U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549 FORM 10-KSB
X
Annual report under Section 13 or 15(d) of the
Securities
Exchange Act of 1934
For the fiscal year ended September 30, 1997
OR
Transition report under Section 13 or 15(d) of the
Securities and Exchange Act of 1934
Commission File No.: 333-17227
VERMILION BANCORP, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 37-1363755
(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification
Number)
714 North Vermilion Street,
Danville, Illinois 61832
(Address of Principal (ZIP Code)
Executive Offices)
Issuer's Telephone Number, Including Area Code: (217) 442--
0207
Securities registered under Section 12(b) of the Exchange
Act: Not Applicable
Securities registered under Section 12(g) of the Exchange
Act:
Common Stock (par value $.01 per share)
(Title of Class)
Check whether the issuer: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
1)Yes X No
2)Yes x No
Check if disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no
disclosure will 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
Issuer's revenues for its most recent fiscal year:
$272,012 million.
As of December 17, 1997, the aggregate value of the
296,510 shares of Common Stock of the Registrant issued
and outstanding on such date, which excludes 100,240
shares held by all directors and executives officers of the
Registrant and the Registrant's Employee Stock Ownership
Plan ("ESOP") as a group,
was approximately $4.08 million. This figure is
based on the closing bid price of $13.75 per share
of the Registrant's Common Stock on December 17, 1997.
Although directors and executive officers and the ESOP were
assumed to be "affiliates" of the Registrant for purposes of
this calculation, the classification is not to be
interpreted as an admission of such status.
Number of shares of Common Stock outstanding as of December
17, 1997: 396,750
Transitional Small Business Disclosure Format: Yes ________
No X
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
(1) Portions of the Annual Report to shareholders for the year ended
September 30, 1997, are incorporated into Part II, Items 5-7 on this
Form 10-KSB.
(2) Portions of the Definitive Proxy Statement for the 1997 annual meeting
of shareholders are incorporated into Part III, Items 9-12 of this form 10-KSB.
PART I
Item 1. Business
General
Vermilion Bancorp, Inc. (the "Company)" is a
Delaware incorporated bank holding company and the sole
stockholder of American Savings Bank of Danville (the
"Savings Bank"). The only significant asset of the Company
is the capital stock of the Savings Bank. The business of
the Company currently consists of the business of the
Savings Bank. At September 30, 1997, the Company had
consolidated total assets of $37.82 million, total
consolidated liabilities of $31.86 million, and total
consolidated stockholders' equity of $5.96 million.
The Company had net income of $252,000 for fiscal 1997, as
compared to a loss of ($71,000) in fiscal 1996. Fiscal 1996
included a one-time special SAIF assessment in the pre-tax
amount of $206,000, resulting in an after-tax charge to earn-
ings for fiscal 1996 of approximately $155,000. The
Company's operating results are derived almost entirely from
the Bank's results of operations.
The Company's earnings depend primarily on the difference be-
tween the yield earned on its loan and investment securities
portfolios and its cost of funds, consisting primarily of the
interest paid on deposits and, to a lesser extent, on borrowings
("interest rate spread"). During fiscal year 1997 the Company's
interest rate spread averaged 2.20% compared to 2.17% and 2.11%
in fiscal years 1996 and 1995, respectively. Net interest income,
after provision for loan losses, increased from $776,000 to
$1.05 million from 1996 to 1997, or 34.6% compared to an increase
of $2,000 or 0.3% from 1995 to 1996. The increase in net interest
income from 1996 to 1997 was due primarily to a $206,000 increase
in interest income from loans, a $33,000 increase in interest income
from deposits with financial institutions, offset by a $70,000 decrease
in interest income from investment securities. During the same period
deposit interest expense declined by $53,000, interest expense
on Federal Home Loan Bank borrowings increased by $16,000, off-
set by a $63,000 decrease in provision for loan losses. From
fiscal 1995 to 1996, the $2,000 increase in net interest income
was due primarily to a $361,000 increase in interest income from
loans receivable, offset by an $83,000 increase in interest ex-
pense on deposits, a $107,000 increase in interest expense on
Federal Home Loan Bank borrowings and a $67,000 increase in pro-
vision for losses on loans.
Total noninterest income declined by $3,000 in 1997 to $42,000
as compared to 1996, while total noninterest expense declined by
$128,000 to $761,000. In the fiscal year 1996, noninterest
income decreased by $6,000 to $45,000 as compared to fiscal year
1995, while total noninterest expense increased $179,000 to
$889,000. The decline in noninterest income during fiscal 1997
was due primarily to an $11,000 decline in loan fees offset by a
$7,000 increase in other income. The decline in noninterest
expense during fiscal year 1997 was due primarily to a decline of
$262,000 in deposit insurance expense, offset by a $104,000
increase in salaries and employee benefits and $41,000 in other
expenses. The $6,000 decline in noninterest income in fiscal 1996
as compared to 1995 was due primarily to a $6,000 decline in other
income. The increase in noninterest expense in fiscal 1996 as
compared to 1995 was due primarily to a $206,000 increase in
deposit insurance expense offset by a $21,000 decline in salaries
and employee benefits.
The Company's assets totaled $37.82 million at September 30, 1997,
as compared with $35.46 million at September 30, 1996. The $2.36
million increase in assets was primarily due to receipt and
investment of proceeds of the conversion of the Bank from the mutual to
stock form of ownership that was completed on March 27, 1997 offset
by a reduction in deposits used to purchase stock in the conversion.
Loans increased by $2.48 million to $29.56 million at September 30, 1997,
as compared to $27.08 million at September 30, 1996. Interest bearing
demand deposits held at other financial institutions increased by
$654,000 to $1.08 million, offset by a $305,000 decrease in cash and
due from banks. Total investment securities decreased to $6.12 million
at September 30,1997, compared to $6.56 million at September 30, 1996.
The Savings Bank is a Illinois-chartered stock savings bank
which was originally founded in 1888 as an Illinois-
chartered mutual building and loan association. The Savings Bank
converted from an Illinois chartered mutual savings
association to an Illinois-chartered mutual savings bank in
1994. In March 1997, the Savings Bank converted from an
Illinois-chartered mutual savings bank to an Illinois-
chartered stock savings bank and was acquired by the
Company. The Savings Bank conducts business from a single
office located in Danville, Illinois. The Savings Bank's
deposits are insured by the Savings Association Insurance
Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC") to the maximum extent permitted by law.
The Savings Bank is primarily engaged in attracting deposits
from the general public through its offices and using those
and other available sources of funds to originate loans
secured by single family residences as well as other loans.
In addition to its lending activities, the Bank also has a
securities portfolio consisting of mortgage-backed
securities and other investment securities.
The Savings Bank is a community-oriented financial
institution which emphasizes customer services and
convenience. As part of this strategy, the Savings Bank has
sought to develop a wide variety of products and services
which meet the needs of its retail customers. The Savings
Bank generally has sought to achieve long-term financial
strength and stability by increasing the amount and
stability of its net interest income.
The Bank is subject to examination and comprehensive regulation
by the office of Banks and Real Estate of the State of Illinois
("Commissioner"), which is the Bank's chartering authority and
primary regulator. The Bank is also subject to regulation by
the FDIC, as the administrator of the SAIF, and to certain re-
serve requirements established by the Federal Reserve Board.
The Bank is a member of the Federal Home Loan Bank of Chicago,
which is one of the 12 regional banks comprising the FHLB System,
and is subject to regulations applicapable to members of the FHLB
of Chicago.
The main office of the Savings Bank is located at 714 North
Vermilion Street, Danville, Illinois 61832, and its
telephone number is (217) 442-0270.
Lending Activities
General. At September 30, 1997, the Company's total loan
portfolio amounted to $29.56 million, or 78.2 % of total
assets at that date. The Company has traditionally
concentrated its lending activities on conventional first
mortgage loans secured by single-family residential
properties and, to a lesser extent, multifamily mortgage
loans and consumer loans. Consistent with its lending
orientation, as of September 30, 1997, $24.87 million or
84.29% of the Company's total loan portfolio consisted of
one-to-four family residential loans, $1.57 million or 5.31%
of the Company's total loan portfolio consisted of consumer
loans and $1.08 million or 3.67% of the Company's total loan
portfolio consisted of multi-family mortgage loans.
Substantially all of the Company's total loan portfolio
consists of conventional loans, which are loans that are
neither insured by the Federal Housing Administration nor
partially guaranteed by the Department of Veteran Affairs.
Historically, the Company's lending activities have been
concentrated in its primary market area of Danville,
Illinois and Vermilion County, Illinois. The Company
estimates that a substantial portion of its mortgage loans
are secured by properties located in its primary market
area, and that substantially all of its non-mortgage loan
portfolio consists of loans made to residents and businesses
located in such primary market area.
Loan Portfolio Composition. The following table sets forth
the composition of the Company's loan portfolio by type of
loan at the dates indicated.
At September 30,
1997 1996
Percent Percent
Balance of Total Balance of Total
(Dollars in Thousands)
Type of Loan:
Real estate mortgage loans:
One-to-four family $24,871 84.29% $21,419 79.13%
Multi-family 1,083 3.67 1,236 4.57
Commercial real estate 1,090 3.69 781 2.89
R.E. sold on contract 300 1.02 374 1.38
R.E. construction loans 116 0.39 342 1.26
Commercial business loans 480 1.63 334 1.23
Consumer loans 1,568 5.31 2,581 9.54
Total loans 29,508 100.00% 27,067 100.00%
Plus:
Deferred loan costs 73 38
Less:
Undisbursed portion of loans 18 26
Allowance for loan losses 152 143
Unearned interest -- --
Total loans, net $29,411 $26,936
At September 30, 1995
Percent
Balance of Total
(Dollars in Thousands)
Type of Loan:
Real estate mortgage loans:
One-to-four family $19,181 79.53%
Multi-family 1,157 4.80
Commercial real estate 669 2.77
R.E. sold on contract 415 1.72
R.E. construction loans 163 0.68
Commercial business loans 242 1.00
Consumer loans 2,291 9.50
Total loans 24,118 100.00%
Plus:
Deferred loan costs --
Less:
Undisbursed portion of loans 89
Allowance for loan losses 74
Unearned interest 1
Total loans, net $23,954
Contractual Principal Repayments and Interest Rates.
The following table sets forth certain information at
September 30, 1997 regarding the dollar amount of
loans maturing in the Bank's total loan portfolio,
based on the contractual terms to maturity, before
giving effect to net items. Loans having no stated
schedule of repayments and no stated maturity are
reported as due in one year or less.
Over One
One Year Through Five Over Five
Or less Years Years Total
(In Thousands)
Real estate mortgage loans:
One-to-four family $ 3,686 $ 4,021 $17,139 $24,871
Multi-family 123 22 938 1,083
Commercial real estate 260 133 697 1,090
Real estate sold on contract 78 -- 222 300
Real estate construction loans 116 -- -- 116
Commercial business loans 147 225 108 480
Consumer Loans 449 914 205 1,568
Total loans $ 4,859 $ 5,315 $19,334 $29,508
The following table sets forth the dollar amount of
all loans, before net items, due one year or more
after September 30, 1997 which have fixed interest
rates or which have floating or adjustable interest
rates. For purposes of the table, all of the Bank's
balloon loans were deemed to have floating or
adjustable rates.
Floating
Fixed Or Adjustable
Rates Rates Total
(In Thousands)
Real estate mortgage loans:
One-to-four family $18,359 $ 2,826 $21,185
Multi-family 922 38 960
Commercial real estate 822 8 830
Real estate sold on contract 147 75 222
Real estate construction loans -- -- --
Commercial business loans 333 -- 333
Consumer loans 1,119 -- 1,119
Total loans $21,702 $ 2,947 $24,649
Scheduled contractual amortization of loans does not
reflect the expected term of the Bank's loan
portfolio. The average life of loans is
substantially less than their contractual terms
because of prepayments and due-on-sale clauses, which
give the Bank the right to declare a conventional
loan immediately due and payable in the event, among
other things, that the borrower sells the real
property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to
increase when current mortgage loan rates are higher
than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage
loans are lower than current mortgage loan rates (due
to refinancings of adjustable-rate and fixed-rate
loans at lower rates). Under the latter
circumstances, the weighted average yield on loans
decreases as higher-yielding loans are repaid or
refinanced at lower rates.
Loan Origination. The following table shows total loans
originated and repaid during the periods indicated.
During the periods indicated, no loans were purchased
or sold.
Years Ended September30,
(In Thousands)
1997 1996 1995
Net loans, beginning balance $26,936 $23,954 $21,626
Loan originations:
Real estate mortgage loans:
One-to-four family 7,227 5,293 3,667
Multi-family -- 235 68
Commercial real estate 492 155 262
Real estate construction loans 664 801 344
Commercial business loans 117 71 263
Consumer loans 1,238 2,180 1,558
Total loan originations 9,738 8,735 6,162
Loan principal reductions 7,297 5,785 3,803
Increase (decrease) due to
Other items, net(1) 34 32 (31)
Net increase in loan portfolio 2,475 2,982 2,328
Loan receivable, net end of period $29,411 $26,936 $23,954
(1) Includes changes in undisbursed portion of
loans, allowance for loan losses, deferred loan fees
and unearned interest.
The lending activities of the Bank are subject to
written underwriting standards and loan origination
procedures established by the Bank's Board of
Directors and management. Applications for
residential mortgage loans are taken by one of the
Bank's officers at the Bank's office or submitted to
the Bank by mail. The process of underwriting loans
and obtaining appropriate documentation, such as
credit reports, appraisals, employment verification
and other documentation is undertaken by the Bank's
loan department. The Bank generally requires that a
property appraisal be obtained in connection with all
new mortgage loans. Property appraisals generally
are performed by an independent appraiser from a list
approved by the Bank's Board of Directors. American
requires that title insurance (or receipt of an abstract opinion)
and hazard insurance be maintained on all security
properties and that flood insurance be maintained if
the property is within a designated flood plain.
Residential mortgage loan applications are primarily
developed from advertising, referrals from real
estate brokers and builders, existing customers and
walk-in customers. Commercial real estate and
commercial business loan applications are obtained
primarily from previous borrowers, direct
solicitations by Bank personnel, as well as
referrals. Consumer loans originated by the Bank are
obtained primarily through existing customers. In
addition, the Bank uses a small group of pre approved
dealers to assist it in the generation of home
improvement loans.
Most loan approvals are considered by the Bank's loan
committee (the "Loan Committee"), consisting of the
Bank's president, assistant vice president and each
of the outside members of the Bank's board of
directors. Generally, real estate mortgage loans of
$100,000 or less may be reviewed and approved by at
least two members of the Loan Committee. All other
real estate loans require the approval of a majority
of the Bank's Board of Directors. Any non-real
estate loan in an amount up to $10,000 may be
approved by one Loan Committee member and any one
loan officer or assistant loan officer. Share loans
may be approved by any elected Bank officer, loan
officer or Loan Committee member and all other loans
within the Loan Committee lending limits must be
approved by at least two Loan Committee members.
Loans exceeding the Loan Committee limitations must
be reviewed and approved by the full Board of
Directors of the Bank. The Bank also has established
aggregate loan limitations which generally apply to
larger loans and groups of loans made to one
borrower. No loan or group of loans to any one
borrower may (1) exceed $500,000 or (2) excluding
first mortgage and share loans, exceed $100,000 (with
such loans in excess of $20,000 required to be
secured).
One-to-four Family Residential Loans. Substantially
all of the Bank's one-to-four family residential
mortgage loans consist of conventional loans.
Conventional loans are loans that are neither insured
by the FHA or partially guaranteed by the Department
of Veterans Affairs ("VA"). Virtually all of the
Bank's one-to-four family residential mortgage loans
are secured by properties and are originated under
terms and documentation which permit their sale to
the Federal Home Loan Mortgage Corporation ("FHLMC"),
or the Federal National Mortgage Association
("FNMA"). Sales of residential mortgage loans have
been insignificant to date. As of September 30,
1997, $24.87 million, or 84.29 %, of the Bank's total
loans consisted of one to four family residential
mortgage loans.
The Bank's one-to-four family mortgage loans are generally
either fixed rate loans or shorter-term balloon
loans. The Bank does not offer adjustable-rate one-
to-four family residential mortgage loans. Fixed-rate
loans generally have maturities ranging from 10 to 20
years and are fully amortizing with monthly loan
payments sufficient to repay the total amount of the
loan with interest by the end of the loan term. At
September 30, 1997, $18.76 million, or 75.43 %, of the
Bank's one-to-four family residential mortgage loans
were fixed-rate loans with original terms of from 10 to 30 years.
At September 30, 1997, the weighted average remaining term to
maturity of the Bank's fixed rate, 1-to-4 family
residential mortgage loans was approximately 12 years.
Substantially all of the Bank's fixed
rate, one-to-four family residential mortgage loans
contain due on sale clauses, which permit the Bank to
declare the unpaid balance to be due and payable upon
the sale or transfer of any interest
in the property securing the loan. The Bank
generally enforces such due-on-sale clauses, but may
waive the clause in certain circumstances.
The balloon loans currently offered by the Bank have
terms of one or three years, but an amortization
schedule of up to 30 years. At the end of a balloon
loan's term, the entire balance of the loan is due.
