SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 1-16763
ALLIED FIRST BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland 36-4482786
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
387 Shuman Blvd., Suite 120W, Naperville, Illinois 60563
(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code: (630) 778-7700
----------
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES |X| NO |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. |X|
As of September 8, 2003, the Registrant had 558,350 shares of Common Stock
issued and outstanding.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the average of the bid and asked price
of such stock as of September 8, 2003 was $6.5 million. (The exclusion from such
amount of the market value of the shares owned by any person shall not be deemed
an admission by the Registrant that such person is an affiliate of the
Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
PART II of Form 10-KSB - Annual Report to Stockholders for the fiscal year ended
June 30, 2003.
PART III of Form 10-KSB - Proxy Statement for 2003 Annual Meeting of
Stockholders.
PART I
Item 1. Description of Business
BUSINESS
General.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995. A number of the matters and subject areas discussed in this annual
report that are historical or current facts deal with potential future
circumstances and developments. The discussion of these matters and subject
areas is qualified by the inherent risks and uncertainties surrounding future
expectations generally, and also may materially differ from the actual future
experience of Allied First Bancorp, Inc. involving any one or more of these
matters and subject areas. Allied First Bancorp, Inc. has attempted to identify,
in context, certain of the factors that it currently believes may cause actual
future experience and results to differ from Allied First Bancorp, Inc.'s
current expectations regarding the relevant matter or subject area. These risks
and uncertainties include, but are not limited to, changes in economic
conditions in Allied First Bancorp, Inc.'s market area, changes in policies by
regulatory agencies, fluctuations in interest rates, and demand for loans in
Allied First Bancorp, Inc.'s market area and competition, all or some of which
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected, or described from time to time in
Allied First Bancorp, Inc.'s reports filed with the U.S. Securities and Exchange
Commission and disseminated by Allied First Bancorp, Inc. in press releases.
This annual report speaks only as of its date, and Allied First Bancorp, Inc.
disclaims any duty to update the information herein.
The following discussion is intended to assist in understanding the
financial condition and results of operations of Allied First Bancorp, Inc. and
Allied First Bank. The discussion and analysis does not include any comments
relating to Allied First Bancorp, Inc., since Allied First Bancorp, Inc. has no
significant operations.
Allied First Bank's results of operations depend primarily on its net
interest income, which is the difference between interest income on
interest-earning assets, which principally consist of loans and investment
securities, and interest expense on interest-bearing liabilities, which
principally consist of deposits and borrowings. Allied First Bank's results of
operation also are affected by the level of its noninterest income and
noninterest expenses and income tax expense.
Allied First Bancorp, Inc. Allied First Bancorp, Inc. was formed in
September, 2001, by Allied First Bank. The acquisition of Allied First Bank by
Allied First Bancorp, Inc. was consummated on December 27, 2001, in connection
with Allied First Bank's conversion from the mutual to stock form.
The executive offices of Allied First Bancorp, Inc. are located at 387
Shuman Boulevard, Suite 120W, Naperville, Illinois 60563, and its telephone
number at that address is (630) 778-7700.
The activities of Allied First Bancorp, Inc. have generally been limited
to investment in the stock of Allied First Bank. Unless otherwise indicated, all
activities discussed below are of Allied First Bank.
Allied First Bank. Allied First Bank's predecessor, the Allied Pilots
Association Federal Credit Union, was established in 1994. The Credit Union was
formed to serve the current and former members of the Allied Pilots Association
(which consists of pilots of American Airlines) and their family members.
2
As a credit union, Allied Pilots Association Federal Credit Union was legally
restricted to serve only customers who shared a "common bond" such as the pilots
and their family members. Unless the context otherwise requires, references to
Allied First Bank for the period before September 1, 2001 shall include Allied
Pilots Association Federal Credit Union.
In 1998, the Credit Union Membership Access Act was enacted by the United
States Congress. This legislation imposed new capital requirements on all
federally insured credit unions by requiring all credit unions to maintain a 7%
net worth capital ratio. Any credit union not meeting this well capitalized
standard is required to allocate a percentage of its earnings to restricted
capital in each calendar quarter in order to meet the requirement. In addition,
any credit union with less than 6% is not considered adequately capitalized and
is required to submit a net worth restoration plan.
Allied Pilots Association Federal Credit Union did not meet the new
capital requirements due to its recent organization in 1994, although it had
continued to increase its capital every year since its founding in accordance
with the approval conditions imposed by the National Credit Union Administration
when its charter was granted. As a credit union, however, it could only increase
its capital ratio through retained earnings or by reducing assets. In
management's opinion, neither of these options would provide a capital base
sufficient to support the long term growth of the institution. After reviewing
its strategic options, including remaining a credit union, the board of
directors determined that converting to a mutual savings bank would be the first
step to addressing the problem of capital inadequacy since a mutual savings bank
could raise capital by converting to stock form. Therefore, after receiving the
necessary membership and regulatory approvals, on September 1, 2001, Allied
Pilots Association Federal Credit Union converted to Allied First Bank, sb.
Our historical principal business consists of attracting retail deposits
from the members of the credit union and investing those funds primarily in
consumer loans. Our revenues are derived principally from interest on loans and
investments. We also generate revenue from fees and other income. Allied First
Bank now serves the general public rather than being limited to serving only the
pilots of American Airlines and their family members.
We offer a variety of deposit accounts having a wide range of interest
rates and terms, which generally include savings accounts, money market
accounts, interest and non-interest bearing demand deposit accounts and time
deposit accounts with varied terms ranging from three months to 60 months. We
have historically solicited deposits from our members, the largest concentration
of which reside in the States of California, Florida, Illinois, and Texas,
through direct mailings and over the Internet.
Lending Activities.
Market Area. As a credit union with a membership base not located in any
one geographic area, we did not service any one market area, although about 10%
of our members reside in Illinois. We intend to continue to increase our
community presence, as well as to serve the former members of Allied Pilots
Association Federal Credit Union, by offering a variety of financial services to
meet the needs of our customers. We are headquartered in Naperville, Illinois,
and have one banking office.
Historically, due to the geographic dispersion of our customer base, we
have offered our products and services through such delivery channels as direct
payroll deposit, debit cards, credit cards, 24 hour telephone access, home
banking and access through automated teller machines located worldwide. Due to
the nature of our historical customer base, we have very limited walk-in traffic
and would expect that to continue in the near future until we establish a
presence in the community.
3
General. Our loans carry either a fixed or an adjustable rate of interest.
We originate a variety of consumer loans including automobile and recreational
vehicle loans, unsecured lines of credit, signature loans, credit cards loans,
home equity loans and mortgage loans. When we originate a mortgage, we typically
sell the loans immediately after funding with servicing released and without
recourse. Currently, these loans are sold to one investor and underwritten by
the investor pursuant to Freddie Mac or Fannie Mae guidelines. However, during
the 2002 fiscal year we started to retain a portion of the loans in our
portfolio. We retain loans within our DuPage County market area for Community
Reinvestment Act purposes as well as outside our market area where retention is
needed for asset/liability management purposes. In determining whether to retain
loans we consider, among other things, the interest rate environment, our
liquidity levels, geographical diversity and balance sheet management. The
maximum loan to value ratio of any retained loan does not exceed 95% and loans
with a loan to value ratio in excess of 80% require private mortgage insurance.
In addition to the retaining a portion of the mortgage loans that we originate,
we also purchase first mortgage loans from other financial institutions. In
2003, we purchased approximately $33.2 million in first mortgage loans from
other financial institutions. We do originate home equity lines of credit for
our portfolio and such loans carry an adjustable rate of interest. We also
originate home equity loans for our portfolio and such loans carry a fixed rate
of interest. We do not originate commercial loans or commercial real estate
loans. However, we do have participations in commercial loans that are secured
by aircraft and real estate. Mortgage loans generally have a longer term
amortization, with principal and interest due each month, than other types of
loans. At June 30, 2003, our net loan portfolio totaled $87.3 million, which
constituted 85.9 % of our total assets.
