Item 1. BUSINESS - ------------------- THE COMPANY
GENERAL =======
FirstFed Bancshares, Inc., a Delaware corporation (the "Company"), is a thrift holding company registered under the Home Owner's Loan Act, as amended (the "HOLA"). The Company's operating subsidiary is First Federal Bank, a federally chartered thrift (the "Bank"). The Bank's subsidiary service corporation, First Insurance Agency, Inc., an Illinois corporation ("FIA"), engages in the business of selling annuities, insurance products and complete brokerage services. The Company was organized in 1992, in connection with the Bank's conversion from the mutual to the stock form of organization (the "Conversion") which was completed on June 30, 1992. As part of the Conversion, the Company issued 3,220,000 shares of its common stock, $.01 par value per share (the "Common Stock"), at a price of $10.00 per share, pre-split. The Company's Common Stock is quoted on the Nasdaq National Market System under the symbol "FFDP".
The Bank is the Company's only financial institution subsidiary and was initially chartered as a federally chartered savings and loan association in 1934. The Bank changed its name to First Federal Bank in 1990. All references to the Company include the Bank and its subsidiary, FIA, unless otherwise indicated, except that references to the Company at or before June 30, 1992 refer to the Bank and FIA on a consolidated basis.
The Company and the Bank are subject to comprehensive regulation, examination and supervision by the Office of Thrift Supervision (the "OTS") and the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is a member of the Federal Home Loan Bank System (the "FHLB") and its deposits are insured by the Savings Association Insurance Fund ("SAIF") to the maximum extent permitted by the FDIC.
The Company engages in a general full service retail banking business and offers a broad variety of consumer and commercial oriented products and services to customers in its primary market area. The Company is principally engaged in the business of attracting deposits from the general public and originating mortgage loans and commercial loans in its primary market area. The Company also originates consumer loans and in addition, invests in mortgage-backed and related securities, investment securities and marketable equity securities. Finally, the Company offers, on an agency basis through FIA, annuities, insurance products and complete brokerage services to its customers.
The Company's income is derived from interest on loans, mortgage- backed and related securities and other securities, service charges and loan origination fees, loan servicing fees and proceeds from the sale, through FIA, of annuity and insurance products. The Company's operations are materially affected by general economic conditions, the monetary and fiscal policies of the federal government and the policies of the various regulatory authorities, including the OTS and the Board of Governors of the Federal Reserve System. Its results of operations are largely dependent upon its net interest income, which is the difference between the interest it receives on its loan and investment securities portfolios and the interest it pays on its deposit accounts and borrowed money.
The Company's corporate headquarters are located at 749 Lee Street, Des Plaines, Illinois. The Company's telephone number is (847) 294-6500.
MARKET AREA ===========
The Company's main office and a drive-up facility are located in downtown Des Plaines, Illinois. Des Plaines is a mature suburban Chicago community which had a population of approximately 53,200 in 1990. Des Plaines is located approximately 20 miles from downtown Chicago and five miles north of Chicago's O'Hare airport.
In March, 1994, the Company established its first branch office in Arlington Heights, Illinois, through the acquisition from the Resolution Trust Corporation of the deposits and office building of the Arlington Heights branch of the former Irving Federal Bank, F.S.B. Arlington Heights is a suburban Chicago community located approximately 10 miles northwest of Des Plaines. Based on the 1990 census, it had a population of approximately 75,500.
On March 2, 1995, the Company opened its third full-service office in Schaumburg, Illinois. Schaumburg is a relatively young suburb, and has seen rapid growth although this has slowed somewhat recently. It is located approximately 16 miles southwest of Arlington Heights and approximately 22 miles west of Des Plaines. Schaumburg had a population of 68,586 in 1990.
Des Plaines and parts of the surrounding contiguous communities such as Park Ridge, Niles and Mount Prospect have historically constituted the Company's primary market area. However, with the establishment of the two new offices by the Company, the market area has expanded into several other suburbs such as Arlington Heights, Prospect Heights, Buffalo Grove, Schaumburg and Hoffman Estates. These suburban areas are characterized by single-family residences, apartment buildings, several regional shopping centers and light industry. These demographics provide the Company with diverse opportunities for commercial lending, which became a focus of the Bank in 1996. In addition, many of the residents of the Company's primary market area consist of professional or "white collar" workers who commute into Chicago or engage in local retail trade, although a significant number of residents in the farther outlying suburbs, such as Schaumburg, work in that community at jobs in the service sector. The Company's success as a home mortgage lender has been due, in part, to its market area's favorable population, housing and income demographics.
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 affect 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, legislative/regulatory changes, 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.
LENDING ACTIVITIES ==================
GENERAL - -------
The principal lending activity of the Bank historically has been originating first mortgage loans for its portfolio, secured by owner occupied one- to four-family residential properties located in its primary market area. The Bank also offers a wide selection of consumer loans. Beginning late in 1995, and continuing into 1996, the Bank began a major balance sheet restructuring project. The Bank is evolving into a full-service commercial bank, offering loans on multi-family residences, commercial loans, commercial real estate loans and purchasing investment grade commercial leases. This type of lending will be the major focus of the Bank going forward.
As part of the balance sheet restructuring project, in 1995 the Bank securitized $116 million of fixed rate portfolio loans with the Federal Home Loan Mortgage Corporation ("FHLMC.") These loans were then classified as securities available-for-sale. At the end of 1996, the Bank securitized $61 million of fixed rate and balloon portfolio loans with FHLMC. These loans were classified as securities available-for-sale at December 31, 1996. At December 31, 1996, included in one-to-four family real estate loans were $10.1 million of loans held for securitization. During 1997, management believes that the trend of securitizing loans will be reduced as the remaining portfolio contains only $29.9 million of conforming loans, (based on current FHLMC guidelines), of which only $10.1 million are securitizable at December 31, 1996. If liquidity needs dictate, management may sell these securities in 1997, in order to originate higher yielding commercial and consumer loans. The Company also invests in mortgage-backed and related securities to supplement its lending activities and to assist in asset/liability management.
LOAN PORTFOLIO The following table outlines the composition of the COMPOSITION Company's loan portfolio in dollar amounts and in percentages as of the dates indicated:
(1) Includes loans held for securitization in the amount of $10.1 million at December 31, 1996.
The following table shows the composition of the Company's loan portfolio by fixed and adjustable rate at the dates indicated:
(1) Includes loans held for securitization.
The following schedule illustrates the contractual maturities of the Company's loan portfolio at December 31, 1996. Mortgages which have adjustable or floating interest rates are shown as maturing in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses:
* Includes demand loans, loans having no stated maturity and overdraft loans.
(1) Includes loans held for securitization and multi-family loans. Under the Financial Institutions Reform, Recovery, and Enforcement Act, the aggregate amount of loans that the Bank is permitted to make to any one borrower is generally limited to 15% of unimpaired capital and surplus (25% if the security for such loan has a "readily ascertainable" value, or 30% for certain residential development loans). At December 31, 1996, based on the above, the Bank's regulatory loan-to-one borrower limit was $6.7 million. On the same date, the Bank's largest loan or loan to one borrower was $6,000,000. Mortgage loans with adjustable rates due after one year totaled $165,240,000 and those with fixed rates totaled $86,952,000 as of December 31, 1996.
All of the Company's lending activities are conducted in accordance with its written underwriting standards and its loan origination procedures. The Company is an equal opportunity lender and each year offers its Affordable Housing Program for families with a maximum household income of 115% of the median income as published by the Federal Housing Finance Board. Decisions on all loan approvals or denials are made on the basis of detailed applications and property valuations (consistent with the Company's written appraisal policy) prepared by independent appraisers. The loan applications are designed primarily to determine the borrower's ability to repay and the more significant items on the application are verified through use of credit reports, financial statements, tax returns and/or third-party confirmations.
ONE-TO-FOUR FAMILY The cornerstone of the Company's lending program RESIDENTIAL REAL has historically been the origination of one-to- ESTATE LENDING four family permanent loans, to be held in its portfolio, secured by mortgages on owner-occupied residences. In December 1996, the Company securitized $61 million of 15 and 30 year fixed-rate and balloon single family residential mortgage loans with FHLMC. The Company, depending on liquidity needs, may sell a portion of these securities in 1997. At December 31, 1996, $251.8 million, or 74.21% of the Company's loan portfolio consisted of permanent loans on one- to four-family residences. At that date, the average outstanding residential loan balance was $88,000 and the principal amount of the Company's largest outstanding residential loan was $1,090,000. Substantially all of the residential loans originated by the Company are secured by properties located in the Company's primary market area. See "Origination, Purchases and Sales of Loans."
In order to reduce its exposure to changes in interest rates, the Company originates adjustable rate mortgages ("ARMs"), subject to market conditions and consumer preference. See "Origination, Purchases and Sales of Loans." As a result of the decline in interest rates in recent years, having the ability and the intent to offer these adjustable rate type products has enabled the Company to gain some flexibility in volatile interest rate markets. These types of loans are monitored to ensure compliance with the Company's asset/liability management goals. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management".
The Company offers ARM loans at rates, terms and fees determined in accordance with market and competitive factors. The programs currently offered generally meet the standards and requirements of the secondary market for residential mortgage loans. The Company's current one- to four-family residential ARMs are fully amortizing loans with contractual maturities of up to 30 years. The interest rates on the ARMs originated by the Company are subject to adjustment at stated intervals and are subject to annual and lifetime adjustment limits. Most of the Company's ARMs have interest rates which are fixed for the first three, five, or seven years, and then adjust annually thereafter based on a pre-set margin above one of several cost of funds indices. The Company also originates, but to a lesser extent, ARMs which reprice every three or five years over the entire life of the loan. Most of the Company's ARMs are convertible into fixed-rate loans at the market rate at the time of conversion. The Company's delinquency experience on its ARMs has generally been similar to its experience on fixed-rate residential loans.
The Company evaluates both the borrower's ability to make principal, interest and escrow payments and the value of the property that will secure the loan. The Company originates residential mortgage loans with loan-to-value ratios of up to 95%. On any mortgage loan exceeding an 80% loan-to-value ratio at the time of origination, the Company requires private mortgage insurance in an amount intended to reduce the Company's exposure to 80% or less of the appraised value of the underlying property.
As of December 31, 1996, the Company had 313 residential mortgage loans with original balances in excess of $214,600 ("jumbo loans") having an aggregate balance of $89.9 million. The Company's delinquency experience on its jumbo residential loans has been similar to its experience on its other residential loans.
The Company's residential mortgage loans customarily include due-on- sale clauses giving the Company the right to declare the loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the property subject to the mortgage.
MORTGAGE-BACKED AND The Company has long purchased mortgage-backed RELATED SECURITIES and mortgage-related securities to supplement loan production. Federal agency mortgage-backed securities generally carry a yield approximately 50 to 100 basis points below that of the corresponding type of residential loan, and the Company's other mortgage related securities also carry lower yields, however, the Company believes they offer greater flexibility in volatile interest rate markets. The Company has also retained the servicing rights on all loans securitized with FHLMC. The Company will evaluate mortgage-backed securities purchases in the future based on its asset/liability objectives, market conditions and alternative investment opportunities.
The Company also purchases mortgage-related securities consistent with its asset/liability management objectives. The mortgage-related securities which the Company owns are collateralized mortgage obligations, and more specifically, real estate mortgage investment conduits ("REMICs"), most of which carry a floating interest rate and have estimated average lives of from one to five years. Collateralized mortgage obligations are securities derived by reallocating cash flows from mortgage pass-through securities or from pools of mortgage loans held by a trust. No interest only, principal only, or residual interest pools are included as part of the portfolio. At December 31, 1996, the amortized cost of these securities was $2.6 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - - Asset/Liability Management".
The following schedule sets forth the contractual maturities of the Company's mortgage-backed and related securities at amortized cost as of December 31, 1996. All of such securities are considered available-for- sale, and include approximately $61 million of 15 and 30 year fixed-rate and balloon portfolio loans that were formerly a part of the Company's loan portfolio and were securitized with the FHLMC in December of 1996. Almost all of the mortgage-backed and related securities are anticipated to be repaid in advance of their contractual maturity as a result of projected mortgage loan prepayments.
COMMERCIAL Management of the Company has made a commitment to become LENDING a full service community bank. In line with this commitment, the Company has increased its originations of commercial real estate loans, commercial leases and commercial loans. Management intends to focus on this type of lending in the future.
The commercial real estate loans and commercial loans are collateralized by property within the Company's market area. The commercial leases, which may extend beyond the Company's market area, are investment grade leases. At December 31, 1996, the Company had $29,628,000 of commercial real estate, commercial loans and commercial leases, all of which either are scheduled to be paid off or reprice within the next five years.
Federal regulations permit federal thrift institutions to make secured or unsecured loans for commercial, corporate, business, or agricultural purposes not to exceed, in the aggregate 20% of total assets of the federal institution. However, amounts in excess of 10% of the total assets of the federal institution can only be used to generate small business loans.
The underwriting standards used by the Company for these types of loans include a determination of the applicant's payment history, cash flow, value of collateral, and credit worthiness of the business.
These types of loans all carry a rate substantially higher than residential mortgages, and also carry greater credit risk. During 1996, management set aside an amount equal to 2% of the loan principal balance on all commercial real estate and commercial loans in an Allowance for Possible Loan Losses account each time a loan of these types was made. Leases, being investment grade instruments, are not considered a substantial risk, therefore, no allowance for possible losses is being set up.
Beginning in December, 1996, the 2% loss provision was spread over the lesser of five years, the maturity of the loan, or the first repricing period of the loan, to better match the interest income being generated by the loan.
At December 31, 1996, the Company had $22,516,000 in commercial real estate loans, $59,000 in commercial loans, and $7,053,000 in commercial leases. The Allowance for Possible Loan Losses account included $285,900 for these types of loans at December 31, 1996.
CONSUMER Management believes that offering consumer loan products LENDING helps to expand and create stronger ties to the Company's existing customer base. In addition, because consumer loans generally have shorter terms to maturity and/or adjustable rates and carry higher rates of interest than do residential mortgage loans, they can be valuable asset/liability management tools. Finally, management believes that consumer loans can diversify the portfolio. Accordingly, the Company pursues consumer lending through marketing and pricing initiatives.
Federal regulations permit federal thrift institutions to make non- mortgage loans up to an aggregate amount of 35% of the institution's assets. In addition, a federal thrift institution has lending authority above the 35% limitation for certain loans such as home improvement loans, home equity loans and loans secured by deposit accounts.
The Company currently originates substantially all of its consumer loans in its primary market area. At December 31, 1996 the Company's consumer loans totaled $56.9 million or 16.76% of the Company's loan portfolio.
The Company's second mortgage and home equity loans are underwritten using the same standards as it uses for one-to-four family residential mortgage loans. The Company's second mortgage loans and home equity lines of credit are generally originated in amounts which, together with the amount of the first mortgage, do not exceed 80% of the appraised value of the property securing the loan. Home equity loans are revolving lines-of-credit, with the interest rate floating at a stated margin over the prime rate. Second mortgage loans are generally made for terms of up to ten years with fixed interest rates. Other consumer loan terms vary according to the type of collateral, length of contract and creditworthiness of the borrower. Lines of credit extended through the Company's credit card programs are limited to $20,000. During, 1996, the average credit card line granted was $4,200.
The Company offers a variety of secured consumer loans, including direct automobile loans, second mortgage loans (including home improvement loans), home equity loans, and loans secured by deposit accounts. In addition, the Company offers unsecured consumer loans through its Visa and MasterCard programs. In 1996, the Company continued to expand its consumer loan portfolio by marketing automobile, credit card and home equity loans. Management believes that these loans which carry a higher rate of interest, can enhance the bottom line when offered in conjunction with a prudent credit risk policy and collection program.
The underwriting standards employed by the Company for consumer loans include a determination of the applicant's payment history on other debts and an assessment of the borrower's ability to meet payments on the proposed loan along with existing obligations. In addition to the creditworthiness of the applicant, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by depreciable assets such as automobiles. In such cases, any repossessed collateral for defaulted consumer loans may not provide adequate sources of repayment for the outstanding loan balances as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Although the level of delinquencies in the Company's consumer loan portfolio has generally been low ($547,000 or approximately .96% of the consumer loan portfolio, at December 31, 1996, was 60 days or more delinquent), there can be no assurance that delinquencies will not increase in the future.
