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, 1997
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
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(State or Other Jurisdiction of Inc. or Orgn.) (I.R.S. Employer ID No.)
135 East Main Street, Decatur, Illinois 62523
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(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. [ ].
As of March 6, 1998, there were issued and outstanding 3,507,070 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 6, 1998 was approximately $67.0 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, 1997.
2. Part III of Form 10-K--Portions of Proxy Statement for 1998 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, 1997, the Company had total
consolidated assets of $391.4 million, total consolidated deposits of $320.0
million, and consolidated stockholders' equity of $54.2 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, 1997, residential
one- to four-family loans represented 66% of the Bank's net loan portfolio, and
commercial and multi-family loans represented 15.8% 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, 1997,
such liquid investments, which included interest-earning deposits in other
financial institutions, and United States Government and federal agency
obligations, totaled $48.0 million, or 12.3% 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 fourteen
offices in its market area of Central Illinois consisting of Macon, DeWitt,
Shelby, Champaign, Christian, Logan and Livingston Counties. On January 3, 1997,
the Bank acquired three branch offices (the "Branch Acquisitions") in Lincoln,
Taylorville and Pontiac, Illinois from another financial institution. In
addition, the Bank opened a new branch office in Champaign, Illinois and another
new branch office in Decatur, Illinois.
Market Area/Local Economy
The Company conducts operations through its main office in Decatur,
Illinois, which is located in Central Illinois, and through thirteen branch
offices in Macon and 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, 1997, the unemployment rate in Macon County was
6.2%, Shelby County was 6.5%, DeWitt County was 5.4%, and Champaign County was
2.6% compared to the national rate of 4.4%. 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.
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,
----------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential one- to four-family (1)........ $ 204,175 66.01% $ 213,082 75.25% $ 187,381 85.32%
Commercial and multi-family................ 48,696 15.75 34,306 12.11 23,168 10.55
--------- ------- --------- ------ --------- -------
Total real estate loans.................. 252,871 81.76 247,388 87.36 210,549 95.87
Commercial loans ............................ 12,373 4.00 7,775 2.75 4,289 1.95
Consumer loans:
Auto....................................... 39,598 12.80 29,111 10.28 3,390 1.55
Home improvement........................... 1,451 .47 931 0.33 795 .36
Home equity................................ 2,678 .87 1,149 0.41 1,233 .56
Passbook................................... 726 .23 256 0.09 222 .10
Student.................................... -- -- -- -- --
Other...................................... 3,872 1.25 2,153 0.76 1,338 .61
--------- ------- --------- ------ --------- -------
Total consumer loans.................... 48,325 15.62 33,600 11.87 6,978 3.18
--------- ------- --------- ------ --------- -------
Total loans receivable.................. 313,569 101.38 288,763 101.98 221,816 101.00
Less:
Undisbursed loan proceeds.................. 3,118 1.01 4,656 1.65 1,139 .52
Unearned discount and net
deferred loan fees/(costs)............... (274) (.09) (306) (0.11) (121) (.05)
Allowance for loan losses.................. 1,431 .46 1,244 0.44 1,172 .53
--------- ------- --------- ------ --------- -------
Total loans receivable,
net.................................... $ 309,294 100.00% $ 283,169 100.00% $ 219,626 100.00%
========= ======= ========= ====== ========= =======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------
1994 1993
------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Residential one- to four-family (1)........ $ 179,578 90.29% $ 176,424 88.32%
Commercial and multi-family................ 16,992 8.55 21,713 10.87
--------- ------ --------- -------
Total real estate loans.................. 196,570 98.84 198,137 99.19
Commercial loans ............................ -- -- -- --
Consumer loans:
Auto....................................... 1,429 .72 1,201 .60
Home improvement........................... 595 .30 459 .23
Home equity................................ 1,337 .67 1,415 .71
Passbook................................... 249 .12 305 .15
Student.................................... 246 .12 392 .20
Other...................................... 1,026 .52 1,032 .52
--------- ------ --------- -------
Total consumer loans.................... 4,882 2.45 4,804 2.41
--------- ------ --------- -------
Total loans receivable.................. 201,452 101.29 202,941 101.60
Less:
Undisbursed loan proceeds.................. 1,480 .74 2,080 1.04
Unearned discount and net
deferred loan fees/(costs)............... (62) (.03) (13) (.01)
Allowance for loan losses.................. 1,148 .58 1,129 .57
--------- ------ --------- -------
Total loans receivable,
net.................................... $ 198,886 100.00% $ 199,745 100.00%
========= ====== ========= =======
</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.
Year Ended December 31,
-----------------------------
1997 1996 1995
-------- -------- -------
(In Thousands)
Loans receivable at beginning of period ....... $288,763 $221,816 $201,452
Originations:
Real estate:
Residential one- to four-family:
ARM loans ............................... 19,186 41,234 15,790
Fixed rate loans ........................ 43,435 28,658 23,387
Commercial and multi-family:
ARM loans ............................... 17,788 13,082 6,653
Fixed rate loans ........................ 2,209 3,707 538
Commercial .................................... 22,149 19,778 7,198
Consumer:
Auto ........................................ 25,369 32,261 2,826
Home improvement ............................ 605 615 588
Home equity ................................. 3,042 1,085 1,206
Student ..................................... -- -- 71
Other ....................................... 5,638 4,668 1,963
-------- -------- --------
Total originations ........................ 139,421 145,088 60,220
Purchases:
Real estate:
Residential one- to four-family:
ARM loans ................................. -- 17,147 14,254
Commercial and multifamily
ARM loans ................................. 4,992 -- --
Fixed rate loans .......................... 2,626 -- --
Commercial Loans ............................ 550 -- --
Consumer:
Auto ........................................ 2,207 -- --
Home improvement ............................ 837 -- --
Other ....................................... 2,568 -- --
-------- -------- --------
Total purchases ........................... 13,780 17,147 14,254
Transfer of mortgage loans
to foreclosed real estate ................... 260 87 144
Repayments ................................... 110,722 82,410 42,374
Loan sales ................................... 17,413 12,791 11,592
-------- -------- --------
Total loans receivable at end of period .... $313,569 $288,763 $221,816
======== ======== ========
Lending Activities
General. The Company's loan portfolio consists primarily of conventional
mortgage loans secured by one- to four-family residences. At December 31, 1997,
the Company's net loan portfolio totaled $309.3 million, of which $204.2
million, or 66.0%, 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 (15.8%), consumer
loans (15.6%), and commercial loans (4.0%). 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. The origination of commercial real estate
and commercial business loans, as well as consumer loans has increased in recent
years in order to diversify the loan portfolio, increase yield, and reduce
interest rate risk.
5
<PAGE>
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 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, 1997, 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,
1997, approximately $154.3 million, or 61.0% of the Company's mortgage loan
portfolio consisted of loans with adjustable interest rates.
For the year ended December 31, 1997, the Company purchased $8.2 million
of commercial and commercial and multifamily real estate loans and $5.6 million
of consumer loans. $4.3 million of the commercial and commercial and multifamily
real estate loans and $5.6 million of the consumer loans were a result of the
Branch Acquisitions. For the years ended December 31, 1996 and 1995,
respectively, the Company purchased $17.1 million and $14.3 million of
residential one- to four-family loans.
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 primarily 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 outside the Company's primary market area. The Company also
purchases single-family mortgage loans from other lenders. 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, 1997, the Company had
$204.2 million, or 66.0%, 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, 1997, the Company originated
$43.4 million of fixed rate residential mortgage loans and $19.2 million of
residential ARM loans. During 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.
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.
6
<PAGE>
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.
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 totaled $112.4 million, or 55.0%, of the Company's total residential
real estate loan portfolio at December 31, 1997.
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, 1997, $48.7
million, or 15.8%, of the Company's net loan portfolio consisted of commercial
and multi-family real estate loans. At December 31, 1997, all except one 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 $1.9
million, and the largest multi-family residential real estate loan had a
principal balance of $2.2 million. At December 31, 1997, no commercial or
multi-family real estate loans in the Company's loan portfolio 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.
7
<PAGE>
Commercial real estate and commercial business lending typically involve
higher interest rates, 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, 1997, consumer loans totaled $48.3
million, or 15.6%, 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 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, 1997 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..... $16,889 $ 9,705 $10,084 $21,173 $53,571 $30,506 $62,247 $ 204,175
Commercial real estate.............. 3,594 1,689 2,666 4,762 28,213 3,568 4,204 48,696
Commercial loans...................... 8,865 869 1,586 915 138 -- -- 12,373
Consumer loans........................ 15,626 11,322 10,318 10,188 825 46 -- 48,325
------- ------- ------- ------- ------- ------- ------- ---------
Total............................ $44,974 $23,585 $24,654 $37,038 $82,747 $34,120 $66,451 $ 313,569
======= ======= ======= ======= ======= ======= ======= =========
</TABLE>
8
<PAGE>
The following table sets forth the dollar amount of all loans at December
31, 1997 that are scheduled to mature after December 31, 1998 and that have
predetermined interest rates and floating or adjustable interest rates.
Floating or
Fixed Rate Adjustable Rate Total
---------- --------------- --------
(In Thousands)
Real estate loans:
Residential one- to four-family ....... $ 77,617 $109,669 $187,286
Commercial real estate ................ 4,365 40,737 45,102
Commercial loans ........................ 2,333 1,175 3,508
Consumer loans .......................... 32,695 4 32,699
-------- -------- --------
Total .............................. $117,010 $151,585 $268,595
======== ======== ========
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 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, 1997, the Company had $273.6 thousand
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 $116,000, $123,000 and $115,000
for the years ended December 31, 1997, 1996, and 1995, respectively.
Loans to One Borrower. The Bank is subject to a loans to one borrower
limit of an amount equal to 20% of total capital plus general loan loss
reserves, and an additional limit equal to 10% of unimpaired capital and
9
<PAGE>
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,
1997, the Bank's largest real estate related borrower had an aggregate principal
outstanding balance of $4.3 million, which balance did not exceed the Bank's
loans-to-one borrower limit of $10.5 million at December 31, 1997.
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.
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.).
10
<PAGE>
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, 1997, 1996, and 1995, the Company owned approximately $29,000,
$77,000 and $51,000, 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,
-------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Delinquent Loans - Non-Accrual:
One- to four-family residential........................ $ 417 $ 30 $ 179 $ 57 $ 249
Commercial............................................. -- 74 -- -- --
Consumer............................................... 57 4 -- -- --
----- ----- ----- ----- -------
Total delinquent loans-non-accruing................. 474 108 179 57 249
Delinquent Loans - 90 Days or More Accruing: (1)
One- to four-family residential........................ 818 268 526 431 295
Commercial............................................. 60 -- -- -- --
Consumer loans......................................... 174 124 11 6 --
-------- ----- ----- ----- -------
Total delinquent loans accruing..................... 1,052 392 537 437 295
-------- ----- ----- ----- -------
Total non-performing loans............................... 1,526 500 716 494 544
Total real estate owned (2).............................. 66 77 51 67 72
-------- ----- ----- ----- -------
Total non-performing assets....................... $ 1,592 $ 577 $ 767 $ 561 $ 616
======== ===== ===== ===== =======
Total non-performing loans to net loans receivable....... .49% .18% .33% .25% .27%
Total non-performing loans to total loans................ .49% .17% .32% .25% .27%
Total non-performing loans to total assets............... .39% .15% .26% .20% .24%
Total non-performing loans and REO to total assets....... .41% .17% .28% .22% .27%
</TABLE>
- ----------------------------------
(1) Represents loans that are well secured and in the process of collection,
with collection expected within 30 days.
(2) Represents property acquired by the Company through foreclosure or deed in
lieu of foreclosure. Upon acquisition, this property is recorded at fair
value. Also includes repossessed assets.
The following table sets forth information with respect to loans past due
60-89 days in the Company's portfolio at the dates indicated.
At December 31,
------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In Thousands)
Loans past due 60-89 days:
One- to four-family residential . $ 989 $ 821 $ 596 $ 696 $ 799
Commercial real estate .......... 880 -- 18 48 54
Commercial loans ................ 299 -- -- -- --
Consumer loans .................. 192 260 -- 23 --
------ ------ ------ ------ ------
Total past due 60-89 days ..... $2,360 $1,081 $ 614 $ 767 $ 853
====== ====== ====== ====== ======
12
<PAGE>
The following table sets forth information with respect to the Company's
delinquent loans and other problem assets at December 31, 1997.
At December 31, 1997
------------------------
Balance Number
-------------- --------
(In Thousands)
Residential real estate:
Loans 60 to 89 days delinquent ....................... $989 28
Loans 90 days or more delinquent - Accruing .......... 818 17
Loans - Not Accruing ................................. 417 7
Commercial loans:
Loans 60 to 89 days delinquent - Accruing ............ 299 1
Loans 90 or more days delinquent - Accruing .......... 60 1
Loans not accruing ................................... -- --
Commercial real estate:
Loans 60 to 89 days delinquent ....................... 880 1
Loans 90 days or more delinquent ..................... -- --
Consumer loans (60 days or more delinquent) ............ 423 65
Foreclosed real estate and repossessions ............... 66 7
Loans to facilitate sale of real estate owned .......... 14 1
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 years ended December 31, 1997 and 1996, the Company provided
$560,000 and $113,000, respectively, for loan losses. During the years ended
December 31, 1995, 1994 and 1993, no provision for loan losses was required. The
Company's allowance for loan losses totaled $1.4 million at December 31, 1997,
and $1.2 million at each of December 31, 1996 and 1995. The Company's allowance
for loan losses totaled $1.1 million at each of December 31, 1994 and 1993. The
provision for the year ended December 31, 1997 reflected, among other factors,
the uncertainties in the local real estate market, the uncertainties in the
local economy, the change in the mix of the loan portfolio, the net charge-offs
incurred during the year 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.