As an Illinois savings bank we are generally entitled to lend up to 25% of
our unimpaired capital and surplus to any one borrower at a time. The maximum
amount which we could have loaned to any one borrower and the borrower's related
entities at June 30, 2003 was $2.5 million. At June 30, 2003, we had no loans or
group of loans to related borrowers with outstanding balances in excess of this
amount. Our five largest lending relationships at June 30, 2003 were as follows:
(i) a $643,000 variable rate loan secured by a first mortgage, (ii) a fixed rate
first mortgage with a $539,000 outstanding balance; (iii) a $499,000 variable
loan secured by a first mortgage; (iv) a $492,000 fixed rate loan secured by a
first mortgage; and (v) a variable rate loan secured by a first mortgage with a
$491,000 outstanding balance. At June 30, 2003, all of these loans totaling $2.7
million in the aggregate were performing in accordance with their terms.
4
The following table presents information concerning the composition of
Allied First Bank's loan portfolio in dollar amounts and in percentages as of
the dates indicated.
June 30,
-------------------------------------------------
2003 2002
--------------------- ---------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Loans:
Vehicle ................................... $ 11,465 13.14% $ 14,678 21.75%
Airplane .................................. 3,312 3.80 2,650 3.93
Boat ...................................... 3,042 3.49 4,304 6.38
Signature ................................. 4,176 4.79 5,225 7.74
Lines of credit ........................... 7,170 8.22 9,268 13.73
Deposit secured ........................... 87 0.10 112 .17
Home equity ............................... 19,374 22.21 20,642 30.59
Commercial real estate (first mortgage) ... 1,221 1.40 2,096 3.11
First mortgages ........................... 32,627 37.40 2,939 4.36
Credit card ............................... 4,770 5.47 5,566 8.24
-------- ------ -------- ------
Total Loans ............................ 87,244 100.00% 67,480 100.00%
====== ======
Less allowance for loan losses ............... (592) (656)
Net deferred loan costs ...................... 141 88
Unamortized premiums ......................... 457 --
-------- --------
Net Loans .............................. $ 87,250 $ 66,912
======== ========
The following table shows the composition of Allied First Bank's loan
portfolio by fixed- and adjustable-rate at the dates indicated.
June 30,
-------------------------------------------------
2003 2002
--------------------- ---------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Fixed-rate loans:
Vehicle .......................................... $ 11,465 13.14% $14,678 21.75%
Airplane ......................................... 1,013 1.16 2,045 3.03
Boat ............................................. 1,793 2.06 2,761 4.09
Signature ........................................ 4,176 4.79 5,225 7.74
Lines of credit .................................. 4,719 5.41 6,590 9.77
Deposit secured .................................. 87 .10 112 0.17
Home equity ...................................... 3,124 3.58 4,951 7.34
Commercial participation loans (aircraft) ........ 1,923 2.20 2,096 3.11
Commercial real estate loans (first mortgage) .... 1,221 1.40 -- --
First mortgages .................................. 7,694 8.82 2,939 4.36
Credit card ...................................... 4,770 5.47 5,567 8.25
-------- ------ ------- ------
Total fixed-rate loans ......................... $ 41,985 48.12% $46,964 69.60%
Adjustable-rate loans:
Airplane ......................................... $ 376 .43% $ 784 .90%
Boat ............................................. 1,249 1.43 1,543 2.29
First mortgages .................................. 24,933 28.58 -- --
Lines of credit .................................. 2,451 2.81 2,678 3.97
Home equity ...................................... 16,250 18.63 15,690 23.25
-------- ------ ------- ------
Total adjustable-rate loans ................... 45,259 51.88% 20,516 30.40
-------- ------ ------- ------
Total gross loans ............................ $ 87,244 100.00% $67,480 100.00%
Net deferred loan costs .......................... 141 88
Unamortized premiums ............................. 457 --
Allowance for loan losses ........................ (592) (627)
-------- -------
Total loans receivable, net ................... $ 87,250 $66,912
======== =======
5
The following schedule illustrates the contractual maturity of Allied
First Bank's loan portfolio at June 30, 2003. The schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses.
Lines Deposit
Vehicle Airplane Boat Signature of Credit Secured
-------- -------- -------- --------- --------- --------
(In Thousands)
Amounts due:
One year or less .............. $ 4,277 $ 598 $ 753 $ 1,718 $ 2,163 $ 29
Over one year to five years ... 7,103 2,579 1,851 2,379 4,994 58
Over five years ............... 85 135 438 79 13 --
-------- -------- -------- -------- -------- --------
Total amount due .............. $ 11,465 $ 3,312 $ 3,042 $ 4,176 $ 7,170 $ 87
======== ======== ======== ======== ======== ========
Unamortized premiums ..........
Net deferred loan costs .......
Allowance for loan losses .....
Loans receivable, net .........
Due after one year:
Adjustable rate ............... $ -- $ 299 $ 1,050 $ -- $ 1,780 $ --
Fixed rate .................... 7,188 2,415 1,239 2,458 3,227 58
-------- -------- -------- -------- -------- --------
Total ......................... $ 7,188 $ 2,714 $ 2,289 $ 2,458 $ 5,007 $ 58
======== ======== ======== ======== ======== ========
Home First Commercial Credit
Equity(1) Mortgages Real Estate Card(2) Total
--------- --------- ----------- -------- --------
(In Thousands)
Amounts due:
One year or less .............. $ 556 $ 2,187 $ 142 $ 4,770 $ 17,194
Over one year to five years ... 1,821 8,747 569 -- 30,101
Over five years ............... 16,997 21,693 510 -- 39,949
-------- -------- -------- -------- --------
Total amount due .............. $ 19,374 $ 32,627 $ 1,221 $ 4,770 $ 87,244
======== ======== ======== ======== ========
Unamortized premiums .......... $ 457
--------
Net deferred loan costs ....... $ 141
--------
Allowance for loan losses ..... $ (592)
--------
Loans receivable, net ......... $ 87,250
========
Due after one year:
Adjustable rate ............... $ 16,249 $ 23,333 $ -- $ -- $ 42,711
Fixed rate .................... 2,569 7,107 1,079 -- $ 27,340
-------- -------- -------- -------- --------
Total ......................... $ 18,818 $ 30,440 $ 1,079 $ -- $ 70,051
======== ======== ======== ======== ========
----------
(1) Includes home equity loans of $16.3 million which require interest only
payments for fifteen years and then converts to a fifteen year
amortization schedule.
(2) Credit card repayment terms require a minimum payment of 2.2% of the
balance or $15, whichever is greater. Due to the revolving credit
arrangement, all amounts shown are due in one year or less.
6
Of our total gross loans of $87.2 million at June 30, 2003, approximately
$42.0 million have fixed rates of interest and approximately $45.2 million have
adjustable rates of interest.
Consumer Lending. Consumer loans generally have shorter terms to maturity,
which reduces our exposure to changes in interest rates, and carry higher rates
of interest than do one- to four-family residential mortgage loans. At June 30,
2003, our total loan portfolio was composed of consumer loans totaling $34.0
million. We offer a variety of secured and unsecured consumer loans, including
automobile and recreational vehicle, recreational boat and airplane loans, lines
of credit and signature loans, credit card loans, and loans secured by savings
deposits.
A significant component of our consumer lending are loans secured by
vehicles (automobiles and recreational vehicles), boats and airplanes. At June
30, 2003, our vehicle loans totaled $11.5 million or 13.1% of our gross loan
portfolio, our boat loans totaled $3.0 million or 3.5% of our gross loan
portfolio, and our consumer airplane loans totaled $1.4 million or 1.6% of our
gross loan portfolio. Boat and airplane loans have a maximum term of six years
for fixed rate loans and 15 years for variable rate loans. Loan to value ratios
for boats and airplanes are up to 90% of the sales price. Vehicle loans may be
written for up to six years and usually have fixed rates of interest. Loan to
value ratios for vehicle loans are up to 100% of the sales price for new
vehicles and up to 100% of the value on used vehicles, based on valuation from
official guides. We originate such loans only on a direct basis, where Allied
First Bank extends credit directly to the borrower. We require the collateral
for these loans to be insured and Allied First Bank to be listed as the loss
payee on the insurance policy.
