio of interest-earning assets to
interest-bearing liabilities. . . . . . . . . 118.96%
------
------
____________________________________
(1) Net of allowance for loan losses, deferred loan fees/costs, and unearned
discounts.
(2) Net interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
RATE/VOLUME ANALYSIS
The tables below set forth certain information regarding changes in
interest income and interest expense of the Company for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes
in volume (changes in volume multiplied by old rate), and (ii) changes in
rates (change in rate multiplied by old volume). For purposes of these
tables, changes attributable to both rate and volume have been allocated
proportionately to the change due to volume and change due to rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1996 VS. 1995 1995 VS. 1994
------------------------------------------------------------------
INCREASE/(DECREASE) TOTAL INCREASE/(DECREASE) TOTAL
DUE TO INCREASE DUE TO INCREASE
------------------------------------------------------------------
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
-------- ----- ---------- ------ ----- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Mortgage loans . . . . . . . . . . . . . $1,693 $(140) $1,553 $ 678 $ 596 $1,274
Mortgage-backed securities. . . . . . . . -- -- -- -- -- --
Commercial loans. . . . . . . . . . . . . 366 9 375 122 -- 122
Consumer and other loans. . . . . . . . . 1,471 (27) 1,444 42 37 79
Securities. . . . . . . . . . . . . . . . 166 16 182 101 296 397
Interest-bearing deposits with
financial institutions. . . . . . . . . (120) 4 (116) 426 150 576
FHLB stock. . . . . . . . . . . . . . . . 23 (1) 22 2 13 15
------ ----- ------ ------ ------ ------
Total interest-earning assets . . . . . 3,599 (139) 3,460 1,371 1,092 2,463
------ ----- ------ ------ ------ ------
Interest expense:
Deposits. . . . . . . . . . . . . . . . . 261 177 438 (143) 1,300 1,157
Other borrowings. . . . . . . . . . . . . 1,450 (24) 1,426 46 134 180
------ ----- ------ ------ ------ ------
Total interest-bearing liabilities. . . 1,711 153 1,864 (97) 1,434 1,337
------ ----- ------ ------ ------ ------
Net change in interest income . . . . . . . $1,888 $(292) $1,596 $1,468 $ (342) $1,126
------ ----- ------ ------ ------ ------
------ ------ ------ ------
</TABLE>
<PAGE>
ASSET AND LIABILITY MANAGEMENT--INTEREST RATE SENSITIVITY ANALYSIS
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income while a positive gap would tend to positively affect net
interest income. Similarly, during a period of falling interest rates, a
negative gap would tend to positively affect net interest income while a
positive gap would tend to adversely affect net interest income.
The Company has sought to reduce its exposure to interest rate risk
generally by attempting to match the maturities of its interest rate sensitive
assets and liabilities, by originating or purchasing ARM loans and other
variable rate or short-term loans, and by originating for sale substantially all
fixed rate residential mortgage loans with maturities of more than 15 years.
The Bank also has sought to lengthen the maturities of its deposits by promoting
longer-term certificates.
At December 31, 1996, the Company's total interest-earning assets maturing
or repricing within one year was exceeded by its total interest-bearing
liabilities maturing or repricing in the same period by $72.3 million,
representing a one-year cumulative gap ratio of negative 21.8%. The Company's
three-year gap was a negative 5.5% at December 31, 1996. The Company's Finance
Committee, which also functions as the Company's Asset-Liability Management
Committee, is responsible for reviewing the Company's assets and liability
policies. The Committee, which consists of the President and the Vice
President/Treasurer of the Company and three members of the Board of Directors,
meets monthly and reports to the Board of Directors on interest rate risks and
trends, as well as liquidity and capital ratios and requirements.
In managing its asset/liability mix, the Company, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, places emphasis on improving its net interest margin and on
matching the interest rate sensitivity of its assets and liabilities, in an
effort to improve its net interest income.
To the extent consistent with its interest rate spread objectives, the
Company has attempted to reduce its interest rate risk and has taken a number of
steps to restructure its assets and liabilities. First, the Company's
residential lending program focuses on the origination and the purchase of ARM
loans for retention in the Company's loan portfolio and the origination for
resale in the secondary mortgage market of fixed rate loans with maturities of
more than 15 years. At December 31, 1996, approximately $154.8 million, or
62.6%, of the Company's mortgage loan portfolio consisted of ARM loans. Second,
the Company has focused its investments primarily on short- and medium-term
securities. Third, the Company has attempted to maintain and increase its
passbook and transaction accounts, which are considered to be somewhat more
resistant to changes in interest rates than certificate accounts. Fourth,
subject to limitations imposed by the Company's interest rate risk policies, the
Company's current practice is to retain in portfolio residential fixed rate
mortgage loans with terms of 15 years or less. Residential fixed rate mortgage
loans with terms in excess of 15 years may be retained in portfolio on a limited
basis and in amounts approved from time to time by the Company's Finance
Committee. Fifth, from time to time, the Company has utilized deposit marketing
programs to lengthen the term of repricing of its liabilities. Finally, the
Company has increased its portfolio of commercial loans and consumer loans which
typically have shorter maturities and which, therefore, contribute to the
interest rate sensitivity of the Company's overall loan portfolio.
<PAGE>
GAP TABLE
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996, which are
expected to reprice or mature, based upon certain assumptions, in each of the
future time periods shown. Except as stated below, the amounts of assets and
liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of term or repricing or the
contractual terms of the asset or liability. For information regarding the
contractual maturities of the Company's loans, investments and deposits, see
"Business of the Company--Lending Activities," "--Investment Activities" and
"--Sources of Funds."
<TABLE>
<CAPTION>
AMOUNTS MATURING OR REPRICING
--------------------------------------------------------
WITHIN 3 3 TO 6 6 MONTHS 1 TO 3 3 TO 5
MONTHS MONTHS TO 1 YEAR YEARS YEARS
--------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans:
Residential 1-4 family:
ARMs $ 14,384 $ 14,434 $ 30,947 $ 42,530 $ 22,226
Fixed rate 5,528 5,410 6,155 20,716 15,566
Commercial and multifamily:
ARMs 3,780 2,345 6,460 9,758 6,522
Fixed rate 1,067 968 2,586 486 86
Commercial loans 6,368 218 322 694 143
Consumer loans 5,406 3,081 5,305 14,334 4,760
Securities (including interest-earning deposits) 3,531 3,002 10,417 12,770 --
-------- -------- -------- -------- --------
Total interest-earning assets 40,064 29,458 62,192 101,288 49,303
-------- -------- -------- -------- --------
Interest-bearing liabilities:
Passbook accounts 14,140 -- -- -- --
NOW accounts, Super NOW and non-interest-bearing
demand deposits 27,050 -- -- -- --
Money market accounts 17,394 -- -- -- --
Certificate accounts 34,203 27,235 33,689 34,572 14,640
FHLB advances 38,800 2,500 9,000 12,500 --
-------- -------- -------- -------- --------
Total interest-bearing liabilities 131,587 29,735 42,689 47,072 14,640
-------- -------- -------- -------- --------
Interest-earning assets less interest-bearing
liabilities ("interest rate gap") $(91,523) (277) $ 19,503 $ 54,216 $ 34,663
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Cumulative excess (deficiency) of interest-sensitive assets over
interest-sensitive liabilities $(91,523) $(91,800) $(72,297) $(18,081) $ 16,582
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Interest rate gap to total assets (27.59)% (0.08)% 5.88% 16.34% 10.45%
Cumulative interest rate gap to total assets (27.59)% (27.67)% (21.79)% (5.45)% 5.00%
Ratio of interest-earning assets to
interest-bearing liabilities 30.45% 99.07% 145.69% 215.18% 336.77%
Cumulative ratio of interest-earning
assets to interest-bearing liabilities 30.45% 43.10% 64.56% 92.80% 106.24%
<CAPTION>
AMOUNTS MATURING OR REPRICING
--------------------------------------------
5 TO 10 10 TO 20 OVER 20
YEARS YEARS YEARS TOTAL
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans:
Residential 1-4 family:
ARMs $ 1,187 $ -- $ -- $125,708
Fixed rate 23,062 10,843 94 87,374
Commercial and multifamily:
ARMs 187 -- -- 29,052
Fixed rate 58 3 -- 5,254
Commercial loans 30 -- -- 7,775
Consumer loans 714 -- -- 33,600
Securities (including interest-earning deposits) -- -- -- 29,720
-------- -------- -------- --------
Total interest-earning assets 25,238 10,846 94 318,483
-------- -------- -------- --------
Interest-bearing liabilities:
Passbook accounts -- -- -- 14,140
NOW accounts, Super NOW and non-interest-bearing
demand deposits -- -- -- 27,050
Money market accounts -- -- -- 17,394
Certificate accounts -- -- -- 144,339
FHLB advances -- -- -- 62,800
-------- -------- -------- --------
Total interest-bearing liabilities -- -- -- 265,723
-------- -------- -------- --------
Interest-earning assets less interest-bearing
liabilities ("interest rate gap") $ 25,238 $ 10,846 $ 94 $ 52,760
-------- -------- -------- --------
-------- -------- -------- --------
Cumulative excess (deficiency) of interest-sensitive assets over
interest-sensitive liabilities $ 41,820 $ 52,666 $ 52,760 $ 52,760
-------- -------- -------- --------
-------- -------- -------- --------
Interest rate gap to total assets 7.61% 3.27% 0.03% 15.90%
Cumulative interest rate gap to total assets 12.60% 15.87% 15.90% 15.90%
Ratio of interest-earning assets to
interest-bearing liabilities N/A N/A N/A 119.86%
Cumulative ratio of interest-earning
assets to interest-bearing liabilities 115.74% 119.82% 119.86% 119.86%
</TABLE>
<PAGE>
In preparing the table on the preceding page, it has been assumed that:
(i) adjustable rate mortgage loans on one- to four- family residences will
prepay at a rate of 15% per year; (ii) fixed rate mortgage loans on one- to-four
family residences with terms to maturity of 10 years or less will prepay at a
rate of 10% per year; (iii) fixed rate first mortgage loans on one- to-four
family residential properties with remaining terms to maturity of over 10 years
will prepay annually as follows:
PREPAYMENT
ASSUMPTION OVER
INTEREST RATE: 10 TO 20 YEARS 20 YEARS
------------- -------------- --------
8% or less 10% 9%
8.01% to 10% 16% 16%
10.01 to 12% 20% 20%
12.01 to 14% 20% 20%
14.01% and over 20% 20%
(iv) fixed and adjustable rate first mortgage loans on residential properties of
five or more units and non-residential properties will prepay at a rate of
12% per year; (v) consumer loans will prepay at a rate of 18% per year; and
(vi) fixed maturity deposits will not be withdrawn prior to maturity.
The above assumptions are annual percentages based on remaining balances
and should not be regarded as indicative of the actual prepayments and
withdrawals which may be experienced by the Company. Moreover, certain
shortcomings are inherent in the analysis presented by the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Management believes this would apply to the Company's passbook,
NOW and Super NOW accounts. Also, interest rates on certain types of assets and
liabilities may fluctuate in advance of or lag behind changes in market interest
rates. Additionally, certain assets, such as ARM loans, have features that
restrict changes in interest rates on a short-term basis and over the life of
the asset. Moreover, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table.
LIQUIDITY AND CASH FLOWS
The Company's primary sources of funds are deposits, funds received from
the sale, amortization and prepayment of loans, advances from the FHLB and funds
provided from operations. While scheduled loan repayments are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Company manages the pricing of its deposits to maintain a desired deposit
balance. In addition, the Company invests excess funds in overnight funds with
the FHLB, short-term deposits with other financial institutions, and other
short-term interest-earning assets that provide liquidity to meet lending
requirements. Overnight funds with the FHLB and other assets qualifying for
regulatory liquidity outstanding at December 31, 1996 totalled $37.5 million.
At December 31, 1996, the Company had outstanding mortgage loan origination
commitments of $1.9 million and commercial loan commitments of $4.2 million.
This amount does not include the unfunded portion of loans in process or unused
lines of credit on commercial and consumer loans. Time deposits scheduled to
mature in less than one year at December 31, 1996, totalled $95.1 million.
Management believes that a significant portion of such deposits will remain with
the Company.
A major portion of the Company's liquidity consists of cash and cash
equivalents which are a product of its operating, investing, and financing
activities. The primary sources of cash are net income and cash derived from
investing activities.
<PAGE>
CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES. Net cash provided by (used in)
operating activities was $(2.5) million, $5.8 million and $3.5 million for the
years ended December 31, 1996, 1995 and 1994, respectively. The primary sources
of cash flows from operating activities were net income from operations of $1.2
million, $2.4 million and $1.7 million and proceeds from the sales of loans of
$13.0 million, $11.7 million and $11.2 million for the years ended December 31,
1996, 1995 and 1994, respectively. The primary use of cash flows from operating
activities was the origination of loans held for sale of $12.4 million, $12.6
million and $10.0 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
CASH FLOWS FROM INVESTING ACTIVITIES. Net cash used in investing activities
was $53.8 million, $22.9 million and $20.3 million for the years ended December
31, 1996, 1995 and 1994, respectively. Primary sources (uses) of cash flows
from investing activities were proceeds from the sale and maturity of securities
of $15.5 million, $18.0 million and $12.0 million and the net (increase)
decrease in interest-bearing deposits at other financial institutions of $7.0
million, $1.4 million and $(14.4) million for the years ended December 31, 1996,
1995 and 1994, respectively. Other primary (sources) uses of cash flows from
investing activities were net increases (decreases) in loans receivable of $46.8
million, $5.5 million and $(3.2) million and investments in securities of $17.6
million, $22.4 million and $14.6 million for the years ended December 31, 1996,
1995 and 1994, respectively. An additional use of cash flows from investing
activities was the purchase of loans of $17.1 million, $14.3 million and $3.6
million for the years ended December 31, 1996, 1995 and 1994, respectively, and
the purchase of cash surrender value of life insurance of $2.9 million for the
year ended December 31, 1994.