In 1996, the Company incurred $1,497,000 of consumer loan charge- offs, 89% of which were related to credit cards, and made provisions of $1,155,000 to the Allowance for Possible Loan Losses related to consumer loans. Also, management made a decision in 1996 to reallocate $350,000 to the Allowance on Consumer Loans from the Allowance on One-to-Four Family Loans, as no losses have been realized on this portfolio over at least the last five years, and none are expected on the current portfolio. During the year, the Company was able to recover $145,000 on consumer loans previously charged off.
Management regularly conducts a review of its loan portfolio, write- off experience and adequacy of allowance. During 1997, management intends to provide the greater of $100,000 or charge-offs on a monthly basis, to maintain the allowance at a level management feels is adequate.
ORIGINATION, PURCHASES AND SALES OF LOANS - -----------------------------------------
The Company originates real estate and other loans through internal loan production personnel (including commissioned originators) located in the Company's offices. Walk-in customers and referrals from real estate brokers, builders and commercial lenders in the area, are also important sources for loan originations.
In order to supplement loan origination during periods of unusual competition or reduced loan demand and in order to acquire additional adjustable rate loans for asset/liability management purposes, the Company periodically considers the purchase of mortgage-backed and related securities and/or residential loans from third party lenders. During 1994, the Company purchased approximately $3.3 million of adjustable rate mortgage-backed securities and approximately $10.1 million of fixed-rate mortgage-backed securities having balloon terms of seven years or less. In addition, during the same period, the Company purchased $3.1 million of fixed-rate and $4.0 million of floating rate short and intermediate tranche mortgage-related securities having estimated average lives of from two to four years. In 1995, the Company purchased $2.0 million of fixed rate and $21.2 million of floating rate mortgage-backed securities, and in 1996, the Company purchased $13.9 million of fixed rate and $87.5 million of floating rate mortgage-backed securities in order to improve its asset/liability management position.
The Company has sold fixed-rate residential real estate loans from time to time. When loans have been sold, the Company retains the responsibility for servicing the loan. During 1994, the Company sold $5.7 million of fixed-rate mortgage loans and at December 31, 1994, had a servicing balance of $18.9 million. At December 31, 1995, and 1996, there was approximately $133.4 million and $178.5 million, respectively, in the loan servicing portfolio, while no loans were sold in either year. At December 31, 1996, there was $80 million of loans securitized with FHLMC which are part of the loan serviced figure. The Company held these loans as mortgage-backed securities on the balance sheet. During 1997, management believes that the trend on securitizing loans will be reduced as the remaining portfolio contains only $29.9 million of conforming loans, (based on current FHLMC guidelines), of which only $10.1 million are securitizable at December 31, 1996. Some of these securitized loans may be sold in 1997 to meet liquidity needs. Furthermore, at December 31, 1996, the Company had no outstanding commitments to sell mortgage- backed or mortgage-related securities. See also "- Lending Activities - Mortgage-Backed and Related Securities."
The following table shows the loan originations, purchases, sales and repayments of the Company for the periods indicated.
DELINQUENCY PROCEDURES - ----------------------
When a borrower fails to make a required payment on a loan, the Bank attempts to cause the delinquency to be cured by contacting the borrower. In the case of residential loans subject to late charges, a late notice is sent 18 days after the due date, at which time a late charged is assessed. If the delinquency is not cured by the 30th day, contact with the borrower is made by phone or a second notice is mailed. Additional written and oral contacts are made with the borrower between 30 and 60 days after the due date.
In the event a real estate loan payment is past due for 90 days or more, management performs an in-depth review of the loan status, the condition of the property and circumstances of the borrower. Based upon the results of its review, management will decide whether to try to negotiate a repayment program with the borrower, or initiate foreclosure proceedings.
Delinquent consumer loans are handled in a similar manner, except that initial contact is made when the payment is five days past due, personal contact is made when the loan becomes more than ten days past due, and the loan is classified as a delinquent loan when it is past due for 30 days or more. Certain consumer loans are placed on non-accrual status when delinquent more than 90 days and deemed appropriate in the collection process.
The following table sets forth the Company's loan delinquencies by type, by amount and by percentage of type at December 31, 1996.
CLASSIFICATION OF ASSETS - ------------------------
Federal regulations require that each savings institution classify its own assets on a regular basis. In addition, in connection with examinations of savings institutions, OTS and FDIC examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: Substandard, Doubtful and Loss. The regulations also include a Special Mention category. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of Substandard assets, with the additional characteristics that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as Loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The Special Mention category consists of assets which do not currently expose a savings institution to a sufficient degree of risk to warrant classification, but do possess credit deficiencies or potential weaknesses deserving management's close attention. Assets classified as Substandard or Doubtful require the institution to establish prudent general allowances for possible loan losses. If an asset or portion thereof is classified as Loss, the institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified Loss, or charge off such amount. If an institution does not agree with an examiner's classification of an asset, it may appeal this determination to the District Director of the OTS. In the above table, all loans delinquent 90 days or more are classified according to the above rules. Certain loans delinquent less than 90 days are categorized as Special Mention. As a result of management's review of its assets, at December 31, 1996, the Company had categorized $623,700 of its assets as Special Mention, $88,500 as Substandard, $128,900 as Doubtful and none as Loss. The Company's classified assets consist of the non-performing loans detailed below and certain loans delinquent less than 90 days.
NON-PERFORMING ASSETS - --------------------- Real estate loans are placed on non-accrual status when either principal or interest is 90 days or more past due unless, in the judgment of management, other factors are present to justify the accrual of interest. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan.
The table below sets forth the amounts and categories of non- performing assets in the Company's loan portfolio. Loans are placed on non-accrual status when the collection of principal and/or interest becomes doubtful. For all years presented, the Company has had no troubled debt restructurings (which involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates).
Management has considered the Company's non-performing assets in establishing its Allowance for Possible Losses on Loans. As of December 31, 1996, there were no specific reserves on any of these assets.
As of December 31, 1996, there were no other loans not included on the table or discussed above where known information about the possible credit problems of borrowers caused management to have serious doubts as to the ability of the borrower to comply with present loan repayment terms.
LOAN LOSS RESERVE ANALYSIS - -------------------------- The following table sets forth an analysis of the Company's allowance for possible loan losses.
Because some loans may not be repaid in full, an allowance for possible loan losses is recorded. Increases to the allowance are recorded by a provision for possible 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 entire allowance is available for any loan charge-offs that occur. A loan is charged off against the allowance by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur.
In accordance with Statement of Financial Accounting Standard No. 114, as amended by 118 (SFAS 114), loans which are considered to be impaired, are reduced to the present value of expected future cash flows or to the fair value of the related collateral, by allocating a portion of the allowance to such loans. If these allocations cause the allowance for possible loan losses to require an increase, such increase is reported as a provision for possible loan losses charged to expense. Loans are evaluated for impairment when payments are delinquent 90 days or more, or when management downgrades the loan classification to doubtful.
The distribution of the Company's allowance for possible losses on loans at the dates indicated is summarized as follows:
Note: in 1995 and 1996, management made a decision to reallocate $500,000 and $350,000, respectively, to the Allowance on Consumer Loans from the Allowance on One-to-Four Family Loans, as no losses have been realized on this portfolio for at least the last five years, and none are expected on the current portfolio.
Management regularly conducts a review of its loan portfolio, write- off experience and adequacy of allowance. During 1997, management intends to provide the greater of $100,000 or charge-offs on a monthly basis, to maintain the allowance at a level management feels is adequate.
INVESTMENT ACTIVITIES =====================
As a part of its asset/liability management strategy, the Company invests in high quality short- and medium-term investments, including interest-bearing deposits and U.S. government and agency securities and, to a lesser extent, municipal bonds and marketable equity securities.
The Bank is required by federal regulations to maintain cash and eligible investments in an amount equal to 5% of customers' accounts and short-term borrowings to assure its ability to meet demands for withdrawals and repayments of short-term borrowings. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is provided. As of December 31, 1996 and 1995, the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable savings and current borrowings) was 9% and 5%, respectively.
The following table sets forth the composition of the Company's investment portfolio at the dates indicated. All items in the table are included at fair value.
The composition and contractual maturities of the securities portfolio at December 31, 1996, excluding FHLB of Chicago stock and equity securities, is indicated in the following table.
SOURCES OF FUNDS ================
GENERAL - ------- Deposit accounts have traditionally been the principal source of the Company's funds for use in lending and for other general business purposes. In addition to deposits, the Company derives funds from borrowings, loan repayments and cash flows generated from operations. Scheduled loan payments are a relatively stable source of funds, while loan prepayments and deposit flows are greatly influenced by general interest rates, economic conditions, competition and the restructuring occurring in the banking industry. Over the past two years, an additional source of funds has been the securitization of loans which are then classified as securities. The Bank has then sold some of the securities to meet liquidity needs in the payment of deposit withdrawals or the funding of loan growth. During 1997, unless there is a significant change in circumstances, additional material securitizations are not expected to occur.
Two non-deposit sources of funds which the Company has increasingly utilized during 1996 are the Treasury Tax and Loan ("T T & L") Option Account and the Retail Repurchase Agreement. The T T & L Account enables the U. S. Treasury to keep tax dollars with the Bank at a floating interest rate, and the Retail Repurchase Agreement allows customers to lend the Bank money which is collateralized by a security that the Bank owns.
DEPOSITS - -------- The Company attracts both short-term and long-term deposits from the Company's primary market area by offering a wide assortment of accounts and rates. The Company offers regular passbook and statement accounts, checking accounts (both interest bearing and non-interest bearing), money market accounts, fixed interest rate certificates of deposits with varying maturities, and individual retirement accounts.
Deposit account terms vary, according to the minimum balance required, the time period the funds must remain on deposit and the interest rate, among other factors. In March of 1995, the Company offered for one day, a certificate promotion in conjunction with the grand opening of its new Schaumburg location. Approximately $69 million was deposited, at a rate of 7.80%. These certificates matured in September of 1996, and concurrently, the Company offered a new Preferred Money Market product. The product has been successful, with a rate that is competitive, but significantly lower than 7.80%, which helped the Company's net interest margin to improve during the last quarter of 1996.
In setting rates, the Company regularly evaluates (i) its investment and lending opportunities, (ii) its internal costs of funds, (iii) the rates offered by competing institutions and (iv) its liquidity position. In order to decrease the volatility of its deposits, the Company imposes penalties on early withdrawal on its certificates of deposit. The Company does not have any brokered deposits and has no present intention to accept or solicit such deposits.
The Company believes that non-certificate accounts can provide relatively low cost funds and accordingly, the Company introduces promotions to attract new checking accounts, and has begun offering new services to make these accounts more desirable such as Telephone Access Banking and Debit Card, both of which have been extensively utilized by the customers.
The following table sets forth the deposit flows experienced by the Company during the periods indicated.
The following table sets forth the dollar amount of deposits in the various types of deposit programs offered by the Company for the periods indicated.
(1) Certificates of deposit include approximately $15,786,000, $17,262,000 and $20,164,000 at December 31, 1996, 1995, and 1994 respectively, which bear interest at increasing rates over the life of the deposit term. These certificates are included in the table at their current rate, while the Bank records interest expense on these certificates on a level yield basis over the contractual deposit term.
The following table shows rate and maturity information for the Company's certificates of deposit as of December 31, 1996. Approximately $15.8 million of the Company's certificates of deposit bear interest at increasing rates over the life of their contractual maturity term. The Company records interest expense on these certificates on a level yield basis over their contractual maturity term. The table below details the actual rates paid on certificates as of December 31, 1996.
The following table indicates the amount of the Company's certificates of deposit by time remaining until maturity as of December 31, 1996.
(1) Includes "Jumbo" certificates of $9,717,000
"Jumbo" certificates are a deposit product for deposits of over $100,000 which carry a rate and term negotiated between the Bank and the depositor at the time of issuance. Not all certificates of deposit with balances in excess of $100,000 are "Jumbos."
For additional information regarding the composition of the Company's deposits, see Note 6 of the "Notes to the Consolidated Financial Statements".
BORROWINGS - ----------- The Company's other available sources of funds include advances from the FHLB of Chicago and collateralized borrowings. As a member of the FHLB of Chicago, the Company is required to own capital stock in the FHLB of Chicago and is authorized to apply for advances from the FHLB of Chicago. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturities. The FHLB of Chicago may prescribe the acceptable uses for these advances, as well as limitations on the size of the advances and repayment provisions. The Company had $62.4 million of FHLB advances outstanding at December 31, 1996, secured by residential mortgage loans. Additional information regarding borrowings can be obtained in Note 7 of the "Notes to the Consolidated Financial Statements".
The following table sets forth the maximum month-end balance, average balance, and weighted average rates of borrowings for the periods indicated: 1996 1995 1994 ------------ ------------ ------------ (Dollars in Thousands) MAXIMUM MONTH-END BALANCES: FHLB Advances $135,600 $ 89,500 $ 52,000 Securities Sold Under Repurchase Agreement 16,162 462 --- Other 11,187 10,358 ---
AVERAGE BALANCES: FHLB Advances $ 89,630 $ 46,033 $ 15,251 Securities Sold Under Repurchase Agreement 11,684 142 --- Other 6,630 1,612 ---
WEIGHTED AVERAGE RATES: FHLB Advances 5.89% 6.25% 5.97% Securities Sold Under Repurchase Agreement 5.25 5.70 --- Other 5.40 5.83 ---
SOURCES OF FUNDS ================ The Company faces strong competition both in originating loans and in attracting deposits. Competition in originating real estate loans comes primarily from mortgage bankers, other savings institutions and commercial banks, all of which also make loans secured by real estate located in the Company's primary market area. The Company competes for real estate loans principally on the basis of the interest rates and loan fees it charges, the types of loans it offers and the quality of services it provides to borrowers. The competition for commercial and consumer loans comes primarily from commercial banks and finance companies.
The Company faces substantial competition in attracting deposits from other savings institutions, commercial banks, securities firms, money market and mutual funds, credit unions and other investment vehicles. The ability of the Company to attract and retain deposits depends on its ability to provide an investment opportunity that satisfies the requirements of investors as to rate of return, liquidity, risk and other factors. The Company competes for these deposits by offering a variety of deposit accounts at competitive rates, convenient business hours and a customer oriented staff.
SUPERVISION AND REGULATION
GENERAL ======= Financial institutions and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of the Company can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations, and policies of various governmental regulatory authorities including, but not limited to, the Office of Thrift Supervision ("OTS"), the Board of Governors of the Federal Reserve System (the "FRB"), the FDIC, the Internal Revenue Service and state taxing authorities, and the Securities and Exchange Commission (the "SEC"). The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial institutions, such as the Company and its subsidiaries, regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to the Company and its subsidiaries establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC's deposit insurance funds and the depositors, rather than the shareholders, of financial institutions.
The following references to material statutes and regulations affecting the Company and its subsidiaries are brief summaries thereof and do not purport to be complete, and are qualified in their entirety by reference to such statutes and regulations. Any change in applicable law or regulations may have a material effect on the business of the Company and its subsidiaries.
RECENT REGULATORY DEVELOPMENTS ==============================
On September 30, 1996, President Clinton signed into law the "Economic Growth and Regulatory Paperwork Reduction Act of 1996" (the "Regulatory Reduction Act"). Subtitle G of the Regulatory Reduction Act consists of the "Deposit Insurance Funds Act of 1996" (the "DIFA"). The DIFA provided for a one-time special assessment on each depository institution holding deposits subject to assessment by the FDIC for the Savings Association Insurance Fund (the "SAIF") in an amount which, in the aggregate, will increase the designated reserve ratio of the SAIF (i.e., the ratio of the insurance reserves of the SAIF to total SAIF- insured deposits) to 1.25% on October 1, 1996. The special assessment was paid by the Bank in full on November 27, 1996.
On October 8, 1996, the FDIC adopted a final regulation implementing the SAIF special assessment. In that regulation, the FDIC set the special assessment rate at .657% of SAIF-assessable deposits held on March 31, 1995. The amount of the special assessment paid by the Bank was $3,033,209, the full amount of which was recorded as a charge against earnings for the quarter ended September 30, 1996. As discussed below, however, the recapitalization of the SAIF resulting from the special assessment will significantly reduce the Bank's ongoing deposit insurance expense.