We also originate unsecured revolving lines of credit and signature
(personal) loans. Unsecured revolving lines of credit and signature loans are
made to borrowers for a variety of personal needs. Unsecured revolving lines of
credit are usually limited to a maximum of three times the borrower's monthly
gross income. These loans usually have fixed rates but permit the institution to
increase or decrease the interest rate upon 30 days advance notice. Any increase
or decrease will apply only if there is a subsequent draw. Management reviews
the loan file periodically to determine whether the line should remain active.
Signature loans are also unsecured and are usually limited to a maximum of
$50,000. Signature loans may be written for up to five years and usually have
fixed rates of interest. At June 30, 2003, unsecured revolving lines of credit
and signature loans totaled $7.2 million or 8.2% of our gross loan portfolio and
$4.2 million or 4.8% of our gross loan portfolio, respectively. At June 30,
2003, we had a commitment to fund an aggregate of $31.6 million in lines of
credit.
Allied First Bank also originates credit card loans through its
participation as a Visa Card issuer. The interest rate currently charged by
Allied First Bank on its credit card loans ranges from 9.9% to 14.9%, and we are
permitted to change the interest rate on 30 days advance notice. The processing
of bills and payments is contracted to an outside service provider. At June 30,
2003, we had a commitment to fund an aggregate of $31.9 million in credit card
loans, which represented the aggregate credit limit on credit cards, and had
$4.8 million of credit card loans outstanding, representing 5.5% of our gross
loan portfolio.
Consumer loans may entail greater risk than do one- to four-family
residential mortgage loans, particularly in the case of consumer loans which are
secured by rapidly depreciable assets, such as automobile and recreational
vehicles, boats and airplanes. In these cases, any repossessed collateral from a
defaulted loan may not provide an adequate source of repayment of the
outstanding loan balance. As a result, consumer loan collections are dependent
on the borrower's continuing financial stability and, thus, are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy.
7
Real Estate Lending. Real estate loans generally have longer terms to
maturity, lower rates of default, and carry lower rates of interest than do
consumer loans. At June 30, 2003, our total loan portfolio was composed of
Residential 1-4 family first mortgage loans and home equity loans totaling $52.0
million. We offer first mortgages loans, home equity loans, and home equity
lines of credit.
A significant component of our real estate lending is Residential 1-4
family first mortgage loans. At June 30, 2003, our residential 1-4 family first
mortgage loans totaled $32.6 or 36.6% of our gross loan portfolio. These loans
are underwritten to Freddie Mac or Fannie Mae guidelines. The maximum loan to
value ratio of any retained loan does not exceed 95% and loans with a loan to
value ratio in excess of 80% require private mortgage insurance. We typically do
not retain loans that are in excess of $500,000.
At June 30, 2003, we had commitments to purchase first mortgage loans
secured by residential properties totaling $20.0 million. The weighted average
interest rate was 4.62% and the loan terms were 30 year fixed and variable.
Another significant component of our real estate lending are our home
equity loans and home equity lines of credit. Home equity loans secured by
second mortgages, together with all prior liens, may have a loan-to-value ratio
of up to 125% of the appraised value. These loans are limited to amounts of up
to $100,000 in the case of loans with loan-to-value ratios in excess of 80%,
have terms of up to 15 years and fixed rates of interest. Our home equity lines
of credit may have a loan-to-value ratio of up to 125% of the appraised value.
Generally, home equity lines of credit have a 15 year draw period and a
repayment period of 15 years. Home equity lines of credit that have a
loan-to-value ratio of 80% or less have a variable-rate of interest equal to the
prime rate of interest as reported in the Wall Street Journal. Home equity lines
above 80% up to 90% have a variable-rate of interest equal to 1.00% above the
prime rate or interest as reported in the Wall Street Journal. Home equity lines
of credit that have a loan-to-value ratio above 90% have a variable-rate of
interest equal to 2.75% above the prime rate of interest as reported in the Wall
Street Journal. Allied First Bank does not require a borrower to obtain private
mortgage insurance on home equity loans or home equity lines of credit. These
loans generally contain a "due on sale" clause allowing us to declare the unpaid
principal due and payable upon sale of the security property. At June 30, 2003,
home equity loans and lines of credit totaled $19.4 million or 22.2% of our
gross loan portfolio. At June 30, 2003, we had a commitment to fund an aggregate
of $10.7 million in home equity lines of credit.
Loan Originations, Purchases, Sales and Repayments. We originate loans
through employees located at our office. Referrals from our current customer
base and advertisements are also an important source of loan originations. We do
not currently use real estate brokers, mortgage loan brokers and builders, but
may do so in the future. While we originate both adjustable-rate and fixed-rate
loans, our ability to originate loans is dependent upon customer demand for
loans. Demand is affected by competition and the interest rate environment. We
occasionally purchase participation interests in commercial loans with other
financial institutions. During 2003, we began purchasing residential 1-4 family
first mortgage loans from other financial institutions. These loans are
typically serviced by the other financial institution. We purchased
approximately $32.0 million in residential 1-4 family first mortgage loans
during 2003.
Asset Quality. When a borrower fails to make a payment on a loan on or
before the default date, we mail a delinquency notice to the borrower when the
loan is 10 days past due. When the loan is 20 days past due, we mail a
subsequent delinquent notice to the borrower. All delinquent accounts are
reviewed by loan personnel, who attempt to cure the delinquency by contacting
the borrower once the loan is 30 days past due. If the loan becomes more than 30
days delinquent, the collector will generally
8
contact by phone or send a personal letter to the borrower in order to identify
the reason for the delinquency. Once the loan becomes more than 30 days
delinquent, contact with the borrower is made typically by requesting payment of
the delinquent amount in full, or the establishment of an acceptable repayment
plan to bring the loan current. If an acceptable repayment plan has not been
agreed upon, loan personnel will generally refer the account to a collection
agency or in the case of a loan secured by real estate to legal counsel, with
instructions to prepare a notice of intent to foreclose. The notice of intent to
foreclose allows the borrower a period of time to bring the account current.
9
Delinquent Loans. The following table sets forth our loans delinquent 60 -
89 days past due and 90 days and over past due by type, number, amount and
percentage of type at June 30, 2003.
Total Loans Delinquent
60 to 89 days past due 90 days and over past due 60 Days and Over
--------------------------- --------------------------- ---------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Vehicle .......................... -- $-- --% -- $-- --% -- $-- --%
Airplane ......................... -- -- -- -- -- -- -- -- --
Boat ............................. -- -- -- -- -- -- -- -- --
Signature ........................ 1 1 0.02 1 16 0.38 2 17 0.41
Lines of credit .................. -- -- -- -- -- -- -- -- --
Share secured .................... -- -- -- -- -- -- -- -- --
Home equity ...................... -- -- -- -- -- -- -- -- --
Commercial participation loans ... -- -- -- -- -- -- -- -- --
(aircraft)
First Mortgages .................. -- -- -- -- -- -- -- -- --
Credit card ...................... -- -- -- -- -- -- -- -- --
--- --- ---- --- --- ---- --- --- ----
Total ............................ 1 $ 1 0.00% 1 $16 0.02% 2 $17 0.02%
=== === ==== === === ==== === === ====
10
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in our loan portfolio. Non-performing assets
consist of non-accrual loans, accruing loans past due 90 days and more, and
foreclosed assets. Loans to a customer whose financial condition has
deteriorated are considered for non-accrual status whether or not the loan is 90
days and more past due. Generally, all loans past due 90 days and more are
classified as non-accrual. On non-accrual loans, interest income is not
recognized until actually collected. At the time the loan is placed on
non-accrual status, interest previously accrued but not collected is reversed
and charged against current income.
Foreclosed assets consist of real estate and other assets which have been
acquired through foreclosure on loans. At the time of foreclosure, assets are
recorded at the lower of their estimated fair value less selling costs or the
loan balance, with any write-down charged against the allowance for loan losses.
At all dates presented, we 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.