13
<PAGE>
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,
---------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding ................... $ 313,569 $ 288,763 $ 221,816 $ 201,452 $ 202,941
Average gross loans outstanding ........... 308,664 255,242 211,413 200,853 197,885
Allowance balances (at beginning of period) $ 1,244 $ 1,172 $ 1,148 $ 1,129 $ 1,112
Provision for losses:
Real estate ............................. 560 113 -- -- --
Charge-offs:
Real estate ............................. 73 3 2 39 45
Consumer ................................ 354 63 4 1 --
Commercial .............................. 20 19 -- -- --
--------- --------- --------- --------- ---------
447 85 6 40 45
Recoveries:
Real estate ............................. 1 40 30 59 60
Consumer ................................ 4 4 -- -- 2
Commercial .............................. 1 -- -- -- --
--------- --------- --------- --------- ---------
6 44 30 59 62
--------- --------- --------- --------- ---------
Net (charge-offs) recoveries .......... (441) (41) 24 19 17
Allowance for purchased loans ............. $ 68 -- -- -- --
--------- --------- --------- --------- ---------
Allowance balance (at end of period) ...... $ 1,431 $ 1,244 $ 1,172 $ 1,148 $ 1,129
========= ========= ========= ========= =========
Allowance for loan losses as a percent
of total loans outstanding .............. .46% .43% .53% .57% .56%
Net (charge-offs) recoveries as a percent
of average gross loans outstanding ...... (.14)% (.02)% .01% .01% .01%
Ratio of allowance for loan losses
to total non-performing loans
at end of period ........................ 93.77% 248.80% 163.69% 232.39% 207.54%
Ratio of allowance for loan losses
to total non-performing loans
and REO at end of period ................ 89.89% 215.60% 152.80% 204.63% 183.28%
</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,
-----------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- -------------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
One- to four-family
residential mortgages.................. $ 540 65.11% $ 580 73.79% $ 606 84.48%
Multi-family
residential mortgages.................. 306 11.25 258 8.02 366 7.54
Commercial real estate................... 95 4.28 74 3.86 121 2.90
Commercial business...................... 125 3.95 78 2.69 44 1.93
Other.................................... 365 15.41 254 11.64 35 3.15
------ ------ ------- ------- ------- ------
Total allowance for loan losses........ $1,431 100.00% $ 1,244 100.00% $ 1,172 100.00%
====== ====== ======= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------
1994 1993
-------------------- ---------------------
% of Loans % of Loans
In Each In Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at end of period applicable to:
One- to four-family
residential mortgages.................. $ 640 89.14% $ 512 86.93%
Multi-family
residential mortgages.................. 334 5.30 453 6.99
Commercial real estate................... 150 3.14 140 3.71
Commercial business...................... -- -- -- --
Other.................................... 24 2.42 24 2.37
------ ------- -------- ------
Total allowance for loan losses........ $1,148 100.00% $ 1,129 100.00%
====== ======= ======== ======
</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 totaled $50.3 million, $32.9 million and $44.6 million at December
31, 1997, 1996 and 1995, respectively. The Company's portfolio of
interest-earning deposits totaled $14.0 million at December 31, 1997, compared
to $6.7 million at December 31, 1996 and $13.7 million at December 31, 1995,
representing an increase of $7.3 million and decrease of $7.0 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, 1997, the
market value of the Company's securities, interest-earning deposits in other
financial institutions, and FHLB stock was $50.5 million.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1997 1996 1995
------------------ ------------------ -------------------
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....... $33,976 $34,167 $19,007 $19,063 $19,953 $20,075
Available for sale:
U.S. Government and agency obligations....... -- -- 3,983 3,983 9,029 9,029
Other........................................ 17 17 17 17 9 9
------- ------- ------- ------- ------- -------
Total investment securities................ 33,993 34,184 23,007 23,063 28,991 29,113
Interest-earning deposits in
other institutions............................. 13,993 13,993 6,730 6,730 13,735 13,735
FHLB stock....................................... 2,349 2,349 3,200 3,200 1,920 1,920
------- ------- ------- ------- ------- -------
Total investments............................ $50,335 $50,526 $32,937 $32,993 $44,646 $44,768
======= ======= ======= ======= ======= =======
</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, 1997. The average yields are based on
amortized cost.
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------
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........ 1.6 $ 4,503 $ 4,541 6.31%
U.S. Government treasury securities...... 1.1 29,473 29,626 6.05
-------- -------
Total.................................. 1.2 $33,976 $34,167 6.08%
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------------
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...... $ 1,500 6.42% $ 3,003 6.25% $ 4,503
U.S. Government treasury securities.... 14,261 5.98 15,212 6.11 29,473
------- -------- -------
Total................................ $15,761 6.03% $ 18,215 6.14% $33,976
======= ==== ======== ====== =======
</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, nor does it solicit funds outside its
market area.
17
<PAGE>
Savings Portfolio. Deposits in the Company as of December 31, 1997, 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 $ 0 $ 7,289 2.28%
NOW accounts and
2.96% None Super NOW 0-5,000 39,682 12.40
2.61 None Passbooks 0-100 18,556 5.80
4.34 None Money market accounts (2) 2,500-5,000 34,388 10.74
Certificates of Deposit(1)
--------------------------
5.01 1-364 days Fixed term, fixed rate 100-2,500 26,363 8.24%
5.43 12-23 months Fixed term, fixed rate 100-5,000 71,327 22.29
5.67 24-35 months Fixed term, fixed rate 100-2,500 62,594 19.56
5.88 36-47 months Fixed term, fixed rate 500 14,263 4.46
6.15 48-59 months Fixed term, fixed rate 100 3,171 .99
6.02 60 months
or greater Fixed term, fixed rate 500-2,500 38,385 11.99
7.55 Various Fixed term, fixed rate 1,000 5 --
5.72 Various Negotiated jumbo/Special (2) 4,008 1.25
--------- -------
$ 320,031 100.00%
========= =======
</TABLE>
- ----------------------------------
(1) IRA and Keogh accounts have balances outstanding of $34,259,370.
(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.
12/31/97 % (Decr) 12/31/96 % (Decr)
--------- -------- ------- -------- -------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non interest-bearing demand......... $ 7,289 2.28% $ 4,655 $ 2,634 1.30% $ 1,200
NOW accounts and
Super NOW......................... 39,682 12.40 15,266 24,416 12.03 4,243
Passbooks........................... 18,556 5.80 4,416 14,140 6.97 (3.922)
Money market deposit
accounts.......................... 34,388 10.74 16,994 17,394 8.57 9,425
Certificates of deposit
which mature:
within 12 months................. 130,278 40.71 35,151 95,127 46.88 15,325
within 12-36 months.............. 78,977 24.68 44,405 34,572 17.04 (14,706)
beyond 36 months................. 10,861 3.39 (3,779) 14,640 7.21 (1,110)
-------- ------ -------- -------- ------ --------
Total deposits................. $320,031 100.00% $117,108 $202,923 100.00% $ 10,455
======== ====== ======== ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Balance Deposit Incr. Balance Deposit Incr. Balance
12/31/95 % (Decr) 12/31/94 % (Decr) 12/31/93
-------- -------- ------- -------- ------- ------ --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Non interest-bearing demand......... $ 1,434 .75% $ 241 $ 1,193 .60% $ (100) $ 1,293
NOW accounts and
Super NOW......................... 20,173 10.48 84 20,089 10.03 549 19,540
Passbooks........................... 18,062 9.39 (2,444) 20,506 10.24 (3,489) 23.995
Money market deposit
accounts.......................... 7.969 4.14 (2,014) 9,983 4.99 (1,752) 11,735
Certificates of deposit
which mature:
within 12 months................. 79,802 41.46 (25,097) 104,899 52.39 11,916 92,983
within 12-36 months.............. 49,278 25.60 20,499 28,779 14.37 (11,514) 40,293
beyond 36 months................. 15,750 8.18 954 14,796 7.38 3,438 11,358
-------- ------ -------- --------- ------- -------- ---------
Total deposits................. $192,468 100.00% $ (7,777) $ 200,245 100.00% $ (952) $ 201,197
======== ====== ======== ========= ====== ======== =========
</TABLE>
19
<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:
At December 31,
------------------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands)
3.99% or less ............... $ 233 $ -- $ --
4.00-5.99% .................. 156,066 96,816 97,966
6.00-7.99% .................. 63,791 47,523 46,851
8.00-9.99% .................. 26 -- 13
-------- -------- --------
$220,116 $144,339 $144,830
======== ======== ========
Certificates of Deposit Maturity Schedule. The following table sets forth
the amounts and maturities of certificates of deposit at December 31, 1997.
<TABLE>
<CAPTION>
Amount Due
----------------------------------------------------------------------
Less Than 1-2 2-3 3-4 After 4
Rate 1 Year Years Years Years Years Total
- ---- ----------- ----- ----- ----- ------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
3.99% or less.................. $ 232 $ 1 $ -- $ -- $ -- $ 233
4.00- 5.99%.................... 108,424 35,665 6,598 1,204 4,175 156,066
6.00- 7.99%.................... 21,622 23,326 13,387 5,018 438 63,791
8.00-9.99%..................... -- -- -- 26 -- 26
--------- -------- -------- -------- -------- ----------
$ 130,278 $ 58,992 $ 19,985 $ 6,248 $ 4,613 $ 220,116
========= ======== ======== ======== ======== ==========
</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, 1997.
Certificates
Maturity Period of Deposit
--------------- ----------
(In Thousands)
Three months or less.............................. $ 1,829
Three through six months.......................... 2,471
Six through twelve months......................... 5,314
Over twelve months................................ 8,245
-------
Total............................................. $17,859
=======
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,
-------------------------------------
1997 1996 1995
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Deposits................................................ $ 838,449 $ 346,917 $ 321,466
Withdrawals............................................. (734,525) (344,292) (336,381)
--------- --------- ---------
Net increase (decrease) before interest credited...... 103,924 2,625 (14,915)
Interest credited....................................... 13,184 7,830 7,138
--------- --------- ---------
Net increase (decrease) in deposits................... $ 117,108 $ 10,455 $ (7,777)
========= ========= =========
</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, 1997, the Company had $12.5
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,
1997, the Company had a $102,000 equity investment in the subsidiary. For the
year ended December 31, 1997, First Mutual Corporation had a net loss of
$26,000.
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.
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.
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Personnel
As of December 31, 1997, the Company and its direct and indirect
subsidiaries had 156 full-time and 33 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. The Bank is also subject to
certain reserve requirements established by the Board of Governors of the
Federal Reserve (the "FRB"). 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, the FRB 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,
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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
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. As a matter of policy, the Commissioner
requires that savings associations that convert to savings banks under the SBA
have a minimum core capital to average assets ratio of 6%. At December 31, 1997,
the Bank's capital ratio as calculated under Illinois law was 10% 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 20% of the savings bank's total capital plus general
loan loss reserves. In addition, total loans and extensions of credit, both
direct and indirect, by a savings bank to any person at one time, where the loan
or extension of credit is 100% secured by readily marketable collateral, may not
exceed 10% of total capital plus general loan loss reserves. At December 31,
1997, the Bank did not have any loans to one borrower that exceeded these
limitations. Federal law regarding loans-to-one-borrower is similar to Illinois
law. For information about the largest borrowers of the Bank, see "Business of
the Company--Lending Activities--Loans to One Borrower."
Illinois-chartered savings banks generally have all lending, investment
and other powers which are possessed by federal savings banks based in Illinois.
Recent federal and state legislative developments have reduced distinctions
between commercial banks and savings institutions in Illinois with respect to
lending and investment authority. As federal law has expanded the authority of
federally chartered savings institutions to engage in activities previously
reserved for commercial banks, Illinois legislation and regulations ("parity
legislation") have given Illinois-chartered savings institutions such as the
Bank the powers of federally chartered savings institutions.
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,
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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 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.
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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 are
paid jointly by BIF-insured institutions and SAIF-insured institutions. The FICO
assessment is 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.
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.
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%.
At December 31, 1997, the Bank was a "well capitalized" institution under
the prompt corrective action regulations of the FDIC.
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 $47.8 million or less
(after a $4.7 million exemption), and 10% must be maintained for that portion of
total transactions accounts in excess of $47.8 million. At December 31, 1997,
the Bank was in compliance with applicable requirements.
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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 are
substantial and include, 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, 1997, the Bank had an "outstanding" CRA rating.
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, 1997, the Bank's
ratio of Tier 1 capital to total average assets was 10%, 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
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supplementary capital cannot exceed 100% of core capital. At December 31, 1997,
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, 1997, the Company met all
of its minimum capital requirements.
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,
1997, the Bank had an investment of $102,000 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.
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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 file reports
as required by the Commissioner, maintain books and records as required by the
Commissioner, pay fees and charges assessed by the Commissioner and is 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.
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FEDERAL AND STATE TAXATION
General
The Company and its subsidiaries file a consolidated federal income tax
return on a December 31, calendar year basis using the accrual method of
accounting. 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, are permitted to
establish reserves for bad debts using an experience method and to make annual
additions thereto which may, within specified limits, be taken as a deduction in
computing taxable income for federal income tax purposes. 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 legislation enacted in 1996, the percentage of taxable income method
has been repealed for years beginning after December 31, 1995. In addition,
"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, 1997, 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), 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 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%. 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
29
<PAGE>
(determined without regard to this preference and prior to reduction for net
operating losses). 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, 1997, the Bank's accumulated tax bad debt reserve
totaled 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.