In light of the recapitalization of the SAIF pursuant to the special assessment authorized by the DIFA, the FDIC, on December 11, 1996, took action to reduce regular semi-annual SAIF assessments from the range of .23% - .31% of deposits to a range of 0% - .27% of deposits. The new rates would be effective for the Bank on January 1, 1997. From October 1, 1996 through December 31, 1996, SAIF-assessable institutions, such as the Bank were assessed at rates ranging from .18% - .27% of deposits, which represents the amount the FDIC calculated as necessary to cover the interest due for that period on outstanding obligations of the Financing Corporation (the "FICO"), discussed below. Because SAIF-assessable institutions were already assessed at rates from .23% - .31% of deposits for the semi-annual period ending December 31, 1996, the FDIC will refund the amount collected from such institutions for the period from October 1, 1996 through December 31, 1996 which exceeds the amount due for that period under the reduced assessment schedule. As a result, the deposit insurance assessments payable by the Bank have been reduced significantly beginning January 1, 1997.
Prior to the enactment of the DIFA, a substantial amount of the SAIF assessment revenue was used to pay the interest due on bonds issued by the FICO, the entity created in 1987 to finance the recapitalization of the Federal Savings and Loan Insurance Corporation (the "FSLIC"), the SAIF's predecessor insurance fund. Pursuant to the DIFA, the interest due on outstanding FICO bonds will be covered by assessments against both SAIF- and BIF- member institutions beginning January 1, 1997. Between January 1, 1997 and December 31, 1999, FICO assessments against BIF- member institutions cannot exceed 20% of the FICO assessments charged SAIF-member institutions. From January 1, 2000 until the FICO bonds mature in 2019, FICO assessments will be shared by all FDIC-insured institutions on a pro rata basis. It has been estimated that the FICO assessments for the period January 1, 1997 through December 31, 1999 will be approximately 0.013% of deposits for BIF members versus approximately 0.064% of deposits for SAIF members, and will be less than 0.025% of deposits thereafter.
The DIFA also provides for a merger of the BIF and SAIF on January 1, 1999. To facilitate the merger of the BIF and SAIF, the DIFA directs the Treasury Department to conduct a study on the development of a common charter and to submit a report, along with appropriate legislative recommendations, to the Congress by March 31, 1997.
In addition to the DIFA, the Regulatory Reduction Act includes a number of statutory changes designed to eliminate duplicative, redundant or unnecessary regulatory requirements. Among other things, the Regulatory Reduction Act removes the percentage of assets limitations on the aggregate amount of credit card and education loans that may be made by a savings association, such as the Bank; increases from 10% to 20% of total assets the aggregate amount of commercial loans that a savings association may make, provided that any amount in excess of 10% of total assets represents small business loans; allows education, small business and credit card loans to be counted in full in determining a savings association's compliance with the qualified thrift lender ("QTL") test; and provides that a savings association may be deemed to meet the QTL test if is qualifies as a domestic building and loan association under the Internal Revenue Code. The Regulatory Reduction Act also clarifies the liability of a financial institution, when acting as a lender or in a fiduciary capacity, under the federal environmental laws. Although the full impact of the Regulatory Reduction Act on the operations of the Company and the Bank cannot be determined at this time, management believes that the legislation will reduce compliance costs to some extent and allow the Company and the Bank somewhat greater operating flexibility.
On August 10, 1996, President Clinton signed into law the Small Business Job Protection Act of 1996 (the "Job Protection Act"). Among other things, the Job Protection Act eliminates the percent-of-taxable- income ("PTI") method for computing additions to a savings association's tax bad debt reserves for tax years beginning after December 31, 1995, and requires all savings associations that have used the PTI method to recapture, over a six year period, all or a portion of their tax bad debt reserves added since the last taxable year beginning before January 1, 1988. The amount of the recapture for the Bank is approximately $3,108,000. The Job Protection Act allows a savings association to postpone the recapture of bad debt reserves for up to two years if the institution meets a minimum level of mortgage lending activity during those years. As a result of these provisions of the Job Protection Act, the Bank will determine additions to its tax bad debt reserves using the same method as a commercial bank of comparable size, and, when the Bank decides to convert to a commercial bank charter, the changes in the tax bad debt recapture rules enacted in the Job Protection Act will make such conversion less costly.
THE COMPANY ===========
GENERAL - ------- The Company, as the sole shareholder of the Bank, is a thrift holding company. As a thrift holding company, the Company is registered with, and is subject to regulation by, the OTS under the HOLA. Under the HOLA, the Company is subject to periodic examination by the OTS and is required to file periodic reports of its operations and such additional information as the OTS may require.
INVESTMENTS AND ACTIVITIES - -------------------------- The HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries from (i) acquiring control of, or acquiring by merger or purchase of assets, another savings and loan or savings and loan holding company without the prior written approval of the OTS; (ii) subject to certain exceptions, acquiring more than 5% of the issued and outstanding shares of voting stock of a savings association or savings and loan holding company except as part of an acquisition of control approved by the OTS; or (iii) acquiring or retaining control of a financial institution that does not have SAIF or BIF insurance of accounts.
A savings and loan holding company may acquire savings associations located in more than one state in both supervisory transactions involving failing savings associations and nonsupervisory acquisitions of healthy institutions, subject to the requirement that in any nonsupervisory transaction, the law of the state in which the savings association to be acquired is located must specifically authorize the proposed acquisition, by language to that effect and not merely by implication. State laws vary in the extent to which interstate acquisitions of savings associations are permitted. Illinois law presently permits savings and loan holding companies located in any state of the United States to acquire savings associations or savings and loan holding companies located in Illinois, subject to certain conditions, including the requirement that the laws of the state in which the acquiror is located permit savings and loan holding companies located in Illinois to acquire savings associations or savings and loan holding companies in the acquiror's state.
A savings association holding company that controls only one savings association subsidiary is generally not subject to any restrictions on the non-banking activities that the holding company may conduct either directly or through a non-banking subsidiary, so long as the holding company's savings association subsidiary constitutes a qualified thrift lender. If, however, the OTS determines that there is reasonable cause to believe that the continuation by a savings association holding company of a particular activity constitutes a serious risk to the financial safety, soundness or stability of its savings association subsidiary, the OTS may require the holding company to cease engaging in the activity (or divest any subsidiary which engages in the activity) or may impose such restrictions on the holding company and the subsidiary savings association as the OTS deems necessary to address the risk, including imposing limitations on (i) the payment of dividends by the savings association to the holding company, (ii) transactions between the savings association and its affiliates and (iii) any activities of the savings association that might create a serious risk that liabilities of the holding company and its affiliates may be imposed on the savings association.
Federal legislation also prohibits the acquisition of "control" of a savings association or savings and loan holding company, such as the Company, without prior notice to certain federal bank regulators. "Control" is defined in certain cases as acquisition of 10% of the outstanding shares of a savings association or a holding company.
DIVIDENDS - --------- The OTS possesses enforcement powers over savings and loan holding companies to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by savings and loan holding companies. In addition to the restrictions on dividends that may be imposed by the OTS, the Delaware General Corporation Law would allow the Company to pay dividends only out of its surplus, or if the Company has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
FEDERAL SECURITIES REGULATION - ----------------------------- The Company's common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Company is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.
THE BANK ========
GENERAL - ------- The Bank is a federally chartered savings association, the deposits of which are insured by the SAIF of the FDIC. As a SAIF-insured, federally chartered savings association, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the OTS, as the chartering authority for federal savings associations, and the FDIC as administrator of the SAIF. The Bank is also a member of the Federal Home Loan Bank System, which provides a central credit facility primarily for member institutions.
DEPOSIT INSURANCE - ----------------- As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk- based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium, while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period.
During the period January 1, 1996 through September 30, 1996, SAIF assessment rates ranged from 0.23% of deposits to 0.31% of deposits. As a result of the recapitalization of the SAIF on October 1, 1996, SAIF assessment rates were reduced, effective October 1, 1996, to a range of 0.18% of deposits to 0.27% of deposits and were further reduced, effective January 1, 1997, to a range of 0% of deposits to 0.27% of deposits. See "--Recent Regulatory Developments" section above.
The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management of the Company is not aware of any activity or condition that could result in termination of the deposit insurance of the Bank.
FICO ASSESSMENTS - ----------------- Since 1987, a portion of the deposit insurance assessments paid by SAIF members have been used to cover interest payments due on the outstanding obligations of the FICO, the entity created to finance the recapitalization of the FSLIC, the SAIF's predecessor insurance fund. Pursuant to federal legislation enacted September 30, 1996, commencing January 1, 1997, both SAIF members and BIF members will be subject to assessments to cover the interest payment on outstanding FICO obligations. Such FICO assessments made against BIF members may not exceed 20% of the amount of the FICO assessments made against SAIF members. It is estimated that SAIF members will pay FICO assessments equal to 0.064% of deposits while BIF members will pay FICO assessments equal to 0.013% of deposits. Between January 1, 2000 and the maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a pro rate basis. It is estimated that FICO assessments during this period will be less than 0.025% of deposits.
OTS ASSESSMENTS - --------------- Federal savings association are required to pay supervisory fees to the OTS to fund the operations of the OTS. The amount of such supervisory fees is based upon each institution's total assets, including consolidated subsidiaries, as reported to the OTS. During the year ended December 31, 1996, the Bank paid supervisory fees to the OTS totaling $131,381.
CAPITAL REQUIREMENTS - -------------------- The OTS has established the following minimum capital standards for savings associations, such as the Bank: a core capital requirement, consisting of a minimum ratio of core capital to total assets of 3%; a tangible capital requirement consisting of a minimum ratio of tangible capital to total assets of 1.5%; and a risk-based capital requirement, consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must consist of core capital. For purposes of these capital standards, core capital consists primarily of permanent stockholders' equity less intangible assets other than certain supervisory goodwill, certain mortgage servicing rights and certain purchased credit card relationships and less investments in subsidiaries engaged in activities not permitted for national banks; tangible capital is substantially the same as core capital except that all intangible assets other than certain mortgage servicing rights must be deducted; and total capital means core capital plus certain debt and equity instruments that do not qualify as core capital and a portion of the Bank's allowances for loan and lease losses.
The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, the regulations of the OTS provide that additional capital may be required to take adequate account of interest rate risk or the risks posed by concentrations of credit or nontraditional activities.
During the year ended December 31, 1996, the Bank was not required by the OTS to increase its capital to an amount in excess of the minimum regulatory requirements. As of December 31, 1996 the Bank exceeded its minimum regulatory capital requirements with a core capital ratio of 7.90%, a tangible capital ratio of 7.90% and a risk-based capital ratio of 16.60%. Additional information on the Bank's capital ratios can be obtained in Note 10 of the "Notes to the Consolidated Financial Statements".
Federal law provides the federal banking regulators, with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well-capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution.
DIVIDENDS - --------- OTS regulations impose limitations upon all capital distributions by thrifts, including cash dividends. The rule establishes three tiers of institutions. An institution that exceeds all fully phased-in capital requirements before and after the proposed capital distribution (a "Tier 1 Institution") could, after prior notice to, but without the approval
of, the OTS, make capital distributions during a calendar year of up to the higher of (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio", which is the excess capital over its fully phased-in capital requirements at the beginning of the calendar year, or (ii) 75% of its net income over the most recent preceding four quarter period. Any additional capital distributions would require prior regulatory approval. As of December 31, 1996, the Bank was a Tier 1 Institution.
The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 1996. Further, under applicable regulations of the OTS, the Bank may not pay dividends in an amount which would reduce its capital below the amount required for the liquidation account established in connection with the Bank's conversion from the mutual to the stock form of ownership in 1992. As if December 31, 1996 approximately $17.1 million was available for payment of dividends by the Bank to the Company. Notwithstanding the availability of funds for dividends, however, the OTS may prohibit the payment of any dividends if the OTS determines such payment would constitute an unsafe or unsound practice.
INSIDER TRANSACTIONS - -------------------- The Bank is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the Company and its subsidiaries, on investments in the stock or other securities of the Company and its subsidiaries and the acceptance of the stock or other securities of the Company or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and its subsidiaries, to principal stockholders of the Company, and to "related interests" of such directors, officers and principal stockholders. In addition, such legislation and regulations may affect the terms upon which any person becoming a director or officer of the Company or one of its subsidiaries or a principal stockholder of the Company may obtain credit from banks with which the Bank maintains a correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS - ------------------------------ The OTS has adopted guidelines which establish operational and managerial standards to promote the safety and soundness of savings associations. The guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. In general, the guidelines prescribe the goals to be achieved in each area, and each institution will be responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the OTS may require the institution to submit a plan for achieving and maintaining compliance. The preamble to the guidelines states that the OTS expects to require a compliance plan from an institution whose failure to meet one or more of the guidelines is of such severity that it could threaten the safety and soundness of the institution. Failure to submit an acceptable plan, or failure to comply with a plan that has been accepted by the OTS, would constitute grounds for further enforcement action.
BRANCHING AUTHORITY - ------------------- Federally chartered savings associations which qualify as "domestic building and loan associations," as defined in the Internal Revenue Code, or meet the QTL test (see "The Bank -- Qualified Thrift Lender Test") have the authority, subject to receipt of OTS approval, to establish branch offices anywhere in the United States, either de novo or through acquisitions of all or part of another financial institution. If a federal savings association fails to qualify as a "domestic building and loan association," as defined in the Internal Revenue Code, or fails to meet the QTL test, the association generally may establish a branch in a state other than the state of its home office only to the extent authorized by the law of the state in which the branch is to be located. As of December 31, 1996, the Bank qualified as a "domestic building and loan association," as defined in the Internal Revenue Code, and met the QTL test.
QUALIFIED THRIFT LENDER TEST - ---------------------------- Under the QTL test in effect prior to September 30, 1996, the Bank generally was required to invest at least 65% of its portfolio assets in "qualified thrift investments," as measured on a monthly average basis in nine out of every 12 months. Qualified thrift investments for purposes of the QTL test consist principally of residential mortgage loans, mortgage-backed securities and other housing and consumer-related investments. The term "portfolio assets" is statutorily defined to mean a savings association's total assets less goodwill and other intangible assets, the association's business property and a limited amount of its liquid assets. Under amendments to the HOLA enacted September 30,1 996, the Bank will be deemed to satisfy the QTL test if it either holds qualified thrift investment equaling 65% or more of its portfolio assets or qualifies as a domestic building and loan association under the Internal Revenue Code. The new legislation also expanded somewhat the definition of qualified thrift investments. See "Recent Regulatory Developments." As of December 31, 1996, the Bank satisfied the QTL test, and qualified as a "domestic building and loan association," as defined in the Internal Revenue Code.
LIQUIDITY REQUIREMENTS - ---------------------- OTS regulations currently require each savings association to maintain, for each calendar month, an average daily balance of liquid assets (including cash, certain time deposits, bankers' acceptances, and specified United States Government, state or federal agency obligations) equal to at least 5% of the average daily balance of its net withdrawable accounts plus short-term borrowings (those repayable in 12 months or less) during the preceding calendar month. This liquidity requirement may be changed from time to time by the OTS to an amount within a range of 4% to 10% of such accounts and borrowings, depending upon economic conditions and the deposit flows of savings associations. OTS regulations also require each savings association to maintain, for each calendar month, an average daily balance of short-term liquid assets (generally liquid assets having maturities of 12 months or less) equal to at least 1% of the average daily balance of its net withdrawable accounts plus short-term borrowings during the preceding calendar month. Penalties may be imposed for failure to meet liquidity ratio requirements. At December 31, 1996, the Bank was in compliance with OTS liquidity requirements, with an overall liquidity ratio of 9% and a short-term liquidity ratio of 4%.
FEDERAL RESERVE SYSTEM - ---------------------- FRB regulations, as presently in effect, require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts), as follows: for transaction accounts aggregating $49.3 million or less, the reserve requirement in 3% of total transaction accounts; and for transactions accounts aggregating in excess of $49.3 million, the reserve requirement is $1.479 million plus 10% of the aggregate amount of total transaction accounts in excess of $49.3 million. The first $4.4 million of otherwise reservable balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment by the FRB. The Bank is in compliance with the foregoing requirements. The balances used to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OTS.