The borrower has the option of repaying the loan on
the due date or, subject to satisfying the Bank's
underwriting criteria, accepting the renewed loan
rate which is then offered by the Bank for such
loans. In the latter case, the renewed loan is a new
balloon loan with the same term as the initial
balloon loan. The Bank has generally offered rates
on such renewed loans at 1/4 of 1% to 1/2 of 1%
higher than rates then offered on its new balloon
residential real estate loans. Modified loans are
amortized over the remaining life of the original
amortization period. At September 30, 1997, $6.08
million or 24.57 % of the Bank's one-to-four family
residential mortgage loans were balloon loans.
Balloon loans decrease the risks associated with
changes in interest rates but involve other risks. If
a borrower renews the loan at a higher interest rate,
the loan payment by the borrower increases, thereby
increasing the potential for default. As with fixed-
rate loans, as interest rates increase, the
marketability of the underlying collateral property
may be adversely affected by higher interest rates.
The Bank believes the ability to adjust the rates of
these loans to reflect either a rising or falling
interest rate environment more than compensates for
risks associated with changing customer payments.
For one-to-four family residential first mortgage
loans the Bank's maximum loan-to-value ("LTV") ratio
generally is 80%, and is based on the lesser of sales
price or appraised value. On such loans with a LTV
ratio of over 85%, private mortgage insurance ("PMI")
is required on the amount of the loan in excess of
80% of value. The amount of an owner-occupied
residential first mortgage loan is limited to
$300,000 and the amount of an investment residential
first mortgage loan is $250,000.
The Bank offers home equity loans secured by second
mortgages. These second mortgage loans have been made
to borrowers who have first mortgages held by the
Bank or customers with substantial other business
with the Bank. The Bank placed second mortgages on
many properties to comply with FHA insurance
requirements which currently require such a lien for
loans of over $7,500. For most of the Bank's second
mortgage loans, the Bank either holds the first
mortgage or the second mortgage is FHA insured. The
Bank holds the first mortgage on approximately 90% of
the properties securing its second mortgage portfolio
which are not FHA-insured loans. A second mortgage
loan generally has a fixed rate of interest and a
term of six months.
Multi-Family Residential and Commercial Real Estate
Loans. At September 30, 1997, the Bank had $2.17
million in outstanding loans secured by multi-family
residences or commercial real estate. Such loans
comprised 7.36% of the Bank's total loan portfolio at September 30,
1997 and all have either fixed rates of interest
or are balloon loans. Generally, fees of 50 basis points to 1% of the
principal loan balances are charged to the borrower upon closing.
The Bank also obtains personal guarantees of the principals as
additional security for any multi-family residential or commercial real
estate loan.
At September 30, 1997, the Bank had $1.08 million in
outstanding loans secured by multi-family residences,
all of which were apartment buildings. The Bank's
underwriting standards generally provide for terms of
up to 20 years with amortization of principal over
the term of the loan and LTV ratios of not more than
75%. At September 30, 1997, the Bank had 15 loans
secured by multi-family residences with an
average balance of $72,000. As of that date none of
the multi family loans were non-performing loans.
At September 30, 1997, the Bank had $1.09 million in
outstanding loans secured by commercial real estate,
primarily retail office and farmland. The Bank's
underwriting standards generally provide for terms of
up to ten years with amortization of principal over
the term of the loans and LTV ratios of not more than
70%. At September 30, 1997, the Bank had 28 loans
secured by commercial real estate with an average
balance of $39,000. As of that date, none of the
Bank's commercial real estate loans were non-
performing loans.
The Bank evaluates various aspects of multi-family
residential and commercial real estate loan
transactions in an effort to mitigate risk to the
extent possible. In underwriting these loans,
consideration is given to the stability of the
property's cash flow history, future operating
projections, current and projected occupancy,
position in the market, location and physical
condition. The underwriting analysis also includes
credit checks and a review of the financial condition
of the borrower and guarantor, if applicable. An
appraisal report is prepared by a state-licensed or
certified appraiser commissioned by the Bank to
substantiate property values for every multifamily
and commercial real estate loan transaction. All
appraisal reports are reviewed by the Bank prior to
the closing of the loan.
Multi-family residential and commercial real estate
lending entails different and significant risks when
compared to one-to four family residential lending
because such loans often involve large loan balances
to single borrowers and because the payment
experience on such loans is typically dependent on
the successful operation of the rental units or
business. These risks can also be significantly
affected by supply and demand conditions in the local
market for apartments, offices or other commercial
space. The Bank attempts to minimize its risk
exposure by limiting such lending to experienced
businessmen, only considering properties with
existing operating performance which can be analyzed,
requiring conservative debt coverage ratios and
periodically monitoring the operation and physical
condition of the collateral. In most cases
commercial real estate loans are made to business
people who are also operating the tenant businesses.
Construction Loans. As of September 30, 1997, the
Bank's construction loans amounted to $116,000, or 0.39%
of the Bank's total loan portfolio. The Bank
originated $664,000 of single-family construction
loans to individuals during the year ended September 30, 1997. A
substantial majority of the Bank's construction loans
have consisted of loans to construct single-family
residences although the Bank will also consider
construction loans for small apartment buildings.
The Bank makes construction loans to individuals and,
on rare occasions, to developers for one-to-four
family residences. Normally these loans are
construction/permanent loans which require no
payments of principal during the construction period.
Interest on the construction loan is normally paid
during or at the close of construction period.
Following the construction period (which is typically
no longer than 6 months), the loan converts to a
permanent loan with monthly amortization of principal
and interest. Construction loans to individuals for
single-family residential properties generally have
the same LTV ratio requirements as applicable to
loans for one-to-four family residences. Loans to
developers are limited to no more than two active
projects. Disbursements of funds during construction
are conditioned upon the completion of a specified
percentage of construction.
Construction financing is generally considered to
involve a higher degree of risk of loss than long-
term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan is
dependent largely upon the accuracy of the initial
estimate of the property's value at completion of
construction or development and the estimated cost
(including interest) of construction. During the
construction phase, a number of factors could result
in delays and cost overruns. If the estimate of
value proves to be inaccurate, the Bank may be
confronted, at or prior to the maturity of the loan,
with a project, when completed, having a value which
is insufficient to assure full repayment. Loans on
lots may run the risk of adverse zoning changes,
environmental or other restrictions on future use.
As of September 30, 1997, none of the Bank's
construction loans were considered non-performing.
Consumer Loans. The Bank offers consumer loans in
order to provide a full range of retail financial
services to its customers. However, substantially
all of such loans are either home improvement,
automobile or share loans. At September 30, 1997,
$1.57 million, or 5.31%, of the Bank's
total loan portfolio was comprised of consumer loans.
The Bank originates substantially all of such loans
in its primary market area. Originations of consumer
loans by the Bank amounted to $1.2 million in 1997.
For loans secured by vehicles either new or less than
two model years old, the Bank's maximum LTV ratio is
the lower of 90% of the purchase price or 100% of the
balance due after trade-in allowances and the maximum
loan amount is $30,000. For loans secured by
vehicles at least two but less than six model years
old, the amount of the loan may not exceed the lowest
of 75% of the purchase price, 100% of the maximum
NADA Official Used Car Guide value or 100% of the
balance due after trade-in and allowances. However,
loans on such vehicles may not in any case exceed
$20,000. The Board has granted management the
authority to exceed LTV ratios and other terms on
vehicle loans if they are noted in subsequent monthly
reports to the Board. As of September 30, 1997, the
Bank had $513,000 of loans secured
by vehicles.
Share loans are secured by the balance in the
borrower's account with the Bank. These loans
generally have interest rates 2% above the rate paid
on the account balance and the principal of the loan
may not exceed 90% of the account balance. As of
September 30, 1997, the Bank had $266,000 of share
loans.
Consumer finance loans generally involve more credit
risk than mortgage loans because of the type and
nature of the collateral and, in certain cases, the
absence of collateral. In addition,
consumer lending collections are dependent on the
borrower's continuing financial stability, and thus
are more likely to be adversely affected by job loss,
divorce, illness and personal bankruptcy. In many
cases, any repossessed collateral for a defaulted
consumer financial loan will not provide an adequate
source of repayment of the outstanding loan balance
because of improper repair and maintenance or
depreciation of the underlying security. The
remaining deficiency often does not warrant further
substantial collection efforts against the borrower.
As of September 30, 1997, $31,000 or
2.0% of the Bank's consumer loans were
considered non-performing.
Commercial Business Loans. The Bank began offering
commercial business loans in March 1995. At
September 30, 1997, the Bank's commercial business
loans amounted to $481,000 or 1.63% of the Bank's total
loan portfolio. The Bank's commercial business loans are
generally made to its current customers on a secured or unsecured
basis and involve a wide range of business purposes. These
loans generally have terms of between six months to
one year. Notes either require a single payment at
the end of their term or have amortizing payments of
principal and interest for periods of up to five
years. Any two loan committee members may approve a
loan of this type in an amount up to $20,000. Any
unsecured loan in excess of $20,000 must be approved
by the Board of Directors. The Bank generally
obtains personal guarantees from the principals of
the borrower with respect to all commercial loans.
The Bank had 18 commercial business loans as of
September 30, 1997 with an average loan balance on
that date of $27,000. As of September 30, 1997, none of
the Bank's commercial business loans was non-performing.
Commercial business lending generally entails
significantly greater risk than the risks involved
with more traditional real estate lending. The
repayment of commercial business loans typically is
dependent on the successful operation and income
stream of the borrower. Such risks can be
significantly affected by economic conditions.
Loans-to-One Borrower Limitations. The Illinois
Savings Bank Act imposes limitations on the aggregate
amount of loans that an Illinois chartered savings
bank can make to any one borrower. Under the Illinois
Savings Bank Act the permissible amount of loans-to-
one borrower is the greater of $500,000 (for a
savings bank meeting its minimum capital
requirements) or 20% of a savings bank's total
capital plus general loan loss reserves. In
addition, a savings bank may make loans in an amount
equal to an additional 10% of the savings bank's
capital plus general loan loss reserves if the loans
are 100% secured by readily marketable collateral.
Under Illinois law, a savings bank's capital consists
of capital stock and noncumulative perpetual
preferred stock, related paid-in capital, retained
earnings and other forms of capital deemed to be
qualifying capital by the FDIC. At September 30,
1997, the Bank's limit on loans-to-one borrower under
the Illinois Savings Bank Act was $1,041,000. At
September 30, 1997, the Bank's five largest groups of
loans-to one borrower ranged from $295,000 to
$450,000, with the largest single loan in such groups being a
$248,000 loan secured by a 60 acre commercial property.
Each of the five largest groups of borrowers has
several loans from the Bank
generally a combination of loans secured by
investment properties and a residence as well as
smaller secured and unsecured personal loans. A
substantial portion of each large group of loans is
secured by real estate. At September 30, 1997, all
of such loans were performing in accordance with their
terms.
Asset Quality
General. As a part of the Bank's efforts to improve
its asset quality, it has developed and implemented
an asset classification system. All of the Bank's
assets are subject to periodic review under the
classification system and assets with classifications
of above normal risk of collection are reported to
and reviewed by the Board monthly. Quarterly reports
to the Board classify the totals of all loan assets
by risk classification.
When a borrower fails to make a required payment on a
loan, the Bank attempts to cure the deficiency by
contacting the borrower and seeking payment.
Contacts are generally made by mail within ten days
after a payment is due. In most cases, deficiencies
are cured promptly. If a delinquency continues, late
charges are assessed and additional efforts are made
to collect the loan. While the Bank generally prefers
to work with borrowers to resolve such problems, when
the account becomes 120 days delinquent, the Bank
institutes foreclosure or other proceedings, as
necessary, to minimize any potential loss.
As a matter of policy the Bank evaluates individual
loans past due 90 days or more to determine if
current payments being collected or underlying
collateral security justifies the accrual of
additional interest.
Real estate acquired by the Bank as a result of
foreclosure or by deed-in-lieu of foreclosure and
loans deemed to be in-substance foreclosed under GAAP
are classified as real estate owned until sold.
Pursuant to SOP 92-3 issued by the AICPA in April
1992, which provides guidance on determining the
balance sheet treatment of foreclosed assets in
annual financial statements for periods ending on or
after December 15, 1992, there is a rebuttable
presumption that foreclosed assets are held for sale
and such assets are recommended to be carried at the
lower of fair value minus estimated costs to sell the
property, or cost (generally the balance of the loan
on the property at the date of acquisition). After
the date of acquisition, all costs incurred in
maintaining the property are expensed and costs
incurred for the improvement or development of such
property are capitalized up to the extent of their
net realizable value. Although, as of September 30,
1997, the Bank had no real estate owned, it is its
policy to comply with the guidance set forth in SOP
92-3.
Under GAAP, the Bank is required to account for
certain loan modifications or restructurings as
"troubled debt restructurings." In general, the
modification or restructuring of a debt constitutes a
troubled debt restructuring if the Bank for economic
or legal reasons related to the borrower's financial
difficulties grants a concession to the borrower that
the Bank would not otherwise consider under current
market conditions. Debt restructurings or loan
modifications for a borrower do not necessarily
always constitute troubled debt restructurings,
however, and troubled debt restructurings do not
necessarily result in non-accrual loans. As of
September 30, 1997, the Bank had no loans deemed to
be troubled debt restructurings. See the table below
under "- Non-Performing Assets."
Delinquent Loans. The following table sets forth
information concerning delinquent loans at the dates
indicated in dollar amounts and as a percentage of
each category of the Bank's loan portfolio. The
amounts presented represent the total outstanding
principal balances of the related loans, rather than
the actual payment amounts which are past due.
September 30, 1997
30-89
Days
Amount Percent of
Loan Category
(Dollars in Thousands)
Real estate mortgage loans:
One-to-four family $ 285 1.14%
Multi-family 16 1.48
Commercial real estate 2 .18
Construction -- --
Commercial business loans -- --
Consumer loans 50 3.19
Total $ 353 1.20%
September 30, 1997
90 Days or more
Amount Percent of
Loan Category
(Dollars in Thousands)
Real estate mortgage loans:
One-to-four family $ 454 1.82%
Multi-family -- --
Commercial real estate -- --
Construction -- --
Commercial business loans -- --
Consumer loans 31 1.98
Total $ 485 1.65%
Non-Performing Assets. The following table sets forth
the amounts and categories of the Bank's non-
performing assets at the dates indicated. The Bank
did not have any troubled debt restructuring at any
of the dates presented.
At September 30,
1997 1996 1995
(Dollars in Thousands)
Non accruing loans:
Real estate mortgage loans:
One-to-four family $ -- $ 74 $ 70
Multi-family -- -- --
Commercial real estate -- -- --
Real estate construction loans -- -- --
Commercial business loans -- -- --
Consumer loans -- -- --
Total non-accruing loans -- $ 74 $ 70
Accruing loans greater than 90
days delinquent:
Real estate mortgage loans:
One-to-four family 454 112 140
Multi-family -- -- --
Commercial real estate -- 93 --
Real estate construction loans -- -- --
Commercial business loans -- -- --
Consumer loans 31 49 6
Total accruing loans greater than
90 days delinquent 485 254 146
Total non-performing loans 485 328 216
Real estate owned -- -- --
Total non-performing assets $485 $328 216
Total non-performing loans as a
percentage of total loans 1.64% 1.21% 0.90%
Total non-performing assets as a
percentage of total assets 1.28% 0.93% 0.64%
Management believes that it is substantially secured with
respect to non-performing assets and that the institution is
adequately reserved.
Other Classified Assets. Federal regulations require
that the Bank classify its assets on a regular basis.
In addition, in connection with examinations of
insured institutions, federal examiners have
authority to identify problem assets and, if
appropriate, classify them in their reports of
examination. There are three classifications for problem assets:
"substandard," "doubtful" and "loss." Substandard
assets have one or more defined weaknesses and are
characterized by the distinct possibility that the
insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the
additional characteristic that the weaknesses make
collection or liquidation in full, on the basis of
currently existing facts, conditions and values
questionable, and there is a high possibility of
loss. An asset classified loss is considered
uncollectible and of such little value that
continuance as an asset of the institution is not
warranted.
At September 30, 1997, the Bank had $187,000 of
assets classified substandard, $144,000 of assets classified
doubtful and $12,000 classified as loss. At such
date, the aggregate of the Bank's classified assets
amounted to 0.91% of total assets.
Allowance for Loan Losses. The Bank's policy is to
establish reserves to absorb losses on loans based on
management's continuing review and evaluation of the
portfolio and its judgment as to the impact of
economic conditions on the portfolio. The allowance
for losses on loans is maintained at a level believed
adequate by management to absorb potential losses in
the portfolio. Management's determination of the
adequacy of the allowance is based on an evaluation
of the past loss experience, changes in the
composition of the portfolio and the current
conditions and amount of loans outstanding. The
allowance is increased by provisions for loan losses
which are charged against income. As shown in the
table below, at September 30, 1997, the Bank's
allowance for loan losses amounted to 31.34% and
0.52% of the Bank's non-performing
loans and total loans receivable, respectively.