Executive Officers of the Company
Listed below is information, as of December 31, 1997, 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 49 President and Chief Executive
Officer
Philip J. Duffy 49 Senior Vice President and Senior
Lending Officer
David G. Weber 49 Senior Vice President
Retail Banking/Operations Officer
G. Lynn Brinkman 57 Vice President, Secretary, Treasurer
30
<PAGE>
and Chief Financial Officer
Gary M. Walters 58 Vice President - Residential Lending
Jimmy W. Goatley 48 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 thirteen branch offices located in seven counties. The
following table sets forth certain information concerning the main office and
each branch office of the Company at December 31, 1997. At December 31, 1997,
the Company's premises and equipment had an aggregate net book value of
approximately $6.9 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
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
31
<PAGE>
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
Champaign Office 1997 Owned
111 S. State Street
Champaign, IL 61820
Pontiac Office 1997 Owned
110 W. Water Street
Pontiac, IL 61764
Lincoln Office 1997 Owned
122 N. McLean Street
Lincoln, IL 62656
Taylorville Office 1997 Owned
725 W. Spresser Street
Taylorville, IL 62568
Fairview Plaza Kroger Money Mart 1997 Leased (5)
1401 W. King
Decatur, IL 62522
- -----------------------------
(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.
(5) The lease for the Fairview Plaza Money Mart was entered into on June 1,
1997 and terminates on May 31, 2002.
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, 1997.
32
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Page 5 of the 1997 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 5 to 7 of the Annual Report are herein incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pages 7 to 18 of the Annual Report are herein incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of December 31,
1997 based on the information and assumptions set forth in the notes. The
Company believes that the assumptions utilized are reasonable. The Company had
no derivative financial instruments, or trading portfolio, as of December 31,
1997. The expected maturity date values for loans receivable and investment
securities were calculated by adjusting the instrument's contractual maturity
date for expectations of prepayments, as set forth in the notes. Similarly,
expected maturity date values for interest-bearing core deposits were calculated
based upon estimates of the period over which the deposits would be outstanding
as set forth in the notes. With respect to the Company's adjustable rate
instruments, expected maturity date values were measured by adjusting the
instrument's contractual maturity date for expectations of prepayments, as set
forth in the notes. From a risk management perspective, however, the Company
believes that repricing dates, as opposed to expected maturity dates, may be a
more relevant metric in analyzing the value of such instruments. Company
borrowings were tabulated by contractual maturity dates.
In preparing the table, it has been assumed that: (i) adjustable rate
mortgage loans on one- to four-family residences will repay at a rate of 15% per
year; (ii) fixed rate mortgage loans to one- to four-family residences with
terms to maturity of 10 years or less will repay at a rate of 14% 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 14% 11%
8.01% to 10% 20% 20%
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; (vi)
commercial loans will not prepay; (vii) fixed maturity deposits will not be
withdrawn prior to maturity; (viii)
33
<PAGE>
passbook savings accounts assume an annual decay rate of 75.33% in the first
year and 15% for the remaining years; (ix) NOW and super accounts assume an
annual decay rate of 64.80% in the first year and 18.72% for the remaining
years; (x) non-interest bearing checking accounts assume an annual decay rate of
45% in the first year and 37.56% for the remaining years; and (xi) money market
accounts assume an annual decay rate of 73.45% in the first year and 37.56% for
the remaining years.
All loans are presented net of undisbursed loan proceeds and do not
include net deferred loan fees/costs or the allowance for loan losses.
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.
34
<PAGE>
<TABLE>
<CAPTION>
Principal Amount Maturing in:
1999- 2001- Fair Value
(Dollars in Thousands) 1998 2000 2002 Thereafter Total 12/31/97
--------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Fixed-interest-rate loans
Residential 1-4 family real estate $ 21,144 $ 24,681 $ 16,978 $ 25,909 $ 88,712 $ 89,953
Average interest rate 7.98% 7.64% 7.61% 7.53% 7.68%
Multifamily and commercial real estate 3,701 2,190 673 151 6,715 6,720
Average interest rate 8.35% 8.36% 8.32% 8.61% 8.36%
Commercial business loans 2,819 1,337 883 112 5,151 5,148
Average interest rate 8.69% 9.14% 8.70% 8.85% 8.81%
Consumer loans 18,927 20,094 5,965 652 45,638 45,762
Average interest rate 9.20% 9.04% 8.99% 9.82% 9.11%
Variable-interest-rate loans
Residential 1-4 family real estate $ 18,061 $ 28,446 $ 20,284 $ 45,592 $112,383 $112,177
Average interest rate 7.73% 7.71% 7.71% 7.70% 7.71%
Multifamily and commercial real estate 7,860 12,508 9,374 12,203 41,945 41,918
Average interest rate 8.51% 8.47% 8.46% 8.42% 8.46%
Commercial business loans 6,046 1,118 32 26 7,222 7,228
Average interest rate 9.09% 9.01% 9.00% 9.00% 9.08%
Consumer loans 1,189 1,151 345 -- 2,685 2,685
Average interest rate 8.75% 7.99% 7.83% -- 8.31%
Fixed-interest-rate securities
(including interest bearing deposits) $ 29,755 $ 18,214 -- -- $ 47,969 $ 48,160
Average interest rate 5.76% 6.14% -- -- 5.90%
Rate-sensitive liabilities:
Non-interest bearing checking $ 3,279 $ 2,446 $ 954 $ 610 $ 7,289 $ 7,289
Average interest rate -- -- -- -- -- --
NOW and super NOW accounts 25,713 4,740 3,132 6,097 39,682 39,682
Average interest rate 2.96% 2.96% 2.96% 2.96% 2.96%
Passbook saving accounts 13,978 1,270 918 2,390 18,556 18,556
Average interest rate 2.61% 2.61% 2.61% 2.61% 2.61%
Money market accounts 25,258 5,570 2,172 1,388 34,388 34,388
Average interest rate 4.34% 4.34% 4.34% 4.34% 4.34%
Certificate of deposit accounts 130,278 78,977 10,749 112 220,116 220,596
Average interest rate 5.40% 5.92% 6.10% 5.92% 5.62%
FHLB advances 10,500 2,000 -- -- 12,500 12,547
Average interest rate 6.53% 6.71% -- -- 6.56%
</TABLE>
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
Pages 19 to 49 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 23, 1998.
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 23, 1998.
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 23, 1998.
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 23, 1998.
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, 1997
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........................................... 19
Consolidated Statements of Financial Condition........................... 20
Consolidated Statements of Income........................................ 21
36
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity............... 23
Consolidated Statements of Cash Flows.................................... 24
Notes to Consolidated Financial Statements............................... 27
(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
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 (41) 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.
37
<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 (96) Exhibit 21
22 Published report regarding None Not Applicable
matters submitted to vote of
security holders
23 Consent of Experts and (98) Exhibit 23
Counsel
24 Power of Attorney None Not Applicable
27 Financial Data Schedule (100) Exhibit 27
28 Information from reports None Not Applicable
furnished to state
insurance regulatory
authorities
99 Additional Exhibits None Not Applicable
</TABLE>
(b) Reports on Form 8-K:
The Registrant has not filed a Current Report on Form 8-K during the quarter
ended December 31, 1997.
38
<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 27, 1998 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 G. Lynn Brinkman, Vice President,
the Board and Director Secretary, Treasurer and Chief
Financial Officer
Date: March 27, 1998 Date: March 27, 1998
By: /s/ Glen J. Whitney By: /s/ Roy M. Ousley
--------------------------------- ---------------------------------
Glen J. Whitney, Vice Chairman Roy M. Ousley, Director
Date: March 27, 1998 Date: March 27, 1998
By: /s/ Richard L. Jacobs By: /s/ Robert D. Nichols
--------------------------------- ---------------------------------
Richard L. Jacobs, Director Robert D. Nichols, Director
Date: March 27, 1998 Date: March 27, 1998
By: /s/ John D. Robinson
---------------------------------
John D. Robinson, Director
Date: March 27, 1998
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
FirstMutual Bancorp, Inc.
Annual
Report
<PAGE>
Mutual Bank
Contents
Letter to Stockholders.........................................................1
Financial Highlights...........................................................2
Highlights of 1997.............................................................3
Report from Lending............................................................3
Report from Retail/Operations..................................................4
Financial Information..........................................................5
Consolidated Financial Statements.............................................19
Directors, Officers,
Stockholder Information .......................................Inside back cover
Locations
Decatur
Main Office
135 East Main Street
217-429-2306
Spring Creek Plaza
701 West Pershing Road
217-877-9493
Brettwood Village Kroger Money Mart
Inside Kroger
3070 North Water Street
217-876-7606
Airport Plaza Kroger Money Mart
Inside Kroger
1818 South Airport Plaza Road
217-864-6050
Fairview Plaza Kroger Money Mart
Inside Kroger
1401 West King
217-429-7011
Fairview Drive-Up
855 North Fairview Avenue
217-429-3095
Forsyth
107 East Highland Avenue
217-877-5030
Clinton
211 South Quincy Street
217-935-2186
Shelbyville
318 West Main Street
217-774-2185
Urbana
602 South Vine Street
217-367-3662
Champaign
111 South State Street
217-352-9440
Lincoln
122 North McLean Street
217-735-2521
Taylorville
725 West Spresser Street
217-824-9664
Pontiac
110 West Water Street
815-842-3838
<PAGE>
Directors
First Mutual Bancorp,Inc,
First Mutual Bank,S.B.
First Mutual Corporation
C.R.Chastain, Chairman
President, Family Drug Stores, Retired
Richard L. Jacobs
Owner, Jacobs Farm
Robert D. Nichols
Owner, Nova Gallery of Art and Framing
Roy M. Ousley
Jeweler / Art Dealer, Retired
Paul K. Reynolds
President / CEO
Jon D. Robinson
Attorney, Campbell & Robinson
Glen J. Whitney
President, Clayton Sales Co., Inc.
Officers and Staff
Paul K. Reynolds
President / CEO
Lending
Philip J. Duffy
Senior Vice President
Gary M. Walters
Vice President
Mortgage Lending
Dennis Krueger
Vice President
Auto Dealer Relations
Retail Banking/Operations
David G. Weber
Senior Vice President
Jim W. Goatley
Vice President
Retail Banking
Steve Danko
Vice President
Operations / Cashier
Finance
G. Lynn Brinkman
Vice President
CFO / Treasurer / Secretary
Human Resources
Kathi L. McClugage
Director of Human Resources
Marketing
Kathryn M. Lowrey
Assistant Vice President
Director of Marketing
First Mutual Corp.
Investments and Insurance
John A. Weakly
Vice President / Manager
Annual Meeting of Stockholders
The annual meeting of stockholders will be held on Thursday, April 23, 1998 at
3:00 p.m. at the Decatur Club, 158 West Prairie, Decatur, Illinois. All
stockholders are welcome to attend.
Transfer Agent and Registrar
American Securities Transfer, Inc.
938 Quail Street, Suite 101
Lakewood, Colorado 80215-5513
303-234-5300
Independent Auditor
Crowe, Chizek and Company LLP
One Mid America Plaza
P. O. Box 3697
Oak Brook, Illinois 60522-3697
Stock Exchange Listing
First Mutual Bancorp, Inc. common stock is listed on the NASDAQ National Market
System under the symbol "FMBD."
General Stockholder Inquiries and Address Changes
American Securities Transfer, Inc.
938 Quail Street, Suite 101
Lakewood, Colorado 80215-5513
303-234-5300
Investor Information
Securities analysts, portfolio managers, and representatives of financial
institutions seeking financial and operating information may contact:
G. Lynn Brinkman
Chief Financial Officer
First Mutual Bancorp, Inc.
135 East Main Street
Decatur, Illinois 62523
217-429-2306
Internet Site
Our internet site offers basic product and service information about Mutual
Bank, as well as office locations. The internet address is: www.mutualbank.com
Annual Report on Form 10-K
A copy of the Company's 1997 Form 10-K, which will be filed with the Securities
and Exchange Commission, will be furnished to stockholders without charge upon
written request to:
Investor Relations
First Mutual Bancorp, Inc.
135 East Main Street
Decatur, Illinois 62523
<PAGE>
- --------------------------------------------------------------------------------
Dear Stockholder:
- --------------------------------------------------------------------------------
We are pleased to present this annual report for 1997, particularly because
during the year we made great strides in our plan to restructure Mutual Bank
into a modern, diversified community bank and financial services institution.
This restructuring began immediately following our conversion from a mutual to a
stock form of ownership on June 30, 1995.
Mutual Bank enjoyed success as a mutually owned thrift for over 90 years. But
during that time, we were essentially a one-dimensional financial institution
that made mortgage loans. Today, because of intense competition from many
nontraditional lenders, modern technology, and a multitude of delivery channels,
the mortgage loan business offers very low profit margins, which are threatened
by considerable interest rate risk. If we are to deliver the returns our
stockholders expect over the long term, we must adapt, evolve, and rise to the
challenge of today's constantly changing, extremely competitive marketplace. To
compete effectively, we must take the necessary steps to become well diversified
in terms of our mix of products, services, earning assets, liabilities, and
markets.
We have made significant progress over the last two years. We improved the
diversity of our loan portfolio by adding more consumer and commercial loans,
which offer higher yields and lower interest rate risk than residential mortgage
loans. On December 31, 1995, our consumer loans receivable totaled $7.0 million.
Two years later that figure had increased 590% to $48.3 million. In the same
time period, commercial loans--including multi-family loans--increased 122%,
from $27.5 million to $61.1 million. Our deposit mix has also improved, thanks
to the addition of more transaction accounts, including business accounts.