CASH FLOWS FROM FINANCING ACTIVITIES. Net cash provided by financing
activities was $57.6 million, $17.9 million and $17.4 million for the years
ended December 31, 1996, 1995 and 1994, respectively. The primary source of
cash flows from financing activities were a $10.5 million increase in deposits
in 1996, the proceeds from stock issuance of $41.6 million for the year ended
December 31, 1995 and increases in advances from the FHLB of $68.7 million and
$18.4 million for the years ended December 31, 1996 and 1994, respectively. The
primary use of cash flows from financing activities was the repayment of $10.0
million and $15.5 million of FHLB advances for the years ended December 31, 1996
and 1995, respectively, and decreases in deposits of $7.8 million and $1.0
million for the years ended December 31, 1995 and 1994, respectively.
For additional information about cash flows from the Company's operating,
financing and investing activities, see Consolidated Statements of Cash Flows
included in the Consolidated Financial Statements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which generally require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Company are monetary. As a result, interest rates
have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be recoverable. However, SFAS No.
121 does not apply to financial instruments, core deposit intangibles, mortgage
and other
<PAGE>
servicing rights, or deferred tax assets. The adoption of SFAS No. 121 in 1996
did not have a material effect on the Company's income or financial condition.
In May 1995, the Financial Accounting Standards Board released SFAS 122,
"Accounting for Mortgage Servicing Rights." SFAS No. 122 requires mortgage
banking enterprises to recognize the rights to service mortgage loans for others
as a separate asset, regardless of the manner in which such rights are acquired.
SFAS No. 122 applies to fiscal years beginning after December 15, 1995.
Adoption of this statement did not have a material impact on the financial
position or operations of the Company. SFAS No. 122 will be superseded by SFAS
No. 125 after December 31, 1996.
In June 1996, the FASB released SFAS No. 125, "Accounting for Transfers and
Extinguishments of Liabilities." SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS No. 125 requires a consistent application of a financial
components approach that focuses on control. Under that approach, after the
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred and derecognizes
liabilities when extinguished. SFAS No. 125 also supersedes SFAS No. 122 and
requires that servicing assets and liabilities be subsequently measured by
amortization in proportion to and over the period of estimated net servicing
income or loss and requires assessment for asset impairment or increases
obligation based on their fair values. SFAS No. 125 applies to transfers and
extinguishments occurring after December 31, 1996 and early or retroactive
application is not permitted. Because the volume and variety of certain
transactions will make it difficult for some entities to comply, some provisions
have been delayed by SFAS No. 127. Management anticipates that the adoption of
SFAS No. 125 will not have a material impact on the financial condition or
operations of the Company.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based
Compensation." This statement encourages companies to use a fair value method
to account for stock based compensation plans. If such a method is not used,
companies must disclose the pro forma effect on net income and earnings per
share had this method been adopted. Adoption of this statement did not have a
material effect on the financial condition or results of operations of the
Company.
In August 1996, legislation was enacted requiring recapture of tax bad debt
reserves accumulated after 1987 over a six-year period starting in 1996.
However, the payment of the tax can be deferred in each of 1996 and 1997 if an
institution originated at least the same average annual principal amount of
mortgage loans that it originated in the six year prior to 1996. The impact of
this legislation will not have a material effect on the financial position or
operations of the Company.
<PAGE>
FIRST MUTUAL BANCORP, INC.
AND SUBSIDIARY
Decatur, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
Decatur, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
CONTENTS
REPORT OF INDEPENDENT AUDITORS 1
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 2
CONSOLIDATED STATEMENTS OF INCOME 3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
First Mutual Bancorp, Inc.
Decatur, Illinois
We have audited the accompanying consolidated statements of financial condition
of First Mutual Bancorp, Inc. and Subsidiary (the "Company") as of December 31,
1996 and 1995 and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Mutual
Bancorp, Inc. and Subsidiary at December 31, 1996 and 1995 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 17, 1997
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1996 and 1995
(Dollars in thousands)
1996 1995
---- ----
ASSETS
Cash and cash equivalents $ 4,350 $ 3,005
Interest-bearing deposits with financial institutions 6,730 13,735
Securities available-for-sale (Note 2) 4,000 9,038
Securities held-to-maturity
(fair value: December 31, 1996 - $19,063;
December 31, 1995 - $20,075) (Note 2) 19,007 19,953
Loans held for sale (Note 4) 1,103 1,447
Loans receivable, net (Note 3) 282,066 218,179
Federal Home Loan Bank stock 3,200 1,920
Accrued interest receivable 1,969 1,944
Foreclosed real estate, net of allowance for losses
(Note 5) 77 51
Premises and equipment (Note 6) 4,119 2,955
Cash surrender value of life insurance (Note 13) 3,215 3,070
Other assets 1,940 379
-------- --------
$331,776 $275,676
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 7) $202,923 $192,468
Advances from borrowers for taxes
and insurance 1,420 1,411
Advances from Federal Home Loan
Bank (Note 8) 62,800 4,100
Accrued expenses and other liabilities 2,416 6,169
-------- --------
269,559 204,148
Commitments and contingencies (Note 12)
Stockholders' equity (Note 11)
Preferred stock - authorized 2,000,000 shares;
none issued -
Common stock - par value $.10 per share;
authorized 8,000,000 shares, issued 4,700,000
shares 470 470
Additional paid-in capital 45,104 44,980
Unearned ESOP shares (Note 10) (3,196) (3,572)
Unearned stock awards (Note 10) (1,504) -
Retained earnings, substantially restricted (Note 9) 29,578 29,604
Treasury stock, at cost, 611,400 shares in 1996 (8,231) -
See accompanying notes to consolidated financial statements.
58.
<PAGE>
Unrealized appreciation (depreciation) on securities
available-for-sale, net of tax (4) 46
-------- --------
62,217 71,528
-------- --------
$331,776 $275,676
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
59.
<PAGE>
<TABLE>
<CAPTION>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995, and 1994
(Dollars in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans receivable
First mortgage loans $ 16,952 $ 15,399 $ 14,125
Consumer and other loans 1,930 486 407
Commercial loans 497 122 -
Securities 1,663 1,481 1,084
Other interest-earning assets 700 794 203
-------- -------- --------
Total interest income 21,742 18,282 15,819
Interest expense
Deposits 9,671 9,233 8,076
Federal Home Loan Bank advances
and other interest charges
(Note 8) 1,683 257 77
-------- -------- --------
Total interest expense 11,354 9,490 8,153
-------- -------- --------
NET INTEREST INCOME 10,388 8,792 7,666
Provision for loan losses (Note 3) 113 - -
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,275 8,792 7,666
Noninterest income
Gain on sales and calls of securities 1 - -
Gain (loss) on sales of loans (Note 4) 179 86 (14)
Deposit service fee income 357 292 294
Loan servicing fees (Note 4) 123 115 111
Investment sales commissions 123 88 120
Other 282 267 155
-------- -------- --------
Total noninterest income 1,065 848 666
Noninterest expense
Compensation and benefits 4,562 3,153 2,868
Occupancy and equipment 876 682 615
SAIF deposit insurance premium 339 465 464
SAIF special assessment 1,314 - -
Advertising and promotion 425 239 295
Data processing 428 350 345
Printing, postage, stationery, and supplies 363 238 203
</TABLE>
60.
(Continued)
<PAGE>
<TABLE>
<S> <C> <C> <C>
Net expense on foreclosed real estate operations 8 11 10
Net (gain) loss on sale of real estate owned
including provisions for losses 1 13 (4)
Other 1,144 751 817
-------- -------- --------
Total noninterest expense 9,460 5,902 5,613
-------- -------- --------
</TABLE>
(Continued)
61.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995, and 1994
(Dollars in thousands)
1996 1995 1994
---- ---- ----
INCOME BEFORE INCOME TAXES $ 1,880 $ 3,738 $ 2,719
Income taxes (Note 9) 709 1,340 987
-------- -------- --------
NET INCOME $ 1,171 $ 2,398 $ 1,732
-------- -------- --------
-------- -------- --------
EARNINGS PER SHARE $.28 $.32 $ -
-------- -------- --------
-------- -------- --------
See accompanying notes to consolidated financial statements.
62.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995, and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Appreciation
Retained (Depreciation)
Additional Unearned Unearned
Earnings - on Securities
Common Paid in ESOP Stock
Substantially Treasury Available-
STOCK CAPITAL SHARES AWARDS
RESTRICTED STOCK FOR-SALE TOTAL
<S> <C> <C> <C> <C>
Balance at January 1, 1994 $ - $ - $ - $ -
$26,079 $ - $ - $26,079
Net income - - - -
------- ------- ------- -------
1,732 - - 1,732
------- ------- ------- -------
Balance at December 31, 1994 - - - -
27,811 - - 27,811
Issuance of common stock 470 44,930 (3,760) -
- - - 41,640
ESOP shares earned - 50 188 -
- - - 238
Cash dividends ($.07 per share) - - - -
(605) - - (605)
Reclassification of securities from held-to-maturity
to available-for-sale, net of tax of $28 - - - -
- - 43 43
Change in unrealized gain on securities
available-for-sale, net of tax of $1 - - - -
- - 3 3
Net income - - - -
------- ------- ------- -------
2,398 - - 2,398
------- ------- ------- -------
Balance at December 31, 1995 470 44,980 (3,572) -
29,604 - 46 71,528
</TABLE>
See accompanying notes to consolidated financial statements.
63.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
<TABLE>
<S> <C> <C> <C> <C>
Net income - - - -
1,171 - - 1,171
Purchase of treasury shares - - - -
- (10,330) - (10,330)
Unearned stock awards - - - (2,099)
- 2,099 - -
ESOP shares earned - 116 376 -
- - - 492
Stock awards earned - - - 595
- - - 595
Tax benefit of stock awards - 8 - -
- - - 8
Change in unrealized appreciation
(depreciation) on securities available-
for-sale, net of tax of $32 - - - -
- - (50) (50)
Cash dividends ($.30 per share) - - - -
-------- -------- -------- --------
(1,197) - - (1,197)
-------- -------- -------- --------
Balance at December 31, 1996 $ 470 $ 45,104 $ (3,196) $ (1,504)
-------- -------- -------- --------
-------- -------- -------- --------
$ 29,578 $ (8,231) $ (4) $ 62,217
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
64.
<PAGE>
<TABLE>
<CAPTION>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 1996, 1995, and 1994
(Dollars in thousands)
____________________________________________________________________________________
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,171 $ 2,398 $ 1,732
Adjustments to reconcile net income to
net cash from operating activities
Depreciation and amortization 395 295 263
Amortization of premiums and
discounts on mortgaged-backed
and investment securities, net 73 102 195
Origination of loans held for sale (12,447) (12,624) (9,984)
Proceeds from sale of loans 12,970 11,678 11,225
Change in net deferred loan
origination costs (188) (53) (49)
Change in deferred income taxes 151 (25) 65
Provision for loan losses 113 - -
Provision for losses on foreclosed
real estate - 8 3
Net gain on the sale of available-for-sale
securities (1) - -
Net (gain) loss on sales of loans (179) (86) 14
Federal Home Loan Bank stock dividends - (29) -
Net (gain) loss on sale of foreclosed
real estate 1 5 (7)
ESOP compensation expense 492 238 -
Stock awards expense 595 - -
Change in
Accrued interest receivable (25) (745) (59)
Cash surrender value of
life insurance (145) (145) (50)
Other assets (1,715) 144 21
Accrued expenses and other
liabilities (3,741) 4,650 91
------- -------- --------
Net cash provided by (used in)
operating activities (2,480) 5,811 3,460
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans receivable (46,753) (5,530) 3,229
Principal payments on mortgage-backed
securities - - 103
Proceeds from maturity of securities
held-to-maturity 15,465 18,000 12,000
</TABLE>
(Continued)
65.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 1996, 1995, and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES (Continued)
Purchase of securities held-to-maturity $(14,598) $(19,397) $(14,614)
Purchase of securities available-for-sale (3,022) (3,041) -
Proceeds of sales and calls of available-for-sale
securities 7,985 - -
Investments in
Loans purchased (17,147) (14,254) (3,645)
Federal Home Loan Bank stock (1,280) - (33)
Premises and equipment (1,523) (276) (90)
Foreclosed real estate (12) (15) (20)
Cash surrender value of life insurance - - (2,875)
Net (increase) decrease in interest-bearing
deposits with financial institutions 7,005 1,439 (14,447)
Proceeds from sales of foreclosed
real estate 72 147 98
-------- -------- --------
Net cash used in investing activities (53,808) (22,927) (20,294)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 10,455 (7,777) (952)
Net change in open line advances from
Federal Home Loan Bank 34,700 (15,500) 18,400
Proceeds from term advances from
Federal Home Loan Bank 26,000 - -
Repayments on term advances from
Federal Home Loan Bank (2,000) - -
Net increase (decrease) in advances from
borrowers for taxes and insurance 9 (119) (80)
Proceeds from stock issuance - 41,640 -
Purchase of treasury stock (10,330) - -
Dividends paid (1,201) (303) -
-------- -------- --------
Net cash provided by financing activities 57,633 17,941 17,368
-------- -------- --------
Net increase in cash and cash equivalents 1,345 825 534
Cash and cash equivalents at beginning of year 3,005 2,180 1,646
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,350 $ 3,005 $ 2,180
-------- -------- --------
-------- -------- --------
</TABLE>
66.
(Continued)
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures of cash flow information
Cash paid for
Interest $ 11,090 $ 9,161 $ 8,049
Income taxes 1,019 1,266 937
Transfers from loans to real estate
acquired through foreclosure 87 144 114
Real estate owned sales financed
through loan origination - 15 45
Transfer of debt securities to held-
to-maturity on January 1, 1994 - - 22,264
Transfer of debt securities to available-
for-sale from held-to-maturity - 5,937 -
</TABLE>
See accompanying notes to consolidated financial statements.
67.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of First Mutual Bancorp, Inc. (the "Company"), its
wholly-owned subsidiary First Mutual Bank, S.B. (the "Bank") and the Bank's
wholly-owned subsidiary, First Mutual Company, which provides investment and
insurance services. All significant intercompany transactions and balances are
eliminated in consolidation.
BUSINESS: The only business of the Company is the ownership of the Bank. The
Bank is engaged in the business of commercial and retail banking and investment
services, with operations conducted through its main office and six branches
located in central Illinois. The Bank's revenues primarily arise from interest
income from commercial and retail lending activities and investments and revenue
derived from mortgage banking through origination of and sales of mortgage loans
to the secondary market with servicing retained and related servicing income.