At June 30,
--------------------
2003 2002
-------- -------
(Dollars in Thousands)
Non-accruing loans:
Vehicle ............................................ $ -- $ --
Airplane ........................................... -- --
Boat ............................................... -- --
Signature .......................................... 16 61
Lines of credit .................................... -- --
Deposit secured .................................... -- --
Home equity ........................................ -- --
Commercial participation loans (aircraft) .......... -- --
First mortgages .................................... -- --
Credit cards ....................................... -- 10
-------- -------
Total ............................................ $ 16 $ 71
======== =======
Accruing loans past due 90 days and over:
Vehicle ............................................ $ -- $ --
Airplane ........................................... -- --
Boat ............................................... -- --
Signature .......................................... -- --
Lines of credit .................................... -- --
Deposit secured .................................... -- --
Home equity ........................................ -- --
Commercial participation loans (aircraft) .......... -- --
First mortgages .................................... -- --
Credit cards ....................................... -- --
-------- -------
Total ............................................ $ -- $ --
======== =======
Total non-performing loans ............................ $ 16 $ 71
Foreclosed assets ..................................... -- --
Total non-performing assets ........................... $ 16 $ 71
======== =======
Allowance for loan losses ............................. $ 592 $656
======== =======
Coverage of non-performing loans ...................... 3700.00% 923.43%
======== =======
Non-performing assets as a percentage of total assets . 0.02% 0.08%
======== =======
11
Other Loans of Concern. In addition to the non-performing assets set forth
in the table above, as of June 30, 2003, there was also an aggregate of
approximately $29,000 in signature loans and $7,000 in credit card balances with
respect to which known information about the possible credit problems of the
borrowers have caused management to have doubts as to the ability of the
borrowers to comply with present loan repayment terms and which may result in
the future inclusion of such items in the non-performing asset categories. These
loans have been considered in management's determination of the adequacy of our
allowance for loan losses.
Classified Assets. Regulations provide for the classification of loans and
other assets, such as debt and equity securities considered by regulators to be
of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management and approved by the board of directors.
General allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. When an insured institution classifies problem assets as "loss," it is
required either to establish a specific allowance for losses equal to 100% of
that portion of the asset so classified or to charge off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the Illinois Office
of Banks and Real Estate and the FDIC, which may order the establishment of
additional general or specific loss allowances.
In connection with the filing of our periodic reports with the Illinois
Office of Banks and Real Estate and the FDIC and in accordance with our
classification of assets policy, we regularly review the problem assets in our
portfolio to determine whether any assets require classification in accordance
with applicable regulations. On the basis of management's review of our assets,
at June 30, 2003, we had four loans totaling $996 classified as substandard;
$15,540 as doubtful and $35,477 as loss. The total amount of classified assets
represented 0.53% of our equity capital and 0.05% of our total assets at June
30, 2003.
Allowance for Loan Losses. We maintain an allowance for loan losses to
absorb losses inherent in the loan portfolio. The allowance is based on ongoing,
quarterly assessments of the estimated losses inherent in the loan portfolio.
Our methodology for assessing the appropriateness of the allowance consists of
several key elements, which include the ratio analysis and specific allowances
for identified problem loans. In addition, the allowance incorporates the
results of measuring impaired loans as provided in SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." These accounting
standards prescribe the measurement methods, income recognition and disclosures
related to impaired loans.
The allowance is calculated by applying loss factors to outstanding loans
based on the internal risk evaluation of the loans or pools of loans. Loans past
due 60 days or more are evaluated individually and loans less than 60 days past
due are evaluated in pools. Changes in risk evaluations of both performing and
nonperforming loans affect the amount of the formula allowance. Loss factors are
based both on our
12
historical loss experience as well as factors that, in management's judgment,
affect the collectibility of the portfolio as of the evaluation date.
The appropriateness of the allowance is reviewed and established by
management based upon its evaluation of then-existing economic and business
conditions affecting our key lending areas and other conditions, such as credit
quality trends (including trends in nonperforming loans expected to result from
existing conditions), collateral values, loan volumes and concentrations,
specific industry conditions within portfolio segments and recent loss
experience in particular segments of the portfolio that existed as of the
balance sheet date and the impact that such conditions were believed to have had
on the collectibility of the loan. Management reviews these conditions monthly.
To the extent that any of these conditions is evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's estimate of the effect of such condition may be reflected as a
specific allowance applicable to such credit or portfolio segment.
Management also evaluates the adequacy of the allowance for loan losses
based on a review of individual loans, historical loan loss experience, the
value and adequacy of collateral, and economic conditions. This evaluation is
inherently subjective as it requires material estimates, including the amounts
and timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change. For all specifically reviewed loans
for which it is probable that Allied First Bank will be unable to collect all
amounts due according to the terms of the loan agreement, Allied First Bank
determines impairment by computing a fair value either based on discounted cash
flows using the loan's initial interest rate or the fair value of the collateral
if the loan is collateral dependent. Large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment and are excluded from
specific impairment evaluation, and their allowance for loan losses is
calculated in accordance with the allowance for loan losses policy described
above.
Because the allowance for loan losses is based on estimates of losses
inherent in the loan portfolio, actual losses can vary significantly from the
estimated amounts. Our methodology as described permits adjustments to any loss
factor used in the computation of the allowance in the event that, in
management's judgment, significant factors which affect the collectibility of
the portfolio as of the evaluation date are not reflected in the loss factors.
By assessing the estimated losses inherent in the loan portfolio on a monthly
basis, we are able to adjust specific and inherent loss estimates based upon any
more recent information that has become available. In addition, management's
determination as to the amount of our allowance for loan losses is subject to
review by the Illinois Office of Banks and Real Estate and the FDIC, which may
require the establishment of additional general or specific allowances based
upon their judgment of the information available to them at the time of their
examination of Allied First Bank.
At June 30, 2003, our allowance for loan losses was $592,000 or .67% of
the total loan portfolio and approximately 3700.0% of total non-performing
loans. Assessing the adequacy of the allowance for loan losses is inherently
subjective as it requires making material estimates, including the amount and
timing of future cash flows expected to be received on impaired loans, that may
be susceptible to significant change. In the opinion of management, the
allowance, when taken as a whole, is adequate to absorb probable incurred loan
losses in our loan portfolio.
Management believes the decrease of .30% of loans correlates to a
significant shift to a more secured loan portfolio. The Company has a much
higher concentration of loans in real estate including home equity loans, than
in prior years, which typically have lower loan losses and lower allowance
account allocation percentages. At June 30, 2003, first mortgage and home equity
loans comprise nearly 62% of the loan portfolio compared to 35% at June 30,
2002. In addition, approximately $24 million of first mortgage loans were
purchased in June 2003. Unsecured loans dropped from 30% of the loan portfolio
in 2002 to 18% of the loan portfolio at June 30, 2003.
13
The following table sets forth an analysis of our allowance for loan
losses.
Years Ended June 30,
--------------------
2003 2002
------- -------
(Dollars in Thousands)
Total gross loans outstanding (at end of period) ..... $87,244 $67,480
======= =======
Average total loans outstanding ...................... $72,256 $65,845
======= =======
Allowance for loan losses, beginning of period ....... $ 656 $ 627
Loan charge-offs:
Vehicle ........................................... -- --
Airplane .......................................... -- --
Boat .............................................. -- --
Signature ......................................... 172 85
Lines of credit ................................... 104 103
Credit cards ...................................... 80 56
Home equity ....................................... -- --
Home extra equity ................................. -- --
First mortgage .................................... -- --
Deposit secured ................................... -- --
------- -------
Total loan charge-offs ....................... 356 244
------- -------
Loan recoveries:
Vehicle ........................................... -- 3
Airplane .......................................... -- --
Boat .............................................. -- --
Signature ......................................... 6 5
Lines of credit ................................... 2 26
Credit cards ...................................... 3 4
Home equity ....................................... -- --
Home extra equity ................................. -- --
First mortgage .................................... -- --
Deposit secured ................................... -- --
------- -------
Total loan recoveries ........................ 11 38
------- -------
Net loan charge-offs ................................. 345 206
Provision charged to operations ...................... 281 235
------- -------
Allowance for loan losses, end of period ............. $ 592 $ 656
======= =======
Ratio of net loan charge-offs during the period
to average loans outstanding ...................... 0.48% 0.31%
======= =======
Provision as a percentage of average loans ........... 0.39% 0.36%
======= =======
Allowance as a percentage of total gross loans ....... 0.67% 0.97%
======= =======
14
The distribution of the allowance for losses on loans at the dates
indicated is summarized as follows.