In January, we acquired bank offices in the Illinois communities of Taylorville,
Lincoln, and Pontiac. Later in the year, we opened a Money Mart banking office
at a third Decatur Kroger location and added a second branch office location in
Champaign-Urbana. These new offices improve our Central Illinois presence,
diversify our markets, give us deposits to fund our lending activities, and
improve customer access to our services.
Our restructuring program has required a significant investment in
infrastructure, talented people, product development, and delivery systems. The
costs associated with the investment will depress earnings, initially, but over
the next few years, as we progress with the restructuring of our balance sheet
and assimilate our new growth and organizational changes, earnings will be
enhanced and better insulated against market forces. By increasing our franchise
value, we will enhance stockholder value. We intend for Mutual Bank to enter the
next century financially stronger and better prepared to compete successfully.
/s/ C. R. Chastain /s/ Paul K. Reynolds
C. R. Chastain Paul K. Reynolds
Chairman President / CEO
1
<PAGE>
Financial Highlights (In thousands, expect percentage and per share data)
At December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Total assets $391,439 $331,776 $275,676
Total loans 309,294 283,169 219,626
Total deposits 320,031 202,923 192,468
Stockholders' equity 54,189 62,217 71,528
Equity to total assets 13.84% 18.75% 25.95%
Book value per common share,
net of unearned ESOP shares 16.80 16.51 16.47
Non-performing assets to total assets .41% .17% .28%
For the year 1997 1996 1995
- --------------------------------------------------------------------------------
Net interest income $11,422 $10,388 $8,792
Net interest margin 3.01% 3.56% 3.55%
Net income 986 1,171 2,398
Net income per share
Basic .31 .29 .32*
Diluted .30 .29 .32*
Cash dividends per share .32 .30 .14*
Return on average assets .24% .38% .93%
Return on average equity 1.79% 1.71% 4.50%
*For the six months ended December 31, 1995.
================================================================================
[The following table was depicted as a bar chart in the printed material
Total Assets
in millions
1995
1996
1997
[The following table was depicted as a bar chart in the printed material
Total Loans
in millions
1995
1996
1997
[The following table was depicted as a bar chart in the printed material
Net Interest Income
in millions
1995
1996
1997
[The following table was depicted as a bar chart in the printed material
Net Income
in millions
1995
1996
1997
2
<PAGE>
- --------------------------------------------------------------------------------
Highlights of 1997
- --------------------------------------------------------------------------------
In 1997, Mutual Bank expanded into new communities while increasing its presence
in the communities with existing locations. Branch offices were acquired in
Lincoln, Taylorville, and Pontiac, and an additional branch was added in both
the Decatur and the Champaign/Urbana areas. By the end of the year, a total of
fourteen Mutual Bank facilities were serving the Central Illinois marketplace.
The Company's total assets increased to $391,439,000 at the end of 1997 from
$331,776,000 at the beginning of the year. This increase totaled $59,663,000, an
increase of 18%. Total loans increased to $309,294,000 from $283,169,000, a 9%
increase, and total deposits increased to $320,031,000 from $202,923,000, a 58%
increase. All of these increases were due primarily to the acquisition of three
branch offices from First of America Bank on January 3, 1997, and the continued
aggressive marketing and pricing of the Bank's loan and deposit products.
In the course of the past year, 581,930 shares of the Company's stock were
purchased by the Company. These purchases were made because the Company's stock
was an attractive investment in view of the price paid for the stock, relative
to the Company's book value per share and economic conditions in general. Total
stockholders' equity was $54,189,000 at the end of the year, representing 13.84%
of total assets, as compared to $62,217,000 and 18.75% of total assets at the
end of 1996. Book value per share increased to $16.80 per share from $16.51 per
share at the end of 1996.
The year 1997 was one of growth for the Company as we grew into new markets and
expanded our presence in existing markets. The Company is positioned and
prepared for the challenges and rewards of 1998 and future years.
- --------------------------------------------------------------------------------
Report from the Lending Division
- --------------------------------------------------------------------------------
In 1997, the lending division moved toward its goals of portfolio growth and
diversification as total net loans receivable increased 9.23% or $26,125,000.
This growth is a result of expanded relationships with existing customers and
the active solicitation of new ones.
The addition of branches in Taylorville, Pontiac, and Lincoln helped us achieve
geographic diversification in the loan portfolio. The economies of these
communities are diverse, and consumer and residential lending in these cities
has started out well. In 1998, we expect to expand on this strong showing.
The new Champaign office (opened in October 1997) complements the Urbana office
and gives Mutual Bank a greater presence in that market. Customer acceptance has
been excellent, and Mutual Bank has already experienced strong commercial loan
demand as a result of this expansion.
The mix of the portfolio continued to change in 1997. At the beginning of the
year, the loan mix was 73.79% residential, 11.64% consumer, and 14.57%
commercial, multi-family, and commercial real estate. By the end of 1997, the
mix was 65.11% residential, 15.41% consumer, and 19.48% commercial,
multi-family, and commercial real estate. These changes increased interest
income as lower rate residential loans were replaced by higher yielding consumer
and commercial loans. The new loans also have a shorter duration and/or interest
rate adjustment features that reduce interest rate risks to the Bank.
3
<PAGE>
- --------------------------------------------------------------------------------
Report from Retail/Operations
- --------------------------------------------------------------------------------
Mutual Bank's retail and operations departments had a very busy and exciting
year in 1997. After going public in June 1995, we vigorously began changing the
Bank's infrastructure in order to offer more commercial and retail banking
products and services. We also established new distribution channels and added
internal capacity to handle the anticipated growth.
In 1996, Mutual Bank installed a check image process, began offering telephone
and PC banking, introduced an ATM/debit card, opened two Kroger grocery store
branches, and redesigned our commercial and retail products. In 1997, these
equipment, system, and human resource initiatives paid off, as the Bank opened
another in-store Kroger branch and a new office in Champaign, and expanded into
Taylorville, Lincoln, and Pontiac--all new territory for us. All of these
changes helped enhance our banking franchise and expedite the process of
converting our organization to a full-service community bank.
Some of the 1997 highlights include the following:
o $117 million in deposit growth
o Five new offices
o Three new markets
o Eight new ATMs
o 5,000 new certificates of deposit
o 5,000 new checking accounts
o 3,000 new savings accounts
o 1,000 new debit cards issued
o 10,000 additional ACH transactions per month
o 5,000 additional telebanking calls per month
o 7,500 additional ATM transactions per month
o 300,000 additional checks processed per month
In 1998, we will focus on reducing interest and operating expenses while
increasing non-interest income in order to establish a record of earnings
growth. This will help produce the long-term income results that we are
expecting in the years to come.
4
<PAGE>
FINANCIAL INFORMATION
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 1997 and 1996. The Common Stock began
trading on June 30, 1995. The information presented may not represent actual
transactions and does not reflect inter-dealer prices, retail markups,
markdowns, or commissions.
1997 1996
--------------------- --------------------
High Low High Low
---- --- ---- ---
First Quarter $16 $14 3/4 $14 1/4 $12 3/8
Second Quarter 16 13 3/4 13 11 3/4
Third Quarter 19 15 13 3/8 11 5/8
Fourth Quarter 27 1/4 17 15 1/2 13
As of December 31, 1997, the Company had approximately 656 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 1997 and 1996.
1997 1996
-------------- --------------
First Quarter $.08 per share $.07 per share
Second Quarter $.08 per share $.07 per share
Third Quarter $.08 per share $.07 per share
Fourth Quarter $.08 per share $.08 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,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total assets.......................................... $ 391,439 $ 331,776 $ 275,676 $ 250,402 $ 231,211
Investment securities................................. 33,993 23,007 28,991 24,580 22,161
Interest-bearing deposits with financial institutions. 13,993 6,730 13,735 15,174 727
FHLB stock............................................ 2,349 3,200 1,920 1,891 1,858
Cash and cash equivalents............................. 4,612 4,350 3,005 2,180 1,646
Loans receivable, net:
Real estate......................................... 248,966 242,049 208,435 194,029 194,973
Commercial loans.................................... 12,248 7,696 4,245 -- --
Consumer and other loans............................ 48,080 33,424 6,946 4,857 4,772
Total loans receivable, net (1)................ 309,294 283,169 219,626 198,886 199,745
Mortgage-backed securities............................ -- -- -- -- 103
Deposits.............................................. 320,031 202,923 192,468 200,245 201,197
Borrowed funds........................................ 12,500 62,800 4,100 19,600 1,200
Stockholders' equity (2).............................. 54,189 62,217 71,528 27,811 26,079
</TABLE>
- ------------------------------------
(1) Includes loans held for sale.
(2) Retained earnings for years prior to 1995.
5
<PAGE>
<TABLE>
<CAPTION>
Summary of Operations Year Ended December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
------- -------- ------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Interest income....................................... $28,629 $21,742 $18,282 $15,819 $16,429
Interest expense...................................... 17,207 11,354 9,490 8,153 8,857
------- ------- ------- ------- -------
Net interest income before provision
for loan losses............................... 11,422 10,388 8,792 7,666 7,572
Provision for loan losses............................. 560 113 -- -- --
------- ------- ------- ------- -------
Net interest income after provision
for loan losses............................... 10,862 10,275 8,792 7,666 7,572
Non-interest income:
Loan servicing fees............................... 116 123 115 111 112
Gain (loss) on sale of loans and securities....... 243 179 86 (14) 274
Investment sales commissions...................... 157 123 88 120 247
Deposit service fee income........................ 780 357 292 294 188
Other income...................................... 423 283 267 155 114
------- ------- ------- ------- -------
Total non-interest income....................... 1,719 1,065 848 666 935
Non-interest expense:
Salaries and employee benefits..................... 5,705 4,562 3,153 2,868 2,521
Occupancy and equipment............................ 1,373 876 682 615 642
Federal deposit insurance premiums................. 135 339 465 464 294
FDIC special assessment............................ -- 1,314 -- -- --
Printing, postage, stationery and supplies......... 458 363 238 203 238
Net expense on foreclosed
real estate operations........................ 11 8 11 10 18
Advertising and promotion.......................... 482 425 239 295 259
Data processing.................................... 796 428 350 345 334
Net (gain) loss on sale of real estate owned,
including provision for losses on
foreclosed real estate........................ 6 1 13 (4) 8
Amortization of goodwill and core deposit intangibles 719 -- -- -- --
Other.............................................. 1,506 1,144 751 817 585
------- ------- ------- ------- -------
Total non-interest expense.................... 11,191 9,460 5,902 5,613 4,899
------- ------- ------- ------- -------
Income before income taxes and cumulative
effect of a change in accounting principle........ 1,390 1,880 3,738 2,719 3,608
Income tax expense.................................... 404 709 1,340 987 1,351
------- ------- ------- ------- -------
Net income before cumulative effect of a
change in accounting principle.................... 986 1,171 2,398 1,732 2,257
Cumulative effect of adoption of a new
income tax accounting method...................... -- -- -- -- 401
------- ------- ------- ------- -------
Net income.................................... $ 986 $ 1,171 $ 2,398 $ 1,732 $ 2,658
======= ======= ======= ======= =======
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Key Financial Ratios and Other Data
At or for the Year Ended December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Equity to assets at period end........................ 13.84% 18.75% 25.95% 11.11% 11.28%
Net interest rate spread (difference between
average yield on interest earning assets
and average cost of interest bearing liabilities)... 2.65 2.54 2.60 2.99 2.91
Net interest margin (net interest income as a
percentage of average interest-earning assets)...... 3.01 3.56 3.55 3.39 3.32
Return on average assets (net income
divided by average total assets).................... .24 .38 .93 .74 1.13
Return on average equity (net income
divided by average equity).......................... 1.79 1.71 4.50 6.40 10.57
Stockholders' equity to average assets ratio
(average stockholders' equity divided by
average total assets)............................... 13.36 22.46 20.72 11.59 10.71
Non-interest income to average assets................. .42 .35 .33 .29 .40
Non-interest expense to average assets................ 2.72 3.11 2.30 2.40 2.09
Non-performing loans to total loans................... .49 .17 .32 .25 .27
Non-performing assets to total assets................. .41 .17 .28 .22 .27
Average interest-earning assets to
average interest-bearing liabilities................ 107.97 126.15 124.51 111.11 110.51
Allowance for loan losses to non-performing loans..... 93.77 248.80 163.69 232.39 207.54
Allowance for loan losses to non-performing assets.... 89.89 215.60 152.80 204.63 183.28
Net interest income to non-interest expense........... 102.06 109.81 148.97 136.58 154.56
Net interest income after provision for loan losses,
to total non-interest expense....................... 97.06 108.62 148.97 136.58 154.56
Number of offices..................................... 14 9 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 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.
7
<PAGE>
Business Strategy
The Company's current business strategy is to operate as a well
capitalized, profitable and independent community bank dedicated to financing
real estate 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) the origination of one- to four-family
residential mortgage loans; (ii) the origination of multi-family and commercial
real estate mortgage loans; (iii) expanding the commercial and consumer loan
portfolios; (iv) maintaining a stable deposit base; (v) managing interest rate
risk exposure; (vi) increasing non-interest income; and (vii) maintaining high
loan underwriting standards and asset quality.