The premiums generated from the insurance and investment operations are not
significant to the overall operations of the Company.
STATEMENTS OF CASH FLOWS: For purposes of the consolidated statements of cash
flows, the Company considers cash on hand and on deposit in non-interest-bearing
accounts with banks to be cash equivalents. The Company reports net cash flows
for interest-bearing deposits in financial institutions with maturities of less
than 90 days and for customer loans and deposit transactions.
SECURITIES: Effective January 1, 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 requires
corporations to classify debt securities as either held-to-maturity, trading, or
available-for-sale. Securities are classified as held-to-maturity when
management has the intent and the Company has the ability to hold those
securities to maturity. All other securities are classified as
available-for-sale since the Company may decide to sell those securities in
response to changes in market interest rates, liquidity needs, changes in yields
or alternative investments, and for other reasons. These securities are carried
at fair value with unrealized gains and losses charged or credited, net of
income taxes, to a valuation allowance included as a separate component of
stockholders' equity. Premiums and discounts are recognized in interest income
using methods that approximate the level-yield method. Realized gains and
losses on disposition are based on the net proceeds and the adjusted carrying
amounts of the securities sold, using the specific identification method.
LOANS HELD FOR SALE: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Net unrealized losses are recognized in a valuation allowance by
charges to income. All sales are made without recourse.
(Continued)
68.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
During 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 122, "Accounting for Mortgage Servicing Rights". SFAS No. 122
requires mortgage banking enterprises to recognize the rights to service
mortgage loans for others as a separate asset, regardless of the manner in which
such rights are acquired. These servicing rights are then amortized in
proportion to and over the period of the estimated servicing income. The effect
of adopting SFAS No. 122 did not have a material impact on the Company's
consolidated financial position or results of operations during 1996. As
discussed in the following paragraph, SFAS No. 122 will be superseded by
Statement of Financial Accounting Standards No. 125 after December 31, 1996.
In June 1996, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Extinguishments of Liabilities". SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS No. 125 requires a consistent application of a
FINANCIAL-COMPONENTS APPROACH that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, and
derecognizes liabilities when extinguished. SFAS No. 125 also supersedes SFAS
No. 122 and requires that servicing assets and liabilities be subsequently
measured by amortization in proportion to and over the period of estimated net
servicing income or loss and requires assessment for asset impairment or
increases obligation based on their fair values. SFAS No. 125 applies to
transfers and extinguishments occurring after December 31, 1996 and early or
retroactive application is not permitted. Management anticipates that the
adoption of SFAS No. 125 will not have a material impact on the financial
position or results of operations of the Bank.
LOANS RECEIVABLE: Loans receivable are stated at unpaid principal balances,
less the allowance for loan losses, and net of deferred loan origination fees
and discounts.
RECOGNITION OF INCOME ON LOANS: Interest on real estate and certain consumer
loans is accrued over the term of the loans based upon the principal balance
outstanding. Discounts on consumer loans are recognized over the loan term
using a method that approximates the interest method. Where serious doubt
exists as to the collectibility of a loan, the accrual of interest is
discontinued.
ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full, the
Company has established an allowance for loan losses. Increases to the
allowance are recorded by a provision for loan losses charged to expense.
Estimating the risk of the loss and the amount of loss on any loan is
necessarily subjective. Accordingly, the allowance is maintained by management
at a level considered adequate to cover possible losses that are currently
anticipated based on past loss experience, general economic conditions,
information about specific borrower situations including their financial
position and collateral values, and other factors and estimates which
(Continued)
69.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
are subject to change over time. While management may periodically allocate
portions of the allowance for specific problem loan situations, the whole
allowance is available for any loan charge-offs that occur. A loan is charged
off against the allowance by management as a loss when deemed uncollectible,
although collection efforts continue and future recoveries may occur.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". SFAS No. 114 (as modified by SFAS No. 118), effective
for the Company beginning January 1, 1995, requires the measurement of impaired
loans, based on the present value of expected cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of collateral if the loan is
collateral dependent. Under this standard, loans considered to be impaired are
reduced to the present value of expected future cash flows or the fair value of
collateral, by allocating a portion of the allowance for loan losses to such
loans. If these allocations cause the allowance for loan losses to be
increased, such increase is reported as a provision for loan losses. The effect
of adopting SFAS No. 114 was not material to the Company's consolidated
financial position or results of operations during 1996 and 1995.
INTEREST INCOME: Interest on loans is accrued over the term of the loans based
upon the principal outstanding. Management reviews loans delinquent 90 days or
more to determine if the interest accrual should be discontinued. Under SFAS
No. 114, as amended by SFAS No. 118, the carrying values of impaired loans are
periodically adjusted to reflect cash payments, revised estimates of future cash
flows, and increases in the present value of expected cash flows due to the
passage of time. Cash payments representing interest income are reported as
such. Other cash payments are reported as reductions in carrying value, while
increases or decreases due to changes in estimates of future payments and due to
the passage of time are reported as adjustments to the provision for loan
losses.
LOAN ORIGINATION FEES AND RELATED COSTS: Loan fees received, net of certain
direct loan origination costs, are deferred. The net deferred fee or cost is
recognized as an adjustment to interest income using the interest method over
the contractual life of the loans.
FORECLOSED REAL ESTATE: Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at fair value at the date of
foreclosure. Costs relating to improving the property are capitalized, whereas
costs relating to holding the property are expensed.
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its estimated fair value, including estimated selling expenses.
(Continued)
70.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PREMISES AND EQUIPMENT: Land is carried at cost. Buildings and furniture,
fixtures, and equipment are carried at cost, less accumulated depreciation.
Buildings and furniture, fixtures, and equipment are depreciated using
principally the straight-line method over the estimated useful lives of the
assets.
INCOME TAXES: The asset and liability approach requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities, using enacted tax rates.
EMPLOYEE STOCK OWNERSHIP PLAN: The Company accounts for its employee stock
ownership plan (ESOP) in accordance with American Institute of Certified Public
Accountants (AICPA) Statement of Position 93-6. The cost of shares issued to
the ESOP but not yet allocated to participants is presented in the consolidated
balance sheet as a reduction of shareholders' equity. Compensation expense is
recorded based on the market price of the shares as they are committed to be
released for allocation to participant accounts. The difference between the
market price and the cost of shares committed to be released is recorded as an
adjustment to paid-in capital. Dividends on allocated ESOP shares are recorded
as a reduction of retained earnings; dividends on unallocated ESOP shares are
reflected as a reduction of debt.
Shares are considered outstanding for earnings per share calculations as they
are committed to be released; unallocated shares are not considered outstanding.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The collectibility of loans, fair value of financial
instruments, and status of contingencies are particularly subject to change.
EARNINGS PER COMMON SHARE: Earnings per share is calculated by dividing the net
earnings by the weighted average number of common shares outstanding, including
stock awards, and common stock equivalents attributable to outstanding stock
options, when dilutive. For 1995, earnings per share is computed using net
earnings from the date that the Bank converted to stock ownership. The weighted
average number of the Company's shares of common stock used to calculate the
1996 and 1995 earnings per share was 4,147,713 and 4,328,955, respectively.
RECLASSIFICATIONS: Certain items in 1995 were reclassified to conform with the
1996 presentation.
(Continued)
71.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 2 - SECURITIES
The amortized cost and fair values of both available-for-sale and
held-to-maturity investments in debt and equity securities are summarized below.
DECEMBER 31, 1996
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
AVAILABLE-FOR-SALE Cost Gains Losses Value
- ------------------ --------- ---------- ---------- --------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 3,990 $ 3 $ (10) $ 3,983
Equity securities 17 - - 17
-------- ------ ------ --------
$ 4,007 $ 3 $ (10) $ 4,000
-------- ------ ------ --------
-------- ------ ------ --------
HELD-TO-MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 19,007 $ 64 $ (8) $ 19,063
-------- ------ ------ --------
-------- ------ ------ --------
DECEMBER 31, 1995
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
AVAILABLE-FOR-SALE Cost Gains Losses Value
- ------------------ --------- ---------- ---------- --------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 8,954 $ 75 $ - $ 9,029
Equity securities 9 - - 9
-------- ------ ------ --------
$ 8,963 $ 75 $ - $ 9,038
-------- ------ ------ --------
-------- ------ ------ --------
HELD-TO-MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 19,953 $ 123 $ (1) $ 20,075
-------- ------ ------ --------
-------- ------ ------ --------
(Continued)
72.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 2 - SECURITIES (Continued)
On December 29, 1995, the Company reclassified a portion of its held-to-maturity
securities to available-for-sale in accordance with "A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities" in order to improve the Company's flexibility in meeting liquidity
needs. The amortized cost and unrealized gain on securities transferred to
available-for-sale were $5,937,000 and $71,000, respectively.
The amortized cost and fair value of debt securities by contractual maturity,
are shown below.
DECEMBER 31, 1996
-----------------
Amortized Fair
Cost Value
---- -----
AVAILABLE-FOR-SALE
Due in one year or less $ - $ -
Due after one year through five years 3,990 3,983
-------- --------
3,990 3,983
Equity securities 17 17
-------- --------
$ 4,007 $ 4,000
-------- --------
-------- --------
HELD-TO-MATURITY
Due in one year or less $ 10,220 $ 10,227
Due after one year through five years 8,787 8,836
-------- --------
$ 19,007 $ 19,063
-------- --------
-------- --------
For the year ended December 31, 1996, the Company received proceeds totaling
approximately $7,985,000 on the sales and calls of available-for-sale
securities. Gross realized gains were approximately $5,000 and gross realized
losses were approximately $4,000.
There were no sales of securities during the years ended December 31, 1995 and
1994.
Securities with a total carrying value of $475,000 and $76,000, and fair values
of $474,000 and $76,000, respectively, were pledged at December 31, 1996 and
1995 to secure certain savings deposits in excess of $100,000.
(Continued)
73.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
DECEMBER 31,
------------
1996 1995
---- ----
First mortgage loan principal balances
Secured by one-to-four family residences $207,648 $181,991
Secured by other properties 30,266 23,168
Construction loans secured by one-to-four
family residences 4,334 3,949
Construction loans secured by other properties 4,040 -
-------- --------
246,288 209,108
Undisbursed portion of loans (4,656) (1,139)
Net deferred loan origination costs 225 112
-------- --------
Total first mortgage loans 241,857 208,081
Commercial loan principal balances 7,775 4,289
Consumer and other loan principal balances
Automobile 29,111 3,390
Home equity and second mortgage 1,149 1,233
Other 3,340 2,355
-------- --------
33,600 6,978
Net deferred loan origination costs 78 3
-------- --------
Total consumer and other loans 33,678 6,981
Total loans receivable 283,310 219,351
Less allowance for loan losses 1,244 1,172
-------- --------
$282,066 $218,179
-------- --------
-------- --------
Activity in the allowance for loan losses is summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
Balance at beginning of period $ 1,172 $ 1,148 $ 1,129
Provision charged to income 113 - -
Charge-offs (85) (6) (40)
Recoveries 44 30 59
------- ------- -------
(Continued)
74.
<PAGE>
Balance at end of period $ 1,244 $ 1,172 $ 1,148
------- ------- -------
------- ------- -------
(Continued)
75.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 3 - LOANS RECEIVABLE (Continued)
Nonaccrual and renegotiated loans for which interest has been reduced totaled
approximately $108,000, $179,000, and $57,000 at December 31, 1996, 1995, and
1994, respectively. Interest income that would have been recorded under the
original terms of such loans and the interest income actually recognized are
summarized below:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
Interest income that would
have been recorded $ 8 $ 15 $ 5
Interest income recognized 3 6 1
------ ------ ------
Interest income foregone $ 5 $ 9 $ 4
------ ------ ------
------ ------ ------
The Company is not committed to lend additional funds to debtors whose loans
have been modified. The Company did not have any impaired loans during the
years ended December 31, 1996 and 1995.
The Company has granted loans to certain bank officers, directors, and their
related interests. Related party loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. All loans are current in their contractual
payments for both principal and interest.
Activity in the loan accounts of officers, directors, and their related
interests follows:
YEAR ENDED
DECEMBER 31,
--------------
1996 1995
---- ----
Balance at beginning of period $ 675 $ 710
Loans disbursed 125 -
Principal repayments (71) (35)
----- -----
Balance at end of period $ 729 $ 675
----- -----
----- -----
(Continued)
76.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 4 - SECONDARY MORTGAGE MARKET ACTIVITIES AND LOAN SERVICING
Mortgage loans originated by the Company and serviced for others are not
included in the accompanying consolidated statements of financial condition.
The unpaid principal balances of these loans are summarized as follows:
DECEMBER 31,
------------
1996 1995 1994
---- ---- ----
Mortgage loan portfolios
serviced for
FHLMC $ 43,812 $ 40,722 $37,882
Other investors 3,536 3,546 2,937
-------- -------- -------
$ 47,348 $ 44,268 $40,819
--------- -------- -------
--------- -------- -------
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $405,000, $396,000, and $374,000, at December 31,
1996, 1995, and 1994, respectively.
The following summarizes the Company's secondary mortgage market activities,
which consist solely of fixed rate one-to-four-family real estate loans:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
Activity during the year
Loans originated for resale $ 12,447 $ 12,624 $ 9,984
Proceeds from sale of loans
originated for resale 12,970 11,678 11,225
Gain (loss) on sale of loans
originated for resale 179 86 (14)
Loan servicing fees 123 115 111
Balance at end of year
Loans held for sale (secured by
one-to-four-family residences) 1,103 1,447 415
(Continued)
77.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 4 - SECONDARY MORTGAGE MARKET ACTIVITIES AND LOAN SERVICING
(Continued)
The following summarizes the Company's activity in mortgage servicing rights for
the year ended December 31, 1996:
Balance at January 1, 1996 $ -
Additions 99
Amortization (2)
Provision for impairment -
------
Balance at December 31, 1996 $ 97
------
------
NOTE 5 - ALLOWANCE FOR LOSSES ON FORECLOSED REAL ESTATE
A summary of the activity in the allowance for losses on foreclosed real estate
is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
Balance at beginning of period $ - $ 3 $ 10
Provision charged to income - 8 3
Charge-offs - (11) (10)
----- ---- ----
Balance at end of year $ - $ - $ 3
----- ---- ----
----- ---- ----
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31,
------------
1996 1995
---- ----
Cost
Land and buildings $ 6,017 $ 5,295
Furniture, fixtures, and equipment 2,158 1,428
-------- --------
8,175 6,723
Less accumulated depreciation 4,056 3,768
-------- --------
$ 4,119 $ 2,955
-------- --------
-------- --------
(Continued)
78
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 7 - DEPOSITS
Certificate of deposit accounts with balances of $100,000 or more totaled
$12,093,000 and $10,735,000 at December 31, 1996 and 1995, respectively.