EMPLOYEES ========= At December 31, 1996, the Company had a total of 105 full-time employees and 37 part-time employees. None of the Company's employees are represented by any collective bargaining group. Management considers its employee relations to be excellent.
EXECUTIVE OFFICERS OF THE COMPANY ================================= The executive officers of the Company, each of whom is currently an executive officer of the Bank, are identified below. The executive officers of the Company are elected annually by the Company's Board of Directors. The Bank has entered into employment agreements with all the executive officers named below.
Name Position With Holding Company and Bank - ---------------------- ----------------------------------------
Larry G. Gillie President and Chief Executive Officer
Paul A. Larsen Senior Vice-President, Treasurer, Chief Financial Officer, and Corporate Secretary
Allen J. Bishop Senior Vice-President, Marketing Manager
Steven J. Messerschmidt Senior Vice-President, Operations Manager
Lawrence J. Schmidt Senior Vice-President, Administrative Manager
Joseph H. Tillotson Senior Vice-President, Lending Manager
Larry G. Gillie, age 56, became the Company's President and Chief Executive Officer on March 1, 1994. Until that time, he had been the Company's Executive Vice President since its formation. He also became the President and Chief Executive Officer of the Bank on March 1, 1994, after having served as the Executive Vice President of the Bank since January 17, 1990. Mr. Gillie joined the Bank in 1987. Prior to joining the Bank, Mr. Gillie was the President of Northbrook Bank, Northbrook, Illinois, from 1979 to 1986.
Paul A. Larsen, age 47, joined the Company in March of 1995 as Senior Vice-President, Chief Financial Officer and Treasurer, and serves in a similar capacity for the Bank. Mr. Larsen has over 25 years of financial management and treasury operations experience within the commercial banking environment.
Allen J. Bishop, age 49, was named Senior Vice-President of the Company and the Bank in March, 1995. He joined the Bank in August of 1992 as Marketing Manager. Mr. Bishop has over 23 years experience in bank marketing and advertising.
Steven J. Messerschmidt, age 45, was named Senior Vice-President of the Company and the Bank in March, 1995. He joined the Bank in April of 1993 as Operations Manager. Mr. Messerschmidt has over 21 years experience in retail banking operations.
Lawrence J. Schmidt, age 44, joined the Company and the Bank in November, 1995 as Senior Vice-President, Administrative Manager. Mr. Schmidt has 20 years experience in a commercial bank environment, with emphasis on commercial lending, loan review and strategic planning.
Joseph H. Tillotson, age 52, was named a Senior Vice-President of the Company and the Bank in March, 1995. He joined the Bank in March of 1993 as Lending Manager. Mr. Tillotson has over 27 years of lending and operations experience in banking.
Item 2.
Item 2. PROPERTIES - --------------------- The Company owns the building and land for its headquarters which is located at 749 Lee Street, Des Plaines, Illinois, and which opened in 1954. At December 31, 1996, this property had 19,575 square feet and a net book value of approximately $2.7 million. The Company also owns the land for its employee parking lot located at 761 Graceland Street, Des Plaines, Illinois. On the same date, this location had a net book value of approximately $19,000.
In March, 1994, the Company acquired the Arlington Heights branch of the former Irving Federal Bank, F.S.B. from the Resolution Trust Corporation. The building contains approximately 14,260 square feet. At December 31, 1996, the net book value of the land and the building was approximately $2.7 million.
In March of 1995, the Company opened its new branch office in Schaumburg, Illinois. The office has approximately 9,800 square feet of space and is situated on a 1.6 acre parcel. At December 31, 1996 the net book value of the land and the building was approximately $2.8 million.
Item 3.
Item 3. LEGAL PROCEEDINGS - ----------------------------
The Company is involved as plaintiff or defendant in various legal actions arising in the normal course of its business. While the ultimate outcome of these various legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these legal actions should not have a material effect on the Company's consolidated financial position or results of operations.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - --------------------------------------------------------------
No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 1996.
PART II -------
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED - --------------------------------------------------------------- SECURITY HOLDER MATTERS -----------------------
As of March 5, 1997, there were 660 holders of record of FirstFed Bancshares, Inc. common stock, and an estimated 1,700 holders of its stock in "street name."
The common stock of FirstFed Bancshares, Inc. is traded on the National Association of Securities Dealers Automated Quotation System (Nasdaq) National Market System under the symbol FFDP.
The table below shows the reported high and low sales prices and dividends (split adjusted) during the periods indicated. The common stock began trading on June 30, 1992.
1996 Dividend High Low 1995 Dividend High Low - ------- -------- ----- ------ ------- -------- ------ ------ 1st Qtr. $.07 $14.67 $14.00 1st Qtr. $.07 $13.17 $11.35 2nd Qtr. $.10 $18.00 $14.35 2nd Qtr. $.07 $13.17 $12.00 3rd Qtr. $.10 $17.50 $16.25 3rd Qtr. $.07 $14.00 $12.58 4th Qtr. $.10 $17.50 $16.50 4th Qtr. $.07 $15.17 $13.35
Year end closing price = $17.25 Year end closing price = $14.17
The Annual Meeting of Stockholders of FirstFed Bancshares, Inc. will be held at 10:00 a.m. on Tuesday, April 22, 1997 at the following location: Casa Royale 783 Lee Street Des Plaines, Illinois 60016
Stockholders are welcome to attend.
Investor information or a copy of the FirstFed Bancshares, Inc. annual report on From 10-K, filed with the Securities and Exchange Commission, is available without charge by writing to Larry G. Gillie, President, or Paul A. Larsen, Sr. Vice President and Treasurer, at the corporate office: FirstFed Bancshares, Inc. 749 Lee Street Des Plaines, Illinois 60016 (847)294-6500
The following companies make a market in FFDP common stock: ABN Amro Chicago Corporation Howe Barnes Investments, Inc. Chicago Capital, Inc. M.A. Schapiro Herzog, Heine, Geduld, Inc. Stifel Nicolaus & Co., Inc.
The dividend reinvestment and stock purchase plan offers stockholders an opportunity to automatically make full or partial dividend reinvestments and make optional cash purchases between $25 and $5,000 each quarter, with no commission charges.
Inquiries regarding stock transfer, registration, lost certificates or changes in name and address should be directed to the stock transfer agent and registrar by writing: Harris Trust and Savings Bank Shareholder Services P.O.Box A-3504 Chicago, Illinois 60690-3504 (312) 360-5201
Corporate Office: FirstFed Bancshares, Inc. 749 Lee Street Des Plaines, Illinois 60016 (847) 294-6500
Corporate Counsel: Barack, Ferrazzano, Kirschbaum, Perlman & Nagelberg 333 W. Wacker Drive Suite 2700 Chicago, Illinois 60606
Independent Auditor: Crowe, Chizek and Company LLP One Mid America Plaza Suite 800 Oak Brook, Illinois 60522
Internet address: http://www.firstfedbank.com
First Federal Bank Offices: 749 Lee Street Des Plaines, Illinois 60016 (847) 294-6500
770 W. Dundee Road Arlington Heights, Illinois 60004 (847) 577-8100
2601 W. Schaumburg Road Schaumburg, Illinois 60194 (847) 798-2800
Item 6.
Item 6. SELECTED FINANCIAL DATA - ----------------------------------
SELECTED CONSOLIDATED FINANCIAL INFORMATION (Dollars In Thousands)
(1) Includes loans held for securitization.
(2) Under applicable provision of the Internal Revenue Code, the Company deducted for tax purposes loan loss provisions which exceeded its financial statement loan loss provisions. Accordingly, retained earnings at December 31, 1996 included approximately $9.3 million for which no liability for federal taxes has been recorded.
SELECTED FINANCIAL RATIOS AND OTHER DATA (Dollars In Thousands)
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ----------------------------------------------------------------------- AND RESULTS OF OPERATIONS -------------------------
FINANCIAL OVERVIEW ================== Total assets of the Company decreased to $541.2 million at December 31, 1996, or 13.1% from year end 1995. During 1996, $242.6 million in securities were sold, generating gains of $2.6 million. These funds were used to generate new loans, including new commercial and commercial real estate loans. Also, $69 million in 7.8% certificates of deposit offered in connection with the opening of the Schaumburg facility matured, which were partially offset by increases to deposit products in the amount of $16.4 million. At the same time, the Company was able to repay borrowings of $19.1 million.
For the year ending December 31, 1996, the Company recorded earnings of $3,549,000, before the effect of the one-time special assessment to recapitalize the Savings Association Insurance Fund (SAIF), in the amount of $1,960,000, net of taxes. This represents a 36.0% increase in net income from the $2,610,550 earned in 1995. The Bank remained a well- capitalized institution, exceeding all current minimum regulatory capital requirements.
STOCK REPURCHASE PROGRAMS AND DIVIDENDS ======================================= On May 15, 1996, the Company effected a three-for-two stock split payable in the form of a one-for-two stock dividend. The regular quarterly dividend rate remained at $.10 per share post-split, representing a 50% increase in the dividend rate as a result of the split. The Company paid four regularly quarterly dividends during 1996, and has announced a $.10 per share dividend for the first quarter of 1997.
During 1996, the Company announced its eighth and ninth stock repurchase programs, for a total of 300,000 shares. Both buyback programs are now completed, at an average price of $17.04.
NON-RECURRING EXPENSE ===================== In 1996, the Company terminated its defined benefit pension plan which covered substantially all employees, and distributed all proceeds to the participants. In 1995, an estimated curtailment expense for the termination was recorded in the amount of $271,000, and in 1996, an additional expense of $30,000 was recorded when the final determination was made.
On September 30, 1996, legislation was signed authorizing the recapitalization of the SAIF through a one-time special assessment of 65.7 basis points. The Bank recorded this expense, in the amount of $3,033,000 during 1996. Beginning January, 1997, management expects an annual reduction in deposit insurance premiums of approximately $750,000, assuming stable deposit levels.
GENERAL ======= On June 30, 1992, the Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings bank. The Bank issued all of its common stock to the Company, and concurrently, the Company issued 3,220,000 shares of Common Stock at $10 per share, pre-split, all pursuant to a plan of conversion (the "Conversion"). As part of the Conversion, proceeds were used to purchase the stock of the Bank.
The Company's business activities currently consists of ownership of the Bank, and investments in other equity securities. The Bank's principal business activities consist of attracting deposits from the public and investing these deposits, together with funds generated from operations and borrowings, primarily in loans secured by mortgages on one-to-four family residences, consumer loans, commercial real estate and commercial loans, investment securities and mortgage-backed securities. The Bank's deposit accounts are insured to the maximum allowable by the Federal Deposit Insurance Corporation (the "FDIC").
The Bank's results of operation are dependent primarily on net interest income, which is the difference between the interest earned on its loans, mortgage-backed securities and investment securities portfolios, and the interest paid on deposits and borrowed funds. The Bank's operating results are also affected, to a lesser extent, by loan commitment fees, deposit related charges and other income. Operating expenses of the Bank include employee compensation and benefits, equipment and occupancy costs, federal deposit insurance premiums and other administrative expenses.
The Bank's results of operations are further affected by economic and competitive conditions, particularly changes in market interest rates. Results are also affected by monetary and fiscal policies of federal agencies, and actions of regulatory authorities.
The Company's basic mission is to continue to serve its local communities by offering profitable financial services. In seeking to accomplish this mission, management is committed to (i) maintaining tangible capital in excess of regulatory requirements, (ii) maintaining high asset quality, (iii) maximizing interest rate spread, and (iv) managing exposure to interest rate risk.
The following information for the Company is presented on a consolidated basis. Except as the context otherwise requires, references to the "Company" refer to the Company, the Bank, and the Bank's subsidiary, First Insurance Agency, Inc. The discussion and analysis that follows should be read in conjunction with the financial statements, notes, and tables presented herein. The information provided below has been rounded in order to simplify presentation. However, ratios and percentages are calculated using the detailed financial information.
BUSINESS STRATEGY ================= The key components of management's business strategy are as follows:
BALANCE SHEET STRUCTURE AND INTEREST RATE RISK MANAGEMENT - --------------------------------------------------------- Management of the Company has undertaken a restructuring of the balance sheet of the Bank from a traditional thrift to that of a full service community bank. As part of this effort, in December 1995, management securitized with FHLMC, the conforming portfolio of 15 and 30 year fixed rate single family residential mortgage loans totaling approximately $116 million. At that time, the Bank had 73% of its balance sheet in fixed rate assets. It is management's goal to have no more than 50% of total assets in fixed rate instruments.
In 1996, the Company sold over $93 million in 15 and 30 year fixed rate mortgage-backed securities, generating net gains of over $2.6 million, or approximately $1.5 million after related taxes. In December 1996, the Bank securitized another $61 million in fixed rate and balloon mortgages with FHLMC, and may sell them in 1997 to meet liquidity needs.
Because of the securitizations of loans in 1995 and 1996, at December 31, 1996 there were $10.1 million of loans remaining in the portfolio which were conforming and could be securitized. In 1997, unless there is a significant change in circumstances, additional material securitizations are not expected to occur.
Redeploying the funds from these sales into variable rate investments and higher yielding commercial and commercial real estate loans enables the Bank to remain flexible in volatile interest rate markets.
CONTROL OF OPERATING EXPENSE - ---------------------------- Management continues to focus on controlling non-interest expenses by implementing cost controls on all aspects of the Bank's operations. During 1996, operating expenses (prior to the one-time SAIF assessment) was $10,671,000. For 1995, operating expenses (net of two non-recurring items discussed below in "Comparison of Operating Results for the Years Ended December 31, 1996 and December 31, 1995 -- Non-Interest Expense"), was $10,327,000. This represents an increase of $344,000, or 3.3% from 1995. Most of this increase can be attributed to the operation of the Schaumburg location, opened in March of 1995. It is management's intent to continue to closely monitor non-interest expenses.
DEPOSIT BASE - ------------ The Company attracts both short-term and long-term deposits from the Company's primary market area by offering a wide assortment of accounts and rates. The Company offers regular passbook and statement savings accounts, checking accounts (both interest bearing and non-interest bearing), money market accounts, fixed interest rate certificates of deposits with varying maturities, and individual retirement accounts.
Deposit account terms vary, according to the minimum balance required, the time period the funds must remain on deposit and the interest rate, among other factors. In March of 1995, the Company offered for one day, a certificate of deposit promotion in conjunction with the grand opening of its new Schaumburg location. Approximately $69 million was deposited, at a rate of 7.8%. These certificates matured in September of 1996, and concurrently, the Company offered a new Preferred Money Market product. The product has been successful, with a rate that is competitive, but lower than 7.8%, which helped the Company's net interest margin to improve during the last quarter of 1996.
In setting rates, the Company regularly evaluates (i) its investment and lending opportunities, (ii) its internal costs of funds, (iii) the rates offered by competing institutions and (iv) its liquidity position. In order to decrease the volatility of its deposits, the Company imposes penalties on early withdrawal on its certificates of deposit. The Company does not have any brokered deposits and has no present intention to accept or solicit such deposits.
The Company believes that non-certificate accounts can provide relatively low cost funds and accordingly, the Company introduces promotions to attract new checking accounts, and has begun offering new services to make these accounts more desirable such as Telephone Access Banking and Debit Card, both of which have been extensively utilized by customers.
LENDING PRODUCTS - ---------------- The principal lending activity of the Bank historically has been originating first mortgage loans for its portfolio, secured by owner occupied one- to four-family residential properties located in its primary market area. The Bank also offers a wide selection of consumer loans.
Beginning late in 1995, and continuing into 1996, the Bank began a major balance sheet restructuring project, to enable it to evolve into a full-service commercial bank. The Bank now offers multi-family structure loans, commercial loans, commercial real estate loans and commercial leases, and intends to focus on this type of lending going forward. At the end of 1996, the Bank securitized $61 million of fixed rate and balloon portfolio loans with FHLMC. These loans were classified as securities at December 31, 1996. Management may sell these securities in 1997, depending on liquidity needed to originate higher yielding consumer and commercial loans. The Company also invests in mortgage-backed and related securities to supplement its lending activities and to assist in asset/liability management.