Highlights of the Company's business strategy are as follows:
o Residential, Multi-family and Commercial Real Estate Mortgage
Lending. The Company originates one- to four-family, owner-occupied,
residential mortgages and multi-family and commercial real estate
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,
1997, the Company had $204.2 million, or 66.0%, of its net loan
portfolio including loans held for sale, invested in mortgage loans
secured by one- to four-family residences. At December 31, 1997, the
Company had $48.7 million, or 15.8%, of its net loan portfolio,
including loans held for sale, invested in mortgage loans secured by
multi-family and commercial real estate. The Company originates both
adjustable rate mortgage loans and fixed rate mortgage loans.
o Commercial and Consumer Lending. The Company originates commercial
business loans to supplement its origination of commercial real
estate loans. For this purpose, the Company employs 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 helps diversify its
interest- earning assets. Commercial real estate and commercial
business lending typically involve larger average loan balances,
higher interest rates, and greater credit risk as compared to
residential real estate lending. At December 31, 1997, the Company
had $12.4 million, or 4.0%, of its net loan portfolio invested in
commercial business 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 higher interest rates, smaller average
loan balances and greater credit risk as compared to residential
real estate loans. At December 31, 1997, the Company had $33.8
million, or 10.8%, of its total loan portfolio invested in such
loans.
o Deposit Base. The Company has had a relatively stable deposit base
that is drawn from its fourteen offices in its market area. The Bank
does not solicit or obtain brokered deposits. At December 31, 1997,
31.2% of its deposit base of $320.0 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 January 3, 1997, the Bank
acquired $145.5 million in deposits from another financial
institution. At December 31, 1997, the Company had outstanding
borrowings of $12.5 million from the FHLB of Chicago.
o Interest Rate Risk Management. The Company has attempted to reduce
its interest rate risk exposure by originating for portfolio
adjustable-rate and shorter-term fixed rate residential and
commercial loans, originating for sale 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 adjustable rate mortgage ("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
8
<PAGE>
in the secondary market, if attractive purchase opportunities arise.
The Company's current practice is to originate for sale virtually
all fixed rate mortgage loans with terms of more than 15 years. In
addition, adjustable rate loans are retained in the Bank's loan
portfolio. Fixed rate mortgage loans with terms of 15 years or less
are alternately retained in portfolio or sold based on the Company's
interest rate risk policies and other interest rate risk
considerations. At December 31, 1997, $154.3 million, or 61.0%, of
the Company's mortgage loan portfolio consisted of ARM loans, and
$98.6 million, or 39.0%, 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 transaction and passbook 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.
o 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, 1997, 1996 and 1995, investment sales commissions were
$157,000, $123,000 and $88,000, respectively. For 1997, the Company
recorded a gain on the sale of mortgage loans of $243,000, compared
with a gain of $179,000 and $86,000 for 1996 and 1995, respectively.
For the years ended December 31, 1997, 1996 and 1995, deposit
service fee income was $780,000, $357,000 and $292,000,
respectively. However, the Company's earnings currently are largely
dependent on the Company's net interest income.
o 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, 1997, 1996 and 1995 was 0.41%, 0.17% and 0.28%,
respectively. The Company's ratio of the allowance for loan losses
to non-performing loans was 93.77%, 248.80% and 163.69% at December
31, 1997, 1996 and 1995, respectively.
9
<PAGE>
Financial Condition
At December 31, 1997
Total assets increased $59.6 million, or 18.0%, to $391.4 million at
December 31, 1997, from $331.8 million at December 31, 1996. The increase was
primarily the result of the acquisition of three branch offices in Lincoln,
Taylorville, and Pontiac, Illinois (the "Branch Acquisitions") from First of
America Bank-Illinois, N.A. on January 3, 1997.
The following summarizes the assets purchased and liabilities assumed as a
result of the Branch Acquisitions.
Assets purchased (In thousands)
Cash due from banks $121,230
Loan receivable $ 9,901
Less: Allowance for loan losses (68) 9,833
-------
Premises & equipment 2,706
Goodwill and core deposit intangibles 13,362
Other assets 83
--------
Total assets purchased $147,214
========
Liabilities assumed
Deposits $145,520
Other liabilities 1,694
--------
Total liabilities assumed $147,214
========
Loans receivable (excluding loans held for sale) increased $25.1 million,
or 8.9%, to $307.2 million at December 31, 1997 from $282.1 million at December
31, 1996. Commercial and multifamily real estate loans increased $14.4 million,
or 42.0%, to $48.7 million at December 31, 1997, from $34.3 million at December
31, 1996. Automobile loans increased $10.5 million, or 36.1%, to $39.6 million
at December 31, 1997, from $29.1 million at December 31, 1996. Commercial
business loans increased $4.6 million, or 59.0%, to $12.4 million at December
31, 1997, from $7.8 million at December 31, 1996. These increases were partially
offset by the decrease in residential one- to four-family mortgage loans
(including loans held for sale) to $204.2 million at December 31, 1997 from
$213.1 million at December 31, 1996, representing a $8.9 million decrease, or
4.2%. Loan growth was primarily attributable to aggressive marketing and pricing
of the Bank's loan products, particularly commercial real estate and business
loans and auto loans and, to a lesser degree, to the Branch Acquisitions.
Loans held for sale increased $1.0 million, or 90.9%, to $2.1 million at
December 31, 1997, from $1.1 million at December 31, 1996. During 1997, the Bank
originated $18.4 million of loans held for sale compared to $12.4 million in
1996. Proceeds from sales of loans increased to $17.7 million in 1997 from $13.0
million in the prior year.
Securities available for sale decreased $4.0 million to $17,000 from $4.0
million at December 31, 1996. The decrease was a result of sales and maturity of
securities available for sale of $31.0 million, which exceeded purchases of
$27.0 million in 1997.
Securities held to maturity increased $15.0 million, or 78.9%, to $34.0
million at December 31, 1997 from $19.0 million at December 31, 1996 as a result
of purchases of $25.4 million exceeding maturities of $10.2 million.
Deposits increased $117.1 million, or 57.7%, to $320.0 million at December
31, 1997, from $202.9 million at December 31, 1996. The increase was primarily
due to the Branch Acquisitions on January 3, 1997.
10
<PAGE>
Advances from the Federal home Loan Bank decreased $50.3 million to $12.5
million at December 31, 1997, from $62.8 million at December 31, 1996. This
decrease was primarily as a result of the use of the proceeds from the Branch
Acquisitions to repay outstanding advances.
Total equity decreased $8.0 million, or 12.9%, to $54.2 million at
December 31, 1997, from $62.2 million at December 31, 1996. The decrease was
primarily due to the repurchase by the Company of Company common stock at a cost
of $9.2 million during 1997. These shares are now held as treasury stock.
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.
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 repurchase by the Company 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.
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.
11
<PAGE>
The Company had net income of $1.0 million, $1.2 million, and $2.4 million
for the years ended December 31, 1997, 1996 and 1995, respectively. The decrease
in net income in 1997 as compared to 1996 was primarily due to the increase in
non-interest expense of $1.7 million due primarily to the increased expenses
resulting from the Branch Acquisitions and the opening of two new branch offices
in 1997. 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.
Interest Income. Interest income totaled $28.6 million for 1997 as
compared to $21.7 million for 1996, representing an increase of $6.9 million, or
31.8%. The increase in interest income was primarily due to an increase in
average interest-earning assets of $87.0 million and to a lesser extent to the
increase in the average yield on earning assets in 1997 to 7.55% from 7.44% in
1996. The increase in the average balance of interest-earning assets was
primarily a result of the use of the proceeds from the Branch Acquisitions. The
increase in the average yield resulted from the increase in balances of loans at
higher yielding rates primarily as a result of a change in the mix of the
interest-earning assets.
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 primarily as a result of a change in the mix of the
interest-earning assets.
Interest Expense. Interest expense totaled $17.2 million for 1997 compared
to $11.4 million for 1996, an increase of $5.8 million, or 50.9%. The increase
in interest expense was primarily due to an increase in the average balance of
interest-bearing liabilities of $119.5 million from $231.6 million in 1996 to
$351.1 million in 1997. The increase in the average balance of interest-bearing
liabilities was primarily attributable to an increase in deposits resulting from
the Branch Acquisitions. $145.5 million of deposits were acquired in the
transaction. The average balance of deposits increased to $330.5 million in 1997
from $200.2 million in 1996.
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.
Net Interest Income. Net interest income totaled $11.4 million for 1997,
as compared to $10.4 million in 1996, representing an increase of $1.0 million,
or 9.6%. The increase was primarily due to the $87.0 million increase in average
interest-earning assets in 1997 due primarily to the use of the proceeds from
the Branch Acquisitions. The Company's ratio of average interest-earning assets
to average interest-bearing liabilities decreased to 107.97% for 1997 as
compared to 126.15% for 1996.
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.
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, and current and, to a lesser extent, expected future
economic conditions. The Company's allowance for loan losses was $1.4 million,
or .46% of total loans outstanding at December 31, 1997 compared with $1.2
million, or .43% of total loans
12
<PAGE>
outstanding at December 31, 1996. The Company's ratio of the allowance for loan
losses to non-performing loans was 93.8%, 248.8% and 163.7% at December 31,
1997, 1996 and 1995, respectively. The ratio of non-performing loans to total
loans was .49%, .17% and .32% at December 31, 1997, 1996 and 1995, respectively.
During 1997, the Company added $187,000 to the allowance for loan losses due to
the increased loan volume and the change in 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 amount of non-performing loans,
the view of the regulatory authorities toward adequate reserve levels, and
inflation.
Non-Interest Income. Non-interest income totaled $1.7 million for 1997
compared to $1.1 million for 1996, an increase of $600,000 million or 54.5%. The
increase was primarily due to an increase in deposit service fee income of
$423,000, an increase of 118.5%. To a lesser extent, the increase was due to the
increase in the gain on the sales of loans of $64,000 and the increase in other
non-interest income of $129,000. The increase in deposit service fee income was
primarily due to the increase in deposits as a result of the Branch Acquisitions
and to the Bank's aggressive pricing of deposit service fees.
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 Expense. Non-interest expense totaled $11.2 million for 1997
as compared to $9.5 million in 1996, an increase of $1.7 million, or 17.9%. The
increase was primarily a result of the increased costs resulting from the Branch
Acquisitions and the opening of two new branch offices. The amortization of
goodwill and core deposit intangibles resulting from the Branch Acquisitions
increased to $719,000 in 1997 from zero in 1996. Compensation and benefits
increased $1.1 million, or 23.9%. Occupancy and equipment expense increased
$497,000 or 56.7%. Data processing expense increased $368,000, or 86.0%. These
increases, which were due in large part to the Branch Acquisitions, were
partially offset by the decrease in the FDIC special assessment to zero from
$1.3 million in 1996 and the decrease in the FDIC deposit insurance premium to
$135,000 from $339,000, a $204,000 decrease.
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 was
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.
Income Taxes. Income taxes totaled $404,000 for the year ended December
31, 1997, compared to $709,000 for the year ended December 31, 1996. The
decrease was due to a decrease in income before income taxes of $.5 million, or
26.3%.
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%.
13
<PAGE>
Average Balance Sheet
The following tables set 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,
----------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- ----------------------------
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.......................... $249,177 $ 19,130 7.68% $224,277 $16,952 7.56% $201,897 $15,399 7.63%
Commercial loans........................ 10,045 911 9.07 5,493 497 9.05 1,442 122 8.46
Consumer and other loans................ 45,067 4,135 9.18 21,989 1,930 8.78 5,246 486 9.26
Securities ............................. 49,366 2,996 6.07 28,166 1,663 5.90 25,353 1,481 5.84
Interest-bearing deposits with
financial institutions................ 22,902 1,276 5.57 9,951 551 5.54 12,116 667 5.51
FHLB stock and other.................... 2,561 181 7.07 2,262 149 6.59 1,913 127 6.64
-------- -------- -------- ------- -------- -------
Total interest-earning assets......... 379,118 28,629 7.55 292,138 21,742 7.44 247,967 18,282 7.37
Non-interest-earning assets............... 32,376 12,157 9,188
-------- -------- --------
Total assets........................ $411,494 $304,295 $257,155
======== ======== ========
Interest-bearing liabilities:
Deposits ............................... $330,451 15,913 4.82 $200,226 9,671 4.83 $194,774 9,233 4.74
Borrowed funds.......................... 20,667 1,294 6.26 31,350 1,683 5.37 4,383 257 5.86
-------- -------- -------- ------- -------- -------
Total interest-bearing liabilities.. 351,118 17,207 4.90 231,576 11,354 4.90 199,157 9,490 4.77
-------- ------- -------
Non-interest-bearing liabilities.......... 5,401 4,376 4,728
-------- -------- --------
Total liabilities.................. 356,519 235,952 203,885
Stockholders' equity...................... 54,975 68,343 53,270
-------- -------- --------
Total liabilities and
stockholders' equity.............. $411,494 $304,295 $257,155
======== ======== ========
Net interest income....................... $ 11,422 $10,388 $ 8,792
======== ======= =======
Net interest rate spread(1)............... 2.65% 2.54% 2.60%
====== ====== ======
Interest earning assets and
net interest margin(2)................... $379,118 3.01% $292,138 3.56% $247,967 3.55%
======== ====== ======== ====== ======== ======
Ratio of average interest-earning
assets to average interest-bearing
liabilities............................. 107.97% 126.15% 124.51%
====== ====== ======
</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.