Effective December 21, 1993, the FDIC, in conjunction
with the Office of the Comptroller of the Currency
("OCC"), the Office of Thrift Supervision ("OTS") and
the Federal Reserve Board, issued the Policy
Statement regarding an institution's allowance for
loan and lease losses. The Policy Statement, which
reflects the position of the issuing regulatory
agencies and does not necessarily constitute GAAP,
includes guidance (i) on the responsibilities of
management for the assessment and establishment of an
adequate allowance and (ii) for the agencies'
examiners to use in evaluating the adequacy of such
allowance and the policies utilized to determine such
allowance. The Policy Statement also sets forth
quantitative measures for the allowance with respect
to assets classified substandard and doubtful and
with respect to the remaining portion of an
institution's loan portfolio. Specifically, the
Policy Statement sets forth the following
quantitative measures which examiners may use to
determine the reasonableness of an allowance: (i)
50% of the portfolio that is classified doubtful;
(ii) 15% of the portfolio that is classified
substandard; and (iii) for the portions of the
portfolio that have not been classified (including
loans designated special mention), estimated credit
losses over the upcoming 12 months based on facts and
circumstances available on the evaluation date.
While the Policy Statement sets forth this
quantitative measure, such guidance is not intended
as a "floor" or "ceiling." The review of the Policy
Statement did not result in a material adjustment to
the Bank's policy for establishing loan losses.
The following table describes the activity related to
the Bank's allowance for possible loan losses for the
periods indicated.
Year Ended September 30,
1997 1996 1995
(Dollars in Thousands)
Balance at beginning of period $143 $ 74 $ 67
Charge-offs:
One-to-four family real estate loans (7) (10) (10)
Consumer loans (2) (2) --
Recoveries: one-to-four family real estate 1 1 4
Net charge-offs (8) (11) (6)
Provision for losses on loans 17 80 13
Balance at end of period $152 $143 $ 74
Allowance for loan losses as a percentage
of total loans outstanding 0.52% 0.53% 0.31%
Allowance for loan losses as a percentage
of total non-performing loans 31.34% 43.60% 34.26%
Ratio of net charge-offs to
average loans outstanding 0.03% 0.04% 0.03%
The following table presents an allocation of the
allowance for loan losses by the categories indicated
and the percentage that loans in each category bear
to total loans. This allocation is used by
management to assist in its evaluation of the Bank's
loan portfolio. It should be noted that allocations
are no more than estimates and are subject to
revisions as conditions change. Based upon historical
loss experience and the Bank's assessment of its loan
portfolio, all of the Bank's allowance for loan
losses have been allocated to the categories of loans
indicated. Allocations of these loans are based
primarily on the creditworthiness of each borrower.
In addition, general allocations are also made to
each category based upon, among other things, the
current and future impact of economic conditions on
the loan portfolio taken as a whole. Losses on loans
made to consumers are reasonably predictable based on
the prior loss experience and a review of current
economic conditions.
At September 30,
1997 1996
Amount Percent Amount Percent
of Loans of loans
in Each in Each
Category to Category to
Total Loans Total Loans
(Dollars in Thousands)
Real estate mortgage loans:
One-to-four family $105 84.29% $ 98 79.13%
Multi-family -- 3.67 -- 4.57
Commercial real estate -- 3.69 -- 2.89
Real estate sold on Contract 4 1.02 4 1.38
Real estate construction -- 0.39 -- 1.26
Commercial business loans 3 1.63 3 1.23
Consumer loans 40 5.31 38 9.54
Total $152 100.00% $143 100.00%
At September 30, 1995
Amount Percent
of Loans
in Each
Category to
Total Loans
(Dollars in Thousands)
Real estate mortgage loans:
One-to-four family $ 53 79.53%
Multi-family -- 4.80
Commercial real estate -- 2.77
Real estate sold on contract 4 1.72
Real estate construction loans -- 0.68
Commercial business loans -- 1.00
Consumer loans 17 9.50
Total $ 74 100.00%
Management of the Bank presently believes that its
allowance for loan losses is adequate to cover any
potential losses in the Bank's loan portfolio.
However, future adjustments to this allowance may be
necessary, and the Bank's results of operations could
be adversely affected if circumstances differ
substantially from the assumptions used by management
in making its determinations in this regard.
Investment Activities
General. Interest income from mortgage-backed
securities and investment securities generally
provides the second largest source of income to the
Bank after interest on loans. The Bank's Board of
Directors has authorized investment in U.S.
Government and agency securities, obligations of the
FHLB, and mortgage backed securities issued by FNMA,
FHLMC and the Government National Mortgage
Association ("GNMA") as well as by certain state,
county and municipal securities. The Bank's
objective is to use such investments to reduce
interest rate risk, enhance yields on assets and
provide liquidity. On September 30, 1997, the Bank's
investment securities portfolio amounted to
$6.12 million, including a net unrealized gain of
$2,000, with respect to its securities available for
sale.
Mortgage-Backed Securities. As of September 30,
1997, the Bank's mortgage-backed securities amounted
to $2.69 million, or 7.11% of total assets. The Bank's
mortgage-backed securities portfolio provides a means of
investing in housing related mortgage instruments without the
costs associated with originating mortgage loans for
portfolio retention and with limited credit risk of
default which arises in holding a portfolio of loans
to maturity. Mortgage-backed securities (which also
are known as mortgage participation certificates or
pass-through certificates) represent a participation
interest in a pool of single-family or multi-family
mortgages. The principal and interest payments on
mortgage-backed securities are passed from the
mortgage originators, as servicer, through
intermediaries (generally U.S. Government agencies
and government sponsored enterprises) that pool and
repackage the participation interests in the form of
securities, to investors such as the Bank. Such U.S.
Government agencies and government sponsored enterprises,
which guarantee the payment of principal and interest to
investors, primarily include the FHLMC, the FNMA and the GNMA.
The FHLMC is a public corporation chartered by the
U.S. Government and owned by the 12 FHLBs and
federally insured savings institutions. The FHLMC
issues participation certificates backed principally
by conventional mortgage loans. The FHLMC guarantees
the timely payment of interest and the ultimate
return of principal on participation certificates.
The FNMA is a private corporation chartered by the
U.S. Congress with a mandate to establish a secondary
market for mortgage loans. The FNMA guarantees the timely
payment of principal and interest on FNMA securities. FHLMC and FNMA
securities are not backed by the full faith and
credit of the United States, but because the FHLMC
and the FNMA are U.S. Government-sponsored
enterprises, these securities are considered to be
among the highest quality investments with minimal
credit risks. The GNMA is a government agency within
the Department of Housing and Urban Development which
is intended to help finance government-assisted
housing programs. GNMA securities are backed by FHA-
insured and VA guaranteed loans, and the timely
payment of principal and interest on GNMA securities
are guaranteed by the GNMA and backed by the full
faith and credit of the U.S. Government. Because the
FHLMC, the FNMA and the GNMA were established to
provide support for low- and middle-income housing,
there are limits to the maximum size of loans that
qualify for these programs, which limit currently is
$207,000.
Mortgage-backed securities typically are issued with
stated principal amounts, and the securities are
backed by pools of mortgages that have loans with
interest rates that are within a range and have
varying maturities. The underlying pool of mortgages
can be composed of either fixed-rate or adjustable-
rate loans. As a result, the risk characteristics of
the underlying pool of mortgages, (i.e., fixed rate
or adjustable rate) as well as prepayment risk, are
passed on to the certificate holder. The life of a
mortgage-backed pass-through security thus
approximates the life of the underlying mortgages.
The Bank's mortgage-backed securities portfolio
includes investments in mortgage-backed securities
backed by ARMs or securities which otherwise have an
adjustable rate feature.
Mortgage-backed securities generally yield less than
the loans which underlie such securities because of
their payment guarantees or credit enhancements which
offer nominal credit risk. In addition, mortgage-
backed and related securities are more liquid than
individual mortgage loans and may be used to
collateralize borrowings of the Bank in the event
that the Bank determined to utilize borrowings as a
source of funds. Mortgage backed securities issued
or guaranteed by the FNMA or the FHLMC (except
interest-only securities or the residual interests in
CMOs) are weighted at no more than 20.0% for risk-
based capital purposes, compared to a weight of 50.0%
to 100.0% for residential loans.
As of September 30, 1997, all of the Bank's $2.69
million of mortgage-backed securities were classified
as held to maturity.
At September 30, 1997, the weighted average
contractual maturity of the Bank's fixed-rate
mortgage-backed securities was approximately 1.9
years. The actual maturity of a mortgage backed
security may be less than its stated maturity due to
prepayments of the underlying mortgages.
Prepayments that are faster than anticipated may
shorten the life of the security and adversely affect
its yield to maturity. The yield is based upon the
interest income and the amortization of any premium
or discount related to the mortgage-backed security.
In accordance with GAAP, premiums and discounts are
amortized over the estimated lives of the loans,
which decrease and increase interest income,
respectively. The prepayment assumptions used to
determine the amortization period for premiums and
discounts can significantly affect the yield of the
mortgage-backed security, and these assumptions are
reviewed periodically to reflect actual prepayments.
Although prepayments of underlying mortgages depend
on many factors, including the type of mortgages, the
coupon rate, the age of mortgages, the geographical
location of the underlying real estate
collateralizing the mortgages and general levels of
market interest rates, the difference between the
interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the
most significant determinant of the rate of
prepayments.
During periods of rising mortgage interest rates, if
the coupon rates of the underlying mortgages are less
than the prevailing market interest rates offered for
mortgage loans, refinancings generally decrease and
slow the prepayment of the underlying mortgages and
the related securities. Conversely, during periods
of falling mortgage interest rates, if the coupon
rates of the underlying mortgages exceed the
prevailing market interest rates offered for mortgage
loans, refinancing generally increases and
accelerates the prepayment of the underlying
mortgages and the related securities. Under such
circumstances, the Bank may be subject to
reinvestment risk because to the extent that the
Bank's mortgage-related securities amortize or prepay
faster than anticipated, the Bank may not be able to
reinvest the proceeds of such repayments and
prepayments at a comparable rate.
Securities. The Bank's investments in investment
securities other than mortgage-backed securities
consist primarily of securities issued by the U.S.
Treasury and federal government agency obligations
except for $362,000 of securities all of which are
general obligations of Illinois municipalities. As
of September 30, 1997, $3.12 million of such
securities portfolio were classified available for sale. The
remaining $362,000 of the Bank's investment
securities portfolio, which do not include the mortgage
backed securities, were classified as held to
maturity. The Bank attempts to maintain a high
degree of liquidity in its investment securities
portfolio and generally does not invest in securities
with terms to maturity exceeding ten years. As of
September 30, 1997, the estimated weighted average
life of the Bank's investment securities portfolio
was 3.79 years.
The following table sets forth certain information
regarding the Bank's investment securities at the
dates indicated.
September 30,
1997 1996
Amortized Market Amortized Market
Cost Value Cost Value
(In Thousands)
Available for sale:(1)
U.S. Treasury $1,741 $1,759 $ 250 $ 253
Federal agencies 1,365 1,357 1,992 1,969
Total available for sale $3,106 $3,116 $2,242 $2,222
Held to maturity:(1)
Federal agencies $ -- $ -- $ 500 $ 499
State and municipal 362 369 361 355
Mortgage-backed Securities 2,638 2,689 3,476 3,473
Total held to maturity $3,000 $3,058 $4,337 $4,327
September 30, 1995
Amortized Market
Cost Value
(In Thousands)
Available for sale:(1)
U.S. Treasury $ 198 $ 199
Federal agencies 1,286 1,287
Total available for sale $1,484 $1,486
Held to maturity:(1)
Federal agencies $2,196 $2,157
State and municipal 360 353
Mortgage-backed Securities 4,260 4,256
Total held to maturity $6,816 $6,766
(1) The Bank adopted the provisions set forth in
SFAS No. 115 on October 1, 1994, which requires
entities to carry securities that are available for sale
at their market value while continuing to carry securities
that are held to maturity at their amortized cost.
The following table sets forth certain information
regarding the maturities of the Bank's investment
securities at September 30, 1997.
Contractually Maturing
Weighted Weighted
Under 1 Average 1-5 Average
Year Yield Years Yield
(Dollars in Thousands)
Available for sale:
U.S. Treasury $ -- --% $1,741 6.10%
Federal agencies -- -- 1,365 5.97
Total available for sale -- -- 3,106 6.03
Held to maturity:
Federal agencies -- -- -- --
State and municipal(1) -- -- -- --
Mortgage-backed securities -- -- 682 6.40
Total held to maturity -- -- 682 6.40
Total investment securities -- -- 3,274 6.10
Contractually Maturing
Weighted Weighted
6-10 Average Over 10 Average
Years Yield Years Yield Total
(Dollars in
Thousands) Available for sale:
U.S. Treasury $ -- -- % $ -- -- % $1,741
Federal agencies -- -- -- -- 1,365
Total available for sale -- -- -- -- 3,106
Held to maturity:
Federal agencies -- -- -- -- --
State and municipal(1) 165 4.65 197 4.85 362
Mortgage-backed securities -- -- 1,956 7.11 2,638
Total held to maturity 165 4.65 2,153 6.90 3,000
Total investment securities 165 4.65 2,153 6.90 6,106
(1) Yields on tax-exempt investments have not been computed on a tax-
equivalent basis.
In addition, as a member of the FHLB of Chicago the
Bank is required to maintain an investment in stock
of the FHLB of Chicago equal to the greater of 1% of
the Bank's outstanding home mortgage
related assets or 5% of its outstanding advances from
the FHLB of Chicago. As of September 30, 1997, the
Bank's investment in stock of the FHLB of Chicago amounted
to $283,000. During the year ended September 30,
1997, the Bank received $19,000 in dividends on its
FHLB stock. No ready market exists for such stock,
which is carried at par value.
Sources of Funds
General. The Bank's principal source of funds for
use in lending and for other general business
purposes has traditionally come from deposits
obtained through the Bank's single retail office. The
Bank also derives funds from amortization and
prepayments of outstanding loans and mortgage-related
securities, and from maturing investment securities.
Loan repayments are a relatively stable source of
funds, while deposit inflows and outflows are
significantly influenced by general interest rates
and money market conditions. The Bank has made
limited use of borrowings to supplement its deposits
as a source of funds.
Deposits. The Bank's current deposit products
include savings accounts, retirement savings
accounts, NOW accounts, MMIA, certificates ranging in
terms from six months to five years and non-interest-
bearing personal and business checking accounts.
The Bank's deposits are obtained primarily from
residents in its Primary Market Area. The Bank
attracts local deposit accounts by offering a wide
variety of accounts, competitive interest rates and a
convenient location and convenient service hours.
The Bank utilizes traditional marketing methods to
attract new customers and savings deposits, including
print and broadcast advertising and direct mailings.
However, the Bank does not solicit funds through
deposit brokers nor does it pay any brokerage fees if
it accepts such deposits.
The Bank has been competitive in the types of
accounts and in interest rates it has offered on its
deposit products but does not necessarily seek to
match the highest rates paid by competing
institutions. With the decline in interest rates
paid on deposit products, the Bank in recent years
has experienced limited disintermediation of deposits
into competing investment products.
The following table sets forth certain information
relating to the Bank's deposits by type, as of the dates indicated.
September 30,
1997 1996 1995
Percent Percent Percent
Of Total of Total of Total
Amount Deposits Amount Deposits Amount Deposits
(Dollars in Thousands)
Transaction accounts:
NOW accounts $ 826 2.84% $ 577 1.88% $ 625 1.99%
Money market investment 896 3.08 1,043 3.39 1,432 4.57
Savings and retirement 5,027 17.28 5,350 17.42 4,965 15.85
Total transaction accounts 6,749 23.20 6,970 22.69 7,022 22.41
Certificates of deposit:
Within 1 year 14,406 49.51 16,995 55.32 14,134 45.12
1-2 years 6,668 22.92 4,369 14.22 7,681 24.52
2-3 years 637 2.19 1,599 5.20 1,856 5.92
3-4 years 442 1.52 293 0.95 339 1.08
4-5 years 196 0.66 498 1.62 299 0.95
Total certificates 22,349 76.80 23,754 77.31 24,309 77.59
Total deposits $29,098 100.00% $30,724 100.00% $31,331 100.00%
The following table sets forth information relating
to the Bank's deposit flows during the periods shown:
At or For the Year Ended September 30,
1997 1996 1995
(In Thousands)
Net deposits (withdrawals)
before interest credited $(2,875) $(1,877) $ (567)
Interest credited 1,249 1,270 1,200
Total increase (decrease)in deposits $(1,626) $ (607) $ 633
The following table shows the interest rate and maturity information
for the Bank's certificates at September 30, 1997.
Maturity Date
One Year Over 1-2 Over 2-3 Over 3-4 Over 4-5
or less Years Years Years Years
(In Thousands)
Interest Rate
4.50 to 4.99% $ 104 $ -- $ -- $ -- $ --
5.00 to 5.99% 11,225 1,675 302 217 76
6.00 to 6.99% 3,077 4,993 335 225 120
Total $14,406 $ 6,668 $ 637 $ 442 $ 196
The following table sets for the maturities of the
Bank's certificates having principal amounts of
$100,000 or more at September 30, 1997.
Maturity Period Amount
(In Thousands)
Three months or less $ 597
Over three through six months 515
Over six through twelve months 940
Over twelve months 812
Total certificates of deposit
with balances of $100,00 or more $ 2,864
Borrowings. The Bank may obtain advances from the
FHLB of Chicago upon the security of the common stock
it owns in that bank and certain of its residential
mortgage loans and securities held to maturity,
provided certain standards related to
creditworthiness have been met. Such advances are
made pursuant to several credit programs, each of
which has its own interest rate and range of
maturities. Prior to fiscal 1996, the Bank had not
used such borrowings during the most recent five-year
period.