At December 31, 1996, scheduled maturities of certificates of deposit are as
follows:
1997 $ 95,127
1998 22,503
1999 12,069
2000 11,421
2001 and thereafter 3,219
-----------
$ 144,339
-----------
-----------
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1996 and 1995, secured advances from the Federal Home Loan Bank
were as follows:
INTEREST MATURITY
RATE DATE 1996 1995
---- ---- ---- ----
6.03% 5/2/97 $2,500 $-
5.97 8/12/97 5,000 -
6.09 9/25/97 2,000 -
6.48 12/19/97 2,000 -
6.33 4/25/98 3,000 -
6.47 5/2/98 2,500 -
6.59 6/19/98 2,000 -
6.43 9/25/98 3,000 -
6.62 9/25/99 2,000 -
Floating Open line 38,800 4,100
------- ------
$62,800 $4,100
------- ------
------- ------
The interest rate on floating advances was 6.95% and 5.31% as of December 31,
1996 and 1995, respectively. The maximum amount of credit available, secured by
a blanket lien on first mortgages, is the lesser of 60% of qualifying collateral
or 35% of total assets of the Bank.
(Continued)
79.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK (Continued)
The Bank maintains a collateral pledge agreement covering secured advances
whereby the savings bank has agreed to at all times keep on hand, free of all
other pledges, liens, and encumbrances, first mortgage loans on residential
property (not more than 90 days delinquent), aggregating no less than 167% of
the outstanding secured advances from the Federal Home Loan Bank of Chicago.
NOTE 9 - INCOME TAXES
Income tax expense is summarized as follows:
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
Current $ 558 $ 1,365 $ 922
Deferred 151 (25) 65
------- --------- --------
$ 709 $ 1,340 $ 987
------- --------- --------
------- --------- --------
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rates of 34% in 1996, 1995, and 1994 to income before income
taxes as a result of the following:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
Expected income tax expense at
federal tax rate $ 639 $ 1,271 $ 925
State income tax, net of federal
tax benefit 55 88 72
Other items, net 15 (19) (10)
-------- ---------- --------
$ 709 $ 1,340 $ 987
-------- ---------- --------
-------- ---------- --------
(Continued)
80.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 9 - INCOME TAXES (Continued)
Deferred tax assets and liabilities are comprised of the following at
December 31:
DECEMBER 31,
------------
1996 1995
---- ----
Loans, principally due to allowance for losses $ 136 $ 183
Accrual for employee benefits 131 83
Unrealized loss on securities available-for-sale 3 -
Other 10 23
-------- --------
Total deferred tax assets 280 289
FHLB stock dividends 142 142
Premises and equipment, principally due to
differences in depreciation 33 14
Unrealized gain on securities available-for-sale - 29
Deferred loan fees 133 51
Other 39 1
-------- --------
Total deferred tax liabilities 347 237
-------- --------
Net deferred tax assets (liabilities) $ (67) $ 52
-------- --------
-------- --------
Management has not recorded a valuation allowance based on the amount of
recoverable taxes paid in prior years.
The Company has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts which differs
from the provision charged to income on the financial statements. Retained
earnings at December 31, 1996 and 1995 include approximately $10,583,000
(representing bad debt deductions accumulated through 1986) for which no
deferred federal income tax liability has been recorded. Tax legislation passed
August 1996 now requires all thrift institutions to deduct a provision for bad
debts for tax purposes based on actual loss experience and recapture the excess
bad debt reserve accumulated in the tax years after 1986. The related amount of
deferred tax liability which must be recaptured is $893,000 and is payable over
a six-year period beginning in 1998.
(Continued)
81.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 10 - STOCK BASED COMPENSATION PLANS
As part of the conversion transaction, the Company established an employee stock
ownership plan ("ESOP") for the benefit of substantially all employees. The
ESOP borrowed $3,760,000 from the Company and used those funds to acquire
376,000 shares of the Company's stock at $10 per share.
Shares issued to the ESOP are allocated to ESOP participants based on principal
repayments made by the ESOP on the loan from the Company. The loan is secured
by shares purchased with the loan proceeds and will be repaid by the ESOP with
funds from the Company's discretionary contributions to the ESOP and earnings on
ESOP assets. Principal payments are scheduled to occur in even quarterly
amounts over a ten-year period. However, in the event Company contributions
exceed the minimum debt service requirements, additional principal payments will
be made.
During 1996, 37,600 shares of stock with an average fair value of $13.07 per
share were committed to be released, resulting in ESOP compensation expense of
$491,000. Shares held by the ESOP at December 31 are as follows:
1996
----
Allocated shares 56
Unallocated shares 320
--------
Total ESOP shares 376
--------
--------
Fair value of unallocated shares $ 4,794
--------
--------
The Company has a stock option plan under the terms of which 470,000 shares of
the Company's common stock were reserved for issuance. The options become
exercisable on a cumulative basis in equal installments over a five-year period
from the date of grant. The options expire ten years from the date of grant.
A summary of the status of the Company's stock option plan as of December 31,
1996 and changes during the year then ended are presented below:
Weighted-
Average
Exercise
Shares Price
------ -----
Outstanding at beginning of year - $ -
Granted 407,600 11.75
Exercised - -
Forfeited - -
-------
Outstanding at end of year 407,600 -
-------
-------
Options exercisable at end of year 81,520
Weighted-average fair value of
options granted during year $ 2.63
NOTE 10 - STOCK BASED COMPENSATION PLANS (Continued)
All of the outstanding options at December 31, 1996 relate to options granted in
1996 at an exercise price of $11.75 and have a remaining life of 9.5 years
before expiration. These options are not fully vested. The exercise price
equals the market value on the date the options were granted.
The Company applies APB Opinion 25 and related Interpretations in accounting for
its stock option plan. Accordingly, no compensation cost has been recognized at
the date of grant. Had compensation cost been determined
82.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
based on the fair value at the grant dates for awards under the plan in 1996
consistent with the method of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION", the Company's net income and earnings per share would have been
reduced to the pro forma amounts in the table below. For purposes of pro forma
disclosure, the estimated fair value of the options is amortized to expense over
the options' vesting period.
1996
(IN THOUSANDS)
--------------
Pro forma net income $ 1,040
Pro forma earnings per share $ 0.25
The fair value of options granted in 1996 was estimated at the date of grant
using a Black-Scholes option pricing model using the following assumptions:
dividend yield of 2.0%; expected volatility factor of the expected market price
of the Company's common stock of 15.0%; risk-free interest rate of 6.6%; and
expected option term of 5 years.
The Black-Scholes option pricing valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
In connection with the conversion to stock ownership, the Company adopted a
Management Recognition and Retention Plan (MRP). In 1996, the Company
contributed $2.1 million allowing the MRP to acquire 178,600 shares of common
stock of the Company, at an average cost of $11.75 per share, to be awarded to
directors and key employees. These shares vest over a five-year period at a
cost of $419,700 each year. The unamortized cost of shares not yet earned
(vested) is reported as a reduction of stockholders' equity.
83.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 11 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
regulatory agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
At year-end, actual capital levels of the Bank (in millions) and minimum
required levels were:
<TABLE>
<CAPTION>
MINIMUM REQUIRED
TO BE WELL
MINIMUM REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
------ ----------------- ------------------
1996 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $ 52,070 27.8% $14,970 8.0% $ 18,712 10.0%
Tier 1 (core) capital (to risk-weighted assets) 50,826 27.2 7,485 4.0 11,227 6.0
Tier 1 (core) capital (to adjusted total assets) 50,826 16.0 9,510 3.0 15,850 5.0
<CAPTION>
1995
- ----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $ 50,216 30.8% $10,918 8.0% $ 13,647 10.0%
Tier 1 (core) capital (to risk-weighted assets) 49,044 35.9 5,459 4.0 8,188 6.0
Tier 1 (core) capital (to adjusted total assets) 49,044 19.6 7,510 3.0 12,517 5.0
</TABLE>
As of December 31, 1996, the most recent notification from the office of the
Commissioner of Savings and Residential Finance categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. There
are no conditions or events since that notification that management believes
have changed the Bank's category.
84.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 11 - REGULATORY MATTERS (Continued)
On December 22, 1994, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a state chartered mutual savings bank to a state
chartered stock savings bank with the concurrent formation of a holding company.
On June 30, 1995, the Company sold 4,700,000 shares of common stock at $10 per
share and received proceeds of $41,640,000, net of conversion expenses and ESOP
shares. Approximately 50% of the gross proceeds of $45,400,000 were used by the
Company to acquire all of the capital stock of the Bank.
At the time of conversion, the Bank established a liquidation account totaling
$27,811,000. The liquidation account is maintained for the benefit of eligible
depositors who continue to maintain their accounts at the Bank after the
conversion. The liquidation account will be reduced annually to the extent that
eligible depositors have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. The liquidation account balance is not available for
payment of dividends.
NOTE 12 - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and unused
lines of credit on consumer loans. Those instruments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the statement of financial condition. The contract or notional
amounts of those instruments reflect the extent of the Company's involvement in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the commitments to extend credit and unused lines of credit on
consumer loans is represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making such
commitments as it does for instruments recorded on the balance sheet.
85.
<PAGE>
NOTE 12 - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS (Continued)
These financial instruments are summarized as follows:
Approximate Contract or
NOTIONAL AMOUNT
---------------
DECEMBER 31,
-----------
1996 1995
---- ----
Financial instruments, the contract amounts of which represent credit risk
Commitments to extend credit (fixed and variable rate commitments of
$1,739 and $4,391 at December 31, 1996; $978 and $4,172 at December 31,
1995)
Commercial $ 4,202 $ 3,700
Mortgage 1,928 1,450
Unused lines of credit on consumer loans 4,117 2,279
Undisbursed portion of construction loans 4,572 1,139
Unused lines of credit on commercial loans 3,005 5,277
Fixed rate mortgage loan commitments at December 31, 1996 have terms ranging
from 60 to 302 days and rates ranging from 6.50% to 9.00%. Fixed rate mortgage
loan commitments at December 31, 1995 have terms ranging from 11 to 58 days and
rates ranging from 7.25% to 9.50%.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
it is deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies, but
primarily consists of single-family residential real estate.
The Company grants commercial and residential real estate and consumer loans to
customers throughout central Illinois. Although the Company has a diversified
loan portfolio, a substantial portion of its debtors' ability to repay their
loans is dependent on the economic conditions within central Illinois.
86.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 12 - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS (Continued)
The deposits of savings associations are presently insured by the Savings
Association Insurance Fund (SAIF), which, along with the Bank Insurance Fund
(BIF), is one of the two insurance funds administered by the Federal Deposit
Insurance Corporation (FDIC). Due to the inadequate capitalization of the SAIF,
a recapitalization plan was signed into law on September 30, 1996 which required
a special assessment of approximately .65% of all SAIF-insured deposit balances
as of March 31, 1995. The Company's assessment of $1,314,000 is reflected in
the 1996 Consolidated Statement of Income.
The Company and its subsidiary are defendants in certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated financial position, results of operations, cash flows and capital
position of the Company and its subsidiary.
At December 31, 1996, the Company and its subsidiary were obligated under
noncancelable operating leases for office space. Certain leases contain
escalation clauses providing for increased rentals based primarily on increases
in the average consumer price index. Net rent expenses under operating leases
were approximately $47,000, $28,000, and $28,000 for the years ended
December 31, 1996, 1995, and 1994, respectively.
The projected minimum rental payments under the terms of the leases at
December 31, 1996, net of projected sublease rentals, are as follows:
YEAR ENDED
DECEMBER 31
-----------
1997 $ 78
1998 73
1999 71
2000 63
2001 and thereafter 19
--------
$ 304
--------
--------
- -------------------------
- -------------------------
There were two new leases entered into during the year ended December 31, 1996.
87.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory profit sharing plan for the benefit of
eligible employees. The annual contribution to the plan is discretionary as
determined by the Board of Directors; however, the amount is limited to fifteen
percent of salaries of eligible employees. The Company contributed $0,
$134,000, and $339,000 to the profit sharing plan for the years ended
December 31, 1996, 1995, and 1994, respectively.