14
<PAGE>
At December 31, 1997
----------------------
Balance Yield/Cost
------- ----------
(Dollars in Thousands)
Interest-earning assets:
Mortgage loans (1) ..................................... $248,966 7.80%
Commercial loans (1) ................................... 12,248 9.01
Consumer and other loans (1) ........................... 48,080 8.94
Securities ............................................. 33,993 6.08
Interest-bearing deposits with financial institutions .. 13,993 5.46
FHLB stock and other ................................... 2,349 7.00
--------
Total interest-earning assets ....................... 359,629 7.73
Non-interest-earning assets .............................. 31,810
--------
Total assets ....................................... $391,439
========
Interest-bearing liabilities:
Deposits ............................................... $320,031 4.83
Borrowed funds ......................................... 12,500 6.56
--------
Total interest-bearing liabilities ................... 332,531 4.90
Non-interest-bearing liabilities ......................... 4,719
--------
Total liabilities .................................. 337,250
Stockholders' equity ..................................... 54,189
--------
Total liabilities and stockholders' equity ......... $391,439
========
Net interest rate spread (2) ............................. 2.83%
======
Ratio of interest-earning assets to
interest-bearing liabilities ....................... 108.15%
======
- ------------------------
(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 table below sets 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,
------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------- -------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Total Due to Total
----------------- Increase ------------------ Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- ------ --------- ------- ------ ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Mortgage loans.......................... $ 1,908 $ 270 $ 2,178 $ 1,693 $ (140) $ 1,553
Commercial loans........................ 413 1 414 366 9 375
Consumer and other loans................ 2,114 91 2,205 1,471 (27) 1,444
Securities.............................. 1,285 48 1,333 166 16 182
Interest-bearing deposits with
financial institutions................ 722 3 725 (120) 4 (116)
FHLB stock.............................. 21 11 32 23 (1) 22
------- ------ ------- ------- ------ -------
Total interest-earning assets......... 6,463 424 6,887 3,599 (139) 3,460
------- ------ ------- ------- ------ -------
Interest expense:
Deposits................................ 6,271 (29) 6,242 261 177 438
Other borrowings........................ (638) 249 (389) 1,450 (24) 1,426
------- ------ ------- ------- ------- -------
Total interest-bearing liabilities.... 5,633 220 5,853 1,711 153 1,864
------- ------ ------- ------- ------ -------
Net change in interest income............. $ 830 $ 204 $ 1,034 $ 1,888 $ (292) $ 1,596
======= ====== ======= ======= ====== =======
</TABLE>
15
<PAGE>
Asset and Liability Management
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of the Company's transactions are denominated
in U.S. dollars with no specific foreign exchange exposures.
Interest-rate risk ("IRR") is the exposure of a banking organization's
financial condition to adverse movements in interest rates. Accepting this risk
can be an important source of profitability and shareholder value. However,
excessive levels of IRR can pose a significant threat to the Company's earnings
and capital base. Accordingly, effective risk management that maintains IRR at
prudent levels is essential to the Company's safety and soundness.
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.
The Company's Finance Committee, which also functions as the Company's
Asset-Liability Management Committee, is responsible for reviewing the Company's
asset 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, 1997, approximately $154.3 million, or
61.0%, of the Company's mortgage loan portfolio consisted or 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
transaction and passbook accounts, which are considered to be somewhat more
resistant to changes in interest rates than certificate accounts. Fourth, fixed
rate mortgage loans with terms of 15 years or less are alternately retained in
portfolio or sold based on the Company's interest rate risk policies and other
interest rate risk considerations evaluated by the Finance Committee from time
to time. Residential fixed rate mortgage loans with terms in excess of 15 years
may be retained in portfolio only 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.
Liquidity
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, 1997 totalled $52.9 million.
16
<PAGE>
At December 31, 1997, the Company had outstanding mortgage loan
origination commitments of $3.3 million and commercial loan commitments of
$423,000. 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, 1997 totalled $130.3
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.
Cash Flows
Cash Flows from Operating Activities. Net cash provided by (used in)
operating activities was $2.5 million, $(2.5) million and $5.8 million for the
years ended December 31, 1997, 1996 and 1995, respectively. The primary sources
of cash flows from operating activities were net income from operations of
$986,000, $1.2 million and $2.4 million and proceeds from the sales of loans of
$17.7 million, $13.0 million and $11.7 million for the years ended December 31,
1997, 1996 and 1995, respectively. The primary use of cash flows from operating
activities was the origination of loans held for sale of $18.4 million, $12.4
million and $12.6 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
Cash Flows from Investing Activities. Net cash provided by (used in)
investing activities was $86.8 million, $(53.8) million and $(22.9) million for
the years ended December 31, 1997, 1996 and 1995, respectively. Primary sources
(uses) of cash flows from investing activities were proceeds from the sale and
maturity of securities of $41.2 million, $23.5 million and $18.0 million and the
net (increase) decrease in interest-bearing deposits at other financial
institutions of $(7.3) million, $7.0 million and $1.4 million for the years
ended December 31, 1997, 1996 and 1995, respectively. Other primary (sources)
uses of cash flows from investing activities were net increases in loans
receivable of $12.3 million, $46.8 million and $5.5 million and investments in
securities of $52.4 million, $17.6 million and $22.4 million for the years ended
December 31, 1997, 1996 and 1995, respectively. An additional use of cash flows
from investing activities was the purchase of loans of $3.9 million, $17.1
million and $14.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively, and cash from the acquisition of three branches of $121.2 million
for the year ended December 31, 1997.
Cash Flows from Financing Activities. Net cash provided by (used in)
financing activities was $(89.0) million, $57.6 million and $17.9 million for
the years ended December 31, 1997, 1996 and 1995, respectively. The primary
sources (uses) of cash flows from financing activities were an (increase)
decrease in deposits of $28.4 million, $(10.5) million and $7.8 million for the
years ended December 31, 1997, 1996 and 1995, respectively and the proceeds from
stock issuance of $41.6 million for the year ended December 31, 1995. In
addition, sources included the increase in advances from the FHLB of $68.7
million for the year ended December 31, 1996. The primary use of cash flows from
financing activities was the repayment of $50.9 million and $10.0 million of
FHLB advances for the years ended December 31, 1997 and 1996, respectively, and
purchases of treasury stock of $9.2 million and $10.3 million for the years
ended December 31, 1997 and 1996, 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 included elsewhere herein.
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.
17
<PAGE>
Impact of New Accounting Standards
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
was issued by the Financial Accounting Standards Board in 1996. This Statement
revises the accounting for transfers of financial assets, such as loans and
securities, and for distinguishing between sales and secured borrowings.
Statement 125 is effective for some transactions in 1997 and others in 1998. The
effect of Statement 125 on the Company's financial statements is not material.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," was issued by the Financial Accounting Standards Board in
1997. This Statement established standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. It does not address issues of recognition or measurement
for comprehensive income and its components. Statement 130 is effective for
fiscal years beginning after December 15, 1997. Since the provisions of this
Statement are disclosure oriented, it will have no impact on the operations of
the Company.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," was issued in 1997 by the
Financial Accounting Standards Board. This Statement established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Statement 131 is effective for periods beginning after December 15, 1997.
Management does not believe that the provisions of this Statement are applicable
to the Company, since substantially all of the Company's operations are banking
activities.
Year 2000
The Company has conducted a review of its computer systems to review the
systems that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. For example, programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company presently
believes that, with modifications to existing software and by converting to new
software, the Year 2000 problem will not pose significant operational problems
for the Company's computer systems as so modified and converted. However, if
such modifications and conversions are not completed timely, the Year 2000
problem may have a material impact on the operations of the Company.
Safe Harbor Statement
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Company and the subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions, the
legislative/regulatory situation, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
18
<PAGE>
FIRST MUTUAL BANCORP, INC.
<PAGE>
NOTES
<PAGE>
[GRAPHIC OMITTED]
FIRST MUTUAL BANCORP, INC.
- --------------------------------------------------------------------------------
<PAGE>
FIRST MUTUAL BANCORP, INC.
AND SUBSIDIARY
Decatur, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
<PAGE>
FIRST MUTUAL BANCORP, INC.
AND SUBSIDIARY
Decatur, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
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>
[Letterhead of Crowe Chizek]
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,
1997 and 1996 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, 1997. 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, 1997 and 1996 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 16, 1998
1.
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,612 $ 4,350
Interest-bearing deposits with financial institutions 13,993 6,730
Securities available-for-sale (Note 2) 17 4,000
Securities held-to-maturity
(fair value: December 31, 1997 - $34,167;
December 31, 1996 - $19,063) (Note 2) 33,976 19,007
Loans held for sale (Note 4) 2,057 1,103
Loans receivable, net (Note 3) 307,237 282,066
Federal Home Loan Bank stock 2,349 3,200
Accrued interest receivable 2,194 1,969
Foreclosed real estate, net of allowance for losses (Note 5) 29 77
Premises and equipment (Note 6) 6,896 4,119
Cash surrender value of life insurance (Note 14) 3,496 3,215
Goodwill and core deposit intangibles (Note 16) 12,643 --
Other assets 1,940 1,940
--------- ---------
$ 391,439 $ 331,776
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 7) $ 320,031 $ 202,923
Advances from borrowers for taxes
and insurance 1,344 1,420
Advances from Federal Home Loan
Bank (Note 8) 12,500 62,800
Accrued expenses and other liabilities 3,375 2,416
--------- ---------
337,250 269,559
Commitments and contingencies (Note 13)
Stockholders' equity (Note 12)
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 45,420 45,104
Unearned ESOP shares (Note 11) (2,820) (3,196)
Unearned stock awards (Note 11) (1,027) (1,504)
Retained earnings, substantially restricted (Note 9) 29,523 29,578
Treasury stock, at cost, 1,192,930 shares in 1997 and
611,400 shares in 1996 (17,377) (8,231)
Unrealized depreciation on securities
available-for-sale, net of tax -- (4)
--------- ---------
54,189 62,217
--------- ---------
$ 391,439 $ 331,776
========= =========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
2.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996, and 1995
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans receivable
First mortgage loans $19,130 $16,952 $15,399
Consumer and other loans 4,135 1,930 486
Commercial loans 911 497 122
Securities 2,996 1,663 1,481
Other interest-earning assets 1,457 700 794
------- ------- -------
Total interest income 28,629 21,742 18,282
Interest expense
Deposits 15,913 9,671 9,233
Federal Home Loan Bank advances and
other interest charges (Note 8) 1,294 1,683 257
------- ------- -------
Total interest expense 17,207 11,354 9,490
------- ------- -------
Net interest income 11,422 10,388 8,792
Provision for loan losses (Note 3) 560 113 --
------- ------- -------
Net interest income after provision for loan losses 10,862 10,275 8,792
Noninterest income
Gain on sales and calls of securities 12 1 --
Gain on sales of loans (Note 4) 243 179 86
Deposit service fees 780 357 292
Loan servicing fees (Note 4) 116 123 115
Investment sales commissions 157 123 88
Other 411 282 267
------- ------- -------
Total noninterest income 1,719 1,065 848
Noninterest expense
Compensation and benefits 5,705 4,562 3,153
Occupancy and equipment 1,373 876 682
FDIC deposit insurance premium 135 339 465
SAIF special assessment -- 1,314 --
Advertising and promotion 482 425 239
Data processing 796 428 350
Printing, postage, stationery, and supplies 458 363 238
Net expense on foreclosed real estate operations 11 8 11
Net loss on sale of real estate owned,
including provisions for losses 6 1 13
Goodwill and core deposit intangible
amortization (Note 16) 719 -- --
Other 1,506 1,144 751
------- ------- -------
Total noninterest expense 11,191 9,460 5,902
------- ------- -------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
3.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996, and 1995
(Dollars in thousands)
- --------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Income before income taxes $ 1,390 $ 1,880 $3,738
Income taxes (Note 9) 404 709 1,340
------- ------- ------
Net income $ 986 $ 1,171 $2,398
======= ======= ======
Earnings per share
Basic $ .31 $ .29 $ .32
====== ====== ======
Diluted $ .30 $ .29 $ .32
====== ====== ======
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996, and 1995
(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> <C> <C> <C> <C>
Balance at January 1, 1995 $ -- $ -- $ -- $ -- $ 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
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
Net income -- -- -- -- 986 -- -- 986
Purchase of treasury shares -- -- -- -- -- (9,151) -- (9,151)
ESOP shares earned -- 247 376 -- -- -- -- 623
Stock awards earned -- -- -- 477 -- -- -- 477
Tax benefit of stock awards -- 69 -- -- -- -- -- 69
Exercise of stock options -- -- -- -- -- 5 -- 5
Change in unrealized appreciation
(depreciation) on securities
available-for-sale, net of tax of $ 3 -- -- -- -- -- -- 4 4
Cash dividends ($.32 per share) -- -- -- -- (1,041) -- -- (1,041)
----- -------- -------- -------- -------- -------- ----- --------
Balance at December 31, 1997 $ 470 $ 45,420 $ (2,820) $ (1,027) $ 29,523 $(17,377) $ -- $ 54,189
===== ======== ======== ======== ======== ======== ===== ========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 1997, 1996, and 1995
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 986 $ 1,171 $ 2,398
Adjustments to reconcile net income to
net cash from operating activities
Depreciation and amortization 656 395 295
Amortization of premiums and discounts
on securities and intangibles, net 922 73 102
Origination of loans held for sale (18,368) (12,447) (12,624)
Proceeds from sale of loans 17,656 12,970 11,678
Change in net deferred loan
origination costs 34 (188) (53)
Change in deferred income taxes 61 151 (25)
Provision for loan losses 560 113 --
Provision for losses on foreclosed
real estate 5 -- 8
Net gain on the sale of available-for-sale
securities (12) (1) --
Net gain on sales of loans (243) (179) (86)
Federal Home Loan Bank stock dividends -- -- (29)
Net loss on sale of foreclosed real estate 1 1 5
ESOP compensation expense 623 492 238
Stock awards expense 477 595 --
Change in
Accrued interest receivable (225) (25) (745)
Cash surrender value of
life insurance -- (145) (145)
Other assets 24 (1,715) 144
Accrued expenses and other liabilities (686) (3,741) 4,650
-------- -------- --------
Net cash provided by (used in)
operating activities 2,471 (2,480) 5,811
Cash flows from investing activities
Net increase in loans receivable (12,290) (46,753) (5,530)
Proceeds from maturity of securities
held-to-maturity 10,215 15,465 18,000
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
6.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 1997, 1996, and 1995
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from investing activities (Continued)
Purchase of securities held-to-maturity $ (25,365) $ (14,598) $ (19,397)
Purchase of securities available-for-sale (27,042) (3,022) (3,041)
Proceeds of sales and calls of available-for-sale
securities 31,022 7,985 --
Investments in
Loans purchased (3,879) (17,147) (14,254)
Federal Home Loan Bank stock 851 (1,280) --
Premises and equipment (671) (1,523) (276)
Foreclosed real estate (45) (12) (15)
Cash surrender value of insurance (281) -- --
Net cash from acquisition of branches 121,230 -- --
Net change in interest-bearing deposits
with financial institutions (7,263) 7,005 1,439
Proceeds from sales of foreclosed real estate 325 72 147
--------- --------- ---------
Net cash provided by (used in) investing
activities 86,807 (53,808) (22,927)
Cash flows from financing activities
Net increase (decrease) in deposits (28,412) 10,455 (7,777)
Net change in open line advances from
Federal Home Loan Bank (38,800) 34,700 (15,500)
Proceeds from term advances from
Federal Home Loan Bank 600 34,000 --
Repayments on term advances from
Federal Home Loan Bank (12,100) (10,000) --
Net increase (decrease) in advances from
borrowers for taxes and insurance (76) 9 (119)
Proceeds from stock issuance -- -- 41,640
Purchase of treasury stock (9,151) (10,330) --
Proceeds from exercise of stock options 5 -- --
Dividends paid (1,082) (1,201) (303)
--------- --------- ---------
Net cash (used in) provided by
financing activities (89,016) 57,633 17,941
--------- --------- ---------
Net increase in cash and cash equivalents 262 1,345 825
Cash and cash equivalents at beginning of year 4,350 3,005 2,180
--------- --------- ---------
Cash and cash equivalents at end of year $ 4,612 $ 4,350 $ 3,005
========= ========= =========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
7.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 1997, 1996, and 1995
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures of cash flow information
Cash paid for
Interest $ 16,355 $ 11,090 $ 9,161
Income taxes 51 998 1,266
Transfers from loans to real estate
acquired through foreclosure 260 87 144
Real estate owned sales financed
through loan origination 22 -- 15
Transfer of debt securities to available-
for-sale from held-to-maturity -- -- 5,937
Purchase of branches
Fair value of assets acquired $ 25,984
Cash received 121,230
--------
Liabilities assumed $147,214
========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
8.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(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 thirteen
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 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: The Company classifies debt securities as either held-to-maturity 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)
9.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Servicing Rights: Servicing rights represent both purchased rights and the
allocated value of servicing rights retained on loans sold. Servicing rights are
expensed in proportion to, and over the period of, estimated net servicing
revenues. Impairment is evaluated based on the fair value of the rights, using
groupings of the underlying loans as to interest rates and then, secondarily, as
to geographic and prepayment characteristics. Any impairment of a grouping is
reported as a valuation allowance.