FINANCIAL CONDITION ===================
Total consolidated assets of the Company decreased $81.3 million, or 13.1% from $622.5 million at December 31, 1995 to $541.2 million at December 31, 1996. This decrease can be attributed to the restructuring that occurred on both sides of the balance sheet. Fixed rate mortgage- backed securities were sold and partially replaced by commercial loans and adjustable rate mortgages and mortgage-backed securities. On the liability side, borrowings decreased, as did longer term certificates of deposit. Also, the 7.8% certificates of deposit opened as part of the Grand Opening of the Schaumburg office matured. The Company has seen an increase in shorter term deposit products such as the Preferred Money Market account, which carries a lower rate of interest.
Loans originated during the year ended December 31, 1996 totaled $127.1 million, of which 46% were residential mortgages, and 22% were commercial real estate loans, commercial loans, and commercial leases, and 32% were consumer loans. Of the first mortgage loans originated, 24% were fixed rate, and the balance were balloons and adjustables. As part of the balance sheet restructuring project, management is focusing more on commercial lending. The Bank's mortgage loan originations are made up of mostly adjustable rate and balloon products which have shorter maturities, than 15 and 30 year fixed rate instruments. The Bank securitized $61 million of fixed rate and balloon loans in December 1996, resulting in net loans receivable increasing $7.6 million, or 2.3% from $332.4 million at December 31, 1995, to $340 million at December 31, 1996. The $61 million of securitized loans were classified as mortgage-backed securities available-for-sale at December 31, 1996. Loans originated for the year ended December 31, 1995 totaled $174.3 million, of which 76% were mortgages, 23% were consumer, and 1% was a commercial real estate loan. Of the first mortgage loans originated in 1995, 55% were fixed rate, and the balance were balloons and adjustable.
Total non-performing loans as of December 31, 1996 increased to $856,000 or 0.2% of total assets. At December 31, 1995, non-performing loans were $681,000 or 0.1% of total assets. Historically this number
is at the high end of the range, but below the rate experienced by the Bank's peer group. Management believes the allowance for possible loan losses to be adequate. Furthermore, 70% of non-performing loans were one-to-four family residential mortgages, and the Bank has not incurred any losses on such mortgages within the last five years.
Mortgage-backed and other mortgage-related securities decreased $92.2 million or 45.2% from December 31, 1995. During 1996, proceeds from the sales of fixed rate mortgage-backed securities as well as principal payments and other securities maturities totaling $252.1 million, were used to purchase $101.4 million in predominantly adjustable rate mortgage-backed securities. At December 31, 1996, $61 million of newly securitized loans are held in the mortgage-backed portfolio, as available-for-sale. Non mortgage-backed securities increased $7.3 million or 15.8% from December 31, 1995. Most of the securities purchased were U.S. Treasury and Government Agency Obligations. At December 31, 1996, mortgage-backed and other securities comprised 31% of total assets.
Deposits decreased to $402.1 million at December 31, 1996, from $454.7 million at December 31, 1995, a decrease of $52.6 million or 11.6%. This decrease was a direct result of $69 million in maturing 7.8% certificates of deposit, partially offset by increases in a new Preferred Money Market product, and growth in both non-interest bearing checking accounts and short-term certificates of deposit.
Short-term borrowings (due within one year) decreased $16.7 million from the December 31, 1995 balance of $70.4 million to $53.7 million at December 31, 1996. Long-term borrowings, all of which are Federal Home Loan Bank advances, have also decreased $2.4 million, or 9.0% since year end 1995.
Book value per common share decreased to $16.30 at December 31, 1996 from $16.55 at December 31, 1995. This was due to the one-time SAIF special assessment, and the change in the unrealized gain on securities available-for-sale, from a gain of $1.7 million at December 31, 1995, to a gain of $.5 million at December 31, 1996. Earnings per share increased from $.67 for the year ended December 31, 1995, to $1.00 for the year ended December 31, 1996, without the effect of the one-time SAIF special assessment.
RESULTS OF OPERATIONS ===================== The Bank's results of operations depend primarily on the level of its net interest income and its ability to generate non-interest income and control non-interest expense. Net interest income is a function of the volume of interest-earning assets and interest-bearing liabilities, and the interest rates paid on them.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 ===================================================================== AND DECEMBER 31, 1995 =====================
GENERAL - ------- Net income for the year ended December 31, 1996 was $1,589,000 compared to $2,611,000 for the year ended December 31, 1995, a decrease of $1,022,000 or 39.1%. This decrease included the one-time special assessment to recapitalize the SAIF, in the amount of $3,033,000, pre tax. This non-recurring charge was offset by net gains on the sales of securities of approximately $2.5 million, or $1.5 million, after related taxes.
During 1995, two non-recurring items were recorded. They were $271,000 for the estimated unfunded liability of the Defined Benefit Plan, and $124,000 for compensation to former officers, less related taxes.
Without the effect of these non-recurring items, net income for 1996 would have been $3,465,000, compared to $2,852,000 for 1995, an increase of $615,000 or 21.6%. This increase can be attributed to gains on sales of securities and increases in other non-interest income of $3,025,000, offset by a decrease in net interest income of $990,000, an increase in the provision for possible loan losses of $753,000, an increase in non- interest expense of $464,000, and an increase in taxes of $206,000 (prior to the tax effect on the non-recurring items.)
INTEREST INCOME - --------------- Interest income increased by $1,523,000 or 3.7% to $42,377,000 for the year ended December 31, 1996 as compared to $40,854,000 for the year ended December 31, 1995, even though the yield on average earning assets decreased 36 basis points to 7.2% for 1996, as compared to a 7.5% yield for 1995. See the "Volume/Rate Analysis" section, below.
Contributing to the decrease in yield was the restructuring of the balance sheet, which resulted in a greater amount of adjustable rate mortgage-backed securities as compared to last year. Management has begun to convert these securities to higher yielding loans. The Bank started operating a new Commercial Lending Department, and it is expected that these types of loans will become an increasing portion of the total loan portfolio. The following table illustrates the increase in yield on average earning assets the Company has experienced for each quarter of 1996 due mainly to the balance sheet restructuring:
FOR THE INDICATED QUARTER OF 1996 1st 2nd 3rd 4th ------ ------ ------ ------ YIELD ON AVERAGE EARNING-ASSETS 7.09% 7.01% 7.15% 7.34%
INTEREST EXPENSE - ---------------- Interest expense increased by $2,514,000 or 9.4% to $29,241,000 for the year ended December 31, 1996 as compared to $26,727,000 for the year ended December 31, 1995. This increase can be attributed primarily to an increase in the average amount of borrowed money, from $47,800,000 for 1995, to $107,900,000 for 1996. The cost of total interest-bearing liabilities remained constant, at 5.4% for 1996 and 1995. See the "Volume/Rate Analysis" section. below.
The following table illustrates the decrease in costs of average interest-bearing liabilities the Company has experienced for each quarter of 1996. During September 1996, the maturity of $69 million in certificates of deposit took place.
FOR THE INDICATED QUARTER OF 1996 1st 2nd 3rd 4th ------ ------ ------ ------ COST OF AVERAGE INTEREST-BEARING LIABILITIES 5.56% 5.50% 5.45% 5.11% PROVISION FOR POSSIBLE LOAN LOSSES - ---------------------------------- The provision for possible loan losses totaled $1,397,000 for the year ended December 31, 1996, compared to $644,000 for the year ended December 31, 1995. Of this $753,000, or 116.9% increase, $242,000 was related to new commercial real estate loans, for which the Company establishes a provision for possible losses at the time the loans are recorded. The balance of this increase resulted from a decision by management to increase the loan loss allowance in light of recent higher write-off experience on credit cards. The Bank, and the banking industry as a whole, is beginning to see more credit card charge-offs resulting from personal bankruptcies. For the year ended December 31, 1996, 42% of all of the charge-offs experienced by the Company were related to personal bankruptcies. Management regularly conducts a review of its loan portfolio, write-off experience and adequacy of allowance. During 1997, management intends to provide the greater of $100,000 or charge-offs on a monthly basis, to maintain the allowance at a level management feels is adequate.
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES - ------------------------------------------------------------ Net interest income after provision for possible loan losses decreased by $1,743,000 or 12.9% to $11,739,000 for the year ended December 31, 1996 as compared to $13,483,000 for the year ended December 31, 1995. The average net interest rate spread for 1996 was 1.7% compared to 2.1% for 1995. The following table illustrates the increases in interest spread and net interest margin the Company has experienced for each quarter of 1996, due to the balance sheet restructuring, including the maturity of the 7.8% certificates of deposit:
FOR THE INDICATED QUARTER OF 1996 1st 2nd 3rd 4th ------ ------ ------ ------ NET INTEREST SPREAD 1.53% 1.51% 1.70% 2.23% NET INTEREST MARGIN 2.05% 1.99% 2.16% 2.67%
NON-INTEREST INCOME - ------------------- Non-interest income increased by $474,000 or 38.9% to $1,690,000 for the year ended December 31, 1996 as compared to $1,217,000 for the year ended December 31, 1995, prior to net gains on the sale of securities in 1996 of $2,551,000. The year ended December 31, 1995 produced a net loss on the sale of securities of $53,000. Most of the balance of the increase in non-interest income was attributable to recognition of loan servicing fees, which increased $335,000 or 76.3%. Deposit related fees and charges also increased $96,000 or 19.5%, as there has been a general increase in fees charged for various Bank services since last year.
NON-INTEREST EXPENSE - -------------------- Non-interest expense was $13,852,000 for 1996, compared to $10,722,000 for 1995, an increase of $3,131,000 or 29.2%. In 1995, there were two non-recurring items recorded. They were $271,000 for the estimated unfunded liability of the Defined Benefit Plan, and $124,000 for compensation to former officers, less related taxes. During 1996, a non-recurring expense was recorded for $30,000, representing the final unfunded liability as a result of the termination of the Defined Benefit Plan. The final determination was higher than anticipated due to a decrease in interest rates between the termination announcement date of January 5, 1995, and the date the final distribution was made on May 29, 1996. Also recorded in 1996, was $3,033,000 for the one-time assessment to recapitalize the SAIF insurance fund, at 65.7 basis points. Without giving consideration to these items, non-interest expense increased $344,000 or 3.3%, from $10,327,000 for 1995, to $10,671,000 for 1996. Most of this increase can be attributed to the operation of the Schaumburg location, opened in March of 1995.
INCOME TAX EXPENSE - ------------------ Income tax expense decreased $827,000 or 60.5%, to $540,000 for the year ended December 31, 1996, compared to $1,367,000 for the year ended December 31, 1995, due to the decrease in income as a result of the SAIF special assessment.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 ====================================================================== AND DECEMBER 31, 1994 =====================
GENERAL - ------- Net income for the year ended December 31, 1995 was $2,611,000 compared to $3,620,000 for the year ended December 31, 1994, a decrease of $1,009,000 or 27.9%. There were two non-recurring items that were recorded in 1995. Additional pension expense of $271,000 was recorded to reflect the curtailment of the Bank's defined benefit plan, and $124,000 in additional compensation expense was incurred due to payouts made to two former officers of the Bank. The balance of the decrease in net income was due primarily to a decrease in net interest income after provision for possible loan losses of $592,000, and an increase in non- interest expenses of $837,000, offset by an increase in non-interest income of $197,000, and a decrease in income taxes of $618,000.
INTEREST INCOME - --------------- Interest income for the year ended December 31, 1995 increased by $10,105,000, or 32.9% to $40,854,000 as compared to $30,749,000 for 1994. The yield on earning assets increased 40 basis points to 7.5% for 1995, as compared to a 7.0% yield for 1994, due to higher average balances in 1995 of mortgage loans and mortgage-backed and related securities. Of the $10.1 million increase, $8.6 million can be attributed to higher volume, and $1.5 million can be attributed to rate. See Volume/Rate Analysis section, below.
INTEREST EXPENSE - ---------------- Interest expense increased by $10,413,000, or 63.8% to $26,727,0000 for the year ended December 31, 1995 as compared to $16,314,000 for the year ended December 31, 1994. Deposit costs increased to 5.4% for the year ended December 31, 1995 compared to 4.2% for 1994, an increase of 119 basis points. Deposit volume also increased by 11.0% from $409,600,000 at December 31, 1994 to $454,700,000 at December 31, 1995. Interest expense declined substantially in the fourth quarter of 1996, as the certificates of deposit opened during the Grand Opening promotion of the Schaumburg location (which carried a rate of 7.8%) mature. Interest expense on borrowed funds was $3,017,000 for 1995 with an average cost of 6.3% for the year. For 1994, interest expense on borrowed money was $910,000 with an average cost of 5.9% for the year.
PROVISION FOR POSSIBLE LOAN LOSSES - ---------------------------------- The provision for possible loan losses totaled $644,000 for the year ended December 31, 1995 compared to $360,000 for the year ended December 31, 1994. This 78.9% increase resulted from a decision by management to increase the possible loan loss allowances in light of higher write-off experiences in the Bank's credit card portfolio, as well as a general rise in charge-offs industry-wide. Management regularly conducts a review of its loan portfolios and write-off experiences, and believes the reserves are adequate at this time. In addition, $44,000 of the increase is related to the higher outstanding balance of commercial real estate loans.
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES - ------------------------------------------------------------ Net interest income after provision for possible loan losses declined by $592,000, or 4.2% to $13,483,000 for 1995 compared to $14,075,000 for 1994, as the average net interest rate spread also declined from 2.8% at December 31, 1994 to 2.1% at December 31, 1995. This narrowing of the spread is a direct result of the aforementioned certificate of deposit promotion. These certificate accounts carried a rate of 7.8% and matured in September of 1996. In addition, the yield curve flattened, from a slope of 138 at December 31, 1994 to a slope of 80 at December 31, 1995. The slope is the difference between rates paid on 30-year Treasury Notes and 6-month Treasury Bills. The smaller the slope, the flatter the yield curve.
NON-INTEREST INCOME - ------------------- Non-interest income increased by $197,000 or 19.2% to $1,217,000 for 1995 from $1,020,000 for 1994. The increase of $89,000 in service charges on deposit accounts was the result of actively pursuing fees for services the Bank did not charge for in the past. The increase in other income of $61,000 was due to offering annuity products through the Bank's subsidiary, First Insurance Agency.
NON-INTEREST EXPENSE - -------------------- Non-interest expense was $10,722,000 for the year ended December 31, 1995, compared to $9,490,000 for the year ended December 31, 1994, an increase of $1,231,000 or 13.0%. This increase included two non- recurring items, totaling $395,000, which were recorded in the second quarter of 1995. Excluding these items, non-interest expense was $10,327,000 for 1995, an increase of $836,000, or 8.9% over the same period in 1994. Non-interest expense (compensation, data processing, furniture and equipment, advertising and other expenses) related to the new Schaumburg location, which was not in operation in 1994, amounted to $704,000 for 1995. In addition, similar expenses for the Arlington office (which was not in operation during the first quarter of 1994) amounted to $226,000 for the first three months of 1995. Federal deposit insurance premium expense also increased as a result of higher balances of deposit accounts. Total advertising expense, on the other hand, decreased by $156,000 primarily due to a credit card promotion in 1994.
INCOME TAX EXPENSE - ------------------ Income tax expense decreased $618,000 or 3.1% to $1,367,000 for 1995, compared to $1,985,000 for 1994, due to the decrease in income.
NET INTEREST INCOME ANALYSIS ============================ The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as interest expense on average interest- bearing liabilities, expressed both in dollars and rates.
WEIGHTED AVERAGE YIELD ANALYSIS =============================== The following table sets forth the weighted average yields on the Company's interest-earning assets, the weighted average interest rates on interest-bearing liabilities and the interest rate spread between the weighted average yields and rates at the dates indicated.
December 31, 1996 1995 1994 -------------------------------------------------------------------- WEIGHTED AVERAGE YIELD ON: Loans Receivable 7.68% 7.65% 7.82% Mortgage-Backed and Mortgage- Related Securities 6.98 6.95 6.28 Securities 6.62 6.29 6.10 Other Investments and FHLB Stock 6.50 4.92 6.08 Combined Weighted Average Yield on Interest-Earning Assets 7.46% 7.33% 7.30%
WEIGHTED AVERAGE RATES PAID ON: Savings Accounts 2.50% 2.50% 2.50% NOW Accounts 1.29 1.29 1.60 Money Market Accounts 4.57 2.70 2.74 Certificates 5.83 6.41 5.33 FHLB Advances 5.91 5.95 6.35 Other Borrowed Money 5.28 5.52 --- Combined Weighted Average Rate Paid on Interest-Bearing Liabilities 5.05% 5.47% 4.67%
NET INTEREST RATE SPREAD 2.41% 1.86% 2.63%
VOLUME/RATE ANALYSIS ==================== The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest- earning assets and interest-bearing liabilities. It distinguishes between the increase related to higher outstanding balances and that due to changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume.) For purposes of this table, changes attributable to both rate and volume, which cannot be segregated have been allocated proportionately to both changes.