The following table sets forth the amounts of the
Bank's borrowings and the weighted average rates for
the year ended September 30, 1997.
For the Year Ended September 30,
1997 1996
(Dollars in Thousands)
FHLB advances:
Average balance outstanding during the period(1) $2,100 $1,917
Maximum amount outstanding
at any month-end during the period $2,600 $2,000
Balance outstanding at end of period $2,600 $2,000
Weighted average interest rate during the period 5.85% 5.58%
Weighted average interest rate at the end of period 5.88% 5.83%
(1) The average balance was computed using an
average of monthly balances during the year.
Subsidiaries
The Bank currently has one subsidiary, G.B.W. Service
Corporation ("GBW"). GBW's primary activities are
the collection of premiums on credit life and credit
disability insurance policies and the collection of
interest on certain real estate sales contracts. The
Bank's investment in its subsidiary totaled $116,000
as of September 30, 1997.
Legal Proceedings
The Bank is involved in routine legal proceedings
occurring in the ordinary course of business which,
in the aggregate except as noted below, are believed
by management to be immaterial to the financial
condition of the Bank. On December 30, 1992,
Rosemary Frobose, a former officer of the Bank, filed
a lawsuit against the Bank in the United States
District Court, Central District of Illinois,
(subsequently transferred to the Central District of
Illinois, Peoria Division) alleging that she was the
victim of a retaliatory discharge based on common law
rights and the federal "whistleblower statute," 12
USC ' 1831j(a). The plaintiff seeks compensatory and
punitive damages against the Bank based upon her loss
of income and employment for at least a ten-year
period. She has not sought a specific dollar amount in her
complaint but at one point made a demand of $900,000.
Recently, the Court entered a summary judgment in
favor of the Bank on each count. The employee has appealed
the judgement on several counts to the Federal Appeals Court
in Chicago. Oral argument was heard on December 12, 1997.
In the judgment of the Bank's litigation counsel, the likelihood that
the plaintiff will prevail in this case is remote.
However, should the case be revised on appeal and a
verdict ultimately directed against the Bank by the
trial court, the Bank's litigation counsel believes
that the range of potential loss is $250,000 to $1
million. In the unlikely event of a verdict within
that range, the resulting loss would have a material
adverse effect on the Bank.
Competition
The Bank faces strong competition both in attracting
deposits and making real estate loans. Its most
direct competition for deposits has historically come
from other savings institutions, credit unions and
commercial banks located in its market area including
many large financial institutions which have greater
financial and marketing resources available to them.
In addition, during times of high interest rates, the Bank
has faced significant competition for
investors' funds from short-term money market
securities, mutual funds and other corporate and
government securities. The ability of the Bank to
attract and retain savings deposits depends on its
ability to generally provide a rate of return,
liquidity and risk comparable to that offered by
competing investment opportunities.
The Bank experiences strong competition for real
estate loans principally from other savings
institutions, commercial banks and mortgage banking
companies. The Bank competes for loans principally
through the interest rates and loan fees it charges,
the efficiency and quality of services it provides
borrowers and the convenient location of its main
office. Competition may increase as a result of the
continuing reduction of restrictions on the
interstate operations of financial institutions.
Employees
The Bank had eight full-time employees and two
part-time employees as of September 30, 1997. None
of these employees is represented by a collective
bargaining agreement. The Bank believes that it
enjoys excellent relations with its personnel.
REGULATION
Set forth below is a brief description of certain
laws and regulations which together with the
descriptions of laws and regulation contained
elsewhere herein, are deemed material to an
investor's understanding of the extent to which the
Company and the Savings Bank are regulated. The
description of these laws and regulations, as well as
descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and
is qualified in its entirety by reference to
applicable laws and regulations.
The Company
General. The Company is the sole stockholder of the
Bank. As such, the Company is a bank holding
company. As a bank holding company, the Company is
required to register with, and is subject to
regulation by, the Federal Reserve Board under the
Bank Holding Company Act ("BHCA"). In accordance with Federal
Reserve Board policy, the Company will be expected to
act as a source of financial strength to the Bank and
to commit resources to support the Bank in
circumstances where the Company might not do so
absent such policy. Under the BHCA, the Company is
subject to periodic examination by the Federal
Reserve Board and is required to file periodic
reports of its operations and such additional
information as the Federal Reserve Board may require.
Because the Bank is chartered under Illinois law, the
Company is also subject to registration with,
and regulation by, the Commissioner under the ISBA.
The BHCA requires prior Federal Reserve Board
approval for, among other things, the acquisition by
a bank holding company of direct or indirect
ownership or control of more than five percent of the
voting shares or substantially all the assets of any
bank, or for a merger or consolidation of a bank
holding company with another bank holding company.
With certain exceptions, the BHCA prohibits a bank
holding company from acquiring direct or indirect
ownership or control of voting shares of any company
which is not a bank or bank holding company and from
engaging directly or indirectly in any activity other
than banking or managing or controlling banks or
performing services for its authorized subsidiaries.
A bank holding company may, however,
engage in or acquire an interest in a company that
engages in activities which the Federal Reserve Board
has determined by regulation or order to be so
closely related to banking or managing or controlling
banks as to be a proper incident thereto.
A bank holding company is a legal entity separate and
distinct from its subsidiary bank or banks.
Normally, the major source of a holding company's
revenue is dividends a holding company receives from
its subsidiary banks. The right of a bank holding
company to participate as a stockholder in any
distribution of assets of its subsidiary banks upon
their liquidation or reorganization or otherwise is
subject to the prior claims of creditors of such
subsidiary banks. The subsidiary banks are subject
to claims by creditors for long-term and short-term
debt obligations, including substantial obligations
for federal funds purchased and securities sold under
repurchase agreements, as well as deposit
liabilities. Under the Financial Institutions
Reform, Recovery and Enforcement Act of 1989, in the
event of a loss suffered by the FDIC in connection
with a banking subsidiary of a bank holding company
(whether due to a default or the provision of FDIC
assistance), other banking subsidiaries of the
holding company could be assessed for such loss.
Federal laws limit the transfer of funds by a
subsidiary bank to its holding company in the form of
loans or extensions of credit, investments or
purchases of assets. Transfers of this kind are
limited to ten percent of a bank's capital and
surplus with respect to each affiliate and to twenty
percent to all affiliates in the aggregate, and are
also subject to certain collateral requirements.
These transactions, as well as other transactions
between a subsidiary bank and its holding company,
must also be on terms substantially the same as, or
at least as favorable as, those prevailing at the
time for comparable transactions with non affiliated
companies or, in the absence of comparable
transactions, on terms or under circumstances,
including credit standards, that would be offered to,
or would apply to, non affiliated companies.
Capital Requirements. The Federal Reserve Board has
adopted capital adequacy guidelines for bank holding
companies (on a consolidated basis) substantially
similar to those of the FDIC for the Bank described
below. At September 30, 1997, the Company's Tier 1
and total capital significantly exceeded the Federal
Reserve Board's capital adequacy requirements.
The Bank
General. The Bank is an Illinois-chartered savings
bank, the deposit accounts of which are insured by
the SAIF of the FDIC. As a SAIF-insured, Illinois-
chartered savings bank, the Bank is subject to the
examination, supervision, reporting and enforcement
requirements of the Commissioner, as the chartering
authority for Illinois savings banks, and the FDIC,
as administrator of the SAIF, and to the statutes and
regulations administered by the Commissioner and the
FDIC governing such matters as capital standards,
mergers, establishment of branch offices, subsidiary
investments and activities and general investment
authority. The Bank is required to file reports with
the Commissioner and the FDIC concerning its
activities and financial condition and will be
required to obtain regulatory approvals prior to
entering into certain transactions, including mergers
with, or acquisitions of, other financial institutions.
The Commissioner and the FDIC have extensive
enforcement authority over Illinois-chartered savings
banks, such as the Bank. This enforcement authority
includes, among other things, the ability to issue
cease-and-desist or removal orders, to assess civil
money penalties and to initiate injunctive actions.
In general, these enforcement actions may be
initiated for violations of laws and regulations and
unsafe and unsound practices.
The Commissioner has established a schedule for the
assessment of "supervisory fees" upon all Illinois
savings banks to fund the operations of the
Commissioner. These supervisory fees are computed on
the basis of each savings bank's total assets
(including consolidated subsidiaries) and are payable
at the end of each calendar quarter. A schedule of
fees has also been established for certain filings
made by Illinois savings banks with the Commissioner.
The Commissioner also assesses fees for examinations
conducted by the Commissioner's staff, based upon the
number of hours spent by the Commissioner's staff
performing the examination. During the fiscal year
ended September 30, 1997, the Bank paid approximately
$15,000 in supervisory fees and expenses.
The system of regulation and supervision applicable
to the Bank establishes a comprehensive framework for
its operations and is intended primarily for the
protection of the FDIC's deposit insurance funds and
the depositors of the Bank. Changes in the
regulatory framework could have a material adverse
effect on the Bank and its operations which, in turn,
could have a material adverse effect on the Holding Company.
Capital Requirements. Under the Illinois Savings
Bank Act ("ISBA") and the regulations of the
Commissioner, an Illinois savings bank must maintain
a minimum level of total capital equal to the higher
of 3% of total assets or the amount required to
maintain insurance of deposits by the FDIC. The
Commissioner has the authority to require an Illinois
savings bank to maintain a higher level of capital if
the Commissioner deems such higher level necessary
based on the savings bank's financial condition,
history, management or earnings prospects.
FDIC-insured institutions are required to follow
certain capital adequacy guidelines which prescribe
minimum levels of capital and require that
institutions meet certain risk-based and leverage
capital requirements. Under the FDIC capital
regulations, an FDIC-insured institution is required
to meet the following capital standards: (i) "Tier 1
capital", for all but the most highly rated
institutions in an amount not less than 4% of total
assets; (ii) "Tier 1 capital" in an amount not less
than 4% of risk-weighted assets; and (iii) "total
capital" in an amount not less than 8% of risk-weighted assets.
FDIC-insured institutions in the strongest financial
and managerial condition (with a composite rating of
"1" under the Uniform Financial Institutions Rating
System established by the Federal Financial
Institutions Examination Council) are required to
maintain "Tier 1 capital" equal to at least 3% of
total assets ( the "leverage limit" requirement).
For all other FDIC-insured institutions, the minimum
leverage limit requirement is 3% of total assets plus
at least an additional 100 to 200 basis points.
Tier 1 capital is defined to include the sum of
common stockholders' equity, non-cumulative perpetual
preferred stock (including any related surplus), and
minority interests in consolidated subsidiaries,
minus all intangible assets (other than qualifying
servicing rights, qualifying purchased creditcard
relationships and qualifying supervisory goodwill),
certain identified losses (as defined in the FDIC's
regulations) and investments in certain subsidiaries.
FDIC-insured institutions also are required to adhere
to certain risk-based capital guidelines which are
designed to provide a measure of capital more
sensitive to the risk profiles of individual banks.
Under the risk-based capital guidelines, capital is
divided into two tiers: core (Tier 1) capital, as
defined above, and supplementary (Tier 2) capital.
Tier 2 capital is limited to 100% of core capital and
includes cumulative perpetual preferred stock,
perpetual preferred stock for which the dividend rate
is reset periodically based on current credit
standing, regardless of whether dividends are
cumulative or non-cumulative, mandatory convertible
debt securities, term subordinated debt, intermediate-
term preferred stock and the allowance for possible
loan and lease losses. The allowance for possible
loan and lease losses includable in Tier 2 capital is
limited to a maximum of 1.25% of risk-weighted
assets. Total capital is the sum of Tier 1 and Tier 2
capital. The risk based capital framework assigns
balance sheet assets to one of four broad risk
categories which are assigned risk weights ranging
from 0% to 100% based primarily on the degree of
credit risk associated with the obligor. Off balance
sheet items are converted to an on-balance sheet
"credit equivalent" amount utilizing certain
conversion factors. The sum of the four risk
weighted categories equals risk-weighted assets. At
September 30, 1997 the Bank met each of its capital requirements.
Dividends. Under the ISBA, dividends may only be
declared when the total capital of the Bank is
greater than that required by Illinois law.
Dividends may be paid by the Bank out of its net
profits (i.e., earnings from current operations, plus
actual recoveries on loans, investments, and other
assets after deducting all current expenses,
including dividends or interest on deposit accounts,
additions to reserves as may be required by the
Illinois Commissioner, actual losses, accrued
dividends on preferred stock, if any, and all State
and federal taxes). The written approval of the
Commissioner must be obtained, however, before a
savings bank having total capital of less than 6% of
total assets may declare dividends in any year in an
amount in excess of 50% of its net profits for that
year. A savings bank may not declare dividends in
excess of its net profits in any year without the
approval of the Commissioner. In addition, before
declaring a dividend on its capital stock, the Bank
must transfer no less than one-half of its net
profits of the preceding half year to its paid-in
surplus until it shall have paid-in surplus equal to
20% of its capital stock. Finally, the Bank will be
unable to pay dividends in an amount which would
reduce its capital below the greater of (i) the
amount required by the FDIC, (ii) the amount required
by the Commissioner or (iii) the amount required for
the liquidation account to be established by the Bank
in connection with the Conversion. The Commissioner
and the FDIC also have the authority to prohibit the
payment of any dividends by the Bank if the
Commissioner or the FDIC determines that the
distribution would constitute an unsafe or unsound
practice. For the year ended September 30, 1997, the
Bank's capital was greater than that required by the
FDIC and higher than 3% of total assets. Based upon
the Illinois definition of "net profits", the Bank
could pay a maximum of $126,000 in dividends
under Illinois Law, and the Bank does not intend to
pay dividends in excess of this amount.
Federal Home Loan Bank System. The Bank is a member
of the FHLB System which consists of 12 FHLBs under
the jurisdiction of the Federal Housing Finance Board
("FHFB"). As a member of the FHLB System, the Bank
is required to acquire and hold shares of capital
stock of the FHLB of Chicago in an amount equal to
the greater of (i) 1.0% of the aggregate outstanding
principal amount of the Bank's aggregate unpaid loan
principal, or (ii) 0.3% of the Bank's total assets.
The Bank's holdings of FHLB capital
stock will be reviewed annually by the FHLB of
Chicago using calendar year-end financial data to
ensure that the Bank is holding the minimum required
amount of FHLB capital stock. If the minimum amount
required is decreased, the FHLB-Chicago may in its
discretion and upon application of the Bank, retire
excess shares of capital stock held by the Bank. The
Bank is in compliance with this requirement with an
investment in FHLB capital stock of $283,000 at
September 30, 1997.
The FHLBs provide a central credit facility primarily
for member institutions. FHLBs make advances to
member banks in accordance with each Federal Home
Loan Bank's policies and procedures established by
the FHFB and the Board of Directors of such FHLB.
All long-term advances by a Federal Home Loan Bank
(advances having an original term to maturity greater
than five years) must be made only for the purpose of
providing funds for residential housing finance.
Advances are made upon the note or obligation of a
member bank, must be fully secured and bear interest
at a rate established by the FHFB. At September 30,
1997, the Bank had $2,600,000 in advances outstanding
from the FHLB of Chicago. The Bank's aggregate outstanding
advances from the FHLB of Chicago may at no time exceed 20
times the amounts paid in by the Bank for its holding
of FHLB capital stock.
Lending Limitations. Under the ISBA, the Bank is
prohibited from making secured or unsecured loans for
business, corporate, commercial or agricultural
purposes representing in the aggregate an amount in
excess of 15% of its total assets, unless the
Commissioner authorizes in writing a higher
percentage limit for such loans upon the request of
an institution. In addition, the regulations of the
Commissioner prohibit the Bank from making
educational loans in excess of 5% of its total assets.
The Bank is also subject to a loans-to-one borrower
limitation. Under the ISBA, the total loans and
extensions of credit, both direct and indirect, by
the Bank to any person (other than the United States
or its agencies, the state of Illinois or its
agencies, and any municipal corporation for money
borrowed) outstanding at one time must not exceed the
greater of $500,000 or 20% of the Bank's total
capital plus general loan loss reserves. In addition
to the above, the total loans and extensions of
credit, both direct and indirect, by the Bank to any
person outstanding at one time and at least 100%
secured by readily marketable collateral must not
exceed the greater of $500,000 or 10% of the Bank's
total capital plus general loan loss reserves.
Brokered Deposits; Regulation of Deposit Rates.
Under applicable laws and regulations, an insured
depository institution may be restricted in
obtaining, directly or indirectly, funds by or
through any "deposit broker," as defined, for
deposit into one or more deposit accounts at the
institution. The term "deposit broker" generally
includes any person engaged in the business of
placing deposits, or facilitating the placement of
deposits, of third parties with insured depository
institutions or the business of placing deposits with
insured depository institutions for the purpose of
selling interests in those deposits to third
parties. Under FDIC regulations, well capitalized
institutions are subject to no brokered deposit
limitations, while adequately capitalized
institutions are able to accept, renew or roll over
brokered deposits only (i) with a waiver from the
FDIC and (ii) subject to the limitation that they do
not pay an effective yield on any such deposit which
exceeds by more than (a) 75 basis points the
effective yield paid on deposits of comparable size
and maturity in such institution's normal market
area for deposits accepted in its
normal market area or (b) by 120% for retail
deposits and 130% for wholesale deposits,
respectively, of the current yield on comparable
maturity U.S. Treasury obligations for deposits
accepted outside the institution's normal market
area. Undercapitalized institutions are not permitted
to accept brokered deposits and may not solicit
deposits by offering an effective yield that exceeds
by more than 75 basis points the prevailing effective
yields on insured deposits of comparable maturity in
the institution's normal market area or in the market
area in which such deposits are being solicited. At
September 30, 1997, the Bank is a well
capitalized institution which was not subject to
restrictions on brokered deposits within the meaning
of these regulations and had no brokered deposits. See
footnotes to Consolidated Financial Statements.