At June 30,
-----------------------------------------------
2003 2002
--------------------- ----------------------
Percent of Percent of
Loans in Loans in
Each Each
Category Category
to Total to Total
Gross Gross
Amount Loans Amount Loans
------ ---------- ------ ----------
(Dollars in Thousands)
Vehicle .............. $ 11 13.04% $ 15 21.73%
Airplane ............. 21 1.58% 85 3.92%
Boat ................. 3 3.46% 15 6.37%
Signature ............ 163 4.70% 206 7.73%
Lines of credit ...... 89 8.15% 93 13.72%
Credit cards ......... 111 5.42% 85 8.24%
Home equity .......... 69 22.03% 85 30.65%
First mortgage ....... 42 37.94% 7 4.37%
Deposit secured ...... 0 .10% -- 0.17%
Participation loans .. 79 3.58% 52 3.10%
Unallocated .......... 4 n/a 13 n/a
---- ------ ---- ------
TOTAL ............. $592 100.00% $656 100.00%
==== ====== ==== ======
15
Investment Activities.
Allied First Bank is authorized to invest in various types of liquid
assets, including obligations of, or guaranteed by the United States or the
State of Illinois, securities of various federal agencies, certain certificates
of deposit of insured banks and savings institutions, certain bankers'
acceptances, repurchase agreements and federal funds. Subject to various
restrictions, Illinois savings banks may also invest their assets in investment
grade commercial paper and corporate debt securities and mutual funds whose
assets conform to the investments that a federally chartered savings bank is
otherwise authorized to make directly.
The President of Allied First Bank has the basic responsibility for the
management of our investment portfolio, subject to the direction and guidance of
the executive committee. The President considers various factors when making
decisions, including the marketability, maturity and tax consequences of the
proposed investment. The maturity structure of investments will be affected by
various market conditions, including the current and anticipated slope of the
yield curve, the level of interest rates, the trend of new deposit inflows, and
the anticipated demand for funds via deposit withdrawals and loan originations
and purchases.
The current objectives of any future investment portfolio would be to
provide liquidity when loan demand is high, to assist in maintaining earnings
when loan demand is low and to maximize earnings while satisfactorily managing
risk, including credit risk, reinvestment risk, liquidity risk and interest rate
risk.
At June 30, 2003, we had $1.6 million in Federal Home Loan Bank stock and
$3.8 million in mortgage-backed securities insured by Fannie Mae and Freddie
Mac.
16
The following table sets forth the con tractual maturities of Allied First
Bancorp, Inc.'s mortgage-backed securities based on amortized cost at June 30,
2003. Not considered in the preparation of the table below are the effects of
prepayments, periodic principal repayments and the adjustable-rate nature of the
instruments.
At June 30, 2003
-----------------------------------------------------------------------
One Year or Less One to Five Years Five to 10 Years
---------------- ----------------- ----------------
(Dollars in Thousands)
Annualized Annualized Annualized
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- -----
Securities available for sale:
Mortgage-backed securities ....... $ -- --% $ -- --% $ -- --%
----- ---- ----- ---- ----- ----
At June 30, 2003
-----------------------------------------------------------------
Beyond 10 Years Total Investment Securities
--------------- ---------------------------
(Dollars in Thousands)
Annualized Annualized
Weighted Approximate Weighted
Carrying Average Carrying Market Average
Value Yield Value Value Yield
----- ----- ----- ----- -----
Securities available for sale:
Mortgage-backed securities ....... $3,806 4.48% $3,806 $3,806 4.48%
------ ---- ------ ------ ----
17
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," requires that investments be
categorized as "held to maturity," "trading securities" or "available for sale,"
based on management's intent as to the ultimate disposition of each security.
Statement of Financial Accounting Standards No. 115 allows debt securities to be
classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." These securities are reported at fair value, and
unrealized gains and losses on the securities would be included in earnings.
Allied First Bank does not currently use or maintain a trading account. Debt and
equity securities not classified as either "held to maturity" or "trading
securities" are classified as "available for sale." These securities are
reported at fair value, and unrealized gains and losses on the securities are
excluded from earnings and reported, net of deferred taxes, as a separate
component of equity.
Sources of Funds.
General. Our sources of funds are deposits, borrowings, payment of
principal and interest on loans, interest earned on or maturation of other
investments and funds provided from operations.
Deposits. We offer a variety of deposit accounts to both consumers and
businesses having a wide range of interest rates and terms. Our deposits consist
of time deposit accounts, savings, money market and demand deposit accounts. We
primarily rely on competitive pricing policies, marketing and customer service
to attract and retain these deposits. We solicit deposits in our market area and
among our member pilots.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts we offer has allowed us to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. We have become more susceptible to short-term fluctuations in
deposit flows as customers have become more interest rate conscious. We try to
manage the pricing of our deposits in keeping with our asset/liability
management, liquidity and profitability objectives, subject to competitive
factors. Based on our experience, we believe that our deposits are relatively
stable sources of funds. Despite this stability, our ability to attract and
maintain these deposits and the rates paid on them has been and will continue to
be significantly affected by market conditions.
18
The following table sets forth the dollar amount of deposits in the
various types of deposit programs we offered at the dates indicated.
June 30,
------------------------------------------
2003 2002
------------------ ------------------
Amount Percent Amount Percent
------- ------ ------- ------
(Dollars in Thousands)
Checking accounts ....... $ 8,386 9.19% $ 8,655 11.28%
Interest checking ....... 4,338 4.75 -- 0.00
Savings accounts ........ 14,824 16.25 12,331 16.07
Money market accounts ... 44,854 49.16 37,445 48.81
Time deposits:
0.00 to 4.84% ....... 11,624 12.75 8,210 10.70
4.85 to 5.60% ....... 2,028 2.22 989 1.29
5.61 to 6.34% ....... 1,382 1.51 1,706 2.22
6.35 to 7.09% ....... 1,260 1.38 4,524 5.90
7.10 to 7.80% ....... 2,547 2.79 2,859 3.73
------- ------ ------- ------
Total time deposits ..... 18,841 20.65 18,288 23.84
------- ------ ------- ------
Total deposits ...... $91,243 100.00% $76,719 100.00%
======= ====== ======= ======
19
The following table shows maturity information for Allied First Bank's
time deposits as of June 30, 2003.
Amount Due For 12 Month Period Ended June 30,
-------------------------------------------------------------------
2004 2005 2006 2007 2008 Total
------- ------- ------- ------- ------- -------
(In Thousands)
Interest Rate
0.00 - 4.84% .... $ 8,565 $ 1,995 $ 488 $ 264 $ 312 $11,624
4.85 - 5.60% .... 243 163 3 763 856 2,028
5.61 - 6.34% .... 577 174 583 48 -- 1,382
6.35 - 7.09% .... 94 584 582 -- -- 1,260
7.10 - 7.80% .... 1,174 576 797 -- -- 2,547
------- ------- ------- ------- ------- -------
Total ......... $10,653 $ 3,492 $ 2,453 $ 1,075 $ 1,169 $18,841
======= ======= ======= ======= ======= =======
The following table indicates the amount of Allied First Bank's time
deposits by time remaining until maturity as of June 30, 2003.
Maturity
----------------------------------------------------------------
3 Months Over 3 to Over 6 to Over 12
or Less 6 Months 12 Months months Total
-------- --------- --------- ------- -------
(In Thousands)
Certificates of deposit less than $100,000 .... $ 2,083 $ 2,775 $ 3,791 $ 5,697 $14,345
Certificates of deposit of $100,000 or more ... 456 630 919 2,491 4,496
------- ------- ------- ------- -------
Total certificates of deposit ................. $ 2,539 $ 3,405 $ 4,710 $ 8,188 $18,841
======= ======= ======= ======= =======
Borrowings. Although deposits are our primary source of funds, we may
utilize borrowings when they are a less costly source of funds, and can be
invested at a positive interest rate spread, when we desire additional capacity
to fund loan demand or when they meet our asset/liability management goals. We
have not historically used borrowings as a source of funds.