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 applies to transfers
and extinguishments occurring after December 31, 1996 and early or retroactive
application is not permitted. The adoption of SFAS No. 125 did 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.
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 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.
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company measures 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.
Smaller balance homogenous loans are defined as residential first mortgage loans
secured by one-to-four family residences, residential construction loans, and
consumer loans and are evaluated collectively for impairment. Commercial real
estate loans and commercial business loans are evaluated individually for
impairment. Normal loan evaluation procedures, as described in the second
preceding paragraph, are used to identify loans which must be evaluated for
impairment. In general, loans classified as "doubtful" or "loss" are considered
impaired while loans classified as "substandard" are individually evaluated for
impairment. Depending on the relative size of the credit relationship, late or
insufficient payments of 30 to 90 days will cause management to reevaluate the
credit under its normal loan evaluation procedures. While the factors which
identify a credit for consideration for measurement of impairment, or
nonaccrual, are similar, the measurement considerations differ. A loan is
impaired when the economic value estimated to be received is less than the value
implied in the original credit agreement. A loan is placed in nonaccrual when
payments are more than 90 days past due unless the loan is adequately
collateralized and in the process of collection.
Interest Income: Interest on loans is accrued over the term of the loans based
upon the principal outstanding. 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.
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
Goodwill and Core Deposit Base: Goodwill and the core deposit base intangibles,
included in other assets, result from the application of purchase accounting
principles to the acquisition of three branches. Goodwill represents the excess
of acquisition cost over the fair value of net assets of the branches and is
amortized over 25 years using the straight-line method. The premium paid to
acquire core deposits is being amortized over the estimated benefit life using
an accelerated method.
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 cost of shares issued to the ESOP but not yet
allocated to participants is presented in the consolidated balance sheet as a
reduction of stockholders' 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.
- --------------------------------------------------------------------------------
(Continued)
12.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common Share: Earnings per common share is computed under the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share", which was adopted retroactively by the Company at the beginning of the
fourth quarter of 1997. Amounts reported as Earnings per Common Share for each
of the three years ended December 31, 1997 reflect the earnings available to
common stockholders for the year divided by the weighted average number of
common shares outstanding during the year.
Future Accounting Changes: New accounting standards have been issued which will
require future reporting of comprehensive income (net income plus changes in
holding gains and losses on securities available-for-sale) and may require
redetermination of industry segment financial information.
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, 1997-----------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-Sale Cost Gains Losses Value
Equity securities $ 17 $ -- $ -- $ 17
======= ===== ===== =======
Held-to-Maturity
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $33,976 $ 191 $ -- $34,167
======= ===== ===== =======
------------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
======= ===== ===== =======
- --------------------------------------------------------------------------------
(Continued)
13.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
On December 29, 1995, the Company reclassified a portion of its securities
held-to-maturity 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, 1997--
Amortized Fair
Cost Value
---- -----
Available-for-Sale
Equity securities $ 17 $ 17
======= =======
Held-to-Maturity
Due in one year or less $15,761 $15,798
Due after one year through five years 18,215 18,369
------- -------
$33,976 $34,167
======= =======
For the years ended December 31, 1997 and 1996, the Company received proceeds
totaling approximately $31,022,000 and $7,985,000, respectively, on the sales
and calls of securities available-for-sale. Gross realized gains were
approximately $22,000 and $5,000 and gross realized losses were approximately
$10,000 and $4,000, respectively.
There were no sales of securities during the year ended December 31, 1995.
Securities with a total carrying value of $450,000 and $475,000 and fair values
of $453,000 and $474,000, respectively, were pledged at December 31, 1997 and
1996 to secure certain savings deposits in excess of $100,000.
- --------------------------------------------------------------------------------
(Continued)
14.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
---- December 31, ----
1997 1996
---- ----
<S> <C> <C>
First mortgage loan principal balances
Secured by one-to-four-family residences $ 194,055 $ 207,648
Secured by other properties 48,026 30,266
Construction loans secured by one-to-four- family residences 8,067 4,334
Construction loans secured by other properties 670 4,040
--------- ---------
250,818 246,288
Undisbursed portion of loans (3,116) (4,656)
Net deferred loan origination costs 148 225
--------- ---------
Total first mortgage loans 247,850 241,857
Commercial loan principal balances 12,373 7,775
Consumer and other loan principal balances
Automobile 39,598 29,111
Home equity 2,678 1,149
Other 6,049 3,340
--------- ---------
48,325 33,600
Undisbursed portion of loans (2) --
Net deferred loan origination costs 122 78
--------- ---------
Total consumer and other loans 48,445 33,678
--------- ---------
Total loans receivable 308,668 283,310
Less allowance for loan losses 1,431 1,244
--------- ---------
$ 307,237 $ 282,066
========= =========
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
--Year Ended December 31,-
1997 1996 1995
---- ---- ----
Balance at beginning of year $ 1,244 $ 1,172 $1,148
Provision charged to income 560 113 --
Charge-offs (447) (85) (6)
Recoveries 6 44 30
Allowance for purchased loans 68 -- --
------- ------- ------
Balance at end of year $ 1,431 $ 1,244 $1,172
======= ======= ======
- --------------------------------------------------------------------------------
(Continued)
15.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE (Continued)
Nonaccrual and renegotiated loans for which interest has been reduced totaled
approximately $474,000, $108,000, and $179,000 at December 31, 1997, 1996, and
1995, 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,-
1997 1996 1995
---- ---- ----
Interest income that would
have been recorded $ 41 $ 8 $ 15
Interest income recognized 18 3 6
----- ----- ----
Interest income foregone $ 23 $ 5 $ 9
===== ===== ====
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, 1997, 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,-
1997 1996
---- ----
Balance at beginning of year $ 729 $ 675
Loans disbursed -- 125
Principal repayments (82) (71)
Change in status (110) --
----- -----
Balance at end of year $ 537 $ 729
===== =====
- --------------------------------------------------------------------------------
(Continued)
16.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(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,--------
1997 1996 1995
---- ---- ----
Mortgage loan portfolios serviced for
FHLMC $49,474 $ 43,812 $40,722
Other investors 3,309 3,536 3,546
------- -------- -------
$52,783 $ 47,348 $44,268
======= ======== =======
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $439,000, $405,000, and $396,000 at December 31,
1997, 1996, and 1995, 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,--
1997 1996 1995
---- ---- ----
Activity during the year
Loans originated for resale $18,368 $ 12,447 $12,624
Proceeds from sale of loans
originated for resale 17,656 12,970 11,678
Gain on sale of loans originated
for resale 243 179 86
Loan servicing fees 116 123 115
Balance at end of year
Loans held for sale (secured by
one-to-four-family residences) 2,057 1,103 1,447
- --------------------------------------------------------------------------------
(Continued)
17.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(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:
1997 1996
---- ----
Balance at beginning of year $ 97 $ --
Additions 137 99
Amortization (14) (2)
Provision for impairment -- --
------ ------
Balance at end of year $ 220 $ 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,
-----------------------
1997 1996 1995
---- ---- ----
Balance at beginning of year $ -- $ -- $ 3
Provision charged to income 5 -- 8
Charge-offs (4) -- (11)
---- ----- ----
Balance at end of year $ 1 $ -- $ --
==== ===== ====
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
---December 31,--
------------
1997 1996
---- ----
Cost
Land and buildings $ 8,843 $6,017
Furniture, fixtures, and equipment 2,539 2,158
------- ------
11,382 8,175
Less accumulated depreciation 4,486 4,056
------- ------
$ 6,896 $4,119
======= ======
- --------------------------------------------------------------------------------
(Continued)
18.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS
Certificate of deposit accounts with balances of $100,000 or more totaled
$17,859,000 and $12,093,000 at December 31, 1997 and 1996, respectively.
At December 31, 1997, scheduled maturities of certificates of deposit are as
follows:
1998 $ 130,278
1999 58,992
2000 19,985
2001 6,248
2002 and thereafter 4,613
---------
$ 220,116
=========
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1997 and 1996, secured advances from the Federal Home Loan Bank
were as follows:
Interest Maturity
Rate Date 1997 1996
---- ---- ---- ----
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 3/25/98 3,000 3,000
6.47 5/2/98 2,500 2,500
6.59 6/19/98 2,000 2,000
6.43 9/25/98 3,000 3,000
6.62 9/25/99 2,000 2,000
Floating Open line -- 38,800
------ ------
$12,500 $62,800
======= =======
The interest rate on floating advances was 6.95% as of December 31, 1996. 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)
19.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(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,-
-----------------------
1997 1996 1995
---- ---- ----
Current $ 343 $ 558 $1,365
Deferred 61 151 (25)
------ ------- ------
$ 404 $ 709 $1,340
====== ======= ======
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% in 1997, 1996, and 1995 to income before income
taxes as a result of the following:
<TABLE>
<CAPTION>
-- Year Ended December 31, --
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected income tax expense at
federal tax rate $ 473 $ 639 $ 1,271
State income tax (credit), net of federal tax (100) 55 88
Other items, net 31 15 (19)
------- ------- -------
$ 404 $ 709 $ 1,340
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
20.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(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,--
------------
1997 1996
---- ----
Loans, principally due to allowance for losses $ 209 $ 136
Accrual for employee benefits 118 131
Unrealized loss on securities available-for-sale -- 3
Other 20 10
----- -----
Total deferred tax assets 347 280
FHLB stock dividends 142 142
Premises and equipment, principally due to
differences in depreciation 59 33
Originated mortgage servicing rights 85 38
Basis difference on acquired intangibles 66 -
Deferred loan fees 126 133
Other -- 1
----- -----
Total deferred tax liabilities 478 347
----- -----
Net deferred tax liabilities $(131) $ (67)
===== =====
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, 1997 and 1996 include approximately $10,583,000
(representing bad debt deductions accumulated through 1986) for which no
deferred federal income tax liability has been recorded.
- --------------------------------------------------------------------------------
(Continued)
21.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 10 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators for earnings per common
share computations for the years ended December 31, 1997, 1996, and 1995 is
presented below.
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Basic Earnings Per Share
Net income $ 986 $1,171 $2,398
Less: net income of Bank prior to conversion -- -- 1,378
------ ------ ------
Net income available to commons shareholders $ 986 $1,171 $1,020
====== ====== ======
Weighted average common shares outstanding 3,195 4,079 4,329
====== ====== ======
Basic Earnings Per Share $ .31 $ .29 $ .32
====== ====== ======
Earnings Per Share Assuming Dilution
Net income available to common shareholders $ 986 $1,171 $1,020
====== ====== ======
Weighted average common shares outstanding 3,195 4,079 4,329
Add: dilutive effect of assumed exercises:
Incentive stock options 103 16 --
------ ------ ------
Weighted average common and dilutive
potential common shares outstanding 3,298 4,095 4,329
====== ====== ======
Diluted Earnings Per Share $ 0.30 $ 0.29 $ .32
====== ====== ======
NOTE 11 - 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.