An institution that is not well-capitalized, even if
meeting minimum capital requirements, may not solicit
deposits by offering interest rates that are
significantly higher than the relevant local or
national rate as determined under the regulations.
Community Reinvestment Act Requirements. The FDIC,
the Federal Reserve Board, the OTS and the OCC have
jointly issued a final rule (the "Final Rule") under
the Community Reinvestment Act (the "CRA"). The
Final Rule eliminates the existing CRA regulation's
twelve assessment factors and substitutes a
performance based evaluation system. The Final Rule
will be phased in over a period of time and became
fully effective on July 1, 1997. Under the Final
Rule, an institution's performance in meeting the
credit needs of its entire community, including low-
and moderate income areas, as required by the CRA,
will generally be evaluated under three tests: the
"lending test," the "investment test," and the
"service test." A "small bank," defined to include
one with less than $250 million in assets, is subject
to a special test, involving consideration of loan to
deposit ratio, the percentage of loans located in the
institution's "assessment area", the degree of
lending to persons of different income levels and to
business and farms of different sizes, geographic
distribution of loans, and responsiveness to
complaints about its performance in meeting local
credit needs. As an alternative, institutions may
submit a "strategic plan" approved by the FDIC.
These tests and standards are applied in a
"performance context." The performance context
includes information on income levels, housing stock
and costs in the local area, any information about
lending, investment and service opportunities in the
area, the association's product offerings and
business strategy, the institution's capacity and
constraints, past performance and performance of
similarly situated lenders, and written comments
placed in the association's public file. Institutions
receive a rating of "outstanding", "satisfactory",
"needs to improve" or "substantial noncompliance."
These ratings are made publicly available and are
used when applications are filed with the agency to
branch, relocate an office, merge with or acquire
other institutions, among other transactions. Based
upon a review of the Final Rule, management of the
Company does not anticipate that the new CRA
regulations will adversely affect the Bank.
Other Regulations
FDICIA. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted on
December 19, 1991. In addition to providing for the
recapitalization of BIF, FDICIA represents a
comprehensive and fundamental change to banking
supervision. FDICIA imposes relatively detailed
standards and mandates the development of additional
regulations governing nearly every aspect of the
operations, management and supervision
of banks and bank holding companies like the Company
and the Bank.
As required by FDICIA, and subsequently amended by
the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "CDR Act"), the federal
banking regulators have adopted (effective August 9,
1995) interagency guidelines establishing standards
for safety and soundness for depository institutions
on matters such as internal controls, loan
documentation, credit underwriting, interest-rate
risk exposure, asset growth, and compensation and
other benefits (the "Guidelines"). In addition, the
federal banking regulators have proposed asset
quality and earnings standards to be added to the
Guidelines. The agencies expect to request a
compliance plan from an institution whose failure to
meet one or more of the standards is of such severity
that it could threaten the safe and sound operation
of the institution. FDIC regulations enacted under
FDICIA also require all depository institutions to be
examined annually by the banking regulators and
depository institutions having $500 million or more
in total assets to have an annual independent audit,
an audit committee comprised solely of outside
directors, and to hire outside auditors to evaluate
the institution's internal control structure and
procedures and compliance with laws and regulations
relating to safety and soundness. The FDIC, in
adopting the regulations, reiterated its belief that
every depository institution, regardless of size,
should have an annual independent audit and an
independent audit committee.
FDICIA requires the banking regulators to take prompt
corrective action with respect to depository
institutions that fall below certain capital levels
and prohibits any depository institution from making
any capital distribution that would cause it to be
considered undercapitalized. Regulations
establishing five capital categories of well
capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and
critically undercapitalized became effective December
19, 1992. Institutions that are not adequately capitalized may
be subjected to a broad range of restrictions on
their activities and will be required to submit a
capital restoration plan which, to be accepted by the
regulators, must be guaranteed in part by any company
having control of the institution. Only well
capitalized institutions and adequately capitalized
institutions receiving a waiver from the FDIC are
permitted to accept brokered deposits, and only those
institutions eligible to accept brokered deposits may
provide pass-through deposit insurance for
participants in employee benefit plans. In other
respects, FDICIA provides for enhanced supervisory
authority, including greater authority for the
appointment of a conservator or receiver for
undercapitalized institutions.
A range of other regulations adopted as a result of
FDICIA include requirements applicable to closure of
branches; additional disclosures to depositors with
respect to terms and interest rates applicable to
deposit accounts; requirements for the banking
agencies to adopt uniform regulations for extensions
of credit secured by real estate; modification of
accounting standards to conform to generally accepted
accounting principles including the reporting of off-
balance sheet items and supplemental disclosure of
estimated fair market value of assets and liabilities
in financial statements filed with the banking
regulators; increased penalties in making or failing
to file assessment reports with the FDIC; greater
restrictions on extensions of credit to directors,
officers and principal stockholders; and increased
reporting requirements on agricultural loans and
loans to small businesses.
As required by FDICIA, the FDIC has established a
risk-based assessment system for the deposit
insurance provided to depositors at depository
institutions whereby assessments to each institution
are calculated upon the probability that the
insurance fund will incur a loss with respect to the
institution, the likely amount of such loss, and the
revenue needs of the insurance fund. Under the
system, deposit insurance premiums are based upon an
institution's assignment to one of three capital
categories and a further assignment to one of three
supervisory subcategories within each capital
category. The result is a nine category assessment
system with initial assessment rates ranging from
twenty-three cents to thirty-one cents per one
hundred dollars of deposits in an institution. The
classification of an institution into a category will
depend, among other things, on the results of off-
site surveillance systems, capital ratio, and CAMELS
rating (a supervisory rating of capital, asset
quality, management, earnings, liquidity, and sensitivity
to market risk).
The CDR Act. On September 23, 1994, the CDR Act was
enacted. The CDR Act includes more than 50 regulatory relief
provisions designed to streamline the regulatory
process for banks and thrifts and to eliminate
certain duplicative regulations and paperwork
requirements established after, and largely as a
result of, the savings and loan debacle. Well run
community banks with less than $250 million in assets
will be examined every 18 months rather than
annually. The application process for forming a bank
holding company has been greatly reduced. Also, the
requirement that call report data be published in
local newspapers has been eliminated.
The CDR Act establishes dual programs and provides
funding in the amount of $382 million to provide for
development services, lending and investment in
distressed urban and rural areas by community
development financial institutions and banks. In
addition, the CDR Act includes provisions relating to
flood insurance reform, money laundering, regulation
of high-cost mortgages, and small business and
commercial real estate loan securitization.
The Branching Act. On September 29, 1994, the Riegle-
Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Branching Act") was enacted. Under the
Branching Act, beginning September 29, 1995,
adequately capitalized and adequately managed bank
holding companies will be allowed to acquire banks
across state lines, without regard to whether the
transaction is prohibited by state law; however, they
will be required to maintain the acquired
institutions as separately chartered institutions.
Any state law relating to the minimum age of target
banks (not to exceed five years) will be preserved.
Under the Branching Act, the Federal Reserve Board
will not be permitted to approve any acquisition if,
after the acquisition, the bank holding company would
control more than 10% of the deposits of insured
depository institutions nationwide or 30% or more of
the deposits in the state where the target bank is
located. The Federal Reserve Board could approve an
acquisition, notwithstanding the 30% limit, if the
state waives the limit either by statute, regulation
or order of the appropriate state official.
In addition, under the Branching Act beginning on
June 1, 1997, banks were permitted to merge with one
another across state lines and thereby create a main
bank with branches in separate states.
After establishing branches in a state through an
interstate merger transaction, the bank could
establish and acquire additional branches at any
location in the state where any bank involved in the
merger could have established or acquired
branches under applicable federal or state law.
The responsible federal agency will not be permitted
to approve any merger if, after the merger, the
resulting entity would control more than 10% of the
deposits of insured depository institutions
nationwide or 30% or more of the deposits in any
state affected by the merger. The responsible agency
could approve a merger, notwithstanding the 30%
limit, if the home state waives the limit either by
statute, regulation or order of the appropriate state
official.
Under the Branching Act, states may adopt legislation
permitting interstate mergers before June 1, 1997.
In contrast, states may adopt legislation before June
1, 1997, subject to certain conditions, opting out of
interstate branching. If a state opts out of
interstate branching, no out-of-state bank may
establish a branch in that state through an
acquisition or de novo, and a bank whose home state
opts out may not participate in an interstate merger
transaction. Illinois has adopted legislation
permitting interstate mergers beginning on June 1,
1997.
FDIC Insurance Premiums. The deposits of the Bank
are currently insured by the SAIF. Both the SAIF and
the Bank Insurance Fund ("BIF"), the federal deposit
insurance fund that covers commercial bank deposits,
are required by law to attain and thereafter maintain
a reserve ratio of 1.25% of insured deposits. The BIF
fund met its target reserve level in September 1995,
but the SAIF was not expected to meet its target
reserve level until at least 2002. Consequently, in
late 1995, the FDIC approved a final rule regarding
deposit insurance premiums which, effective with
respect to the semiannual premium assessment
beginning January 1, 1996, reduced deposit insurance
premiums for BIF member institutions to zero basis
points (subject to an annual minimum of $2000) for
institutions in the lowest risk category. Deposit
insurance premiums for SAIF members were maintained
at their existing levels (23 basis points for
institutions in the lowest risk category).
On September 30, 1996 President Clinton signed into
law legislation which eliminated the premium
differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's
reserves to the required ratio. The legislation
provided that all SAIF member institutions pay a one
time special assessment to recapitalize the SAIF,
which was sufficient to bring the reserve ratio in
the SAIF to 1.25% of insured deposits. The
legislation also provides for the merger of the BIF
and the SAIF, with such merger being conditioned upon
the prior elimination of the thrift charter.
Effective October 8, 1996, FDIC regulations imposed a
one-time special assessment of 65.7 basis points on
SAIF-assessable deposits as of March 31, 1995. The
Bank's one-time special assessment amounted to
$206,000 pre-tax.
On December 24, 1996, the FDIC adopted lower
assessment rates for SAIF members to reduce the
disparity in the assessment rates paid by BIF and
SAIF members. Beginning October 1, 1996, effective
SAIF rates range from zero basis points to 27 basis
points. From 1997 through 1999, SAIF members will
pay 6.4 basis points to fund the Financing
Corporation while BIF member institutions will pay
approximately 1.3 basis points.
The FDIC may terminate the deposit insurance of any
insured depository institution, including the Savings
Bank, if it 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 by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during
the hearing process for the permanent termination of
insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the
accounts at the institution at the time of the
termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to
two years, as determined by the FDIC. Management is
aware of no existing circumstances which would result
in termination of the Savings Bank's deposit
insurance.
Regulatory Enforcement Authority. Applicable banking
laws include substantial enforcement powers available
to federal banking regulators. 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 against banking organizations and institution
affiliated parties, as defined. 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 regulatory
authorities.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank are subject to the
corporate tax provisions of the Code, as well as
certain additional provisions of the Code which apply
to thrift and other types of financial institutions.
The following discussion of tax matters is intended
only as a summary and does not purport to be a
comprehensive description of the tax rules applicable
to the Company and the Bank.
Fiscal Year. The Company and its subsidiaries file a
consolidated federal income tax return on a September
30 year end basis.
Method of Accounting. The Savings Bank maintains its
books and records for federal income tax purposes
using the accrual method of accounting. The accrual
method of accounting generally requires that items of
income be recognized when all events have occurred
that establish the right to receive the income and
the amount of income can be determined with
reasonable accuracy, and that items of expense be
deducted at the later of (i) the time when all events
have occurred that establish the liability to pay the
expense and the amount of such liability can be
determined with reasonable accuracy or (ii) the time
when economic performance with respect to the item of
expense has occurred.
Bad Debt Reserves. Savings institutions, such as the
Bank, which meet certain definitional tests primarily
relating to their assets and the nature of their
businesses, are permitted to establish a reserve for
bad debts and to make annual additions to the
reserve. These additions may, within specified
formula limits, be deducted in arriving at the
institution's taxable income. For purposes of
computing the deductible addition to its bad debt
reserve, the institution's loans are separated into
"qualifying real property loans" (i.e., generally
those loans secured by certain interests in real
property) and all other loans ("non-qualifying
loans"). The deduction with respect to non-
qualifying loans must be computed under the
experience method as described below. The following
formulas may be used to compute the bad debt
deduction with respect to qualifying real
property loans: (i) actual loss experience, or (ii)
a percentage of taxable income. Reasonable additions
to the reserve for losses on non-qualifying loans
must be based upon actual loss experience and would
reduce the current year's addition to the reserve for
losses on qualifying real property loans, unless that
addition is also determined under the experience
method. The sum of the additions to each reserve for
each year is the institution's annual bad debt
deduction.
Under the experience method, the deductible annual
addition to the institution's bad debt reserves is
the amount necessary to increase the balance of the
reserve at the close of the taxable year to the
greater of (a) the amount which bears the same ratio
to loans outstanding at the close of the taxable year
as the total net bad debts sustained during the
current and five preceding taxable years bear to the
sum of the loans outstanding at the close of the six
years, or (b) the lower of (i) the balance of the
reserve account at the close of the Bank's "base
year," which was its tax year ended December 31,
1987, or (ii) if the amount of loans outstanding at
the close of the taxable year is less than the amount
of loans outstanding at the close of the base year,
the amount which bears the same ratio to loans
outstanding at the close of the taxable year as the
balance of the reserve at the close of the base year
bears to the amount of loans outstanding at the close
of the base year.
Under the percentage of taxable income method, the
bad debt deduction equals 8% of taxable income
determined without regard to that deduction and with
certain adjustments. The availability of the
percentage of taxable income method permits a
qualifying savings institution to be taxed at a lower
effective Federal income tax rate than that
applicable to corporations in general.
This resulted generally in an effective Federal
income tax rate payable by a qualifying savings
institution fully able to use the maximum deduction
permitted under the percentage of taxable income
method, in the absence of other factors affecting
taxable income, of 31.3% exclusive of any minimum tax
or environmental tax (as compared to 34% for
corporations generally). For tax years beginning on
or after January 1, 1993, the maximum corporate tax
rate was increased to 35%, which increased the
maximum effective federal income tax rate payable by
a qualifying savings institution fully able to use
the maximum deduction to 32.2%. Any savings
institution at least 60% of whose assets are
qualifying assets, as described in the Code, will
generally be eligible for the full deduction of 8% of
taxable income. As of December 31, 1995, 93.6% of
the assets of the Bank were "qualifying assets" as
defined in the Code, and the Bank anticipates that at
least 60% of its assets will continue to be
qualifying assets in the immediate future. If this
ceases to be the case, the institution may be
required to restore some portion of its bad debt
reserve to taxable income in the future.
Under the percentage of taxable income method, the
bad debt deduction for an addition to the reserve for
qualifying real property loans cannot exceed the
amount necessary to increase the balance in this
reserve to an amount equal to 6% of such loans
outstanding at the end of the taxable year. The bad
debt deduction is also limited to the amount which,
when added to the addition to the reserve for losses
on non-qualifying loans, equals the amount by which
12% of deposits at the close of the year exceeds the
sum of surplus, undivided profits and reserves at the
beginning of the year. Based on experience, it is
not expected that these restrictions will be a
limiting factor for the Bank in the foreseeable
future. In addition, the deduction for qualifying
real property loans is reduced by an amount equal to
all or part of the deduction for non-qualifying
loans.
At September 30, 1997, the Federal income tax
reserves of the Bank included $1.0 million for which
no Federal income tax has been provided. Because of
these Federal income tax reserves and the liquidation
account to be established for the benefit of certain
depositors of the Bank in connection with the
conversion of the Bank to stock form, the retained
earnings of the Bank are substantially restricted.
Pursuant to certain legislation which was recently
enacted and which is effective for tax years
beginning after 1995, a small thrift institution (one
with an adjusted basis of assets of less than $500
million), such as the Bank, no longer is permitted to
make additions to its tax bad debt reserve under the
percentage of taxable income method. Such
institutions are permitted to use the experience
method in lieu of deducting bad debts only as they
occur. Such legislation requires the Bank to realize
increased tax liability over a period of at least six
years, beginning in 1996. Specifically, the
legislation requires a small thrift institution to
recapture (i.e., take into income) over a multi year
period the balance of its bad debt reserves in excess
of the lesser of (i) the balance of such reserves as
of the end of its last taxable year ending before
1988 or (ii) an amount that would have been the
balance of such reserves had the institution always
computed its additions to its reserves using the
experience method. The recapture requirement is
suspended for each of two successive taxable years
beginning January 1, 1996 in which the Bank
originates an amount of certain kinds of residential
loans which in the aggregate are equal to or greater
than the average of the principal amounts of such
loans made by the Bank during its six taxable years
preceding 1996. It is anticipated that any recapture
of the Bank's bad debt reserves accumulated after
1987 would not have a material adverse effect on the
Bank's financial condition and results of operations.