In August 1994, the Bank entered into various deferred compensation agreements
with directors and certain officers. These agreements provide for guaranteed
payments for a specified period (ranging from 36 to 180 months) after a
specified age is attained (ranging from age 65 to age 79). The liability for
each covered director and officer is being accrued over the service period in
which the benefit has been earned. The liability totaled approximately $339,000
and $214,000 at December 31, 1996 and 1995, respectively. Expense of
approximately $125,000 and $105,000 has been included in compensation and
benefits in the accompanying statements of income for the years ended
December 31, 1996 and 1995, respectively. The Bank is the beneficiary of life
insurance policies on the directors and officers with an aggregate cash
surrender value of $3,215,000 and $3,070,000, as of December 31, 1996 and 1995,
respectively.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following tables show the estimated fair value and the related carrying
value of the Company's financial instruments. Items which are not financial
instruments are not included.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----- ----------- -------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $4,350 $4,350 $3,005 $3,005
Interest-bearing deposits with financial institutions 6,730 6,730 13,735 13,735
Securities available-for-sale 4,000 4,000 9,038 9,038
Securities held-to-maturity 19,007 19,063 19,953 20,075
Loans held for sale 1,103 1,119 1,447 1,461
Loans receivable, net 282,066 280,913 218,179 216,754
Federal Home Loan Bank stock 3,200 3,200 1,920 1,920
Cash surrender value of life insurance 3,215 3,215 3,070 3,070
Accrued interest receivable 1,969 1,969 1,944 1,944
Mortgage servicing rights 97 97 - -
</TABLE>
88.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
LIABILITIES
Demand, NOW, money market, and savings deposits $ (58,584) $ (58,584) $ (47,638) $ (47,638)
Certificates of deposit (144,339) (145,189) (144,830) (145,915)
Advances from borrowers for taxes and insurance (1,420) (1,420) (1,411) (1,411)
Advances from Federal Home Loan Bank (62,800) (62,640) (4,100) (4,100)
Accrued interest payable (1,471) (1,471) (1,207) (1,207)
</TABLE>
For purposes of the above, the following assumptions were used. The estimated
fair value for cash and cash equivalents; interest-bearing deposits with
financial institutions; Federal Home Loan Bank stock; cash surrender value of
life insurance; accrued interest receivable; mortgage servicing rights; demand,
NOW, money market, and savings deposits; advances from borrowers for taxes and
insurance; and accrued interest payable are considered to approximate their
carrying values. The estimated fair value for investments is based on quoted
market values for the individual securities or for equivalent securities. The
loans held for sale estimated fair value is determined based upon FHLMC or other
commitment rates for similar loans. The estimated fair value for loans is based
on estimates of the rate the Company would charge for similar loans at
December 31, 1996 and 1995, respectively, applied for the time period until
estimated payment. The estimated fair value of certificates of deposit is based
on estimates of the rate the Company pays on such deposits at December 31, 1996
and 1995, respectively, applied for the time period until maturity. The
estimated fair value of term advances is based on calculating the present value
of future cash flows using the current rate for an advance with a similar length
of maturity. The estimated fair value of the open line of credit advance is
considered to approximate its carrying value. Loan commitments are not included
in the table above as their estimated fair value is immaterial.
Other assets and liabilities of the Company that are not defined as financial
instruments, such as property and equipment, are not included in the above
disclosures. Also not included are nonfinancial instruments typically not
recognized in financial statements such as customer goodwill and similar items.
While the above estimates are based on management's judgment of the most
appropriate factors, there is no assurance that were the Company to have
disposed of these items on the balance sheet date, the fair values would have
been achieved, because the market value may differ depending on the
circumstances. The estimated fair values at the balance sheet date should not
necessarily be considered to apply at subsequent dates.
89.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 15 - ACQUISITION
On January 3, 1997, the Bank purchased selected assets and assumed certain
deposits of three branches from another financial institution. The following
summarizes the assets purchased and liabilities assumed:
Assets purchased
Cash and due from banks $ 121,282
Commercial loans 3,702
Consumer loans 6,240
Premises and equipment 2,723
Intangible assets 14,732
Other assets 59
----------
Total assets purchased $ 148,738
----------
----------
Liabilities assumed
Deposits $ 146,182
Other liabilities 2,556
----------
Total liabilities assumed $ 148,738
----------
----------
Intangible assets consist of core deposits which will be amortized over a ten
year period.
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed balance sheets, statements of income and
statements of cash flows for First Mutual Bancorp, Inc.
CONDENSED BALANCE SHEETS
December 31, 1996 and 1995
1996 1995
---- ----
ASSETS
Cash and cash equivalents $ 79 $ 16
Interest-bearing certificates of deposit at
other financial institutions 4,200 9,820
Securities available-for-sale 3,983 9,029
ESOP debt receivable 3,196 3,572
Investment in bank subsidiary 50,883 49,044
Accrued interest receivable and other assets 187 425
------- --------
$62,528 $ 71,906
------- --------
------- --------
90.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
1996 1995
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities $ 311 $ 378
Stockholders' equity
Common stock 470 470
Additional paid-in capital 45,104 44,980
Unearned ESOP shares (3,196) (3,572)
Unearned stock awards (1,504) -
Retained earnings 29,578 29,604
Treasury stock (8,231) -
Unrealized loss on AFS securities, net of tax (4) 46
-------- --------
$ 62,528 $ 71,906
-------- --------
-------- --------
CONDENSED STATEMENTS OF INCOME
For the year ended December 31, 1996 and
the period July 1, 1995 through December 31, 1995
1996 1995
---- ----
Income
Securities $ 462 $ 227
ESOP interest income 275 -
Net gain on sale of securities 1 -
Other interest earning assets 372 468
-------- --------
Total income 1,110 695
Expenses
Compensation and benefits 26 14
Other expenses 262 112
-------- --------
Total expenses 288 126
-------- --------
INCOME BEFORE INCOME TAXES 822 569
Income taxes 282 199
-------- --------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF BANK SUBSIDIARY 540 370
Undistributed earnings in bank subsidiary 631 1,020
-------- --------
NET INCOME $ 1,171 $ 1,390
-------- --------
-------- --------
91.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 16 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the year ended December 31, 1996 and
the period July 1, 1995 through December 31, 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,171 $ 1,390
Adjustments to reconcile net income to
net cash provided by operating activities
Equity in undistributed earnings of subsidiary (631) (1,020)
Amortization of premiums and discounts on
investment securities (6) 9
Gain on the sale of available-for-sale securities (1) -
Change in
Other assets 252 (425)
Other liabilities (54) 45
--------- ---------
Net cash provided by (used in) operations 731 (1)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of stock of First Mutual Bank - (22,700)
Purchase of securities held-to-maturity - (5,930)
Purchase of securities available-for-sale (3,015) (3,032)
Proceeds from the sale/maturities of available-for-sale
securities 7,986 -
Change in interest-bearing deposits 5,620 (9,820)
Capital contribution to subsidiary (104) (26)
--------- ---------
Net cash provided by (used) in investing activities 10,487 (41,508)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issuance - 41,640
Payment received on loan to ESOP 376 188
Purchase of treasury stock (10,330) -
Dividends paid (1,201) (303)
Net cash provided by (used in) financing activities (11,155) 41,525
--------- ---------
Net increase in cash and cash equivalents 63 16
Cash and cash equivalents at beginning of period 16 -
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 79 $ 16
-------- ---------
-------- ---------
</TABLE>
92.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 17 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
1996 THREE MONTHS ENDED
------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Interest income $ 5,016 $ 5,277 $ 5,543 $ 5,906
Interest expense 2,456 2,627 2,961 3,310
--------- ---------- ---------- ----------
NET INTEREST INCOME 2,560 2,650 2,582 2,596
Provision for loan losses 25 25 25 38
Other income 269 265 256 275
Other expense 1,611 1,889 3,834 2,126
--------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 1,193 1,001 (1,021) 707
Income tax expense (benefit) 435 430 (416) 260
--------- ---------- ---------- ----------
NET INCOME (LOSS) $ 758 $ 571 $ (605) $ 447
--------- ---------- ---------- ----------
Earnings (loss) per common share $ .17 $ .14 $ (.14) $ .11
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
<CAPTION>
1995 THREE MONTHS ENDED
------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Interest income $ 4,164 $ 4,450 $ 4,821 $ 4,847
Interest expense 2,239 2,491 2,358 2,402
--------- ---------- ---------- ----------
NET INTEREST INCOME 1,925 1,959 2,463 2,445
Provision for loan losses - - - -
Other income 184 211 223 230
Other expense 1,344 1,382 1,452 1,724
--------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 765 788 1,234 951
Income taxes 270 275 455 340
--------- ---------- ---------- ----------
NET INCOME $ 495 $ 513 $ 779 $ 611
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Earnings per common share N/A N/A $ .18 $ .14
</TABLE>
93.
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,350 $ 3,005
Interest-bearing deposits with financial institutions 6,730 13,735
Securities available-for-sale (Note 2) 4,000 9,038
Securities held-to-maturity
(fair value: December 31, 1996 - $19,063;
December 31, 1995 - $20,075) (Note 2) 19,007 19,953
Loans held for sale (Note 4) 1,103 1,447
Loans receivable, net (Note 3) 282,066 218,179
Federal Home Loan Bank stock 3,200 1,920
Accrued interest receivable 1,969 1,944
Foreclosed real estate, net of allowance for losses (Note 5) 77 51
Premises and equipment (Note 6) 4,119 2,955
Cash surrender value of life insurance (Note 13) 3,215 3,070
Other assets 1,940 379
---------- ----------
$ 331,776 $ 275,676
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 7) $ 202,923 $ 192,468
Advances from borrowers for taxes
and insurance 1,420 1,411
Advances from Federal Home Loan
Bank (Note 8) 62,800 4,100
Accrued expenses and other liabilities 2,416 6,169
---------- ----------
269,559 204,148
Commitments and contingencies (Note 12)
Stockholders' equity (Note 11)
Preferred stock - authorized 2,000,000 shares;
none issued -
Common stock - par value $.10 per share;
authorized 8,000,000 shares, issued 4,700,000 shares 470 470
Additional paid-in capital 45,104 44,980
Unearned ESOP shares (Note 10) (3,196) (3,572)
Unearned stock awards (Note 10) (1,504) -
Retained earnings, substantially restricted (Note 9) 29,578 29,604
Treasury stock, at cost, 611,400 shares in 1996 (8,231) -
Unrealized appreciation (depreciation) on securities
available-for-sale, net of tax (4) 46
---------- ----------
62,217 71,528
---------- ----------
$ 331,776 $ 275,676
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
97.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995, and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans receivable
First mortgage loans $ 16,952 $ 15,399 $ 14,125
Consumer and other loans 1,930 486 407
Commercial loans 497 122 -
Securities 1,663 1,481 1,084
Other interest-earning assets 700 794 203
--------- --------- ---------
Total interest income 21,742 18,282 15,819
Interest expense
Deposits 9,671 9,233 8,076
Federal Home Loan Bank advances and
other interest charges (Note 8) 1,683 257 77
--------- --------- ---------
Total interest expense 11,354 9,490 8,153
--------- --------- ---------
NET INTEREST INCOME 10,388 8,792 7,666
Provision for loan losses (Note 3) 113 - -
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,275 8,792 7,666
Noninterest income
Gain on sales and calls of securities 1 - -
Gain (loss) on sales of loans (Note 4) 179 86 (14)
Deposit service fee income 357 292 294
Loan servicing fees (Note 4) 123 115 111
Investment sales commissions 123 88 120
Other 282 267 155
--------- --------- ---------
Total noninterest income 1,065 848 666
Noninterest expense
Compensation and benefits 4,562 3,153 2,868
Occupancy and equipment 876 682 615
SAIF deposit insurance premium 339 465 464
SAIF special assessment 1,314 - -
Advertising and promotion 425 239 295
Data processing 428 350 345
Printing, postage, stationery,
and supplies 363 238 203
Net expense on foreclosed real
estate operations 8 11 10
Net (gain) loss on sale of real estate owned
including provisions for losses 1 13 (4)
Other 1,144 751 817
--------- --------- ---------
Total noninterest expense 9,460 5,902 5,613
--------- --------- ---------
</TABLE>
98.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995, and 1994
(Dollars in thousands)
1996 1995 1994
---- ---- ----
INCOME BEFORE INCOME TAXES $ 1,880 $ 3,738 $ 2,719
Income taxes (Note 9) 709 1,340 987
-------- ------- -------
NET INCOME $ 1,171 $ 2,398 $ 1,732
-------- ------- -------
-------- ------- -------
EARNINGS PER SHARE $ .28 $ .32 $ -
-------- ------- -------
-------- ------- -------
See accompanying notes to consolidated financial statements.
99.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995, and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Appreciation
Retained (Depreciation)
Additional Unearned Unearned
Earnings - on Securities
Common Paid in ESOP Stock
Substantially Treasury Available-
STOCK CAPITAL SHARES AWARDS
RESTRICTED STOCK FOR-SALE TOTAL
<S> <C> <C> <C> <C>
Balance at January 1, 1994 $ - $ - $ - $ -
$ 26,079 $ - $ - $ 26,079
Net income - - - -
-------- -------- -------- --------
1,732 - - 1,732
-------- -------- -------- --------
Balance at December 31, 1994 - - - -
27,811 - - 27,811
Issuance of common stock 470 44,930 (3,760) -
- - - 41,640
ESOP shares earned - 50 188 -
- - - 238
Cash dividends ($.07 per share) - - - -
(605) - - (605)
Reclassification of securities
from held-to-maturity
to available-for-sale, net of tax of $28 - - - -
- - 43 43
Change in unrealized gain on securities
available-for-sale, net of tax of $1 - - - -
- - 3 3
Net income - - - -
-------- -------- -------- --------
2,398 - - 2,398
-------- -------- -------- --------
Balance at December 31, 1995 470 44,980 (3,572) -
29,604 - 46 71,528
</TABLE>
100.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Net income - - - -
1,171 - - 1,171
Purchase of treasury shares - - - -
- (10,330) - (10,330)
Unearned stock awards - - - (2,099)
- 2,099 - -
ESOP shares earned - 116 376 -
- - - 492
Stock awards earned - - - 595
- - - 595
Tax benefit of stock awards - 8 - -
- - - 8
Change in unrealized appreciation
(depreciation) on securities available-
for-sale, net of tax of $32 - - - -
- - (50) (50)
Cash dividends ($.30 per share) - - - -
-------- -------- -------- --------
(1,197) - - (1,197)
-------- -------- -------- --------
Balance at December 31, 1996 $ 470 $ 45,104 $ (3,196) $ (1,504)
-------- -------- -------- --------
-------- -------- -------- --------
$29,578 $ (8,231) $ (4) $ 62,217
-------- -------- -------- --------
-------- -------- -------- --------
(Continued)
</TABLE>
101.