We may obtain advances from the Federal Home Loan Bank of Chicago upon the
security of our mortgage loans as well as mortgage backed securities. These
advances may be made pursuant to several different credit programs, each of
which has its own interest rate, range of maturities and call features. We also
have a $4.0 million line of credit with LaSalle National Bank. At June 30, 2003,
we had commitments to borrow $15 million for the purchase of first mortgages
totaling $20 million. The terms of the advances were one, two, and three years
with $5.0 million due in each year and have fixed rates of 1.34%, 1.70%, and
2.12%. The commitment to borrow the $15 million for the purchase of first
mortgages was executed on July 29, 2003. August 13, 2003 we purchased $7.2
million in fixed rate mortgage backed securities with a weighted average
interest rate of 4.84% with funding from our variable rate open line at the
Federal Home Loan Bank of Chicago. In September 2003 we purchased variable rate
first mortgage loans of $17.9 million with funding from the variable rate open
line.
Subsidiary and Other Activities.
At June 30, 2003, Allied First Bancorp, Inc. had a single subsidiary,
Allied First Bank.
20
Competition.
We face strong competition in originating real estate and consumer loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from other savings institutions, commercial banks, credit unions and
mortgage bankers. Other savings institutions, commercial banks, credit unions
and finance companies provide vigorous competition in consumer lending.
We attract all of our deposits through our single location. Competition
for those deposits is principally from other savings institutions, commercial
banks and credit unions located in the same community as well as where our
customers reside in other parts of the United States, as well as mutual funds
and other alternative investments. We compete for these deposits by offering
superior service and a variety of deposit accounts at competitive rates. We
offer products and services through a variety of delivery channels including
direct payroll deposit, debit cards, credit cards, 24 hour telephone access,
home banking and access through automated teller machines located worldwide. As
of June 30, 2003, we held less than 1% of the deposits in our primary market
area.
Employees.
At June 30, 2003, we had a total of 23 employees, including five part-time
employees. Our employees are not represented by any collective bargaining group.
Management considers its employee relations to be good.
REGULATION
General.
Allied First Bank, as an Illinois chartered savings bank, is subject to
extensive regulation and oversight by the Illinois Office of Banks and Real
Estate and the FDIC as its primary Federal regulator, extending to all aspects
of its operations. Allied First Bank also is subject to examination by the FDIC
which insures the deposits of Allied First Bank to the maximum extent permitted
by law. It is also subject to requirements established by the Federal Reserve
Board. State chartered savings banks are required to file periodic reports with
the Illinois Office of Banks and Real Estate and the FDIC and are subject to
periodic examinations by the Illinois Office of Banks and Real Estate and the
FDIC. The investment and lending authority of savings banks are prescribed by
state and federal laws and regulations, and such institutions are prohibited
from engaging in any activities not permitted by such laws and regulations. Such
regulation and supervision primarily is intended for the protection of
depositors and not for the purpose of protecting shareholders.
Allied First Bancorp, Inc.
Allied First Bancorp, Inc, is a bank holding company with the powers of a
financial holding company. A bank holding company must obtain Federal Reserve
Board approval before; (i) acquiring, directly or indirectly, ownership of
control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company.
Additionally, a bank holding company may not, with certain exceptions,
acquire direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank or a bank
21
holding company, or engage directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve Board regulation,
have been identified as activities closely related to the business of banking or
managing or controlling banks. The list of activities permitted by the Federal
Reserve Board includes, among other things, operating a savings institution,
mortgage company, finance company, credit card company or factoring company,
performing certain data processing operations; providing certain investment and
financial advice, and leasing property on a full-payout, non-operating basis. As
a financial holding company, Allied First Bancorp may also engage in insurance
and securities underwriting. Allied First Bancorp has no current plans to engage
in these activities, but may do so in the future.
Further, under Federal Reserve Board policy, a bank holding company must
serve as a source of strength for its subsidiary banks. Under this policy, the
Federal Reserve Board may require, and has required in the past, a bank holding
company to contribute additional capital to an undercapitalized subsidiary bank.
The Federal Reserve Board has established capital requirements for bank
holding companies that generally parallel the capital requirements for FDIC
insured depository institutions banks. For bank holding companies with
consolidated assets of less that $150 million, such as Allied First Bancorp,
Inc., compliance is measured on a bank-only basis.
Allied First Bank.
The Illinois Office of Banks and Real Estate has extensive authority over
the operations of Illinois savings banks. As part of this authority, Allied
First Bank is required to file periodic reports with the Illinois Office of
Banks and Real Estate and is subject to periodic examination by the Illinois
Office of Banks and Real Estate and the FDIC, as its Federal regulator. When
these examinations are conducted by the Illinois Office of Banks and Real Estate
and the FDIC, the examiners may require Allied First Bank to provide for higher
general or specific loan loss reserves. All savings institutions are subject to
an annual assessment, based upon the savings bank's total assets, to fund the
operations of the Illinois Office of Banks and Real Estate.
The Illinois Office of Banks and Real Estate and the FDIC also have
extensive enforcement authority over all Illinois savings banks, including
Allied First Bank. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the agencies. Except
under certain circumstances, public disclosure of final enforcement actions by
the FDIC is required.
In addition, the investment, lending and branching authority of Allied
First Bank is prescribed by Illinois and federal laws and it is prohibited from
engaging in any activities not permitted by such laws. Allied First Bank is in
compliance with the noted restrictions.
Allied First Bank's general permissible lending limit for
loans-to-one-borrower is equal to 25% of unimpaired capital and surplus (except
for loans fully secured by certain readily marketable collateral, in which case
this limit is increased to 30% of unimpaired capital and surplus). At June 30,
2003, Allied First Bank's lending limit under this restriction was $2.5 million.
Allied First Bank is in compliance with the loans-to-one-borrower limitation.
22
The FDIC, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan.
Insurance of Accounts and Regulation by the FDIC.
Allied First Bank is a member of the Bank Insurance Fund, which is
administered by the FDIC. Deposits are insured up to the applicable limits by
the FDIC and such insurance is backed by the full faith and credit of the United
States Government. As insurer, the FDIC imposes deposit insurance premiums and
is authorized to conduct examinations of and to require reporting by
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the Savings Association Insurance Fund or the Bank Insurance
Fund.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) 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.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the Bank Insurance Fund will
be less than the designated reserve ratio of 1.25% of Bank Insurance Fund
insured deposits. In setting these increased assessments, the FDIC must seek to
restore the reserve ratio to that designated reserve level, or such higher
reserve ratio as established by the FDIC.
Since January 1, 1997, the premium schedule for Bank Insurance Fund and
Savings Association Insurance Fund insured institutions has ranged from 0 to 27
basis points. However, Savings Association Insurance Fund and Bank Insurance
Fund insured institutions are required to pay a Financing Corporation
assessment, in order to fund the interest on bonds issued to resolve thrift
failures in the 1980s, equal to approximately 2 basis points for each $100 in
domestic deposits. These assessments, which may be revised based upon the level
of Bank Insurance Fund and Savings Association Insurance Fund deposits, will
continue until the bonds mature in the year 2017.
Regulatory Capital Requirements.
Federally insured savings banks, such as Allied First Bank, are required
to maintain a minimum level of regulatory capital under Federal law. The FDIC
has established capital standards, including a leverage ratio or Tier 1 capital
requirement, a Tier 1 risked-based capital requirement and a risk-based capital
requirement applicable to its regulated banks. The FDIC is also authorized to
impose capital requirements in excess of these standards on individual
institutions on a case-by-case basis.
The capital standards require Tier 1 capital equal to at least 4.0% of
adjusted total assets unless its supervisory condition is such to allow it to
maintain a 3.0% ratio. Tier 1 capital generally includes
23
common stockholders' equity and retained income, and certain noncumulative
perpetual preferred stock and related income. In addition, all intangible
assets, other than a limited amount of purchased mortgage servicing rights and
purchased credit card relationships, must be deducted from Tier 1 capital for
calculating compliance with the requirement. At June 30, 2003, Allied First Bank
had no intangible assets.