ASSET/LIABILITY MANAGEMENT ========================== In an attempt to manage the Bank's exposure to changes in interest rates, management closely monitors the Bank's interest rate risk. Management has an Asset/Liability Committee, consisting of senior officers, which meets monthly to review the Bank's interest rate risk position and make recommendations for adjusting such position. In addition, the Board reviews the Bank's position on a monthly basis, including simulations of the effect on the Bank's capital of various interest rate scenarios.
In managing its asset/liability mix, the Bank may place greater or less emphasis on maximizing net interest margin than on better matching the interest rate sensitivity of its assets and liabilities in an effort to improve its capital, depending on the relationship between long and short-term interest rates, market conditions, and consumer preferences. Management believes that the increased net income resulting from a mismatch in the maturity of its assets and liability portfolios can, during periods of declining or stable interest rates, provide high enough returns to justify the increased exposure to sudden and unexpected increases in interest rates which can result from such a mismatch. As a result, the Bank may be somewhat more exposed to rapid increases in interest rates than some other institutions which concentrate principally on matching the duration of their assets and liabilities.
LIQUIDITY AND CAPITAL RESOURCES ===============================
LIQUIDITY - --------- The Company's primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, and funds provided by other operations. While scheduled loan and mortgage-backed securities repayments and maturities of short-term investments are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, competition and the restructuring occurring in the banking industry.
The Company's cash flows are a result of three principal activities: operating activities, investing activities and financing activities. Net cash received in operating activities, primarily interest on loans and investments, less interest paid on deposits and borrowed funds, was $.5 million for the year ended December 31, 1996. Net cash received in investing activities was $75.1 million for the year ended December 31, 1996. Security sales and maturities generated $281.2 million while principal payments on mortgage-backed and related securities amounted to $37.9 million. Purchases of investment securities and mortgage-backed securities were $171.3 million, and loan originations, net of principal payments, were $70.1 million for the year. Net cash used in financing activities amounted to $81.9 million for the year ended December 31, 1996, and was accounted for mostly by the net decrease in short-term borrowings and deposits.
The Company uses its liquidity to meet its ongoing commitments to fund maturing certificates of deposit and deposit withdrawals, repay borrowings, fund existing and continuing loan commitments, and pay operating expenses. At December 31, 1996, the Company had commitments to originate loans totaling $18.7 million, and its customers had approved but unused lines of credit totaling $64.5 million. The Company considers its liquidity and capital resources to be adequate to meet its foreseeable short and long-term needs. The Company expects to be able to fund or refinance, on a timely basis, its material commitments and long- term liabilities.
CAPITAL RESOURCES - ----------------- At December 31, 1996, the Bank had core and tangible capital of $42.3 million or 7.9% of adjusted total assets, which was approximately $26.2 million and $34.3 million above the minimum capital requirements in effect on that date of 3.0% and 1.5%, respectively, of adjusted total assets. On December 31, 1996, the Bank had total risk-based capital of $43.7 million (including $42.3 million in core capital), or 16.6% of risk-weighted assets of $263.3 million. This amount was approximately $22.7 million above the 8.0% total risk-based capital requirement in effect on that date. For additional information, see Note 10 of the "Notes to the Consolidated Financial Statements".
IMPACT OF NEW ACCOUNTING STANDARDS ================================== In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. However, SFAS No. 121 does not apply to financial instruments, core deposit intangibles, mortgage and other servicing rights, or deferred tax assets. The adoption of SFAS No. 121 in 1996 did not have a material effect of the Bank's income or financial condition.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights." SFAS No, 122 requires an institution that purchases or originates mortgage loans and sells or securitized those loans with servicing rights retained to allocate the total cost of the mortgage loans to the mortgage servicing rights and the loan (without the mortgage servicing rights) based on their relative fair values. In addition, institutions are required to assess impairment of the capitalized mortgage servicing portfolio based on the fair value of those rights. SFAS No. 122 is effective for fiscal years beginning after December 15, 1995. Adoption of this statement did not have a material impact on the Bank's earnings or financial condition. SFAS No. 122 will be superseded by SFAS No. 125 after December 31, 1996.
In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based Compensation." This statement establishes financial accounting standards for stock-based employee compensation plans. SFAS No. 123 permits the Bank to choose either a new fair value based method or the current APB Opinion 25 intrinsic value based method of accounting for its stock based compensation agreements. SFAS No. 123 requires pro forma disclosures of net earnings and earnings per share computed as if the fair value based method has been applied in financial statements of companies that continue to follow current practice in accounting for such arrangement under Opinion 25. The disclosure provisions of SFAS No. 123 are effective for fiscal years beginning after December 15, 1995. The adoption of this statement will not have an effect on the earnings of financial position of the Bank.
In June 1996, the FASB released SFAS No. 125, "Accounting for Transfers and Extinguishments of Liabilities." SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. SFAS No. 125 requires a consistent application of a financial components approach that focuses on control. Under that approach, after the transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred and derecognizes liabilities when extinguished. SFAS No. 125 also supersedes SFAS No. 122 and requires that servicing assets and liabilities be subsequently measured by amortization in proportion to and over the period of estimated net servicing income or loss and requires assessment for asset impairment or increases obligation based on their fair values. SFAS No. 125 applies to transfers and extinguishments occurring after December 31, 1996 and early or retroactive application is not permitted. Because the volume and variety of certain transactions will make it difficult for some entities to comply, some provisions have been delayed by SFAS No. 127. Management anticipates that the adoption of SFAS No. 125 will not have a material impact on the financial condition or operations of the Bank.
In August 1996, legislation was enacted requiring recapture of tax bad debt reserves accumulated after 1987 over a six-year period starting
in 1996. However, the payment of the tax can be deferred in each of 1996 and 1997 if an institution originated at least the same average annual principal amount of mortgage loans that it originated in the six year prior to 1996. The impact of this legislation will not have a material effect on the financial position or operations of the Bank.
Item 8.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------
REPORT OF INDEPENDENT AUDITORS ==============================
CROWE CHIZEK ------------
Board of Directors and Stockholders FirstFed Bancshares, Inc. Des Plaines, Illinois
We have audited the accompanying consolidated statements of financial condition of FirstFed Bancshares, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FirstFed Bancshares, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP --------------------------------- Crowe, Chizek and Company LLP
Oak Brook, Illinois February 10, 1997
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ==============================================
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY =============================================== Years ended December 31, 1996, 1995 and 1994
(continued)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued) =========================================================== Years ended December 31, 1996, 1995 and 1994
(continued)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued) =========================================================== Years ended December 31, 1996, 1995 and 1994
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS =====================================
Years ended December 31, 1996, 1995 and 1994
(continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) =================================================
Years ended December 31, 1996, 1995 and 1994
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ==========================================
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ---------------------------------------------------
NATURE OF FirstFed Bancshares, Inc. (the "Company") is a thrift OPERATIONS holding company organized under the laws of the state of Delaware. Through its wholly-owned subsidiary, First Federal Bank (the "Bank"), the Company provides a full line of financial services to customers within the nine counties in northeast Illinois from its three locations.
BASIS OF The accompanying consolidated financial statements for PRESENTATION the years ended December 31, 1996, 1995 and 1994 include the accounts of FirstFed Bancshares, Inc., First Federal Bank, and the Bank's wholly-owned subsidiary, First Insurance Agency, Inc. On June 30, 1992, the Bank converted from a federal mutual savings bank to a federal stock savings bank and concurrently became a wholly- owned subsidiary of the Company in a stock-for-stock exchange with Bank stockholders. Since the transaction is an internal reorganization, the historical cost basis of accounting is continued for the Bank. All significant intercompany transactions and balances are eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted accounting principles and with general practices within the thrift industry requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.
SECURITIES 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. 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. Securities are classified as held-to-maturity when the Company has the positive intent and management the ability to hold those securities to maturity. Accordingly, they are stated at cost, adjusted for amortization of premiums and accretion of discounts. At December 31, 1996, the Company had no securities classified as held-to- maturity.
LOANS AND Loans are stated at the principal amount outstanding, LOAN INCOME net of unearned income and the allowance for possible loan losses. Interest on real estate and certain consumer loans is accrued over the term of the loans based upon the principal balance outstanding. Where serious doubt exists as to the collectibility of a loan, the accrual of interest is discontinued.
The Company defers loan fees, net of certain direct loan origination costs. The net amount deferred is reported in the statements of financial condition as part of loans and is recognized as interest income over the term of the loan using the level yield method.
The accrual of interest income is discontinued on a loan when principal or interest is 90 days or more past due, unless the loan is
well secured and in the process of collection. When a loan is placed on nonaccrual status, interest previously accrued but not collected in the current period is reversed against current period interest income. Interest accrued in prior years but not collected is charged against the allowance for loan losses.
The Company adopted Statement of Financial Accounting Standard No. 122 on January 1, 1996. This statement eliminates the accounting distinction between originated and purchased mortgage servicing rights. Beginning in 1996, when a loan is originated with the intent to sell, or a loan is securitized, a separate asset is recognized for the mortgage servicing rights. This asset will be amortized over the life of the underlying loans. The adoption of this statement was not material to the Company's financial condition or operation in 1996.
ALLOWANCE Because some loans may not be repaid in full, an FOR POSSIBLE allowance for possible loan losses is recorded. LOAN LOSSES Increases to the allowance are recorded by a provision for possible 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 entire allowance is available for any loan charge-offs that occur. A loan is charged-off against the allowance by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur.
In accordance with Statement of Financial Accounting Standard No. 114, as amended by 118 (SFAS 114), loans which are considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of the related collateral, by allocating a portion of the allowance to such loans. If these allocations cause the allowance for possible loan losses to require an increase, such increase is reported as a provision for possible loan losses charged to expense. Loans are evaluated for impairment when payments are delinquent 90 days or more, or when management downgrades the loan classification to doubtful.
Smaller balance homogeneous loans are defined as residential first mortgage loans secured by one-to-four family residences, residential construction loans and share loans, and are evaluated collectively for impairment. Commercial real estate 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 place in nonaccrual when payments are more than 90 days past due unless the loan is adequately collateralized and in the process of collection. Although impaired loan and nonaccrual loan balances are measured differently, impaired loan disclosures under SFAS Nos. 114 and 118 are not expected to differ significantly from nonaccrual and renegotiated loan disclosures.
PREMISES Bank premises and equipment are stated at cost, less AND EQUIPMENT accumulated depreciation and amortization. Provisions for depreciation and amortization, included in operating expenses, are computed on the straight-line method over the estimated useful lives of the assets. The cost of maintenance and repairs is charged to income as incurred while significant repairs are capitalized.
BRANCH During 1994, the Bank assumed approximately $20,639,000 ACQUISITION of deposits and acquired the Arlington Heights, Illinois building of a branch of the former Irving Federal Savings and Loan Association from the Resolution Trust Corporation.
A premium of $3,040,000 resulting from the purchase and assumption is being amortized over 10-15 years, using the straight-line method. The unamortized premium balances of $2,366,000 and $2,572,000 are included in other assets in the December 31, 1996 and 1995 statements of financial condition, respectively.
INCOME The provision for income taxes is based on an asset and TAXES liability approach. 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.
EARNINGS The weighted average number of shares outstanding for PER SHARE purposes of computing primary earnings per share were 3,557,960, 3,869,985, and 4,166,817 shares for the years ended December 31, 1996, 1995 and 1994, respectively. Primary weighted average shares include common shares outstanding and common stock equivalents attributable to outstanding stock options and all shares held by the Employee Stock Ownership Plan (the "ESOP") are considered outstanding for the earnings per share calculation. In 1996, the fully diluted calculation was not antidilutive, and the weighted average number of shares was 3,598,543.
STATEMENT OF For the purpose of this statement, cash and cash CASH FLOWS equivalents is defined to include cash on hand, demand balances, and interest-bearing deposits with financial institutions with original maturities of three months or less. The Company reports net cash flows for customer loan transactions and deposit transactions.
RECLASSI- Certain items in the financial statements as of and for FICATIONS the years ended December 31, 1995 and 1994 have been reclassified, with no effect on net income, to conform with the current year presentation.
Note 2 - STOCK SPLIT - --------------------
On May 15, 1996, the Company's Board of Directors authorized a three- for-two stock split effected in the form of a one-for-two stock dividend. All share and per share amounts included in the financial statements have been restated to reflect the stock split.
Note 3 - SECURITIES - -------------------
The amortized cost and fair value of securities available-for-sale are as follows:
On December 19, 1995, the Company reclassified all of its held-to- maturity securities to available-for-sale in accordance with "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities". The amortized cost and unrealized gain on securities transferred to available-for-sale were $64,639,736 and $379,295, respectively.
Proceeds from sales of available-for-sale securities in 1996 and 1995 and proceeds from sales of investment securities in 1994 and gross realized gains and losses were as follows:
1996 1995 1994 ----------- ----------- ----------- Proceeds from sales $242,621,926 $ 4,217,431 $49,364,279 Gross realized gains 3,284,528 16,625 146,831 Gross realized losses (733,394) (69,781) (236,624)
The carrying value of mortgage-backed and related securities are net of unamortized premiums of $129,551 and $995,383 and unaccreted discounts of $122,407 and $58,126 at December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, respectively, $36,494,000 and $5,544,000 of securities were pledged to secure deposits and short term borrowings.
The amortized cost and fair value of securities available-for-sale at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair Cost Value ------------ ------------ SECURITIES AVAILABLE-FOR-SALE Due in one year or less $ 41,579 $ 	 41,343 Due after one year through five years 25,198,207 25,335,593 Due after five years through ten years 20,000,000 19,878,125 Due in over ten years 4,772,276 4,755,028 Mortgage-backed securities 108,981,218 	109,301,735 Collateralized mortgage obligations 2,639,423 2,632,885 Federal Home Loan Bank stock 7,190,000 7,190,000 Marketable equity securities 3,181,375 3,741,375 ------------ ------------ $172,004,078 $	172,876,084 ============ ============
Note 4 - LOANS RECEIVABLE - -------------------------
Loans receivable at December 31 are summarized as follows:
1996 1995 ------------ ------------ First mortgage loans: Secured by one-to-four family residences $251,830,792 $275,569,543 Secured by other properties 995,161 176,452 ------------ ------------ 252,825,953 275,745,995
Net deferred loan origination costs 647,482 542,181 ------------ ------------ Total first mortgage loans 253,473,435 	276,288,176 ------------ ------------
Commercial real estate 22,516,016 2,200,000 Commercial loans 58,406 --- Commercial leases 7,053,341 --- ------------ ------------ 29,627,763 2,200,000
Net deferred loan origination fees ( 31,323) --- ------------ ------------ Total commercial real estate and other commercial 29,596,440 2,200,000 ------------ ------------
Consumer and other loans: Automobile 21,801,686 18,618,467 Credit card 15,811,531 18,289,142 Home equity 18,327,897 15,909,122 Home improvement 242,095 414,292 Personal loans 381,611 --- Share loans 330,942 498,254 Other 3,756 178,697 ------------ ------------ 56,899,518 53,907,974 ------------ ------------ $339,969,393 $	332,396,150 ============ ============
Included in first mortgage loans secured by one-to-four family residences at December 31, 1996 are $10,100,000 of loans held for securitization.
Loans serviced for the FHLMC approximated $178,548,000, $133,433,000 and $19,458,000 at December 31, 1996, 1995 and 1994, respectively.
The Bank had lending transactions with directors and executive officers of the Company, the Bank and their associates which totaled approximately $821,000 and $676,000 at December 31, 1996 and 1995, respectively.
Loans on which the accrual of interest has been discontinued totaled approximately $95,000 and $531,000 at December 31, 1996 and 1995, respectively. The Company did not have any loans which were impaired under SFAS No. 114 either at or during the years ended December 31, 1996 and December 31, 1995.