As of September 30, 1997, the Bank's accumulated bad
debt reserves after 1987 amounted to $9,000.
Distributions. If the Bank were to distribute cash
or property to its sole stockholder, and the
distribution was treated as being from its
accumulated bad debt reserves, the distribution would
cause the Bank to have additional taxable income. A
distribution is deemed to have been made from
accumulated bad debt reserves to the extent that (a)
the reserves exceed the amount that would have been
accumulated on the basis of actual loss experience,
and (b) the distribution is a "non-qualified
distribution." A distribution with respect to stock
is a non qualified distribution to the extent that,
for federal income tax purposes, (i) it is in
redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case
of a current distribution, together with all other
such distributions during the taxable year, it
exceeds the institution's current and post-1951
accumulated earnings and profits. The amount of
additional taxable income created by a non-qualified
distribution is an amount that when reduced by the
tax attributable to it is equal to the amount of the
distribution.
Minimum Tax. The Code imposes an alternative minimum
tax at a rate of 20%. The alternative minimum tax
generally applies to a base of regular taxable income
plus certain tax preferences ("alternative minimum
taxable income" or "AMTI") and is payable to the
extent that tax calculated on AMTI in excess of an
exemption amount exceeds the regular tax liability.
The Code provides that an item of tax preference is
the excess of the bad debt deduction allowable for a
taxable year pursuant to the percentage of taxable
income method over the amount allowable under the
experience method. Other items of tax preference
that constitute AMTI include (a) tax-exempt interest on
newly issued (generally, issued on or after August 8,
1986) private activity bonds other than certain
qualified bonds and (b) 75% of the excess (if any) of
(i) adjusted current earnings as defined in the Code,
over (ii) AMTI (determined without regard to this
preference and prior to reduction by net operating
losses).
Net Operating Loss Carryovers. A financial
institution may carry back net operating losses
("NOLs") to the preceding three taxable years and
forward to the succeeding 15 taxable years. This
provision applies to losses incurred in taxable years
beginning after 1986. At September 30, 1997, the
Bank had no NOL carryforwards for Federal income tax
purposes.
Audit by the IRS. The Bank's Federal income tax
returns for taxable years through September 30, 1992
have been closed for the purpose of examination by the
Internal Revenue Service (the "IRS").
State and Local Taxation
State of Illinois. The Company and the Bank will
file a combined Illinois income tax return. For
Illinois income tax purposes, they are taxed at an
effective rate equal to 7.2% 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). The exclusion
of income on United States Treasury obligations has
the effect of reducing Illinois Taxable Income. The
Company is also required to file an annual report
with and pay an annual franchise tax to the State of
Illinois.
Delaware Taxation. As a Delaware holding company not
earning income in Delaware, the Company is exempt
from Delaware corporate income tax but is required to
file an annual report with and pay an annual
franchise tax to the State of Delaware.
Item 2. Properties
At September 30, 1997, the Company conducted its
business from its sole office in Danville, Illinois.
The following tables set forth the net book value
(including leasehold improvement, furnishings and
equipment) and certain other information with respect
to the offices and other properties of the Company at
September 30, 1997.
Net Book Value of
Premises and
Owned or Equipment at Deposits at
Location Leased September 30, 1997 September 30, 1997
(In Thousands)
Main Office:
714 North Vermilion Street Owned $ 461 $29,098
Danville, Illinois 61832
Item 3. Legal Proceedings
The Company is involved in routine legal proceedings
occurring in the ordinary course of business which,
in the aggregate except as noted below, are believed
by management to be immaterial to the financial
conditon of the bank. On December 30, 1992,
Rosemary Frobose, a former officer of the Bank, filed
a lawsuit against the Bank in the United States
District Court, Central District of Illinois,
(subsequently transferred to the Central District of
Illinois, Peoria Division) alleging that she was the
victim of a retaliatory discharge based on common law
rights and the federal "whistleblower statute," 12
USC ' 1831j(a). The plaintiff seeks compensatory and
punitive damages against the Bank based upon her loss
of income and employment for at least a ten-year
period. She has not sought a specific dollar amount in her
complaint but at one point made a demand of $900,000.
Recently, the Court entered a summary judgment in
favor of the Bank on each count. The employee has appealed
the judgement on several counts to the Federal Appeals Court in
Chicago. Oral argument was heard on December 12, 1997.
The Bank plans to continue vigorously contest this lawsuit.
In the judgment of the Bank's litigation counsel, the likelihood that
the plaintiff will prevail in this case is remote.
However, should the case be revised on appeal and a
verdict ultimately directed against the Bank by the
trial court, the Bank's litigation counsel believes
that the range of potential loss is $250,000 to $1
million. In the unlikely event of a verdict within
that range, the resulting loss would have a material
adverse effect on the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The information required herein is incorporated by reference
from page 39 of the Company's 1997 Annual Report to Stockholders
which is included herein as Exhibit 13 ("Annual Report").
Item 6. Selected Financial Data
The information required herein is incorporated by reference
from pages 2 to 3 of the Company's 1997 Annual Report.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation
The information required herein is incorporated by
reference from pages 4 to 16 of the 1997 Annual Report.
Item 7a. Quantitative and Qualitative Disclosure About Market Risk
The information required herein is incorporated by reference
from pages 11 to 14 of the 1997 Annual Report.
Item 8. Financial Statements
The information required herein is incorporated by
reference from pages 17 to 36 of the 1997 Annual Report.
Item 9. Changes in and Disagreements on With
Accountants on Accounting and Financial Disclosure
Not applicable
PART III
Item 10. Directors and Executive Officers of the
Registrant
The information required herein is incorporated by
reference from page 37 of the 1997 Annual Report.
Item 11. Executive Compensation
To be filed by amendment.
Item 12. Security Ownership of Certain Beneficial
Owners and Management
To be filed by amendment.
Item 13. Certain Relationships and Related
Transactions
To be filed by amendment.
Item 14. Exhibits, List and Reports on Form 8-K
(a) The following documents are filed as part of
this report and are incorporated herein by reference
from the Registrant's 1997 Annual Report:
Independent Auditors' Report.
Consolidated Balance Sheet as of September 30, 1997 and 1996.
Consolidated Statement of Income for the Years Ended
September 30, 1997 and 1996.
Consolidated Statement of Changes in Shareholders'
Equity for the Years Ended September 30, 1997 and 1996.
Consolidated Statement of Cash Flows for the Years
Ended September 30, 1997 and 1996.
Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K. None
The following exhibits are filed as part of the Form
10-K, and this list includes the Exhibit Index:
No. Exhibits
2 Plan of Conversion*
3.1 Certificate of Incorporation of Vermilion Bancorp, Inc.*
3.2 Bylaws of Vermilion Bancorp, Inc.*
4 Stock Certificate of Vermilion Bancorp, Inc.*
10.1 Employment Agreement between American Savings Bank of
Danville and Merrill G. Norton*
13 Annual Report to Stockholders for the Year Ended
September 30, 1997
21 List of Subsidiaries (See "Business - Subsidiaries" in
this Form 10-KSB)
27 Financial Data Schedule
________________
*Incorporated herein by reference from the Company's Registration
Statement filed with SEC on December 3, 1996, as subsequently
amended.
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.
VERMILION BANCORP, INC.
By: /s/ MERRILL G. NORTON
Merrill G. Norton
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, this report has
been signed below by the following persons on
behalf of the registrant and in the capacities and
on the dates indicated.
/s/ MERRILL G. NORTON
Merrill G. Norton
President, Chief Executive Officer and Director December 29, 1997
/s/ THOMAS B. MEYER
Thomas B. Meyer
Chairman of the Board and Director December 29, 1997
/s/ WILLIAM T. INGRAM
William T. Ingram Director and Secretary December 29, 1997
/s/ CARL W. BUSBY
Carl W. Busby
Director December 29, 1997
/s/ ROBERT L. EWBANK
Robert L. Ewbank Director December 29, 1997
VERMILION BANCORP, INC.
1997 ANNUAL REPORT
TO STOCKHOLDERS
TABLE OF CONTENTS
Page
President's Letter to Stockholders 1
Selected Consolidated Financial and Other Data 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations 4
Consolidated Financial Statements: 17
Independent Auditors' Report 18
Consolidated Statements of Financial Condition 19
Consolidated Statements of Income 20
Consolidated Statements of Shareholders' Equity 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 23
Directors and Executive Officers 37
Banking Locations 38
Stockholder Information 39
Dear Stockholders:
Changes during 1997 have been the most exciting events in over
100 years we have provided successful banking services in the
Danville area.
Vermilion Bancorp, Inc. was created as a holding company for
American Savings Bank of Danville in March 1997 to build a
stronger locally managed banking organization to serve our
area customers.
With the addition of 3.3 Million dollars in net corporate
capital from stock sales, Vermilion Bancorp, Inc and American
Savings Bank of Danville welcome the opportunities offered by
this financial strength.
As a small highly capitalized bank holding company we are
examining new alternatives for growth in customer services and
building on our strength in personal banking relations. We
continue to enjoy healthy growth in all lending areas.
New computer applications have increased the efficiency of all
areas of lending and new account origination, allowing the
Bank to enhance the productivity of our dedicated staff.
As President of Vermilion Bancorp, Inc. I have enjoyed the
support of an effective and active Board of Directors. Em-
bracing the needs of stockholder value and investment returns
in each planning decision is a new priority for the Board and
Officers.
Following the March 25, 1997 stock conversion date the holding
company enjoyed profits of over $200,000 in the last six
months of our fiscal year. Overall profits for the fiscal
year ended September 30, 1997 of $252,012 were a substantial
improvement over the $71,168 September 30, 1996 loss which
included the one time FDIC charge of $155,000 net of income
taxes.
I wish to thank all stockholders of Vermilion Bancorp, Inc.
for their confidence and encouragement shown by investing
in our future in community banking.
Sincerely,
/s/ Merrill G. Norton
Merrill G. Norton
President and Chief
Executive Officer
(1)
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial and other data
of the Company does not purport to be complete and is qualified
in its entirety by reference to the more detailed financial
information, including the Consolidated Financial Statements and
Related Notes, appearing elsewhere herein.
At September 30,
1997 1996 1995 1994 1993
(Dollars in Thousands)
Selected Financial Condition
Data:
Total assets $37,816 $35,459 $33,977 $33,198 $33,591
Cash and cash equivalents 1,138 789 571 699 1,288
Interest-bearing time
deposits 99 99 99 694 1,181
Securities(1)
Available for sale 3,116 2,222 1,486 -- --
Held to maturity 3,000 4,337 6,816 9,205 13,082
Loans, net 29,411 26,936 23,954 21,627 18,235
Premises and equipment 461 467 495 468 483
Federal Home Loan Bank of
Chicago stock, at cost 283 269 255 236 236
Deposits 29,098 30,724 31,331 30,698 31,158
Federal Home Loan Bank advances 2,600 2,000 -- -- --
Total equity capital 5,955 2,355 2,442 2,341 2,185
Full service offices 1 1 1 1 1
Year Ended September 30,
1997 1996 1995 1994 1993
(In Thousands)
Selected Operating Data:
Total interest income $ 2,803 $ 2,634 $ 2,375 $ 2,279 $ 2,390
Total interest expense 1,741 1,778 1,588 1,355 1,521
Net interest income 1,062 856 787 924 869
Provision for losses on loans 17 80 13 105 8
Net interest income after
provision for losses on loans 1,045 776 774 819 861
Non-interest income 42 45 51 49 82
Non-interest expenses 761 889(2) 710 700 763
Income (loss) before taxes 326 (68) 115 168 180
Provision for income taxes 74 3 15 13 59
Net income (loss) 252 $ (71) 100 $ 155 $ 121
Net income per share N/A N/A N/A N/A N/A
Book value per share 16.21 N/A N/A N/A N/A
Dividends per share $ 0.00 N/A N/A N/A N/A
(1) The Bank adopted the provisions set forth in Statement of
Financial Accounting Standards No. 115 on October 1, 1994,
which requires entities to carry securities that are
available for sale at their market value while continuing to
carry securities that are held to maturity at their
amortized cost. See Note 1 to the Consolidated Financial
Statements.
(2) Includes a special assessment of $206,000 to recapitalize the
Savings Association Insurance Fund ("SAIF").
(2)
At or For the Year Ended September 30,
1997 1996 1995 1994 1993
Other Data:
Profitability:
Return on average assets 0.67% (0.20)%(4) 0.29% 0.46% 0.36%
Return on average equity 5.07 (2.89)(4) 4.18 6.86 5.78
Interest rate spread for
period(1) 2.20 2.17 2.11 2.59 2.42
Net interest margin(2) 2.92 2.48 2.39 2.83 2.64
Non-interest expenses to
average assets 2.03 2.49 2.08 2.13 2.26
Average interest-earning assets
to average interest bearing
liabilities 115.18 106.05 104.04 104.78 104.81
Capital Ratios:
Average equity to average assets 13.26 6.90 7.02 6.76 6.22
Asset Quality:
Non-performing assets to total
assets(3) 1.28 0.93 0.64 0.26 1.64
Net chargeoffs (recoveries) to
average loans 0.03 0.04 0.03 0.76 (0.01)
Allowance for loan losses to
total loans 0.52 0.53 0.31 0.29 0.60
Allowance for loan losses to
non-performing loans 31.34 43.60 34.26 73.26 19.78
Capital Ratios of the Bank(5)
Tier 1 risk-based capital ratio 26.50 14.45 14.59 15.98 16.32
Total risk-based capital ratio 27.30 15.33 15.03 16.44 17.14
Tier 1 leverage capital ratio 13.50% 6.61% 7.11% 6.92% 6.50%
(1) The interest rate spread represents the difference between
the average yield on interest-earning assets and the average
rate paid on interest-bearing liabilities.
(2) The net interest margin represents net interest income
divided by average interest-earning assets.
(3) Non-performing assets include non-accrual loans, accruing
loans delinquent 90 days or more and real estate owned.
(4) When calculated without the special SAIF assessment, the
return on average assets and the return on average equity
would have been 0.24% and 3.01%, respectively.
(5) Prior to fiscal [1994], the Bank operated as a mutual
savings and loan association. As such, the Bank was subject
to the capital requirements of the Office of Thrift
Supervision ("OTS") and not those of the Federal Deposit
Insurance Corporation ("FDIC") and was at all times in
compliance therewith.
(3)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Vermilion Bancorp, Inc. (the "Company") is the holding
company for the American Bank (the "Bank"). The operating
results of the Company depend upon the operating results of the
Bank. The results of the Bank are primarily dependent upon its
net interest income, which is determined by the difference
between interest income on interest-earning assets, which consist
principally of loans, investment securities and other
investments, and interest expense on interest-bearing
liabilities, which consist principally of deposits and borrowed
money. The Bank's net income also is affected by its provision
for loan losses, as well as the level of its other income,
including loan fees and service charges and miscellaneous items,
and its other expenses, including compensation and other employee
benefits, premises and occupancy costs, federal deposit insurance
premiums, data processing expense, net loss on real estate owned
and other miscellaneous expenses, and income taxes.
On March 25, 1996, the Bank completed its conversion from the
mutual to the stock form (the "Conversion") and was acquired by
the Company. In the Conversion, the Company issued 396,750
shares of common stock, which resulted in net proceeds to the
Company, after costs and employee stock ownership plan shares of
approximately $3.3 million.
In addition to historical information, forward-looking
statements are contained herein that are subject to risks and
uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from
current expectations, include, but are not limited to, the impact
of economic conditions (both generally and more specifically in
the markets in which the Company operates), the impact of
competition for the Company's customers from other providers of
financial services, the impact of government legislation and
regulation (which changes from time to time and over which the
Company has no control), and other risks detailed in this Annual
Report and in the Company's other Securities and Exchange
Commission filings. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking
statements, to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk
factors described in other documents the Company files from time
to time with the Securities and Exchange Commission, including
the Quarterly Reports on Form 10-Q to be filed by the Company in
1998 and any Current Reports on Form 8-K filed by the Company.
(4)
Changes in Financial Condition
General. Total assets of the Bank increased by $2.4 million,
or 6.7%, to $37.8 million at September 30, 1997 from $35.5 million at
September 30, 1996. The increase in total assets during 1997 was due
primarily to a $2.5 million increase in net loans, and a $349,000
increase in cash and cash equivalents, partially offset by a $442,000
reduction in total investment securities.
Cash and cash equivalents. Cash and cash equivalents,
which consist of cash and due from banks and interest-bearing demand
deposits at other institutions, increased by $349,000, or 44.2%, to
$1.1 million at September 30, 1997 compared to $789,000 at September 30,
1996. The increase in cash and cash equivalents in fiscal
1997 was primarily the result of receipt of proceeds from
issuance of stock by the Company in connection with the
conversion of the Bank from the mutual to stock form of ownership.
At September 30, 1997, cash and cash equivalents amounted to 3.0%
of the Company's total assets. Cash and cash equivalents may be utilized
to fund deposit withdrawals or as a source of funds for new loan
originations or for the purchase of investment or mortgage-backed
securities.