- --------------------------------------------------------------------------------
(Continued)
22.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 11 - STOCK BASED COMPENSATION PLANS (Continued)
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 1997, 37,600 shares of stock with an average fair value of $16.57 per
share were committed to be released, resulting in ESOP compensation expense of
$623,000. Shares held by the ESOP at December 31 are as follows:
1997
----
Allocated shares 92
Unallocated shares 282
------
Total ESOP shares 374
------
Fair value of unallocated shares $7,050
======
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 and changes during
the year are presented below:
Weighted-
December 31, December 31, Average
1997 1996 Exercise
Shares Shares Price
------ ------ -----
Outstanding at beginning of year 407,600 -- $11.75
Granted -- 407,600 $11.75
Exercised (400) -- $11.75
Forfeited -- -- --
-------- --------
Outstanding at end of year 407,200 407,600 --
======== ========
Options exercisable at end of year 176,740 81,520
Weighted-average fair value of
options granted during year $ -- $ 3.85
- --------------------------------------------------------------------------------
(Continued)
23.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 11 - STOCK BASED COMPENSATION PLANS (Continued)
All of the outstanding options at December 31, 1997 relate to options granted in
1996 at an exercise price of $11.75 and have a remaining life of 8.5 years
before expiration. These options are not fully vested. The exercise price
equaled 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 1997 and 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.
1997 1996
---- ----
Pro forma net income $ 823 $ 786
Pro forma earnings per share
Basic .26 .19
Diluted .25 .19
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 10 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 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. The
unamortized cost of shares not yet earned (vested) is reported as a reduction of
stockholders' equity. MRP compensation expense totaled $477,000 and $595,000 for
the years ended December 31, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
(Continued)
24.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 12 - 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 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
------ ----------------- ------------------
1997 Amount Ratio Amount Ratio Amount Ratio
- ---- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $39,862 18.2% $17,556 8.0% $21,945 10.0%
Tier 1 (core) capital (to risk-weighted assets) 38,430 17.5 8,778 4.0 13,167 6.0
Tier 1 (core) capital (to average assets) 38,430 10.0 11,499 3.0 19,165 5.0
1996
- ----
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 average assets) 50,826 16.0 9,510 3.0 15,850 5.0
</TABLE>
As of December 31, 1997, 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)
25.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 12 - REGULATORY MATTERS (Continued)
On June 30, 1995, the date of the Bank's conversion to a stock institution, 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 13 - 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 amounts
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.
These financial instruments are summarized as follows:
Approximate Contract or
Notional Amount
---------------
---December 31,---
------------
1997 1996
---- ----
Financial instruments, the contract amounts of which
represent credit risk
Commitments to extend credit (fixed and
variable rate commitments of $2,173 and $1,567 at
December 31, 1997; $4,391 and $1,739 at
December 31, 1996)
Commercial $ 423 $ 920
Mortgage 3,317 5,210
Unused lines of credit on consumer loans 4,381 4,117
Undisbursed portion of construction loans 3,116 4,572
Unused lines of credit on commercial loans 8,070 3,005
- --------------------------------------------------------------------------------
(Continued)
26.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS (Continued)
Fixed rate mortgage loan commitments at December 31, 1997 have terms ranging
from 60 to 212 days and rates ranging from 7.125% to 9.00%. Fixed rate mortgage
loan commitments at December 31, 1996 have terms ranging from 60 to 302 days and
rates ranging from 7.50% to 9.00%.
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.
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, 1997, 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 $99,000, $47,000, and $28,000 for the years ended December
31, 1997, 1996, and 1995, respectively.
The projected minimum rental payments under the terms of the leases at December
31, 1997, net of projected sublease rentals, are as follows:
- --------------------------------------------------------------------------------
(Continued)
27.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS (Continued)
Year Ended
December 31
-----------
1998 $ 95
1999 93
2000 84
2001 41
2002 and thereafter 9
-----
$ 322
=====
There was one new lease entered into during the year ended December 31, 1997.
NOTE 14 - 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 $134,000 to
the profit sharing plan for the year ended December 31 1995. No contributions
were made during 1996 or 1997.
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 $275,000
and $299,000 at December 31, 1997 and 1996, respectively. Expense (income) of
approximately $(43,497), $125,000, and $105,000 has been included in
compensation and benefits in the accompanying statements of income for the years
ended December 31, 1997, 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 $3,496,000 and $3,215,000 as of December 31,
1997 and 1996, respectively.
- --------------------------------------------------------------------------------
(Continued)
28.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 15 - 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, 1997-- --December 31, 1996--
----------------- -----------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 4,612 $ 4,612 $ 4,350 $ 4,350
Interest-bearing deposits with financial institutions 13,993 13,993 6,730 6,730
Securities available-for-sale 17 17 4,000 4,000
Securities held-to-maturity 33,976 34,167 19,007 19,063
Loans held for sale 2,057 2,083 1,103 1,119
Loans receivable, net 307,237 309,508 282,066 280,913
Federal Home Loan Bank stock 2,349 2,349 3,200 3,200
Cash surrender value of life insurance 3,496 3,496 3,215 3,215
Accrued interest receivable 2,194 2,194 1,969 1,969
Mortgage servicing rights 220 220 97 97
LIABILITIES
Demand, NOW, money market, and savings deposits $ (99,915) $ (99,915) $ (58,584) $ (58,584)
Certificates of deposit (220,116) (220,596) (144,339) (145,189)
Advances from borrowers for taxes and insurance (1,344) (1,344) (1,420) (1,420)
Advances from Federal Home Loan Bank (12,500) (12,547) (62,800) (62,640)
Accrued interest payable (2,323) (2,323) (1,471) (1,471)
</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 rates the Company and the local market would charge for
similar loans at December 31, 1997 and 1996, respectively, applied for the time
period until estimated payment. The estimated fair value of certificates of
deposit is based on estimates of the rates the Company and the local market pays
on such deposits at December 31, 1997 and 1996, 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.
- --------------------------------------------------------------------------------
(Continued)
29.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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.
NOTE 16 - 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 $121,230
Commercial real estate loans 3,739
Commercial loans 550
Consumer loans 5,612
Allowance on purchased loans (68)
Premises and equipment 2,706
Intangible assets 13,362
Other assets 83
--------
Total assets purchased $147,214
========
Liabilities assumed
Deposits $145,520
Other liabilities 1,694
--------
Total liabilities assumed $147,214
========
- --------------------------------------------------------------------------------
(Continued)
30.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 16 - ACQUISITION (Continued)
Intangible assets, which arose from the acquisition of the branches consisted of
the following at December 31:
1997
----
Excess of purchase price over fair value $11,052
Core deposit intangible 2,310
-------
Total 13,362
Less accumulated amortization (719)
-------
Intangible assets net $12,643
=======
The excess of purchase price over the fair value is being amortized over twenty
five years. Amortization charged to expense was $442,000 for the year ended
December 31, 1997.
The core deposit intangible assets were determined in consideration of the value
of non-interest-bearing demand, NOW, savings, and money market deposit accounts
assumed. The valuation method estimated annual cash flow differentials of the
core deposit interest and handling costs of alternative funds sources, such as
certificates of deposit, and then discounted such cash flow differentials to
their present value. The core deposit intangible asset is being amortized to
match the estimated run-off of core deposits acquired. Amortization charged to
expense for the year ended December 31, 1997 was $277,000.
NOTE 17 - 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, 1997 and 1996
1997 1996
---- ----
ASSETS
Cash and cash equivalents $ 38 $ 79
Securities available-for-sale -- 3,983
ESOP debt receivable 2,820 3,196
Investment in bank subsidiary 51,095 50,864
Accrued interest receivable and other assets 28 206
Interest-bearing certificates of deposit at
other financial institutions 501 4,200
------- -------
$54,482 $62,528
======= =======
- --------------------------------------------------------------------------------
(Continued)
31.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 17 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
1997 1996
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities $ 293 $ 311
Stockholders' equity
Common stock 470 470
Additional paid-in capital 45,420 45,104
Unearned ESOP shares (2,820) (3,196)
Unearned stock awards (1,027) (1,504)
Retained earnings 29,523 29,578
Treasury stock (17,377) (8,231)
Unrealized loss on AFS securities, net of tax -- (4)
-------- --------
$ 54,482 $ 62,528
======== ========
Condensed Statements of Income
Years ended December 31, 1997 and 1996
and period July 1, 1995 through December 31, 1995
1997 1996 1995
---- ---- ----
Income
Securities $ 15 $ 462 $ 227
ESOP interest income 244 275 --
Net gain (loss) on sale of securities (6) 1 --
Other interest earning assets 80 372 468
Dividends from subsidiary 2,000 -- --
------- ------- -------
Total income 2,333 1,110 695
Expenses
Compensation and benefits 27 26 14
Other expenses 288 262 112
------- ------- -------
Total expenses 315 288 126
------- ------- -------
Income before income taxes 2,018 822 569
Income taxes 4 282 199
------- ------- -------
Income before equity in undistributed
earnings of bank subsidiary 2,014 540 370
(Over-distributed) undistributed earnings
in bank subsidiary (1,028) 631 1,020
------- ------- -------
Net income $ 986 $ 1,171 $ 1,390
======= ======= =======
- --------------------------------------------------------------------------------
(Continued)
32.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
- --------------------------------------------------------------------------------
NOTE 17 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Cash Flows
Years ended December 31, 1997 and 1996
and period July 1, 1995 through December 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 986 $ 1,171 $ 1,390
Adjustments to reconcile net income to
net cash provided by operating activities
Equity in over-distributed (undistributed)
earnings of subsidiary 1,028 (631) (1,020)
Amortization of premiums and discounts
on securities (50) (6) 9
Loss (gain) on the sale of securities available-for-sale 6 (1) --
Change in
Other assets 175 252 (425)
Other liabilities 22 (54) 45
-------- -------- --------
Net cash provided by operating activities 2,167 731 (1)
Cash flows from investing activities
Purchase of stock of First Mutual -- -- (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 securities available-
for-sale 4,034 7,986 --
Change in interest-bearing deposits 3,699 5,620 (9,820)
Capital contribution to subsidiary (89) (104) (26)
-------- -------- --------
Net cash provided by (used in) investing activities 7,644 10,487 (41,508)
Cash flows from financing activities
Proceeds from stock issuance -- -- 41,640
Payment received on loan to ESOP 376 376 188
Purchase of treasury stock (9,151) (10,330) --
Exercise of stock options 5 -- --
Dividends paid (1,082) (1,201) (303)
-------- -------- --------
Net cash provided by (used in) financing activities (9,852) (11,155) 41,525
-------- -------- --------
Net change in cash and cash equivalents (41) 63 16
Cash and cash equivalents at beginning of period 79 16 --
-------- -------- --------
Cash and cash equivalents at end of period $ 38 $ 79 $ 16
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
33.
<PAGE>
FIRST MUTUAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
(Table amounts in thousands of dollars)
except per share data
- --------------------------------------------------------------------------------
NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
----------------Three Months Ended----------------
------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997
- ----
Interest income $ 7,235 $ 7,238 $ 7,163 $ 6,993
Interest expense 4,392 4,359 4,294 4,162
------- ------- ------- -------
Net interest income 2,843 2,879 2,869 2,831
Provision for loan losses 160 93 143 164
Other income 353 413 459 494
Other expense 2,996 2,557 2,787 2,851
------- ------- ------- -------
Income before income taxes 40 642 398 310
Income tax expense (benefit) (41) 206 127 112
------- ------- ------- -------
Net income $ 81 $ 436 $ 271 $ 198
======= ======= ======= =======
Earnings per common share
Basic $ .02 $ .14 $ .09 $ .06
Diluted $ .02 $ .14 $ .08 $ .06
<CAPTION>
----------------Three Months Ended----------------
------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1996
- ----
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
Basic $ .18 $ .14 $ (.15) $ .12
Diluted $ .18 $ .14 $ (.15) $ .12
</TABLE>
- --------------------------------------------------------------------------------
34.
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
FIRST MUTUAL BANK, S.B.
FIRST MUTUAL COMPANY
EXHIBIT 23
CONSENT OF EXPERTS AND COUNSEL
<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 28, 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, 1997.
Crowe, Chizek and Company, LLP
Oak Brook, Illinois
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,612
<INT-BEARING-DEPOSITS> 13,993
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17
<INVESTMENTS-CARRYING> 33,976
<INVESTMENTS-MARKET> 34,167
<LOANS> 309,294
<ALLOWANCE> 1,431
<TOTAL-ASSETS> 391,439
<DEPOSITS> 320,031
<SHORT-TERM> 10,500
<LIABILITIES-OTHER> 4,719
<LONG-TERM> 2,000
0
0
<COMMON> 470
<OTHER-SE> 53,719
<TOTAL-LIABILITIES-AND-EQUITY> 391,439
<INTEREST-LOAN> 24,176
<INTEREST-INVEST> 2,996
<INTEREST-OTHER> 1,457
<INTEREST-TOTAL> 28,629
<INTEREST-DEPOSIT> 15,913
<INTEREST-EXPENSE> 17,207
<INTEREST-INCOME-NET> 11,422
<LOAN-LOSSES> 560
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 11,191
<INCOME-PRETAX> 1,390
<INCOME-PRE-EXTRAORDINARY> 986
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 986
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.30
<YIELD-ACTUAL> 3.01
<LOANS-NON> 474
<LOANS-PAST> 1,052
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,244
<CHARGE-OFFS> 447
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 1,431
<ALLOWANCE-DOMESTIC> 1,431
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
Note: Allowance for Purchase loans 68
</FN>
</TABLE>