Activity in the allowance for possible loan losses is summarized as follows for the years ended December 31:
1996 1995 1994 ----------- ----------- -----------
Balance at beginning of year $ 1,379,096 $ 1,520,258 $ 1,581,377 Provision 1,396,879 644,000 360,000
Recoveries 145,252 118,392 52,673 Loans charged-off (1,497,181) (903,554) (473,792) ----------- ----------- ----------- Net charge-offs (1,351,929) (785,162) (421,119) ----------- ----------- -----------
Balance at end of year $ 1,424,046 $ 	1,379,096 $ 1,520,258 =========== =========== ===========
Note 5 - PREMISES AND EQUIPMENT - -------------------------------
Premises and equipment at December 31 are summarized as follows:
1996 1995 ----------- ----------- Cost Land $ 1,656,428 $ 1,656,428 Buildings 8,776,144	 8,762,198 Furniture, fixtures and equipment 2,797,987 2,557,377 ----------- ----------- 13,230,559 12,976,003 Less accumulated depreciation and amortization 3,371,784 	2,716,121 ----------- ----------- $ 9,858,775 $10,259,882 =========== ===========
Note 6 - DEPOSITS - -----------------
Certificates of deposit accounts, individually exceeding $100,000, totaled $28,741,000 and $37,272,000 at December 31, 1996 and 1995, respectively. At December 31, 1996, stated maturities of all certificates of deposits were:
1997 $196,947,112 1998 37,672,697 1999 9,865,551 2000 14,375,372 2001 1,475,937 thereafter 5,533,039 ------------ $265,869,708 ============
Certificates of deposit included approximately $15,786,000 and $17,262,000 at December 31, 1996 and 1995, respectively, which bear interest at increasing rates over the life of the deposit term. The Bank records interest expense on these deposits on a level yield basis over the contractual deposit term.
Note 7 - BORROWINGS - -------------------
Borrowings at December 31 are summarized as follows:
1996 1995 -------------------- -------------------- Weighted Weighted Average Average Rate Amount Rate Amount ------ ----------- ------ ----------- Short-term borrowings: Advances from the Federal Home Loan Bank due in: 1996 --- --- 5.86% $49,800,000 1997 5.72% $37,400,000 --- --- Demand --- --- 6.19 19,500,000 Securities sold under repurchase agreement 5.26 12,792,267 5.52 461,562 Other borrowings 5.15 3,498,009 5.15 673,397 ----------- ----------- $53,690,276 $70,434,959
Long-term borrowings: Advances from Federal Home Loan Bank due in: 1997 --- --- 7.71% $ 2,400,000 2000 6.19% $25,000,000 6.19 25,000,000 ----------- ----------- $25,000,000 $27,400,000
The Bank maintains a collateral pledge agreement dated February 1, 1993 covering secured advances whereby the Bank has agreed to at all times keep on hand, free of all other pledges, liens, and encumbrances, first mortgages on improved residential property (not more than 90 days delinquent) aggregating no less than 167% of the outstanding secured advances from the Federal Home Loan Bank.
Securities sold under repurchase agreements either carry a fixed rate for the term of the agreement, and generally mature within 90-180 days from the transaction date, or reprice weekly. Physical control is maintained over the collateral pledged in the agreements. One repurchase agreement is with the State of Illinois, in the amount of $10,000,000. This agreement matures on June 23, 1997, and the total amount at risk would be $1,121,000 at December 31, 1996. Information concerning securities sold under agreements to repurchase is summarized as follows:
1996 1995 ----------- ----------- Average month-end balance during the year $12,185,370 $ 135,000
Average interest rate during the year 5.25% 5.70%
Maximum month-end balance during the year $16,162,321 $ 435,150
Securities underlying these agreements at year-end were as follows:
1996 1995 ----------- ----------- Amortized cost of securities $24,086,000 $ 1,788,000
Fair value 24,249,000 1,846,000
Other borrowings consisted of a Treasury tax and loan option which allows the Bank to accept U.S. Treasury deposits of excess funds along with deposits of customer taxes. The other borrowing has an interest rate which adjusts weekly. This borrowing is collateralized by a pledge
of various securities, with an amortized cost of $12,408,000 and $3,675,000, and a fair value of $12,506,000 and $3,697,000 at December 31, 1996, and 1995, respectively.
Note 8 - INCOME TAXES - ---------------------
The income tax provision for the years ended December 31 is summarized as follows:
1996 1995 1994 ----------- ----------- ----------- Current Federal $ 338,326 $ 807,410 $	1,315,607 State (141,513) (143,527) 18,331 Deferred 343,000 703,288 650,828 ----------- ----------- ----------- $ 539,813 $1,367,171 $1,984,766 =========== =========== ===========
Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% to income before income taxes as a result of the following:
1996 1995 1994 ----------- ----------- ----------- Expected income tax expense at federal tax rate $ 723,697 $1,352,425 $1,905,600 State income tax, net of federal tax benefit (114,461) 20,826 91,464 Increase in cash surrender value of director life insurance (56,371) Other (13,052) (6,080) (12,298) ----------- ----------- ----------- $ 539,813 $1,367,171 $1,984,766 =========== =========== ===========
The deferred tax liabilities, included in other liabilities in the accompanying statement of financial condition, consisted of the following at December 31, 1996 and 1995:
1996 1995 ----------- ----------- Gross deferred tax assets Deferred compensations and employee benefits $ 748,000 $ 654,000 Other 14,000 --- ----------- ----------- 762,000 654,000 Gross deferred tax liabilities Unrealized gain on securities available-for-sale (338,000) (1,072,000) Depreciation (417,000) (330,000) FHLB stock dividends (176,000) (176,000) Bad debt deduction (652,000) (306,000) Deferred loan fees (609,000) (568,000) Other --- (23,000) ----------- ----------- (2,192,000) (2,475,000) ----------- ----------- Net deferred tax asset (liability) $(1,430,000) $(1,821,000)
The deferred tax asset for the unrealized loss on marketable equity securities in 1995 is offset by a valuation allowance of an equal amount.
Prior to 1996, the Bank 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 in the financial statements. Retained earnings at December 31, 1996 include approximately $9,264,000 representing the bad debt deduction accumulated through 1986, for which no deferred income tax liability has been recorded. Tax legislation passed August, 1996 now requires all thrift institutions to deduct a provision for bad debts for tax purposes based on actual loss experience, and recapture the excess bad debt reserve accumulated in the tax years after 1986. The related amount of deferred tax liability which must be recaptured is approximately $3,108,000 and is payable over a six-year period, beginning no later than 1998. There will be no effect on the consolidated income statement as a result of this legislation.
Note 9 - COMMITMENTS, CONTINGENT LIABILITIES, 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 and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, and previously approved unused lines of credit. Those instruments involve, to varying degrees, elements of credit and interest- rate risk in excess of the amount recognized in the statement of financial condition.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and previously approved unused lines of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for loans recorded in the statement of financial condition.
At December 31, 1996 and 1995, these financial instruments are summarized as follows:
Amount ------------------------- 1996 1995 ----------- ----------- Off-balance-sheet financial instruments whose contract amounts represent credit risk Commitments to extend credit Fixed rate $16,476,000 $ 2,738,000 Variable rate 2,174,010 2,076,000 Unused lines of credit 64,528,321 66,412,000
The fixed rate commitments have rates ranging from 6.25% to 8.125% and 6.75% to 8.00% at December 31, 1996 and 1995, respectively. Since certain commitments to make loans and fund lines of credit and loans in process expire without being used, the above amounts do not necessarily represent future cash commitments. No losses are anticipated as a result of these transactions.
The Company's principal loan customers are located in Northeast Illinois, and most loans are secured by specific collateral including residential real estate and commercial real estate.
The deposits of savings institutions, such as the Bank, are presently insured by the Savings Association Insurance Fund (SAIF), which, along with the Bank Insurance Fund (BIF), is one of the two insurance funds administered by the Federal Deposit Insurance Corporation (FDIC.) Due to
the inadequate capitalization of the SAIF Fund, a recapitalization plan was signed into law on September 30, 1996, which required a special one- time assessment of approximately .65% of all SAIF-insured deposit balances as of March 31, 1995. The Bank paid this liability in 1996, which totaled $3,033,209, and is included in the consolidated statement of income.
Note 10 - CAPITAL REQUIREMENTS - ------------------------------
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 undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.
At December 31, 1996, the Bank's regulators categorized the Bank as well capitalized. Actual capital levels (in millions) and minimum required levels were:
Federal regulations require the Bank to comply with a Qualified Thrift Lender ("QTL") test which requires that 65% of assets be maintained in housing-related finance and other specified assets. If the QTL test is not met, limits are placed on growth, branching, new investments, FHLB advances and dividends, or the institution must convert to a commercial bank charter. Management considers the QTL test to have been met.
On June 30, 1992, the Bank converted from a federal mutual savings and loan association to a federal stock savings bank with the concurrent formation of a holding company. At the time of conversion, the Bank established a liquidation account for the benefit of eligible account holders as of March 31, 1991 who continue to maintain their accounts at the Bank after the conversion. The liquidation account will be reduced
annually to the extent that eligible account holders 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 account holder 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 before any distribution may be made with respect to the Bank's capital stock.
Note 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS - ---------------------------------------------
Corporations are required to disclose fair value information about their financial instruments. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The methods and assumptions used to determine fair values for each class of financial instruments are presented below:
The estimated fair value for cash and cash equivalents, interest bearing deposits with financial institutions, Federal Home Loan Bank stock, accrued interest receivable, NOW, money market and savings deposits, and short-term borrowings, accrued interest payable are considered to approximate their carrying values. The estimated fair value for securities available-for-sale and securities held-to-maturity are based on quoted market values for the individual securities or for equivalent securities. The estimated fair value for loans is based on estimates of the rate the Company would charge for similar loans at December 31, 1996 and 1995, applied for the time period until estimated payment. The estimated fair value of certificates of deposit is based on estimates of the rate the Company would pay on such deposits at December 31, 1996 and 1995, applied for the time period until maturity. The estimated fair value of Federal Home Loan Bank advances and other borrowings is based on the estimate of the rate the Company would pay for such borrowings at December 31, 1996 and 1995 for a time period until maturity. Loan commitments are not included in the table below as their estimated fair value is immaterial.
Other assets and liabilities of the Company that are not defined as financial instruments such as property and equipment, are not included in the above disclosures. Also, not included are nonfinancial instruments
typically not recognized in financial statements such as loan servicing rights, 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 December 31, 1996 and 1995, the fair values would have been achieved, because the market value may differ depending on the circumstances. The estimated fair values at December 31, 1996 and 1995 should not necessarily be considered to apply at subsequent dates.
Note 12 - EMPLOYEE BENEFIT PLANS - --------------------------------
In 1996, the Company terminated its defined benefit pension plan which covered substantially all employees, and distributed all proceeds to the participants. In 1995, an estimated curtailment expense for the termination was recorded in the amount of $271,174, and in 1996, an additional expense of $29,851 was recorded when the final determination was made.
The Bank has a defined contribution plan covering all of its eligible employees. Employees are eligible to participate in the plan after attainment of age 21 and completion of one year of service. The Company provides matching funds under the Company's 401(k) Plan. The Company matches an amount equal to the employee's contribution, up to a maximum of 2.5% of annual compensation. The expense recorded in 1996 and 1995 was $61,334 and $49,482, respectively.
The Company's Board of Directors has adopted a stock option and incentive plan that was ratified by the stockholders. Under the stock option plan, stock options, stock appreciation rights, and restricted stock awards, up to an aggregate of 483,000 shares at the market price of the Company's common stock on the date of grant, were available to be granted to the directors, officers, and employees of the Company or the Bank. During 1995, the stock option plan was amended to increase to 858,000 the aggregate shares available.
In 1996, the Board of Directors adopted the 1996 Stock Option and Incentive Plan, whereby an additional 164,000 stock options could be granted, bringing the total of aggregate shares available to 1,022,000. During 1996, options for 141,000 shares had been granted at $14.17 - $17.00 per share and are fully vested after completing six years of service.
Financial Accounting Standard No. 123, which became effective for 1996, requires pro forma disclosures for companies that do not adopt its fair value accounting method for stock-based employee compensation. Accordingly, the following pro forma information presents net income and earnings per share had the Standard's fair value method been used to measure compensation cost for stock option plans. Compensation cost actually recognized for stock options was $0 for 1996 and 1995.
1996 1995 -------------- -------------- Net income as reported $ 1,588,706 $ 2,610,550 Pro forma net income 1,362,505 2,493,293
Primary earnings per share as reported $ .45 $ .67 Pro forma primary earnings per share .38 .64
Fully diluted earnings per share as reported .44 .67 Pro forma fully diluted earnings per share .38 .64
The activity in the stock option plans for 1995 and 1996 are summarized as follows:
WEIGHTED AVERAGE NUMBER EXERCISE OF OPTIONS PRICE ---------- -------- OUTSTANDING AT JANUARY 1, 1995 392,940 $ 6.67
GRANTED 360,000 12.97 EXERCISED ( 80,970) ( 6.67) --------- OUTSTANDING AT DECEMBER 31, 1995 671,970 10.015
GRANTED 141,000 16.06 EXERCISED ( 73,230) ( 6.67) FORFEITED ( 24,000) (12.83) --------- OUTSTANDING AT DECEMBER 31, 1996 715,740 11.48 =========
Options exercisable at year-end are as follows:
NUMBER WEIGHTED AVERAGE OF OPTIONS EXERCISE PRICE ---------- ---------------- 1995 311,970 $ 6.67 1996 249,240 7.00
For options granted during the year, the weighted average fair values at grant date are as follows:
NUMBER OF OPTIONS EXERCISE PRICE FAIR VALUE ---------- -------------- ------------ 1995 360,000 $12.97 $ 2.40 1996 141,000 16.06 3.61
The fair value of options granted during 1996 and 1995 is estimated using the following weighted average information: risk-free interest rate of 6.5%, expected life of 6 years, expected volatility of stock price of .04699% and .1472%, and expected dividends of 25% per year.
At year end 1996, options outstanding were as follows:
Number of options 715,740 Range of exercise price $6.67 - $17.00 Weighted average exercise price $11.48 Weighted average remaining option life 6.00 years For options now exercisable: Number 249,240 Weighted average exercise price $ 7.00
The Bank has established a Bank Incentive Plan ("BIP") in order to provide persons in key management positions with an ownership interest in the Company. Under the BIP, 182,176 shares have been awarded to key personnel. The stock granted under the BIP is restricted as to certain rights at the time of issuance. These restrictions are removed over a period of five years. During 1996 and 1995, 11,838 and 9,338 shares became vested. The market value of the shares, determined at the date of grant, are charged to expense over the vesting period.
In 1993, the Company began to provide certain postretirement healthcare benefits for eligible employees. Employees may become eligible based on the number of years of service and if they reach normal retirement age while working for the Company. In accordance with SFAS No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions", the Company has elected to amortize the accumulated postretirement benefit obligation (APBO) over 20 years. At December 31, 1996 and 1995, respectively, the APBO was $706,410 and $642,859, and the postretirement benefit cost for each of the years ended December 31, 1996, 1995 and 1994 was $ 98,000, $108,000 and $70,000, respectively. The annual rate of increase in the per capita cost of covered health care was assumed to be 11.5% for 5 years and 5.5% thereafter. The other related disclosures are not considered significant to the financial statements.
The Company and most of its outside directors have entered into various deferred compensation agreements. These agreements provide for guaranteed payments for a specified period (ranging from 60 to 180 months) after a specified age is attained (ranging from age 60 to age 72). The liability for each covered director is being accrued over the vesting period. Expense of $62,000, $152,000 and $264,000 has been included in compensation and benefits in the accompanying consolidated statements of income for the years ended December 31, 1996, 1995 and 1994, respectively. The Company is the beneficiary of life insurance policies on the directors with an aggregate face value of approximately $2,819,000 and $2,916,000 at December 31, 1996 and 1995. In addition, the policies had aggregate cash surrender values of approximately $308,000 and $255,000 at December 31, 1996 and 1995.
The Company maintains a retirement plan for directors which provides retirement benefits based upon the total number of years of service and average monthly fees received during the last three years of service as a director. Retirement benefits are payable upon retirement, as defined under the Plan, and are payable for ten years. The maximum monthly retirement benefit available is $1,500. In addition to the monthly retirement benefit, upon attainment of age 65, each director and their spouse is provided lifetime medical and dental coverage as a supplement to Medicare. The directors' retirement expense recorded in 1996 and in 1995 was $26,400 and $28,007, respectively.