<PAGE>
<TABLE>
<CAPTION>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 1996, 1995, and 1994
(Dollars in thousands)
____________________________________________________________________________________
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,171 $ 2,398 $ 1,732
Adjustments to reconcile net income to
net cash from operating activities
Depreciation and amortization 395 295 263
Amortization of premiums and
discounts on mortgaged-backed
and investment securities, net 73 102 195
Origination of loans held for sale (12,447) (12,624) (9,984)
Proceeds from sale of loans 12,970 11,678 11,225
Change in net deferred loan
origination costs (188) (53) (49)
Change in deferred income taxes 151 (25) 65
Provision for loan losses 113 - -
Provision for losses on foreclosed
real estate - 8 3
Net gain on the sale of available-for-sale
securities (1) - -
Net (gain) loss on sales of loans (179) (86) 14
Federal Home Loan Bank stock dividends - (29) -
Net (gain) loss on sale of foreclosed
real estate 1 5 (7)
ESOP compensation expense 492 238 -
Stock awards expense 595 - -
Change in
Accrued interest receivable (25) (745) (59)
Cash surrender value of
life insurance (145) (145) (50)
Other assets (1,715) 144 21
Accrued expenses and other
liabilities (3,741) 4,650 91
-------- -------- --------
Net cash provided by (used in)
operating activities (2,480) 5,811 3,460
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans receivable (46,753) (5,530) 3,229
Principal payments on mortgage-backed
securities - - 103
Proceeds from maturity of securities
held-to-maturity 15,465 18,000 12,000
</TABLE>
(Continued)
102
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES (Continued)
Purchase of securities held-to-maturity $(14,598) $(19,397) $(14,614)
Purchase of securities available-for-sale (3,022) (3,041) -
Proceeds of sales and calls of available-for-sale
securities 7,985 - -
Investments in
Loans purchased (17,147) (14,254) (3,645)
Federal Home Loan Bank stock (1,280) - (33)
Premises and equipment (1,523) (276) (90)
Foreclosed real estate (12) (15) (20)
Cash surrender value of life insurance - - (2,875)
Net (increase) decrease in interest-bearing
deposits with financial institutions 7,005 1,439 (14,447)
Proceeds from sales of foreclosed
real estate 72 147 98
-------- -------- --------
Net cash used in investing activities (53,808) (22,927) (20,294)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 10,455 (7,777) (952)
Net change in open line advances from
Federal Home Loan Bank 34,700 (15,500) 18,400
Proceeds from term advances from
Federal Home Loan Bank 26,000 - -
Repayments on term advances from
Federal Home Loan Bank (2,000) - -
Net increase (decrease) in advances from
borrowers for taxes and insurance 9 (119) (80)
Proceeds from stock issuance - 41,640 -
Purchase of treasury stock (10,330) - -
Dividends paid (1,201) (303) -
-------- -------- --------
Net cash provided by financing activities 57,633 17,941 17,368
-------- -------- --------
Net increase in cash and cash equivalents 1,345 825 534
Cash and cash equivalents at beginning of year 3,005 2,180 1,646
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,350 $ 3,005 $ 2,180
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
103
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures of cash flow information
Cash paid for
Interest $ 11,090 $ 9,161 $ 8,049
Income taxes 1,019 1,266 937
Transfers from loans to real estate
acquired through foreclosure 87 144 114
Real estate owned sales financed
through loan origination - 15 45
Transfer of debt securities to held-
to-maturity on January 1, 1994 - - 22,264
Transfer of debt securities to available-
for-sale from held-to-maturity - 5,937 -
</TABLE>
(Continued)
104
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
(Table amounts in thousands of dollars)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements include the accounts of First Mutual Bancorp, Inc. (the
"Company"), its wholly-owned subsidiary First Mutual Bank, S.B. (the "Bank")
and the Bank's wholly-owned subsidiary, First Mutual Company, which provides
investment and insurance services. All significant intercompany transactions
and balances are eliminated in consolidation.
BUSINESS: The only business of the Company is the ownership of the Bank.
The Bank is engaged in the business of commercial and retail banking and
investment services, with operations conducted through its main office and
six branches located in central Illinois. The Bank's revenues primarily arise
from interest income from commercial and retail lending activities and
investments and revenue derived from mortgage banking through origination of
and sales of mortgage loans to the secondary market with servicing retained
and related servicing income. The premiums generated from the insurance and
investment operations are not significant to the overall operations of the
Company.
STATEMENTS OF CASH FLOWS: For purposes of the consolidated statements of
cash flows, the Company considers cash on hand and on deposit in
non-interest-bearing accounts with banks to be cash equivalents. The Company
reports net cash flows for interest-bearing deposits in financial
institutions with maturities of less than 90 days and for customer loans and
deposit transactions.
SECURITIES: Effective January 1, 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 requires
corporations to classify debt securities as either held-to-maturity, trading,
or available-for-sale. Securities are classified as held-to-maturity when
management has the intent and the Company has the ability to hold those
securities to maturity. All other securities are classified as
available-for-sale since the Company may decide to sell those securities in
response to changes in market interest rates, liquidity needs, changes in
yields or alternative investments, and for other reasons. These securities
are carried at fair value with unrealized gains and losses charged or
credited, net of income taxes, to a valuation allowance included as a
separate component of stockholders' equity. Premiums and discounts are
recognized in interest income using methods that approximate the level-yield
method. Realized gains and losses on disposition are based on the net
proceeds and the adjusted carrying amounts of the securities sold, using the
specific identification method.
LOANS HELD FOR SALE: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value
in the aggregate. Net unrealized losses are recognized in a valuation
allowance by charges to income. All sales are made without recourse.
(Continued)
105
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
During 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 122, "Accounting for Mortgage Servicing Rights". SFAS No. 122
requires mortgage banking enterprises to recognize the rights to service
mortgage loans for others as a separate asset, regardless of the manner in
which such rights are acquired. These servicing rights are then amortized in
proportion to and over the period of the estimated servicing income. The
effect of adopting SFAS No. 122 did not have a material impact on the
Company's consolidated financial position or results of operations during
1996. As discussed in the following paragraph, SFAS No. 122 will be
superseded by Statement of Financial Accounting Standards No. 125 after
December 31, 1996.
In June 1996, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Extinguishments of Liabilities". SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 125 requires a consistent
application of a FINANCIAL-COMPONENTS APPROACH that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred, and derecognizes liabilities when extinguished. SFAS No.
125 also supersedes SFAS No. 122 and requires that servicing assets and
liabilities be subsequently measured by amortization in proportion to and
over the period of estimated net servicing income or loss and requires
assessment for asset impairment or increases obligation based on their fair
values. SFAS No. 125 applies to transfers and extinguishments occurring
after December 31, 1996 and early or retroactive application is not
permitted. Management anticipates that the adoption of SFAS No. 125 will not
have a material impact on the financial position or results of operations of
the Bank.
LOANS RECEIVABLE: Loans receivable are stated at unpaid principal balances,
less the allowance for loan losses, and net of deferred loan origination fees
and discounts.
RECOGNITION OF INCOME ON LOANS: Interest on real estate and certain consumer
loans is accrued over the term of the loans based upon the principal balance
outstanding. Discounts on consumer loans are recognized over the loan term
using a method that approximates the interest method. Where serious doubt
exists as to the collectibility of a loan, the accrual of interest is
discontinued.
ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full, the
Company has established an allowance for loan losses. Increases to the
allowance are recorded by a provision for loan losses charged to expense.
Estimating the risk of the loss and the amount of loss on any loan is
necessarily subjective. Accordingly, the allowance is maintained by
management at a level considered adequate to cover possible losses that are
currently anticipated based on past loss experience, general economic
conditions, information about specific borrower situations including their
financial position and collateral values, and other factors and estimates
which
(Continued)
106
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
are subject to change over time. While management may periodically allocate
portions of the allowance for specific problem loan situations, the whole
allowance is available for any loan charge-offs that occur. A loan is
charged off against the allowance by management as a loss when deemed
uncollectible, although collection efforts continue and future recoveries may
occur.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". SFAS No. 114 (as modified by SFAS No. 118), effective
for the Company beginning January 1, 1995, requires the measurement of
impaired loans, based on the present value of expected cash flows discounted
at the loan's effective interest rate or, as a practical expedient, at the
loan's observable market price or the fair value of collateral if the loan is
collateral dependent. Under this standard, loans considered to be impaired
are reduced to the present value of expected future cash flows or the fair
value of collateral, by allocating a portion of the allowance for loan losses
to such loans. If these allocations cause the allowance for loan losses to
be increased, such increase is reported as a provision for loan losses. The
effect of adopting SFAS No. 114 was not material to the Company's
consolidated financial position or results of operations during 1996 and 1995.
INTEREST INCOME: Interest on loans is accrued over the term of the loans
based upon the principal outstanding. Management reviews loans delinquent 90
days or more to determine if the interest accrual should be discontinued.
Under SFAS No. 114, as amended by SFAS No. 118, the carrying values of
impaired loans are periodically adjusted to reflect cash payments, revised
estimates of future cash flows, and increases in the present value of
expected cash flows due to the passage of time. Cash payments representing
interest income are reported as such. Other cash payments are reported as
reductions in carrying value, while increases or decreases due to changes in
estimates of future payments and due to the passage of time are reported as
adjustments to the provision for loan losses.
LOAN ORIGINATION FEES AND RELATED COSTS: Loan fees received, net of certain
direct loan origination costs, are deferred. The net deferred fee or cost is
recognized as an adjustment to interest income using the interest method over
the contractual life of the loans.
FORECLOSED REAL ESTATE: Real estate properties acquired through, or in lieu
of, loan foreclosure are initially recorded at fair value at the date of
foreclosure. Costs relating to improving the property are capitalized,
whereas costs relating to holding the property are expensed.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to operations if the carrying value of a
property exceeds its estimated fair value, including estimated selling
expenses.
(Continued)
107
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PREMISES AND EQUIPMENT: Land is carried at cost. Buildings and furniture,
fixtures, and equipment are carried at cost, less accumulated depreciation.
Buildings and furniture, fixtures, and equipment are depreciated using
principally the straight-line method over the estimated useful lives of the
assets.
INCOME TAXES: The asset and liability approach requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of
assets and liabilities, using enacted tax rates.
EMPLOYEE STOCK OWNERSHIP PLAN: The Company accounts for its employee stock
ownership plan (ESOP) in accordance with American Institute of Certified
Public Accountants (AICPA) Statement of Position 93-6. The cost of shares
issued to the ESOP but not yet allocated to participants is presented in the
consolidated balance sheet as a reduction of shareholders' equity.
Compensation expense is recorded based on the market price of the shares as
they are committed to be released for allocation to participant accounts.
The difference between the market price and the cost of shares committed to
be released is recorded as an adjustment to paid-in capital. Dividends on
allocated ESOP shares are recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares are reflected as a reduction of debt.
Shares are considered outstanding for earnings per share calculations as they
are committed to be released; unallocated shares are not considered
outstanding.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The collectibility of
loans, fair value of financial instruments, and status of contingencies are
particularly subject to change.
EARNINGS PER COMMON SHARE: Earnings per share is calculated by dividing the
net earnings by the weighted average number of common shares outstanding,
including stock awards, and common stock equivalents attributable to
outstanding stock options, when dilutive. For 1995, earnings per share is
computed using net earnings from the date that the Bank converted to stock
ownership. The weighted average number of the Company's shares of common
stock used to calculate the 1996 and 1995 earnings per share was 4,147,713
and 4,328,955, respectively.
RECLASSIFICATIONS: Certain items in 1995 were reclassified to conform with
the 1996 presentation.
(Continued)
108
<PAGE>
NOTE 2 - SECURITIES
The amortized cost and fair values of both available-for-sale and
held-to-maturity investments in debt and equity securities are summarized
below.
DECEMBER 31, 1996
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
- ------------------ ---- ----- ------ -----
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 3,990 $ 3 $ (10) $ 3,983
Equity securities 17 - - 17
------- ----- ------ -------
$ 4,007 $ 3 $ (10) $ 4,000
------- ----- ------ -------
------- ----- ------ -------
HELD-TO-MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $19,007 $ 64 $ (8) $19,063
------- ----- ------ -------
------- ----- ------ -------
DECEMBER 31, 1995
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
- ------------------ ---- ----- ------ -----
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 8,954 $ 75 $ - $ 9,029
Equity securities 9 - - 9
------- ----- ------ -------
$ 8,963 $ 75 $ - $ 9,038
------- ----- ------ -------
------- ----- ------ -------
HELD-TO-MATURITY
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $19,953 $ 123 $ (1) $20,075
------- ----- ------ -------
------- ----- ------ -------
(Continued)
109
<PAGE>
NOTE 2 - SECURITIES (Continued)
On December 29, 1995, the Company reclassified a portion of its
held-to-maturity securities to available-for-sale in accordance with "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in
Debt and Equity Securities" in order to improve the Company's flexibility in
meeting liquidity needs. The amortized cost and unrealized gain on
securities transferred to available-for-sale were $5,937,000 and $71,000,
respectively.
The amortized cost and fair value of debt securities by contractual maturity,
are shown below.
DECEMBER 31, 1996
-----------------
Amortized Fair
COST VALUE
AVAILABLE-FOR-SALE
Due in one year or less $ - $ -
Due after one year through five years 3,990 3,983
------- -------
3,990 3,983
Equity securities 17 17
------- -------
$ 4,007 $ 4,000
------- -------
------- -------
HELD-TO-MATURITY
Due in one year or less $10,220 $10,227
Due after one year through five years 8,787 8,836
------- -------
$19,007 $19,063
------- -------
------- -------
For the year ended December 31, 1996, the Company received proceeds totaling
approximately $7,985,000 on the sales and calls of available-for-sale
securities. Gross realized gains were approximately $5,000 and gross
realized losses were approximately $4,000.
There were no sales of securities during the years ended December 31, 1995
and 1994.
Securities with a total carrying value of $475,000 and $76,000, and fair
values of $474,000 and $76,000, respectively, were pledged at December 31,
1996 and 1995 to secure certain savings deposits in excess of $100,000.