At June 30, 2003, Allied First Bank had Tier 1 capital equal to $9.3
million, or 9.5% of adjusted total assets, which is $5.4 million above the
minimum requirement of 4.0% in effect on that date.
The FDIC also requires its regulated banks to maintain a Tier 1 risk-based
capital ratio of 4.0%. At June 30, 2003, Allied First Bank had a Tier 1 risked
based capital ratio of 12.1%, which was $6.2 million above the 4.0% requirement
in effect on that date.
The FDIC also requires its regulated banks to maintain total capital of at
least 8.0% of risk-weighted assets. Total capital consists of core capital, as
defined above, and supplementary capital. Supplementary capital consists of
certain permanent and maturing capital instruments that do not qualify as core
capital and general valuation loan and lease loss allowances up to a maximum of
1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the
risk-based requirement only to the extent of core capital. The FDIC is also
authorized to require a savings institution to maintain an additional amount of
total capital to account for concentration of credit risk and the risk of
non-traditional activities.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example, a
50% risk weight has been assigned prudently underwritten permanent one- to
four-family first lien mortgage loans not more than 90 days delinquent and
having a loan-to-value ratio of not more than 80% at origination unless insured
to such ratio by an insurer approved by Fannie Mae or Freddie Mac.
On June 30, 2003, Allied First Bank had total risk-based capital of $9.9
million and risk-weighted assets of $97.9 million; or total capital of 12.9% of
risk-weighted assets. This amount was $3.7 million above the 8.0% requirement in
effect on that date.
The FDIC is authorized and, under certain circumstances, required to take
certain actions against savings banks that fail to meet their capital
requirements. The FDIC is generally required to take action to restrict the
activities of an "undercapitalized institution," which is an institution with
less than either a 4.0% core capital ratio, a 4.0% Tier 1 risked-based capital
ratio or an 8.0% risk-based capital ratio. Any such institution must submit a
capital restoration plan and until such plan is approved by the FDIC may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The
FDIC is authorized to impose the additional restrictions that are applicable to
significantly undercapitalized institutions.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized institution must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings bank that fails to comply with its capital plan or has Tier 1
risk-based or core capital ratios of less than 3.0% or a risk-based capital
ratio of less than 6.0% and is considered "significantly undercapitalized" must
be made subject to one or more additional specified actions and operating
restrictions which may cover all aspects of its operations and may include a
forced merger or acquisition of the institution. An institution that becomes
"critically undercapitalized" because it has a tangible capital
24
ratio of 2.0% or less is subject to further mandatory restrictions on its
activities in addition to those applicable to significantly undercapitalized
institutions. In addition, the FDIC must be appointed as a receiver, or
conservator, for a savings bank, with certain limited exceptions, within 90 days
after it becomes critically undercapitalized.
The FDIC is also generally authorized to reclassify an institution into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the Illinois Office of Banks and Real Estate or the FDIC
of any of these measures on Allied First Bank may have a substantial adverse
effect on its operations and profitability.
Limitations on Dividends and Other Capital Distributions.
Under Illinois law, a savings bank may pay dividends without prior
regulatory approval in an amount not exceeding its net profits in any one
calendar year. Dividends in excess of such amount require approval of the
Illinois Office of Banks and Real Estate. The savings bank may not pay dividends
if it is under capitalized.
Community Reinvestment Act.
Under the Community Reinvestment Act, every FDIC-insured institution has a
continuing and affirmative obligation consistent with safe and sound banking
practices to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The Community Reinvestment Act does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the Community Reinvestment Act. The Community Reinvestment Act
requires the FDIC, in connection with the examination of Allied First Bank, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications, such
as a merger or the establishment of a branch, by Allied First Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the FDIC. Allied First Bank has not yet been examined for Community
Reinvestment Act compliance. Allied First Bank has submitted a strategic CRA
plan with the FDIC and has not yet received approval as of June 30, 2003.
Transactions with Affiliates.
Generally, transactions between a savings bank or its subsidiaries and its
affiliates are required to be on terms as favorable to the institution as
transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the
institution's capital. Affiliates of Allied First Bank include Allied First
Bancorp, Inc. and any company which is under common control with Allied First
Bank.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the FDIC. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must generally be made on terms substantially the same as for loans to
unaffiliated individuals.
25
Federal Securities Law.
The stock of Allied First Bancorp, Inc. is registered with the SEC under
the Securities Exchange Act of 1934, as amended. Allied First Bancorp, Inc. will
be subject to the information, proxy solicitation, insider trading restrictions
and other requirements of the SEC under the Securities Exchange Act of 1934.
Allied First Bancorp, Inc. stock held by persons who are affiliates of
Allied First Bancorp, Inc. may not be resold without registration unless sold in
accordance with certain resale restrictions. Affiliates are generally considered
to be officers, directors and principal stockholders. If Allied First Bancorp,
Inc. meets specified current public information requirements, each affiliate of
Allied First Bancorp, Inc. will be able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System.
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts, primarily checking, NOW and Super NOW checking accounts. At June 30,
2003, Allied First Bank was in compliance with these reserve requirements.
Savings institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require institutions to
exhaust other reasonable alternative sources of funds, including Federal Home
Loan Bank borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System.
Allied First Bank is a member of the Federal Home Loan Bank of Chicago. It
is one of 12 regional Federal Home Loan Banks that administers the home
financing credit function of savings institutions. Each Federal Home Loan Bank
serves as a reserve or central bank for its members within its assigned region.
It is funded primarily from proceeds derived from the sale of consolidated
obligations of the Federal Home Loan Bank System. It makes loans or advances to
members in accordance with policies and procedures, established by the board of
directors of the Federal Home Loan Bank, which are subject to the oversight of
the Federal Housing Finance Board. All advances from the Federal Home Loan Bank
are required to be fully secured by sufficient collateral as determined by the
Federal Home Loan Bank. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, Allied First Bank is required to purchase and maintain stock
in the Federal Home Loan Bank of Chicago. At June 30, 2003, Allied First Bank
had $1.6 million in Federal Home Loan Bank stock, which was in compliance with
this requirement. For the fiscal year ended June 30, 2003, such dividends have
averaged 5.62%.
Under federal law the Federal Home Loan Banks are required to provide
funds for the resolution of troubled savings institutions and to contribute to
low- and moderately priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have adversely affected
the level of Federal Home Loan Bank dividends paid and could continue to do so
in the future. These contributions could also have an adverse effect on the
value of Federal Home Loan Bank stock in the future. A reduction in value of
Allied First Bank's Federal Home Loan Bank stock may result in a corresponding
reduction in Allied First Bank's capital.
26
For the fiscal year ended June 30, 2003, Allied First Bank recorded
$89,000 in dividends paid by the Federal Home Loan Bank of Chicago.
Federal Taxation.
General. Allied First Bancorp, Inc. and Allied First Bank are subject to
federal income taxation in the same general manner as other corporations, with
some exceptions discussed below. The following discussion of federal taxation is
intended only to summarize pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to Allied First Bancorp,
Inc. or Allied First Bank. On September 1, 2001, Allied Pilots Association
Federal Credit Union converted its credit union charter to a state savings bank
charter. Prior to the conversion, the institution was described in Internal
Revenue Code Section 501(c)(14) and was not generally subject to corporate
income taxation. Subsequent to the charter conversion, the institution is
considered a financial institution described in Internal Revenue Code Section
581 and is subject to federal (generally 34%) corporate income taxes. The
institution will compute certain items differently in calculating its taxable
income than it will for computing income for financial statement purposes.
Common differences for a financial institution include but are not limited to
the computation of bad debts, depreciation, accretion income and loan fees.
Allied First Bank may also be subject to the corporate alternative minimum tax
which is assessed at a 20% rate. For federal income tax purposes, Allied First
Bank will report its income and expenses on the accrual method of accounting and
use a fiscal year ending on June 30 for purposes of filing its federal income
tax return.
Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax
at a rate of 20% on a base of regular taxable income plus certain tax
preferences, called alternative minimum taxable income. The alternative minimum
tax is payable to the extent such alternative minimum taxable income is in
excess of an exemption amount. Net operating losses can offset no more than 90%
of alternative minimum taxable income. Certain payments of alternative minimum
tax may be used as credits against regular tax liabilities in future years.