Net Loans. The Company's net loans amount to $29.4
million at September 30, 1997, a $2.5 million, or a 9.3% increase
over net loans at September 30, 1996. Such increase was due
primarily to originations of residential mortgage loans.
Investment securities. The Company's investment securities
amounted to $6.1 million at September 30, 1997 compared to $6.6
million at September 30, 1996. The decrease in investment
securities was primarily the result of a $1.3 million decrease in
investment securities held to maturity, offset by an $894,000
increase in investments available for sale.
Deposits. The Company's total deposits amounted to $29.1
million at September 30, 1997 compared to $30.7 million at
September 30, 1996. During 1997, the Company's total deposits
decreased by $1.6 million, or 5.2%.
Federal Home Loan Bank Advances. The Company's total
advances from the FHLB of Chicago amounted to $2.6 million at
September 30, 1997, compared to $2.0 million at September 30, 1996,
an increase of 30.0%. The proceeds of these advances were used
to fund growth in the Company's loan portfolio during 1997.
(5)
Average Balances, Net Interest Income and Yields Earned and Rates Paid. The
following table presents for the periods indicated the total dollar amount of
interest income from average interest-earning assets and the resultant yields,
as well as the total dollar amount of interest expense on average interest-
bearing liabilities and the resultant rates, and the net interest margin. The
table does not reflect any effect of income taxes. All average balances are
based on average monthly balances during the periods.
At
Sept. 30
1997 Year Ended September 30, 1997
Yield/ Averag Yield/
Rate Balance Interest Rate
Interest-earning assets:
Loans, net(1) 8.37% $28,290 $ 2,324 8.24%
Interest-bearing deposits
with financial institutions 5.72 2,252 100 4.44
Securities(2) 5.70 2,477 149 6.02
Mortgage-backed securities 6.53 3,564 230 6.48
Total interest-earning assets 7.89 36,583 2,803 7.68
Non-interest-earning assets 926
Total assets 37,509
Interest-bearing liabilities:
Deposits:
Now 1.64 471 8 1.70
Money market investment 3.03 1,016 32 3.15
Savings and retirement 4.41 5,304 263 4.96
Certificates 5.67 22,820 1,315 5.76
Total deposits 5.31 29,611 1,618 5.32
FHLB advances 5.87 2,150 123 5.88
Total interest-bearing liabilities 5.37 31,761 1,741 5.48
Non-interest bearing liabilities 776
Total liabilities 32,537
Equity capital 4,972
Total liabilities and
equity capital $37,509
Net interest income; interest
rate spread(3) 2.52 $ 1,062 2.20
Net interest margin(4) 2.92
Ratio of interest-earning
assets to average interest-
bearing liabilities 116.95% 115.18%
(6)
Year Ended September 30, 1996
Average Yield/
Balance Interest Rate
Interest-earning assets:
Loans, net(1) $25,869 $ 2,118 8.19%
Interest-bearing deposits with
financial institutions 1,330 67 5.04
Securities(2) 3,531 204 5.78
Mortgage-backed securities 3,811 245 6.43
Total interest-earning assets 34,541 2,634 7.63
Non-interest-earning assets 1,117
Total assets $35,658
Interest-bearing liabilities:
Deposits:
NOW accounts $ 469 $ 10 2.13
Money market investment 1,355 38 2.80
Savings and retirement 5,161 236 4.57
Certificates 23,672 1,387 5.86
Total deposits 30,657 1,671 5.45
FHLB advances 1,917 107 5.58
Total interest-bearing liabilities 32,574 1,778 5.46
Non-interest bearing liabilities 624
Total liabilities 33,198
Equity capital 2,460
Total liabilities and equity capital $35,658
Net interest income; interest
rate spread(3) $ 856 2.17%
Net interest margin(4) 2.48%
Ratio of interest-earning
assets to average interest-
bearing liabilities 106.05%
(7)
Year Ended September 30, 1995
Average Yield/
Balance Interest Rate
Interest-earning assets:
Loans, net(1) $22,399 $ 1,757 7.84%
Interest-bearing deposits with
financial institutions 1,381 80 5.80
Securities(2) 4,670 256 5.48
Mortgage-backed securities 4,510 282 6.25
Total interest earning assets 32,960 2,375 7.21
Non-interest-earning assets 1,112
Total assets $34,072
Interest-bearing liabilities:
Deposits:
Now accounts $ 516 $ 13 2.52
Money market investment 1,685 55 3.26
Savings and retirement 5,124 234 4.57
Certificates 23,842 1,286 5.39
Total deposits 31,167 1,588 5.10
FHLB advances -- -- --
Total interest-bearing liabilities 31,167 1,588 5.10
Non-interest-bearing liabilities 513
Total liabilities 31,680
Equity Capital 2,392
Total liabilities and equity capital $34,072
Net interest income; interest
rate spread(3) $ 787 2.11%
Net interest margin(4) 2.39%
Ratio of interest-earning assets to
average interest-bearing liabilities 104.04%
(1) Includes loans on which the Bank has discontinued accruing interest.
(2) Includes securities available for sale and held to maturity and excludes
mortgage-backed securities.
(3) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate on interest-
bearing liabilities.
(4) Net interest margin is net interest income divided by average interest-
earning assets.
(8)
Rate/Volume Analysis. The following table describes the extent to which
changes in interest rates and changes in volume of interest-related assets and
liabilities have affected the Bank's interest income and interest expense during
the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume), and (iii)
total change in rate and volume. The combined effect of changes in both rate
and volume has been allocated proportionately to the change due to rate and the
change due to volume.
Year Ended September 30,
1997 vs 1996
Increase
(Decrease) Total
Due To Increase
Rate Volume Decrease
(In Thousands)
Interest-earning assets:
Interest-bearing deposits with
financial institutions $ (9) $ 42 $ 33
Loans, net 13 193 206
Securities(1) 9 (64) (55)
Mortgage-backed securities 2 (17) (15)
Total change in interest income 15 154 169
Interest-bearing liabilities:
Deposits:
Now accounts (2) -- (2)
Money market investment 5 (11) (6)
Savings and retirement 20 7 27
Certificates (23) (49) (72)
FHLB advances 5 11 16
Total change in interest expense 5 (42) (37)
Net change in net interest income $ 10 $ 196 $ 206
Year Ended September 30,
1996 vs. 1995
Increase
(Decrease) Total
Due To Increase
Rate Volume (Decrease)
(In Thousands)
Interest-earning assets:
Interest-bearing deposits with
financial institutions $(10) $ (3) $(13)
Loans, net 80 281 361
Securities(1) 13 (65) (52)
Mortgage-backed securities 8 (45) (37)
Total change in interest income 91 168 259
Interest-bearing liabilities:
Deposits:
NOW accounts (2) (1) (3)
Money market investment (7) (10) (17)
Savings and retirement -- 2 2
Certificates 110 (9) 101
FHLB advances -- 107 107
Total change in interest expense 101 89 190
Net change in net interest income $(10) $ 79 $ 69
(1) Includes securities available for sale and held to maturity. Does not
include mortgage-backed securities.
(9)
Results of Operations
Net Income. The Company reported net income of $252,000, and
a loss of $71,000 during the years ended September 30, 1997 and 1996,
respectively. The income reflects higher interest margins due to the increase
in capital of which a majority had been interest earning deposits prior to
the March 25, 1997 conversion. The Bank reported a net loss of $71,000
during the year ended September 30, 1996. The primary reason for the net loss
reported in fiscal 1996 was the increase in deposit insurance expense from
$71,000 in fiscal 1995 to $277,000 in fiscal 1996 due to a special assessment
of $206,000.
Net Interest Income. Net interest income is determined by interest rate
spread (i.e., the difference between the yields earned on its interest-
earning assets and the rates paid on its interest-bearing liabilities) and
the relative amounts of interest-earning assets and interest-bearing
liabilities. The Bank's average interest-rate spread was 2.20% and 2.17%
during the years ended September 30, 1997 and 1996, respectively. The Bank's
net interest margin (i.e., net interest income as a percentage of average
interest-earning assets) was 2.92 % and 2.48% during the years ended
September 30, 1997 and 1996 respectively.
Net interest income increased by $206,000, or 24.1%, during the year
ended September 30, 1997 to $1.1 million compared to $856,000 for the year
ended September 30, 1996. The primary reasons for this increase were a
$206,000 increase in net interest income from loans, a $53,000 decrease in
deposit interest expense offset by a $70,000 decrease in interest income
from investment securities.
Interest Income. Total interest income increased by $169,000 or 6.4% in
the year ended September 30, 1997. Interest income on loans amounted to
$2.3 million fiscal 1997 compared to $2.1 million in fiscal 1996. The
average balance of the Bank's total loans increased by $2.4 million, or
9.4%, in fiscal 1997 compared to fiscal 1996 and the average yield earned
on loans increased by 5 basis points (with 100 basis points being equal to
1.0%). Interest income on mortgage-backed securities decreased by $15,000 or
6.1% in fiscal 1997 compared to fiscal 1996 due primarily to a $247,000
decrease in the average balance of mortgage backed securities. Interest
income on securities and interest-bearing deposits decreased by $22,000,
or 8.1%, in fiscal 1997 compared to fiscal 1996 due primarily to a decrease
in average balance of securities.
Interest Expense. The primary component of interest expense during all
periods presented is interest on deposits. Total interest expense decreased
by $37,000, or 2.1%, during the year ended September 30, 1997 compared to the
year ended September 30, 1996. The decrease was due primarily to a decrease
in the average balance of certificares of deposit held by the institution
from $23.7 million to $22.8 million, offset by an increase in the average
rate paid on savings and retirement accounts from 4.57% to 4.96%.
Certificates of depost (including certificates of deposit of $100,000 or more)
constituted 76.8% of the Bank's total deposits at September 30, 1997
compared to 77.3% at September 30, 1996. The average balance of the
Bank's certificates decreased by $852,000 or 3.6% from fiscal year 1997 to
1996, while the average cost of certificates decreased by 10 basis points in
fiscal 1997.
Provisions for Losses on Loans. Provisions for losses on loans are
charged to earnings to bring the total allowance for loan losses to a level
considered appropriate by management based on a methodology implemented by
the Bank which is designed to assess, among other things, experience, the
volume and type of lending conducted by the Bank, overall portfolio mix,
the amount of the Bank's classified assets, the status of past due principal
and interest payments, loan-to-value ratios of loans in the Bank's loan
portfolio, general economic conditions, particularly as they relate to the
Bank's market area, and other factors related to the collectibility of the
Bank's loan portfolio. Management of the Bank assesses the allowance for loan
losses on a monthly basis and will make provisions for loan losses as deemed
appropriate by management in order to maintain the adequacy of the allowance
for loan losses.
The Bank's provisions for loan losses decreased to $17,000 in fiscal
1997, compared to $80,000 in fiscal 1996. At September 30, 1997, the Bank's
allowance for loan losses amounted to 31.3% of total non-performing loans and
to 0.5% of total loans receivable.
Non-interest Income. Non-interest income decreased $3,000 or 6.7% for
the year ended September 30, 1997 compared to the year ended September 30,
1996.
Non-interest Expenses. Total non-interest expenses were $761,000 in
the year ended September 30, 1997 which amounted to a $128,000 or 14.4%
decrease compared to the year ended September 30, 1996. The primary reason
for the decrease was due to the decrease in deposit insurance expense,
because a special assessement of $206,000 (before tax) was imposed in fiscal
1996 as a part of the recaptilization of the SAIF. The decrease was partially
offset by a $104,000 increase in salaries and employee benefits.
(10)
Income Taxes. The Bank incurred income tax expense of $74,000 for the
year ended September 30, 1997, as compared to $3,000 for fiscal 1996. The
Company's effective tax rate amounted to 22.7% for fiscal 1997.
Asset and Liability Management
The ability to maximize net interest income is largely dependent
upon the achievement of a positive interest rate spread that can be sustained
during fluctuations in prevailing interest rates. Interest rate sensitivity
is a measure of the difference between amounts of interest-earning assets
and interest-bearing liabilities which either reprice or mature within a
given period of time. The difference, or the interest rate repricing "gap,"
provides an indication of the extent to which an institution's interest rate
spread will be affected by changes in interest rates. A gap is considered
positive when the amount of interest-rate sensitive assets exceeds the amount
of interest-rate sensitive liabilities, and is considered negative when the
amount of interest-rate sensitive liabilities exceeds the amount of interest-
rate sensitive assets during a given time period. Generally, during a period
of rising interest rates, a negative gap within shorter maturities would
adversely affect net interest income, while a positive gap within shorter
maturities would result in an increase in net interest income, and during
a period of falling interest rates, a negative gap within shorter maturities
would result in an increase in net interest income while a positive gap
within shorter maturities would have the opposite effect. As of September
30, 1997, the amount of the Bank's interest-bearing liabilities which were
estimated to mature or reprice within one year exceeded the Bank's interest-
earning assets with the same characteristics by $11.0 million or 29.2% of the
Bank's total assets.
The Bank's actions with respect to interest rate risk and its asset/
liability gap management are reviewed periodically by the Bank's Board of
Directors. As part of the Board's review, it sets interest rate risk targets
and reviews the Bank's current composition of assets and liabilities in light
of the prevailing interest rate environment.
The Bank has historically emphasized the origination of fixed-rate
long-term residential real estate loans for retention in its portfolio. At
September 30, 1997, $18.4 million or 74.5% of the Bank's total loan portfolio
due one year or more after September 30, 1997, consisted of one-to-four-
family fixed-rate long-term residential mortgage loans. Although the Bank
anticipates that a substantial portion of its loan portfolio will continue to
consist of fixed-rate long-term loans, the Bank has limited the term of such
loans originated since 1983 to no more than 20 years with a substantial
majority of such loans having a term of 15 years or less. The Bank has
also attempted to mitigate the interest rate risk of holding a significant
portion of fixed-rate loans in its portfolio through the origination of one-
to-four family fixed-rate balloon loans with terms of one or three years.
At the end of a balloon loan's term, the entire balance is due. The borrower
has the option of repaying the loan on the due date or, subject to satisfying
the Bank's underwriting criteria, accepting the modified loan rate which is
then offered by the Bank for such loans. In the latter case, the renewed loan
is a new balloon loan with the same term as the initial balloon loan. The
Bank has generally offered rates on such renewed loans at 1/4 of 1% to 1/2 of
1% higher than rates then offered on its new balloon residential real estate
loans. Renewed balloon loans are amortized over the remaining life of the
original amortization period. At September 30, 1997, $2.8 million or 9.5% of
the Bank's total loan portfolio consisted of one-to-four family fixed-rate
balloon loans.
(11)
In addition, the Bank has also invested new funds or reinvested funds
from maturing securities into shorter-term securities and variable-rate
mortgage-backed securities in order to increase the interest-rate sensitivity
of its assets. As of September 30, 1997, the Bank had $1.3 million of
variable-rate mortgage-backed securities and had $3.1 million of investments
in various and federal agency government securities with terms to maturity of
less than five years. As of September 30, 1997, $3.1 million of the Bank's
investment securities portfolio were classified as available for sale, which
will permit the Bank to sell such securities if deemed appropriate in
response to, among other things, changes in interest rates.
The Bank's deposits have included a relatively high amount of
certificates, which are generally higher costing and more interest-rate
sensitive than "core" deposits. At September 30, 1997, $22.3 million, or
76.8% of the Bank's total deposits were comprised of certificates of deposit
(including certificates of deposit of $100,000 or more) and $14.4 million,
or 50.0% of the Banks total deposits consisted of certificates which are
scheduled to mature within one year. Certificates generally are costlier and
a more volatile source of funds than transaction accounts. In addition,
certificates are more likely to be invested in other instruments than are
transaction accounts. Notwithstanding the foregoing, management believes that
most of its certificates will remain at the Bank upon maturity. The Bank does
not accept brokered deposits.
The Bank believes that its current interest-rate pricing gap is within
a range acceptable to the Commissioner and consistent with the Bank's
internal guidelines. However, as the general interest rate environment and
the condition in the Bank's market change, the Bank will continue to monitor
the interest-rate sensitivity of its assets and liabilities. In order to
continue to improve the Bank's interest-rate gap position, it plans to
continue to focus on increasing consumer and commercial business lending
and investing in shorter-term and variable-rate securities. Moreover, the
Bank believes that the additional capital it will raise as a result of the
sale of the Common Stock will enhance its flexibility to operate within a
wider range of interest-rate gap scenarios.
(12)
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at September 30, 1997, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature
in each of the future time periods shown (the "GAP Table"). Except as stated
below, the amount of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of
term to repricing or the contractual maturity of the asset or liability. The
table sets forth an approximation of the projected repricing of assets and
liabilities at September 30, 1997, on the basis of contractual maturities,
anticipated prepayments, and scheduled rate adjustments within a six month
period and subsequent selected time intervals.