(Continued)
110
<PAGE>
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
DECEMBER 31,
------------
1996 1995
---- ----
First mortgage loan principal balances
Secured by one-to-four family residences $207,648 $181,991
Secured by other properties 30,266 23,168
Construction loans secured by one-to-four
family residences 4,334 3,949
Construction loans secured by other properties 4,040 -
-------- --------
246,288 209,108
Undisbursed portion of loans (4,656) (1,139)
Net deferred loan origination costs 225 112
-------- --------
Total first mortgage loans 241,857 208,081
Commercial loan principal balances 7,775 4,289
Consumer and other loan principal balances
Automobile 29,111 3,390
Home equity and second mortgage 1,149 1,233
Other 3,340 2,355
-------- --------
33,600 6,978
Net deferred loan origination costs 78 3
-------- --------
Total consumer and other loans 33,678 6,981
Total loans receivable 283,310 219,351
Less allowance for loan losses 1,244 1,172
-------- --------
$282,066 $218,179
-------- --------
-------- --------
Activity in the allowance for loan losses is summarized as follows:
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
Balance at beginning of period $ 1,172 $ 1,148 $ 1,129
Provision charged to income 113 - -
Charge-offs (85) (6) (40)
Recoveries 44 30 59
------- ------- -------
(Continued)
111
<PAGE>
Balance at end of period $ 1,244 $ 1,172 $ 1,148
------- ------- -------
------- ------- -------
(Continued)
112
<PAGE>
NOTE 3 - LOANS RECEIVABLE (Continued)
Nonaccrual and renegotiated loans for which interest has been reduced totaled
approximately $108,000, $179,000, and $57,000 at December 31, 1996, 1995, and
1994, respectively. Interest income that would have been recorded under the
original terms of such loans and the interest income actually recognized are
summarized below:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
Interest income that would
have been recorded $ 8 $ 15 $ 5
Interest income recognized 3 6 1
----- ----- ----
Interest income foregone $ 5 $ 9 $ 4
----- ----- ----
----- ----- ----
The Company is not committed to lend additional funds to debtors whose loans
have been modified. The Company did not have any impaired loans during the
years ended December 31, 1996 and 1995.
The Company has granted loans to certain bank officers, directors, and their
related interests. Related party loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with unrelated persons and do not involve
more than normal risk of collectibility. All loans are current in their
contractual payments for both principal and interest.
Activity in the loan accounts of officers, directors, and their related
interests follows:
Year Ended
DECEMBER 31,
------------
1996 1995
---- ----
Balance at beginning of period $ 675 $ 710
Loans disbursed 125 -
Principal repayments (71) (35)
----- -----
Balance at end of period $ 729 $ 675
----- -----
----- -----
(Continued)
113
<PAGE>
NOTE 4 - SECONDARY MORTGAGE MARKET ACTIVITIES AND LOAN SERVICING
Mortgage loans originated by the Company and serviced for others are not
included in the accompanying consolidated statements of financial condition.
The unpaid principal balances of these loans are summarized as follows:
DECEMBER 31,
------------
1996 1995 1994
---- ---- ----
Mortgage loan portfolios
serviced for
FHLMC $43,812 $40,722 $37,882
Other investors 3,536 3,546 2,937
------- ------- -------
$47,348 $44,268 $40,819
------- ------- -------
------- ------- -------
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $405,000, $396,000, and $374,000, at December
31, 1996, 1995, and 1994, respectively.
The following summarizes the Company's secondary mortgage market activities,
which consist solely of fixed rate one-to-four-family real estate loans:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
Activity during the year
Loans originated for resale $12,447 $12,624 $ 9,984
Proceeds from sale of loans
originated for resale 12,970 11,678 11,225
Gain (loss) on sale of loans
originated for resale 179 86 (14)
Loan servicing fees 123 115 111
Balance at end of year
Loans held for sale (secured by
one-to-four-family residences) 1,103 1,447 415
(Continued)
114
<PAGE>
NOTE 4 - SECONDARY MORTGAGE MARKET ACTIVITIES AND LOAN SERVICING
(Continued)
The following summarizes the Company's activity in mortgage servicing rights
for the year ended December 31, 1996:
Balance at January 1, 1996 $ -
Additions 99
Amortization (2)
Provision for impairment -
------
Balance at December 31, 1996 $ 97
------
------
NOTE 5 - ALLOWANCE FOR LOSSES ON FORECLOSED REAL ESTATE
A summary of the activity in the allowance for losses on foreclosed real
estate is as follows:
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
Balance at beginning of period $ - $ 3 $ 10
Provision charged to income - 8 3
Charge-offs - (11) (10)
------ ------ ------
Balance at end of year $ - $ - $ 3
------ ------ ------
------ ------ ------
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31,
------------
1996 1995
---- ----
Cost
Land and buildings $ 6,017 $ 5,295
Furniture, fixtures, and equipment 2,158 1,428
------- -------
8,175 6,723
Less accumulated depreciation 4,056 3,768
------- -------
$ 4,119 $ 2,955
------- -------
------- -------
(Continued)
116
<PAGE>
NOTE 7 - DEPOSITS
Certificate of deposit accounts with balances of $100,000 or more totaled
$12,093,000 and $10,735,000 at December 31, 1996 and 1995, respectively.
At December 31, 1996, scheduled maturities of certificates of deposit are as
follows:
1997 $ 95,127
1998 22,503
1999 12,069
2000 11,421
2001 and thereafter 3,219
---------
$ 144,339
---------
---------
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1996 and 1995, secured advances from the Federal Home Loan
Bank were as follows:
Interest Maturity
Rate Date 1996 1995
----- -------- ---- ----
6.03% 5/2/97 $ 2,500 $ -
5.97 8/12/97 5,000 -
6.09 9/25/97 2,000 -
6.48 12/19/97 2,000 -
6.33 4/25/98 3,000 -
6.47 5/2/98 2,500 -
6.59 6/19/98 2,000 -
6.43 9/25/98 3,000 -
6.62 9/25/99 2,000 -
Floating Open line 38,800 4,100
-------- --------
$ 62,800 $ 4,100
-------- --------
-------- --------
The interest rate on floating advances was 6.95% and 5.31% as of December 31,
1996 and 1995, respectively. The maximum amount of credit available, secured
by a blanket lien on first mortgages, is the lesser of 60% of qualifying
collateral or 35% of total assets of the Bank.
(Continued)
116
<PAGE>
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK (Continued)
The Bank maintains a collateral pledge agreement covering secured advances
whereby the savings bank has agreed to at all times keep on hand, free of all
other pledges, liens, and encumbrances, first mortgage loans on residential
property (not more than 90 days delinquent), aggregating no less than 167% of
the outstanding secured advances from the Federal Home Loan Bank of Chicago.
NOTE 9 - INCOME TAXES
Income tax expense is summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
Current $ 558 $ 1,365 $ 922
Deferred 151 (25) 65
----- ------- -----
$ 709 $ 1,340 $ 987
----- ------- -----
----- ------- -----
Total income tax expense differed from the amounts computed by applying the
U.S. federal income tax rates of 34% in 1996, 1995, and 1994 to income before
income taxes as a result of the following:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
Expected income tax expense at
federal tax rate $ 639 $ 1,271 $ 925
State income tax, net of federal
tax benefit 55 88 72
Other items, net 15 (19) (10)
------ ------- ------
$ 709 $ 1,340 $ 987
------ ------- ------
------ ------- ------
(Continued)
117
<PAGE>
NOTE 9 - INCOME TAXES (Continued)
Deferred tax assets and liabilities are comprised of the following at
December 31:
DECEMBER 31,
1996 1995
---- ----
Loans, principally due to allowance for losses $ 136 $ 183
Accrual for employee benefits 131 83
Unrealized loss on securities available-for-sale 3 -
Other 10 23
----- -----
Total deferred tax assets 280 289
FHLB stock dividends 142 142
Premises and equipment, principally due to
differences in depreciation 33 14
Unrealized gain on securities available-for-sale - 29
Deferred loan fees 133 51
Other 39 1
----- -----
Total deferred tax liabilities 347 237
----- -----
Net deferred tax assets (liabilities) $ (67) $ 52
----- -----
----- -----
Management has not recorded a valuation allowance based on the amount of
recoverable taxes paid in prior years.
The Company has qualified under provisions of the Internal Revenue Code which
permit it to deduct from taxable income a provision for bad debts which
differs from the provision charged to income on the financial statements.
Retained earnings at December 31, 1996 and 1995 include approximately
$10,583,000 (representing bad debt deductions accumulated through 1986) for
which no deferred federal income tax liability has been recorded. Tax
legislation passed August 1996 now requires all thrift institutions to deduct
a provision for bad debts for tax purposes based on actual loss experience
and recapture the excess bad debt reserve accumulated in the tax years after
1986. The related amount of deferred tax liability which must be recaptured
is $893,000 and is payable over a six-year period beginning in 1998.
(Continued)
118
<PAGE>
NOTE 10 - STOCK BASED COMPENSATION PLANS
As part of the conversion transaction, the Company established an employee
stock ownership plan ("ESOP") for the benefit of substantially all employees.
The ESOP borrowed $3,760,000 from the Company and used those funds to
acquire 376,000 shares of the Company's stock at $10 per share.
Shares issued to the ESOP are allocated to ESOP participants based on
principal repayments made by the ESOP on the loan from the Company. The loan
is secured by shares purchased with the loan proceeds and will be repaid by
the ESOP with funds from the Company's discretionary contributions to the
ESOP and earnings on ESOP assets. Principal payments are scheduled to occur
in even quarterly amounts over a ten-year period. However, in the event
Company contributions exceed the minimum debt service requirements,
additional principal payments will be made.
(Continued)
119
<PAGE>
During 1996, 37,600 shares of stock with an average fair value of $13.07 per
share were committed to be released, resulting in ESOP compensation expense
of $491,000. Shares held by the ESOP at December 31 are as follows:
1996
----
Allocated shares 56
Unallocated shares 320
-------
Total ESOP shares 376
-------
-------
Fair value of unallocated shares $ 4,794
-------
-------
The Company has a stock option plan under the terms of which 470,000 shares
of the Company's common stock were reserved for issuance. The options become
exercisable on a cumulative basis in equal installments over a five-year
period from the date of grant. The options expire ten years from the date of
grant.
A summary of the status of the Company's stock option plan as of December 31,
1996 and changes during the year then ended are presented below:
Weighted-
Average
Exercise
SHARES PRICE
------ -----
Outstanding at beginning of year - $ -
Granted 407,600 11.75
Exercised - -
Forfeited - -
--------
Outstanding at end of year 407,600 -
--------
--------
Options exercisable at end of year 81,520
Weighted-average fair value of
options granted during year $ 2.63
NOTE 10 - STOCK BASED COMPENSATION PLANS (Continued)
All of the outstanding options at December 31, 1996 relate to options granted
in 1996 at an exercise price of $11.75 and have a remaining life of 9.5 years
before expiration. These options are not fully vested. The exercise price
equals the market value on the date the options were granted.
The Company applies APB Opinion 25 and related Interpretations in accounting
for its stock option plan. Accordingly, no compensation cost has been
recognized at the date of grant. Had compensation cost been determined based
on the fair value at the grant dates for awards under the plan in 1996
consistent with the method of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION", the Company's net income and earnings per share would have
been reduced to the pro forma amounts in the table below. For purposes of
(Continued)
120
<PAGE>
pro forma disclosure, the estimated fair value of the options is amortized to
expense over the options' vesting period.
1996
(IN THOUSANDS)
--------------
Pro forma net income $ 1,040
Pro forma earnings per share $ 0.25
The fair value of options granted in 1996 was estimated at the date of grant
using a Black-Scholes option pricing model using the following assumptions:
dividend yield of 2.0%; expected volatility factor of the expected market
price of the Company's common stock of 15.0%; risk-free interest rate of
6.6%; and expected option term of 5 years.
The Black-Scholes option pricing valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options.
In connection with the conversion to stock ownership, the Company adopted a
Management Recognition and Retention Plan (MRP). In 1996, the Company
contributed $2.1 million allowing the MRP to acquire 178,600 shares of common
stock of the Company, at an average cost of $11.75 per share, to be awarded
to directors and key employees. These shares vest over a five-year period at
a cost of $419,700 each year. The unamortized cost of shares not yet earned
(vested) is reported as a reduction of stockholders' equity.
(Continued)
121
<PAGE>
NOTE 11 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by
federal regulatory agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject
to qualitative judgments by regulators about components, risk weightings, and
other factors, and the regulators can lower classifications in certain cases.
Failure to meet various capital requirements can initiate regulatory action
that could have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although
these terms are not used to represent overall financial condition. If
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as is
asset growth and expansion, and plans for capital restoration are required.
At year-end, actual capital levels of the Bank (in millions) and minimum
required levels were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
------ ----------------- ------------------
1996 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $ 52,070 27.8% $14,970 8.0% $18,712 10.0%
Tier 1 (core) capital (to risk-weighted assets) 50,826 27.2 7,485 4.0 11,227 6.0
Tier 1 (core) capital (to adjusted total assets) 50,826 16.0 9,510 3.0 15,850 5.0
1995
- ----
Total capital (to risk-weighted assets) $ 50,216 30.8% $10,918 8.0% $13,647 10.0%
Tier 1 (core) capital (to risk-weighted assets) 49,044 35.9 5,459 4.0 8,188 6.0
Tier 1 (core) capital (to adjusted total assets) 49,044 19.6 7,510 3.0 12,517 5.0
</TABLE>
As of December 31, 1996, the most recent notification from the office of the
Commissioner of Savings and Residential Finance categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believes have changed the Bank's category.
(Continued)
122
<PAGE>
NOTE 11 - REGULATORY MATTERS (Continued)
On December 22, 1994, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a state chartered mutual savings bank to a state
chartered stock savings bank with the concurrent formation of a holding
company. On June 30, 1995, the Company sold 4,700,000 shares of common stock
at $10 per share and received proceeds of $41,640,000, net of conversion
expenses and ESOP shares. Approximately 50% of the gross proceeds of
$45,400,000 were used by the Company to acquire all of the capital stock of
the Bank.
At the time of conversion, the Bank established a liquidation account
totaling $27,811,000. The liquidation account is maintained for the benefit
of eligible depositors who continue to maintain their accounts at the Bank
after the conversion. The liquidation account will be reduced annually to
the extent that eligible depositors have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest
in the liquidation account. In the event of a complete liquidation, each
eligible depositor will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held. The liquidation account balance
is not available for payment of dividends.
NOTE 12 - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and unused lines of credit on consumer loans. Those instruments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the statement of financial condition. The contract or
notional amounts of those instruments reflect the extent of the Company's
involvement in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the commitments to extend credit and unused lines of credit on
consumer loans is represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making such
commitments as it does for instruments recorded on the balance sheet.