Allied First Bank has not been subject to the alternative minimum tax, nor do we
have any such amounts available as credits for carryover.
Corporate Dividends-Received Deduction. Allied First Bancorp, Inc. may
eliminate from its income dividends received from Allied First Bank as a wholly
owned subsidiary of Allied First Bancorp, Inc. if it elects to file a
consolidated return with Allied First Bank. The corporate dividends-received
deduction is 100% or 80%, in the case of dividends received from corporations
with which a corporate recipient does not file a consolidated tax return,
depending on the level of stock ownership of the payor of the dividend.
Corporations which own less than 20% of the stock of a corporation distributing
a dividend may deduct 70% of dividends received or accrued on their behalf.
State Taxation.
For Illinois income tax purposes, the Bank is taxed at an effective rate
equal to 7.18% of Illinois taxable income. For these purposes, "Illinois Taxable
Income" generally means federal taxable income, subject to certain adjustments
(including the addition of interest income on state and municipal obligations
and the exclusion of interest income on United States Treasury obligations).
27
Item 2. Description of Properties
At June 30, 2003, Allied First Bancorp, Inc. had one office, 5,200 square
feet, which it leases. The net book value of Allied First Bancorp, Inc.'s
investment in equipment and fixtures, excluding computer equipment, was fully
depreciated at June 30, 2003.
Allied First Bancorp, Inc. is currently negotiating with the current
lessor for new space in the same facility. Management is negotiating a five-year
lease term with additional space.
Allied First Bancorp, Inc. utilizes a third party service provider to
maintain its data base of depositor and borrower customer information. The net
book value of the data processing and computer equipment utilized by Allied
First Bancorp, Inc. at June 30, 2003 was approximately $51,000.
Allied First Bancorp, Inc. has signed a seven-year contract for core
processing with a new third party service provider to begin in April 2004.
Item 3. Legal Proceedings
From time to time Allied First Bancorp, Inc. is involved as plaintiff or
defendant in various legal actions arising in the normal course of business.
Allied First Bancorp, Inc. does not anticipate incurring any material liability
as a result of such litigation.
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 June 30, 2003.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Page 39 of the Annual Report to Stockholders is herein incorporated by
reference.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Pages 4 through 16 of the Annual Report to Stockholders are herein
incorporated by reference.
Item 7. Financial Statements
The following information appearing in Allied First Bancorp, Inc.'s Annual
Report to Stockholders is incorporated by reference.
28
Pages in
Annual
Annual Report Section Report
--------------------- --------
Independent Auditors' Report .................................................... 17
Consolidated Balance Sheets as of June 30, 2003 and 2002 ........................ 18
Consolidated Statements of Income for the Years Ended June 30, 2003 and 2002 .... 19
Consolidated Statements of Changes in Stockholders' Equity for
Years Ended June 30, 2003 and 2002 ........................................... 20
Consolidated Statements of Cash Flows for Years Ended June 30, 2003
and 2002 ..................................................................... 21
Notes to Consolidated Financial Statements ...................................... 22-38
With the exception of the aforementioned information, Allied First
Bancorp, Inc.'s Annual Report to Stockholders for the year ended June 30, 2003,
is not deemed filed as part of this Annual Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with Allied First Bancorp,
Inc.'s accountants on accounting or financial disclosure matters
Item 8A. Controls and Procedures.
Pages 16 of the Annual Report to Stockholders are hereby incorporated by
reference.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
Directors.
Information concerning Directors of Allied First Bancorp, Inc. is
incorporated herein by reference from the Proxy Statement for the Annual Meeting
of Stockholders to be held in 2003, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Executive Officers.
Information concerning Executive Officers of Allied First Bancorp, Inc. is
incorporated herein by reference from the Proxy Statement for the Annual Meeting
of Stockholders to be held in 2003, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Compliance with Section 16(a).
Section 16(a) of the Securities Exchange Act of 1934 requires Allied First
Bancorp, Inc.'s directors and executive officers, and persons who own more than
10% of a registered class of the Allied
29
First Bancorp, Inc.'s equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of Allied First Bancorp, Inc. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish Allied First Bancorp,
Inc. with copies of all Section 16(a) forms they file.
To Allied First Bancorp, Inc.'s knowledge, based solely on a review of the
copies of such reports furnished to Allied First Bancorp, Inc. and written
representations that no other reports were required, during the fiscal year
ended June 30, 2003, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10 percent beneficial owners were complied
with.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Proxy Statement for the Annual Meeting of Stockholders to be
held in 2003, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Item 11. 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 Proxy Statement for the
Annual Meeting of Stockholders to be held in 2003, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
During the fiscal year ended June 30, 2003, Allied First Bancorp, Inc. did
not have any compensation plans or individual compensation arrangements under
which equity securities of Allied First Bancorp, Inc. were authorized for
issuance to employees or non-employees.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
incorporated herein by reference from the Proxy Statement for the Annual Meeting
of Stockholders to be held in 2003, a copy of which will be filed not later than
120 days after the close of the fiscal year.
30
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Regulation Reference to
S-B Prior Filing or
Exhibit Exhibit Number
Number Document Attached Hereto
---------- --------------------------------------------------------- ---------------
3(i) Articles of Incorporation *
3(ii) Bylaws *
4 Instruments defining the rights of security holders, *
including debentures
10 Material Contracts **
(a) Employment Contract between Kenneth L. Bertrand
and Allied First Bank
(b) Amendment to executive employment agreement 10(b)
13 Annual Report to Stockholders 13
21 Subsidiaries of Registrant 21
23 Consents of Experts and Counsel 23
31.1 Rule 13a-14 under the Securities Exchange Act of 1934 31.1
certification for Chief Executive Officer
31.2 Rule 13a-14 under the Securities Exchange Act of 1934 31.2
certification for Chief Financial Officer
32.1 Section 906 Certification Under the Sarbanes-Oxley Act of 32.1
2002 for the Chief Executive Officer
32.2 Section 906 Certification Under the Sarbanes-Oxley Act of 32.2
2002 for the Chief Financial Officer
----------
* Filed as exhibits to the Company's Form SB-2 registration statement filed
on September 18, 2001 (File No. 333-69570) of the Securities Act of 1933.
All of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-B.
** Attached as an exhibit to the Company's Form 10-KSB filed on September 30,
2002.
(b) Reports on Form 8-K
On May 1, 2003, Allied First Bancorp, Inc. filed a form 8-K attaching a
press release regarding it's common stock repurchase program. On May 15, 2003,
Allied First Bancorp, Inc. filed a form 8-K attaching a press release regarding
the completion of it's common stock repurchase program.
31
Item 14. Principal Accountant Fees and Services.
The information required as to this item is incorporated by reference from
the Proxy Statement for the Annual Meeting of Stockholders to be held in 2003, a
copy of which will be filed no later than 120 days after the close of the fiscal
year.
32
SIGNATURES
In accordance with Section 13 of 15(d) of the Exchange Act, the Issuer
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: September 29,2003 ALLIED FIRST BANCORP, INC.
By: /S/ Kenneth L. Bertrand
--------------------------------
Kenneth L. Bertrand
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Issuer and in the capacities and on the
dates indicated.
By: /S/ Kenneth L. Bertrand By: /S/ Brian K. Weiss
------------------------------ --------------------------------
Kenneth L. Bertrand, President Brian K. Weiss
and Chief Executive Officer Vice President and Chief Financial
(Principal Executive and Officer
Operating Officer) (Chief Financial Officer and
Accounting Officer)
Date: September 29, 2003 Date: September 29, 2003
By: /S/ John G. Maxwell, Jr. By: /S/ William G. McKeown
------------------------------ --------------------------------
John G. Maxwell, Jr. William G. McKeown
Chairman of the Board Director
Date: September 29, 2003 Date: September 29, 2003
By: /S/ Frank K. Voris By: /S/ Brien J. Nagle
------------------------------ --------------------------------
Frank K. Voris Brien J. Nagle
Director Director
Date: September 29, 2003 Date: September 29, 2003
By: /S/ Paul F. Renneisen
------------------------------
Paul F. Renneisen
Director
Date: September 29, 2003
33