The Company's Board of Directors adopted the ESOP for the benefit of all employees of the Bank. On June 30, 1992, in conjunction with the Bank's mutual to stock conversion, the ESOP acquired 386,400 shares of Company stock, at $6.67 per share for a total of $2,576,000. In November of 1993, Statement of Position 93-6 (SOP 93-6), "Employer's Accounting for Employee Stock Ownership Plans", was issued. SOP 93-6 is applicable for fiscal years beginning after December 15, 1993. The Company is not required to adopt the provisions of SOP 93-6 since all of the shares were acquired before December 31, 1992. To fund the acquisition of Company stock, the ESOP borrowed $2,576,000 from the Company. The balance of this loan was $858,071 and $1,198,165 at December 31, 1996 and 1995, respectively, and is reflected as a reduction of stockholders' equity. The Company makes annual contributions to the ESOP equal to the ESOP's debt service. All dividends received by the ESOP are used to pay debt service. The ESOP shares are pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid in the year. Debt of the ESOP is recorded as debt and the shares pledged as collateral are reported as unearned ESOP shares in the statement of financial condition. The Company recognizes compensation expense equal
to the amount of cash contributed to the ESOP. ESOP contributions were $289,576, $302,878 and $339,663 for 1996, 1995 and 1994, respectively. The ESOP shares as of December 31 were as follows:
1996 1995 ------- -------
Allocated shares 162,128 124,875 Committed to be released 46,358 46,358 Suspense shares 129,419 175,777 ------- ------- Total ESOP shares 337,905 347,010 ======= =======
Note 13 - PARENT COMPANY ONLY FINANCIAL STATEMENTS - -------------------------------------------------- Presented below are the condensed balance sheet, condensed statement of income and condensed statement of cash flows for FirstFed Bancshares, Inc.
CONDENSED BALANCE SHEETS December 31, 1996 and 1995 1996 1995 ----------- ----------- ASSETS Cash in banks $ 890,656 $ 2,214,943 Securities 3,939,375 697,750 Investment in Bank 44,638,062 54,643,683 Other assets 531,758 240,532 ----------- ----------- TOTAL ASSETS $49,999,851 $57,796,908 =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities $ 55,846 $ 119,051
Stockholders' equity Common stock 34,066 28,096 Additional paid-in capital 22,154,593 27,229,239 Retained earnings 33,990,384 39,373,445 Treasury stock, at cost (5,837,673) (9,396,577) Unrealized gain (loss) on securities available-for-sale 343,056 42,750 Unrealized gain on securities available-for-sale of subsidiary Bank 191,135 (1,695,874) Unearned stock awards (73,485) (96,805) ESOP loan ( 858,071) (1,198,165) ----------- ----------- TOTAL EQUITY 49,944,005 57,677,857 ----------- -----------
TOTAL LIABILITIES AND EQUITY $49,999,851 $	57,796,908 =========== ===========
CONDENSED STATEMENTS OF INCOME For the years ended December 31, 1996, 1995 and 1994
CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31, 1996, 1995 and 1994
Note 14 - QUARTERLY RESULTS OF OPERATIONS (Unaudited) - ----------------------------------------------------- (In thousands, except per share data)
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON - ----------------------------------------------------------- ACCOUNTING AND FINANCIAL DISCLOSURES ------------------------------------ None.
PART III --------
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------------------------------------------------------------- Information concerning directors of the Registrant is incorporated herein by reference from the Company's definitive Proxy Statement for the 1997 Annual Meeting of Stockholders. Information concerning the executive officers of the Registrant is discussed in Item 1 of this Report, "Business--Executive Officers of the Company."
Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's executive officers and directors and persons who own more than 10% of the Company Common Stock file reports of ownership and changes in ownership with the Securities and Exchange Commission and with the exchange on which the Company's shares of Company Common Stock are traded. Such persons are also required to furnish the Company with copies of all Section 16(a) forms they file. Based solely on the Company's review of the copies of such forms furnished to the Company and, if appropriate, representations made to the Company by any such reporting person concerning whether a Form 5 was required to be filed for the 1995 fiscal year, the Company is not aware that any of its directors and executive officers or 10% stockholders failed to comply with the filing requirements of Section 16(a) during the period commencing January 1, 1996 through December 31, 1996.
Item 11.
Item 11. EXECUTIVE COMPENSATION - ----------------------------------
Information concerning executive compensation is incorporated herein by reference from the Company's definitive Proxy Statement for the 1997 Annual Meeting of Stockholders, except for information contained under the heading "Compensation Committee Report on Executive Compensation" and "Performance Graph."
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND - --------------------------------------------------------------- MANAGEMENT ----------
Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the Company's definitive Proxy Statement for the 1997 Annual Meeting of Stockholders.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ----------------------------------------------------------
Information concerning certain relationships and transactions is incorporated herein by reference from the Company's definitive Proxy Statement for the 1997 Annual Meeting of Stockholders.
PART IV -------
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON - ------------------------------------------------------------------- FORM 8-K --------
Reports on Form 8-K:
A report on Form 8-K was filed on November 26, 1996 to report under Item 5, Other Events, that the Company announced a regular quarterly dividend to the stockholders of FirstFed Bancshares, Inc. Common Stock.
A report on Form 8-K was filed on December 23, 1996 to report under Item 5, Other Events, that the Company announced the completion of a Stock Repurchase Program, and announced a new Stock Repurchase Program.
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.
FIRSTFED BANCSHARES, INC.
By: /s/ Larry G. Gillie By: /s/ Paul A. Larsen -------------------------- -------------------------- Larry G. Gillie, Paul A. Larsen, President and Senior Vice-President, Chief Executive Officer Treasurer and Chief Financial Officer
Date: March 7, 1997 Date: March 7, 1997
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/ Donald J. Cameron By: /s/ Larry G. Gillie -------------------------- -------------------------- Donald J. Cameron, Larry G. Gillie, President, Chairman of the Board Chief Executive Officer and Director
Date: March 7, 1997 Date: March 7, 1997
By: /s/ George T. Drost By: /s/ John A. Flink -------------------------- -------------------------- George T. Drost, Director John A. Flink, Director
Date: March 7, 1997 Date: March 7, 1997
By: /s/ David M. Miller By: /s/ Gerald T. Niedert -------------------------- -------------------------- David M. Miller, Director Gerald T. Niedert, Director
Date: March 7, 1997 Date: March 7, 1997
By: /s/ David B. Speer By: /s/ David E. Spiegler -------------------------- -------------------------- David B. Speer, Director David E. Spiegler, Director
Date: March 7, 1997 Date: March 7, 1997
By: /s/ Frank A. Svoboda By: /s/ Thomas TenHoeve -------------------------- -------------------------- Frank A. Svoboda, Jr., Director Thomas TenHoeve, Director
Date: March 7, 1997 Date: March 7, 1997
FIRSTFED BANCSHARES, INC.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
EXHIBIT 10.3 - ------------
FORM OF CHANGE OF CONTROL AGREEMENT FOR: Paul A. Larsen Lawrence J. Schmidt Joseph H. Tillotson Steven J. Messerschmidt Allen J. Bishop
CHANGE OF CONTROL AGREEMENT ---------------------------
This Change of Control Agreement (this "Agreement"), is made and entered into as of the ______ day of ________________, 1996, (the "Effective Date") by and between FirstFed Bancshares, Inc., a Delaware corporation (the "Employer"), and ________________ (the "Executive").
	RECITALS
A. The Executive is currently serving as the Senior Vice President in charge of ____________ of First Federal Bank for Savings (the "Bank").
B. The Employer owns all of the issued and outstanding capital stock of the Bank.
C. The Employer desires to continue to employ the Executive as an officer of the Employer and the Executive is willing to continue such employment.
D. In addition, the Employer recognizes that circumstances may arise in which a change of control of the Employer through acquisition or otherwise may occur thereby causing uncertainty of employment without regard to the competence or past contributions of the Executive, which uncertainty may result in the loss of valuable services of the Executive, and the Employer and the Executive wish to provide reasonable security to the Executive against changes in the employment relationship in the event of any such change of control.
NOW, THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter contained, it is covenanted and agreed by and between the parties hereto as follows:
AGREEMENTS ----------
1. Term and Termination.
(a) Basic Term. The term of this Agreement shall be for one (1) year commencing as of the Effective Date, and shall, upon the favorable review of the performance of the Executive by the Board of Directors of the Employer, automatically extend for one (1) additional year commencing on each anniversary of the Effective Date. This Agreement may be terminated by either party effective as of the last day of the then current one (1) year period by written notice to that effect delivered to the other not less than ninety (90) days prior to the anniversary of such Effective Date.
(b) Termination upon Change of Control. (i) In the event of a Change in Control (as defined below) of the Employer and the termination of the Executive's employment under either A or B below, the Executive shall be entitled to a lump sum payment equal to his annual base salary at the time of such termination. The Employer shall also continue to provide coverage for the Executive under the Bank health insurance program for one (1) year following such termination. The following shall constitute termination under this paragraph:
A. The Executive terminates his employment by a written notice to that effect delivered to the Board within one hundred and eighty (180) days after the Change in Control.
B. The employment of the Executive is terminated by the Employer or its successor either in contemplation of or within one (1) year after the Change in Control.
(ii) For purposes of this paragraph, the term "Change in Control" shall mean the following:
A. The consummation of the acquisition by any person (as such term is defined in Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of thirty- three percent (33%) or more of the combined voting power of the then outstanding voting securities; or
B. The individuals who, as of the date hereof, are members of the Board cease for any reason to constitute a majority of the Board, unless the election, or nomination for election by the stockholders, of any new director was approved by a vote of a majority of the Board, and such new director shall, for purposes of this Agreement, be considered as a member of the Board; or
C. Approval by stockholders of: (1) a merger or consolidation if the stockholders immediately before such merger or consolidation do not, as a result of such merger or consolidation, own, directly or indirectly, more than sixty-seven percent (67%) of the combined voting power of the then outstanding voting securities of the entity resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities outstanding immediately before such merger or consolidation; or (2) a complete liquidation or dissolution or an agreement for the sale or other disposition of all or substantially all of the assets of the entity.
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because thirty-three percent (33%) or more of the combined voting power of the then outstanding securities is acquired by: (1) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained for employees of the entity; or (2) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the
stockholders in the same proportion as their ownership of stock immediately prior to such acquisition.
(c) Regulatory Suspension and Termination. (i) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Employer's affairs by a notice served under Section 8(e)(3) (12 U.S.C. paragraph 1818(e)(3)) or 8(g) (12 U.S.C. paragraph 1818(g)) of the Federal Deposit Insurance Act, as amended, the Employer's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Employer may in its discretion (A) pay the Executive all or part of the compensation withheld while their Agreement obligations were suspended and (B) reinstate (in whole or in part) any of the obligations which were suspended.
(ii) If the Executive is removed and/or permanently prohibited from participating in the conduct of the Employer's affairs by an order issued under Section 8(e) (12 U.S.C. paragraph 1818(e)) or 8(g) (12 U.S.C. paragraph 1818(g)) of the Federal Deposit Insurance Act, as amended, all obligations of the Employer under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.
(iii) If the Employer is in default as defined in Section 3(x) ( 12 U.S.C. paragraph 1813(x)(1)) of the Federal Deposit Insurance Act, as amended, all obligations of the Employer under this Agreement shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties.
(iv) All obligations of the Employer under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the institution by the Federal Deposit Insurance Corporation (the "FDIC"), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Employer under the authority contained in Section 13(c) (12 U.S.C. paragraph 1823(c)) of the Federal Deposit Insurance Act, as amended, or when the Employer is determined by the FDIC to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action.
(v) Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with Section 18(k) (12 U.S.C. paragraph 1828(k)) of the Federal Deposit Insurance Act, as amended, and any regulations promulgated thereunder.
2. Withholding.
The Employer shall be entitled to withhold from amounts payable to the Executive hereunder, any federal, state or local withholding or other taxes or charges which it is from time to time required to withhold. The Employer shall be entitled to rely upon the opinion of its legal counsel with regard to any question concerning the amount or requirement of any such withholding.
3. Intercorporate Transfers.
If the Executive shall be voluntarily transferred to an affiliate of the Employer, such transfer shall not be deemed to terminate or modify this Agreement and the employing corporation to which the Executive shall have been transferred shall, for all purposes of this Agreement, be construed as standing in the same place and stead as the Employer as of the date of such transfer. For purposes hereof, an affiliate of the Employer shall mean any corporation directly or indirectly controlling, controlled by, or under common control with the Employer.
4. Interest in Assets.
Neither the Executive nor his estate shall acquire hereunder any rights in funds or assets of the Employer, otherwise than by and through the actual payment of amounts payable hereunder; nor shall the Executive or his estate have any power to transfer, assign, anticipate, hypothecate or otherwise encumber in advance any of said payments; nor shall any of such payments be subject to seizure for the payment of any debt, judgment, alimony, separate maintenance or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise of the Executive.
5. Not an Employment Agreement.
Nothing in this Agreement shall give the Executive any rights (or impose any obligations) to continued employment by the Employer or successor of the Employer, nor shall it give the Employer any rights (or impose any obligations) for the continued performance of duties by the Executive for the Employer or successor of the Employer.
6. General Provisions.
(a) Successors; Assignment. This Agreement shall be binding upon and inure to the benefit of the Executive, the Employer and his and its respective personal representatives, successors and assigns, and any successor or assign of the Employer shall be deemed the "Employer" hereunder. The Employer shall require any successor to all or substantially all of the business and/or assets of the Employer, whether directly or indirectly, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Employer would be required to perform if no such succession had taken place.
(b) Entire Agreement; Modifications. This Agreement constitutes the entire agreement between the parties respecting the employment of the Executive, and supersedes all prior negotiations, undertakings, agreements and arrangements with respect thereto, whether written or oral. Except as otherwise explicitly provided herein, this Agreement may not be amended or modified except by written agreement signed by the Executive and the Employer.
(c) Enforcement and Governing Law. The provisions of this Agreement shall be regarded as divisible and separate; if any of said provisions should be declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remaining provisions
shall not be affected thereby. This Agreement shall be construed and the legal relations of the parties hereto shall be determined in accordance with the laws of the state of Illinois without reference to the law regarding conflicts of law.
(d) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the Executive within fifty (50) miles from the location of the Employer, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction.
(e) Legal Fees. All reasonable legal fees paid or incurred by the prevailing party pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the losing party if the prevailing party is successful on the merits pursuant to a legal judgment, arbitration or settlement.
(f) Waiver. No waiver by either party at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by the other party, shall be deemed a waiver of any similar or dissimilar provisions or conditions at the same time or any prior or subsequent time.
(g) Notices. Notices pursuant to this Agreement shall be in writing and shall be deemed given when received; and, if mailed, shall be mailed by United States registered or certified mail, return receipt requested, postage prepaid; and if to the Employer, addressed to the principal headquarters of the Employer, attention: Chairman; or, if to the Executive, to the address set forth below the Executive's signature on this Agreement, or to such other address as the party to be notified shall have given to the other.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
FIRSTFED BANCSHARES, INC. EXECUTIVE
____________________ ____________________ Larry G. Gillie, President (Address)
FIRST FEDERAL BANK FOR SAVINGS
____________________ Larry G. Gillie, President
EXHIBIT 21.1 ------------
SUBSIDIARIES OF REGISTRANT
First Federal Bank for Savings, a federally chartered thrift with locations in Des Plaines, Arlington Heights, and Schaumburg, Illinois.
First Insurance Agency, Inc., an Illinois corporation located in Des Plaines, Illinois
EXHIBIT 23.1 ------------
CONSENT OF CROWE CHIZEK
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors FirstFed Bancshares, Inc.
We consent to the incorporation by reference in this Registration Statement on Form S-8 filed with the Securities and Exchange Commission on June 30, 1995, on Form S-3 (as amended) filed with the Securities and Exchange Commission o March 17, 1997, and on Form S-8 filed with the Securities and Exchange Commission on December 9, 1992 of our report on the financial statements included in the Form 10-K of FirstFed Bancshares, Inc. for the year ended December 31, 1996.
/s/ Crowe, Chizek and Company LLP _________________________________
Oak Brook Illinois March 20, 1997