(Continued)
123
<PAGE>
NOTE 12 - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS (Continued)
These financial instruments are summarized as follows:
Approximate Contract or
NOTIONAL AMOUNT
---------------
DECEMBER 31,
------------
1996 1995
---- ----
Financial instruments, the contract amounts of which represent credit risk
Commitments to extend credit (fixed and variable rate commitments of
$1,739 and $4,391 at December 31, 1996; $978 and $4,172 at December 31,
1995)
Commercial $ 4,202 $ 3,700
Mortgage 1,928 1,450
Unused lines of credit on consumer loans 4,117 2,279
Undisbursed portion of construction loans 4,572 1,139
Unused lines of credit on commercial loans 3,005 5,277
Fixed rate mortgage loan commitments at December 31, 1996 have terms ranging
from 60 to 302 days and rates ranging from 6.50% to 9.00%. Fixed rate
mortgage loan commitments at December 31, 1995 have terms ranging from 11 to
58 days and rates ranging from 7.25% to 9.50%.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Company upon extension
of credit, is based on management's credit evaluation of the counterparty.
Collateral held varies, but primarily consists of single-family residential
real estate.
The Company grants commercial and residential real estate and consumer loans
to customers throughout central Illinois. Although the Company has a
diversified loan portfolio, a substantial portion of its debtors' ability to
repay their loans is dependent on the economic conditions within central
Illinois.
(Continued)
124
<PAGE>
NOTE 12 - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS (Continued)
The deposits of savings associations are presently insured by the Savings
Association Insurance Fund (SAIF), which, along with the Bank Insurance Fund
(BIF), is one of the two insurance funds administered by the Federal Deposit
Insurance Corporation (FDIC). Due to the inadequate capitalization of the
SAIF, a recapitalization plan was signed into law on September 30, 1996 which
required a special assessment of approximately .65% of all SAIF-insured
deposit balances as of March 31, 1995. The Company's assessment of
$1,314,000 is reflected in the 1996 Consolidated Statement of Income.
The Company and its subsidiary are defendants in certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition
of these matters is not expected to have a material adverse effect on the
consolidated financial position, results of operations, cash flows and
capital position of the Company and its subsidiary.
At December 31, 1996, the Company and its subsidiary were obligated under
noncancelable operating leases for office space. Certain leases contain
escalation clauses providing for increased rentals based primarily on
increases in the average consumer price index. Net rent expenses under
operating leases were approximately $47,000, $28,000, and $28,000 for the
years ended December 31, 1996, 1995, and 1994, respectively.
The projected minimum rental payments under the terms of the leases at
December 31, 1996, net of projected sublease rentals, are as follows:
Year Ended
DECEMBER 31
1997 $ 78
1998 73
1999 71
2000 63
2001 and thereafter 19
-----
$ 304
-----
-----
- -----------------------
- -----------------------
There were two new leases entered into during the year ended December 31, 1996.
(Continued)
125
<PAGE>
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory profit sharing plan for the benefit
of eligible employees. The annual contribution to the plan is discretionary
as determined by the Board of Directors; however, the amount is limited to
fifteen percent of salaries of eligible employees. The Company contributed
$0, $134,000, and $339,000 to the profit sharing plan for the years ended
December 31, 1996, 1995, and 1994, respectively.
In August 1994, the Bank entered into various deferred compensation
agreements with directors and certain officers. These agreements provide for
guaranteed payments for a specified period (ranging from 36 to 180 months)
after a specified age is attained (ranging from age 65 to age 79). The
liability for each covered director and officer is being accrued over the
service period in which the benefit has been earned. The liability totaled
approximately $339,000 and $214,000 at December 31, 1996 and 1995,
respectively. Expense of approximately $125,000 and $105,000 has been
included in compensation and benefits in the accompanying statements of
income for the years ended December 31, 1996 and 1995, respectively. The
Bank is the beneficiary of life insurance policies on the directors and
officers with an aggregate cash surrender value of $3,215,000 and $3,070,000,
as of December 31, 1996 and 1995, respectively.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following tables show the estimated fair value and the related carrying
value of the Company's financial instruments. Items which are not financial
instruments are not included.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
Carrying Estimated Carrying Estimated
VALUE FAIR VALUE VALUE FAIR VALUE
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 4,350 $ 4,350 $ 3,005 $ 3,005
Interest-bearing deposits with financial institutions 6,730 6,730 13,735 13,735
Securities available-for-sale 4,000 4,000 9,038 9,038
Securities held-to-maturity 19,007 19,063 19,953 20,075
Loans held for sale 1,103 1,119 1,447 1,461
Loans receivable, net 282,066 280,913 218,179 216,754
Federal Home Loan Bank stock 3,200 3,200 1,920 1,920
Cash surrender value of life insurance 3,215 3,215 3,070 3,070
Accrued interest receivable 1,969 1,969 1,944 1,944
Mortgage servicing rights 97 97 - -
</TABLE>
(Continued)
126
<PAGE>
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
Carrying Estimated Carrying Estimated
VALUE FAIR VALUE VALUE FAIR VALUE
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
LIABILITIES
Demand, NOW, money market, and savings deposits $ (58,584) $ (58,584) $ (47,638) $ (47,638)
Certificates of deposit (144,339) (145,189) (144,830) (145,915)
Advances from borrowers for taxes and insurance (1,420) (1,420) (1,411) (1,411)
Advances from Federal Home Loan Bank (62,800) (62,640) (4,100) (4,100)
Accrued interest payable (1,471) (1,471) (1,207) (1,207)
</TABLE>
For purposes of the above, the following assumptions were used. The
estimated fair value for cash and cash equivalents; interest-bearing deposits
with financial institutions; Federal Home Loan Bank stock; cash surrender
value of life insurance; accrued interest receivable; mortgage servicing
rights; demand, NOW, money market, and savings deposits; advances from
borrowers for taxes and insurance; and accrued interest payable are
considered to approximate their carrying values. The estimated fair value
for investments is based on quoted market values for the individual
securities or for equivalent securities. The loans held for sale estimated
fair value is determined based upon FHLMC or other commitment rates for
similar loans. The estimated fair value for loans is based on estimates of
the rate the Company would charge for similar loans at December 31, 1996 and
1995, respectively, applied for the time period until estimated payment. The
estimated fair value of certificates of deposit is based on estimates of the
rate the Company pays on such deposits at December 31, 1996 and 1995,
respectively, applied for the time period until maturity. The estimated fair
value of term advances is based on calculating the present value of future
cash flows using the current rate for an advance with a similar length of
maturity. The estimated fair value of the open line of credit advance is
considered to approximate its carrying value. Loan commitments are not
included in the table above as their estimated fair value is immaterial.
Other assets and liabilities of the Company that are not defined as financial
instruments, such as property and equipment, are not included in the above
disclosures. Also not included are nonfinancial instruments typically not
recognized in financial statements such as customer goodwill and similar
items.
While the above estimates are based on management's judgment of the most
appropriate factors, there is no assurance that were the Company to have
disposed of these items on the balance sheet date, the fair values would have
been achieved, because the market value may differ depending on the
circumstances. The estimated fair values at the balance sheet date should
not necessarily be considered to apply at subsequent dates.
(Continued)
127
<PAGE>
NOTE 15 - ACQUISITION
On January 3, 1997, the Bank purchased selected assets and assumed certain
deposits of three branches from another financial institution. The following
summarizes the assets purchased and liabilities assumed:
Assets purchased
Cash and due from banks $ 121,282
Commercial loans 3,702
Consumer loans 6,240
Premises and equipment 2,723
Intangible assets 14,732
Other assets 59
---------
Total assets purchased $ 148,738
---------
---------
Liabilities assumed
Deposits $ 146,182
Other liabilities 2,556
---------
Total liabilities assumed $ 148,738
---------
---------
Intangible assets consist of core deposits which will be amortized over a ten
year period.
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed balance sheets, statements of income and
statements of cash flows for First Mutual Bancorp, Inc.
CONDENSED BALANCE SHEETS
December 31, 1996 and 1995
1996 1995
ASSETS
Cash and cash equivalents $ 79 $ 16
Interest-bearing certificates of deposit at
other financial institutions 4,200 9,820
Securities available-for-sale 3,983 9,029
ESOP debt receivable 3,196 3,572
Investment in bank subsidiary 50,883 49,044
Accrued interest receivable and other assets 187 425
-------- --------
$ 62,528 $ 71,906
-------- --------
-------- --------
(Continued)
128
<PAGE>
NOTE 16 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
1996 1995
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities $ 311 $ 378
Stockholders' equity
Common stock 470 470
Additional paid-in capital 45,104 44,980
Unearned ESOP shares (3,196) (3,572)
Unearned stock awards (1,504) -
Retained earnings 29,578 29,604
Treasury stock (8,231) -
Unrealized loss on AFS securities, net of tax (4) 46
-------- --------
$ 62,528 $ 71,906
-------- --------
-------- --------
CONDENSED STATEMENTS OF INCOME
For the year ended December 31, 1996 and
the period July 1, 1995 through December 31, 1995
1996 1995
---- ----
Income
Securities $ 462 $ 227
ESOP interest income 275 -
Net gain on sale of securities 1 -
Other interest earning assets 372 468
-------- --------
Total income 1,110 695
Expenses
Compensation and benefits 26 14
Other expenses 262 112
-------- --------
Total expenses 288 126
-------- --------
INCOME BEFORE INCOME TAXES 822 569
Income taxes 282 199
-------- --------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF BANK SUBSIDIARY 540 370
Undistributed earnings in bank subsidiary 631 1,020
-------- --------
NET INCOME $ 1,171 $ 1,390
-------- --------
-------- --------
(Continued)
129
<PAGE>
NOTE 16 - PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the year ended December 31, 1996 and
the period July 1, 1995 through December 31, 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,171 $ 1,390
Adjustments to reconcile net income to
net cash provided by operating activities
Equity in undistributed earnings of subsidiary (631) (1,020)
Amortization of premiums and discounts on
investment securities (6) 9
Gain on the sale of available-for-sale securities (1) -
Change in
Other assets 252 (425)
Other liabilities (54) 45
-------- --------
Net cash provided by (used in) operations 731 (1)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of stock of First Mutual Bank - (22,700)
Purchase of securities held-to-maturity - (5,930)
Purchase of securities available-for-sale (3,015) (3,032)
Proceeds from the sale/maturities of available-for-sale
securities 7,986 -
Change in interest-bearing deposits 5,620 (9,820)
Capital contribution to subsidiary (104) (26)
-------- --------
Net cash provided by (used) in investing activities 10,487 (41,508)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issuance - 41,640
Payment received on loan to ESOP 376 188
Purchase of treasury stock (10,330) -
Dividends paid (1,201) (303)
-------- --------
Net cash provided by (used in) financing activities (11,155) 41,525
-------- --------
Net increase in cash and cash equivalents 63 16
Cash and cash equivalents at beginning of period 16 -
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 79 $ 16
-------- --------
-------- --------
</TABLE>
(Continued)
130
<PAGE>
<TABLE>
<CAPTION>
NOTE 17 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
1996 THREE MONTHS ENDED
- ---- ------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Interest income $ 5,016 $ 5,277 $ 5,543 $ 5,906
Interest expense 2,456 2,627 2,961 3,310
------- ------- ------- -------
NET INTEREST INCOME 2,560 2,650 2,582 2,596
Provision for loan losses 25 25 25 38
Other income 269 265 256 275
Other expense 1,611 1,889 3,834 2,126
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 1,193 1,001 (1,021) 707
Income tax expense (benefit) 435 430 (416) 260
------- ------- ------- -------
NET INCOME (LOSS) $ 758 $ 571 $ (605) $ 447
------- ------- ------- -------
------- ------- ------- -------
Earnings (loss) per common share $.17 $.14 $(.14) $.11
1995 THREE MONTHS ENDED
- ---- ------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Interest income $ 4,164 $ 4,450 $ 4,821 $ 4,847
Interest expense 2,239 2,491 2,358 2,402
------- ------- ------- -------
NET INTEREST INCOME 1,925 1,959 2,463 2,445
Provision for loan losses - - - -
Other income 184 211 223 230
Other expense 1,344 1,382 1,452 1,724
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 765 788 1,234 951
Income taxes 270 275 455 340
------- ------- ------- -------
NET INCOME $ 495 $ 513 $ 779 $ 611
------- ------- ------- -------
------- ------- ------- -------
Earnings per common share N/A N/A $.18 $.14
</TABLE>
(Continued)
131
<PAGE>
EXHIBIT 21
STATE OF
PARENT SUBSIDIARY INCORPORATION
------ ---------- -------------
First Mutual Bancorp, Inc. First Mutual Bank, S.B. Illinois
First Mutual Bank, S.B. First Mutual Corporation Illinois
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
First Mutual Bancorp, Inc.
We consent to the incorporation by reference in this Registration Statement
on Form S-8 filed with the Securities and Exchange Commission on July 25,
1996 of our report on the financial statements included in the Form 10-K of
First Mutual Bancorp, Inc. for the year ended December 31, 1996.
/s/ Crowe, Chizek, and Company LLP
----------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
March 31, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 4350
<INT-BEARING-DEPOSITS> 6730
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4000
<INVESTMENTS-CARRYING> 19007
<INVESTMENTS-MARKET> 19063
<LOANS> 283169
<ALLOWANCE> 1244
<TOTAL-ASSETS> 331776
<DEPOSITS> 202923
<SHORT-TERM> 50300
<LIABILITIES-OTHER> 3836
<LONG-TERM> 12500
470
0
<COMMON> 0
<OTHER-SE> 61747
<TOTAL-LIABILITIES-AND-EQUITY> 331776
<INTEREST-LOAN> 19379
<INTEREST-INVEST> 1663
<INTEREST-OTHER> 700
<INTEREST-TOTAL> 21742
<INTEREST-DEPOSIT> 9671
<INTEREST-EXPENSE> 11354
<INTEREST-INCOME-NET> 10388
<LOAN-LOSSES> 113
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 9460
<INCOME-PRETAX> 1880
<INCOME-PRE-EXTRAORDINARY> 1171
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1171
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
<YIELD-ACTUAL> 3.562
<LOANS-NON> 108
<LOANS-PAST> 392
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1172
<CHARGE-OFFS> 85
<RECOVERIES> 44
<ALLOWANCE-CLOSE> 1244
<ALLOWANCE-DOMESTIC> 1244
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