More Than
Within Six to More Than Three Years Over
six Twelve One Year to to five Five
Months Months Three Years Years Years Total
(Dollars in Thousands)
Interest-earning
assets:
Securities(1)(2) $ -- $ -- $ 2,316 $ 797 $ 365 $ 3,478
Loans, net(3) 2,803 1,789 3,920 2,063 18,836 29,411
Interest-bearing
deposits(4) 1,182 99 -- -- -- 1,281
Mortgage-backed
securities 691 793 956 -- 198 2,638
Total interest-
earning assets 4,676 2,681 7,192 2,860 19,399 36,808
Interest-bearing
liabilities:
Deposits(5):
NOW accounts 113 114 227 -- -- 454
Money market
investment accounts 224 224 448 -- -- 896
Savings accounts 206 207 830 830 -- 2,073
Retirement accounts 150 150 600 600 1,495 2,995
Certificates 8,133 6,273 7,305 638 -- 22,349
Total interest-
bearing deposits 8,826 6,968 9,410 2,068 1,495 28,767
Advances from FHLB 2,000 600 -- -- -- 2,600
Total interest-
bearing liabilities 10,826 7,568 9,410 2,068 1,495 31,367
Excess (deficiency)
of interest-earning
assets over
interest-bearing
liabilities (6,150) (4,887) (2,218) 792 17,904 5,441
Cumulative excess
(deficiency) of
interest-earning
assets over interest-
bearing liabilities (6,150)(11,037) (13,255) (12,463) 5,441 5,441
Cumulative excess
(deficiency) of
interest-earning
assets over interest-
bearing
liabilities as a
percent of
total assets (16.26)%(29.19)% (35.05)% (32.96)% 14.39% 14.39%
(1) Reflects repricing, contractual maturity or anticipated call date.
(2) Includes securities available for sale and held to maturity and FHLB of
Chicago stock. Excludes mortgage-backed securities.
(3) Fixed-rate loans, including balloon loans, are included in the periods
in which they are scheduled to be repaid, based on scheduled
amortization, adjusted to take into account estimated prepayments.
Therefore, for purposes of the table, all of the Bank's balloon loans
are deemed to have a term equal to the initial amortization period.
Annual prepayment rates for adjustable-rate and fixed-rate residential
loans are assumed to be 5%.
(4) Includes interest-bearing demand and interest-bearing time deposits.
(5) Deposit accounts are assumed to have the following annual decay rates:
NOW accounts - 50%; money market investment accounts - 50%; savings
accounts - 20%; and retirement accounts - 10%.
(13)
Certain assumptions based on regional, state and local data
for savings associations in the state of Illinois and on the
Bank's historical experience are contained in the above table
which affect the presentation therein. Although certain assets
and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in
market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates of other types of
assets and liabilities lag behind changes in market interest
rates. Certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates on a short-term
basis and over the life of the asset. In the event of a change
in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in calculating
the table.
Liquidity and Capital Resources
The Bank's liquidity, represented by cash and cash
equivalents, is a product of its operating, investing and
financing activities. The Bank's primary sources of funds are
deposits, amortization, prepayments and maturities of outstanding
loans and mortgage-backed securities, maturities of investment
securities and other short-term investments and funds provided
from operations. While scheduled payments from the amortization
of loans and mortgage-backed securities and maturing investment
securities and short-term investments are relatively predictable
sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and
competition. In addition, the Bank invests excess funds in
overnight deposits and other short-term interest-earning assets
which provide liquidity to meet lending requirements. The Bank
has been able to generate sufficient cash through its deposits
and has had a limited use of borrowings as a source of funds
during the past five years. As loan originations and deposits
remained stable, the Bank used cash from maturing securities in
its investment portfolio to fund loan originations. As of
September 30, 1997, the Bank had the ability to borrow up to
$15.5 million from the FHLB.
Liquidity management is both a daily and long-term function
of business management. Excess liquidity is generally invested
in short-term investments such as overnight deposits. On a
longer-term basis, the Bank maintains a strategy of investing in
various lending products. The Bank uses its sources of funds
primarily to meet its ongoing commitments, to pay maturing
savings certificates and savings withdrawals, fund loan
commitments and maintain a portfolio of mortgage-backed and
investment securities. At September 30, 1997 the total approved
loan commitments outstanding amounted to $578,000. At
the same date, the Bank had commitments of $23,000 under
unused letters of credit. Certificates scheduled to mature in
one year or less at September 30, 1997 totaled $14.4
million. Management believes that a significant portion of
maturing deposits will remain with the Bank. The Bank
anticipates that even with interest rates at lower levels than
have been experienced in recent years, which has caused a
disintermediation of funds, it will continue to have sufficient
funds together with borrowings, to meet its current commitments.
The mixture of deposit liabilities and borrowings will depend on
the relevant cost of each of these sources of funds.
Federally-insured state-chartered banks are required to
maintain minimum levels of regulatory capital. Under current
FDIC regulations, insured state-chartered banks generally must
maintain (i) a ratio of Tier 1 leverage capital to total assets
of at least 3.0% (4.0% to 5.0% for all but the most highly rated
banks) and (ii) a ratio of Tier 1 capital to risk weighted assets
of at least 4.0% and a ratio of total capital risk weighted
assets of at least 8.0%. At September 30, 1997, the Bank was in
compliance with applicable regulatory capital requirements.
(14)
Recent Accounting Pronouncements
In February 1997, the FASB issued SFAS No. 128, "Earnings
Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share (EPS) and applies to entities with
publicly held common stock or potential common stock. SFAS No.
128 simplifies previous standards for computing EPS. SFAS No.
128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods;
earlier application is not permitted. SFAS No. 128 requires
restatement of all prior period EPS data presented. Accordingly,
the Company will adopt Statement 128 during the fiscal quarter
ending December 31, 1997. Management does not anticipate that
this will have a material impact on its EPS disclosures.
In February 1997, the FASB issued SFAS No. 129, "Disclosure
of Information about Capital Structure." SFAS No. 129 summarizes
previously issued disclosure guidance contained within APB
Opinions No. 10 and 15 as well as SFAS No. 47. There will be no
changes to the Company's disclosures pursuant to the adoption of
SFAS No. 129. This statement is effective for financial
statements issued for periods ending after December 15, 1997.
Accordingly, the Company will adopt Statement 129 during fiscal 1998.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting
and display of comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive
income is defined as "the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investment by
owners and distributions to owners." The comprehensive income
and related cumulative equity impact of comprehensive income
items will be required to be disclosed prominently as part of the
notes to the financial statements. Only the impact of unrealized
gains or losses on securities available for sale is expected to
be disclosed as an additional component of the Company's income
under the requirements of SFAS No. 130. This statement is
effective for fiscal years beginning after December 15, 1997.
The Company will adopt Statement 130 during fiscal year 1999.
Disclosures About Segments of an Enterprise. Also in 1997,
the FASB issued Statement No. 131, Disclosures about Segments of
an Enterprise and Related Information, which supersedes SFAS 14,
"Financial Reporting for Segments of a Business Enterprise",
establishes standards for the way that public enterprises report
information about operating segments in annual financial
statements and requires reporting of selected information about
operating segments in annual financial statements issued to the
public. It also establishes standards for disclosures regarding
products and services, geographic area and major customers. SFAS
131 defines operating segments as components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
This standard is effective for financial statments periods beginning
December 15, 1997 and requires comparative information for earlier
years to be restated. Due to recent issuance of this standard,
management has been unable to fully evaluate the impact, if any,
they may have on the Company's future financial statement disclosures.
(15)
Impact of Inflation and Changing Prices
The Financial Statements of the Bank and related notes
presented herein have been prepared in accordance with GAAP which
require the measurement of financial position and operating
results in terms of historical dollars, without considering
changes in the relative purchasing power of money over time due
to inflation.
Unlike most industrial companies, substantially all of the
assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant
impact on a financial institution's performance than the effects
of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude
as the prices of goods and services, since such prices are
affected by inflation to a larger extent than interest rates. In
the current interest rate environment, liquidity and the maturity
structure of the Bank's assets and liabilities are critical to
the maintenance of acceptable performance levels. Over the three
most recent fiscal years, interest rates have been relatively low
and stable and such environment has generally had a positive
impact on the Bank's revenues and income.
(16)
Vermilion Bancorp, Inc.
and Subsidiary
Consolidated Financial Statements
September 30, 1997 and 1996
Vermilion Bancorp, Inc.
and Subsidiary
Table of Contents
Page
Independent Auditor's Report 18
Financial Statements
Consolidated balance sheet 19
Consolidated statement of income 20
Consolidated statement of changes in stockholder's equity 21
Consolidated statement of cash flows 22
Notes to consolidated financial statements 23
(17)
Independent Auditor's Report
Board of Directors
Vermilion Bancorp, Inc. and Subsidiary
Danville, Illinois
We have audited the consolidated balance sheet of
Vermilion Bancorp, Inc. and subsidiary as of September
30, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity,
and cash flows for the years then ended. These
consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to
express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the 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
described above present fairly, in all material respects,
the consolidated financial position of Vermilion Bancorp,
Inc. and subsidiary as of September 30, 1997 and 1996,
and the results of their operations and their cash flows
for the years then ended, in conformity with generally
accepted accounting principles.
/s/ Geo. S. Olive & Co. LLC
Champaign, Illinois
October 17, 1997
(18)
Vermilion Bancorp, Inc.
and Subsidiary
Consolidated Balance Sheet
September 30 1997 1996
Assets
Cash and due from banks $ 55,354 $ 359,747
Interest-bearing demand deposits 1,082,543 429,451
Cash and cash equivalents 1,137,897 789,198
Interest-bearing time deposits 99,000 99,000
Investment securities
Available for sale 3,115,652 2,221,693
Held to maturity 3,000,155 4,336,559
Total investment securities 6,115,807 6,558,252
Loans 29,563,296 27,079,584
Allowance for loan losses (151,868) (143,349)
Net loans 29,411,428 26,936,235
Premises and equipment 460,617 466,928
Federal Home Loan Bank stock 283,200 269,000
Other assets 308,126 340,599
Total assets $37,816,075 $35,459,212
Liabilities
Deposits
Noninterest bearing $ 285,753 $ 165,593
Interest bearing 28,811,931 30,558,460
Total deposits 29,097,684 30,724,053
Federal Home Loan Bank borrowings 2,600,000 2,000,000
Other liabilities 163,259 380,010
Total liabilities 31,860,943 33,104,063
Commitments and Contingent Liabilities
Stockholders' Equity
Preferred stock, $.01 par value
Authorized and unissued - 400,000 shares
Common stock, $.01 par value
Authorized - 1,600,000 shares
Issued - 396,750
Outstanding - 367,479 3,968
Paid-in-capital 3,614,922
Retained earnings - substantially restricted 2,622,516 2,370,504
Net unrealized gain (loss) on securities
available for sale 6,437 (15,355)
Less:
Unearned employee stock ownership plan shares -
29,271 shares (292,711)
Total stockholders' equity 5,955,132 2,355,149
Total liabilities and stockholders' equity $37,816,075 $35,459,212
See notes to consolidated financial statements.
(19)
Vermilion Bancorp, Inc.
and Subsidiary
Consolidated Statement of Income
Year Ended September 30 1997 1996
Interest Income
Loans $2,324,161 $2,118,137
Investment securities 378,710 448,729
Deposits with financial institutions 100,052 67,274
Total interest income 2,802,923 2,634,140
Interest Expense
Deposits 1,617,919 1,670,717
Federal Home Loan Bank borrowings 122,927 107,113
Total interest expense 1,740,846 1,777,830
Net Interest Income 1,062,077 856,310
Provision for loan losses 17,000 80,000
Net Interest Income After Provision for
Loan Losses 1,045,077 776,310
Noninterest Income
Loan fees 216 11,551
Net realized gains on sales of
available-for-sale securities 938
Other income 40,387 33,343
Total noninterest income 41,541 44,894
Noninterest Expenses
Salaries and employee benefits 380,308 275,741
Net occupancy and equipment expenses 83,216 96,895
Data processing fees 44,668 40,568
Deposit insurance expense 14,901 277,093
Printing and office supplies 15,954 15,710
Legal and professional fees 42,346 36,569
Advertising and promotion 12,370 28,525
Director and committee fees 49,360 41,107
Other expenses 117,944 77,281
Total noninterest expenses 761,067 889,489
Income (Loss) Before Income Tax 325,551 (68,285)
Income tax expense 73,539 2,883
Net Income (Loss) $252,012 $(71,168)
See notes to consolidated financial statements.
(20)
<TABLE>
Vermilion Bancorp, Inc. and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
Net Unearned
Unrealized Employee
Common Stock Gain Stock
(Loss) on Ownership
Securities Plan
Shares Paid-in Retained Available Shares
Outstanding Amount Capital Earnings for Sale Total
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1995 $2,441,672 $ 737 $2,442,409
Net loss for 1996 (71,168) (71,168)
Net change in unrealized
gain (loss) on securities
available for sale (16,092) (16,092)
Balance, September 30, 1996 2,370,504 (15,355) 2,355,149
Issuance of common stock 396,750 $3,968 $3,609,455 3,613,423
Employee Stock Ownership
Plan shares acquired (31,740) $(317,400 (317,400)
Employee Stock Ownership
Plan shares allocated 2,469 5,467 24,689 30,156
Net income for 1997 252,012 252,012
Net change in unrealized
gain (loss) on securities
available for sale 21,792 21,792
Balance, September 30, 1997 367,479 $3,968 $3,614,922 $2,622,516 $ 6,437 $(292,711) $5,955,132
See notes to consolidated financial statements.
</TABLE>
(21)
Vermilion Bancorp, Inc
and Subsidiary
Consolidated Statement of Cash Flows
Year Ended September 30 1997 1996
Operating Activities
Net income (loss) $ 252,012 $ (71,168)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Provision for loan losses 17,000 80,000
Investment securities gains (938)
Deferred income tax 55,059 (41,577)
Investment securities amortization, net 11,838 11,049
Depreciation 26,139 33,594
Compensation expense related to ESOP 30,156
Change in
Other assets (30,986) 7,250
Other liabilities (216,751) 177,022
Net cash provided by operating activities 143,529 196,170
Investing Activities
Purchases of securities available for sale (2,044,483) (550,000)
Proceeds from maturities of securities available
for sale 900,000 1,394,257
Proceeds from sales of securities available for
sale 250,938
Purchases of securities held to maturity (150,000)
Proceeds from maturities of securities held to
maturity 1,505,282 867,113
Net change in loans (2,492,193) (3,062,278)
Purchases of premises and equipment (19,828) (5,271)
Purchase of Federal Home Loan Bank stock (14,200) (14,000)
Net cash used by investing activities (2,064,484) (1,370,179)
Financing Activities
Net change in deposits (1,626,369) (607,385)
Proceeds of Federal Home Loan Bank borrowings 600,000 2,000,000
Issuance of common stock, net of offering costs 3,613,423
Purchase of common stock for ESOP (317,400)
Net cash provided by financing activities 2,269,654 1,392,615
Net Change in Cash and Cash Equivalents 348,699 218,606
Cash and Cash Equivalents, Beginning of Year 789,198 570,592
Cash and Cash Equivalents, End of Year $1,137,897 $789,198
Additional Cash Flows Information
Interest paid $1,735,675 $1,770,178
Income tax paid 27,000 17,205
See notes to consolidated financial statements.
(22)
Vermilion Bancorp, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Nature of Operations and Summary of Significant Accounting
Policies
The accounting and reporting policies of Vermilion Bancorp, Inc.
(the "Company") and its wholly owned subsidiary, American Savings
Bank of Danville (the "Bank"), conform to generally accepted
accounting principles and reporting practices followed by the
thrift industry. The Bank has a wholly owned subsidiary, GBW
Service Corporation, whose principal activity is servicing
contract sales of real estate. The more significant of the
policies are described below.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
The Company is a savings and loan holding company whose principal
activity is the ownership and management of the Bank. The Bank
operates under a state thrift charter and provides full banking
services. As a state-chartered thrift, the Bank is subject to
regulation by the State of Illinois Office of Banks and Real
Estate and the Federal Deposit Insurance Corporation.
The Bank generates commercial, mortgage and consumer loans and
receives deposits from customers located primarily in Danville
and the immediately surrounding communities. The Bank's loans
are generally secured by specific items of collateral including
real property and consumer assets. Although the Bank has a
diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon economic
conditions in the Danville area.
Consolidation - The consolidated financial statements include the
accounts of the Company and the Bank after elimination of all
material intercompany transactions and accounts.
Investment Securities - Debt securities are classified as held to
maturity when the Bank has the positive intent and ability to
hold the securities to maturity. Securities held to maturity are
carried at amortized cost. Debt securities not classified as
held to maturity are classified as available for sale.
Securities available for sale are carried at fair value with
unrealized gains and losses reported separately in stockholders'
equity, net of tax.
Amortization of premiums and accretion of discounts are recorded
as interest income from securities. Realized gains and losses
are recorded as net security gains (losses). Gains and losses on
sales of securities are determined on the specific-identification
method.
(23)
Vermilion Bancorp, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Loans are carried at the principal amount outstanding. Interest
income is accrued on the principal balances of loans. The
accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments
as they become due. Interest income is subsequently recognized
only to the extent cash payments are received. Certain loan fees
and direct costs are being deferred and amortized as an
adjustment of yield on the loans.
Allowance for loan losses is maintained to absorb loan losses
based on management's continuing review and evaluation of the
portfolio and its judgment as to the impact of economic
conditions on the portfolio. The evaluation by management
includes consideration of past loss experience, changes in the
composition of the portfolio, and the current condition and
amount of loans outstanding, and the probability of collecting
all amounts due. Impaired loans are measured by the present
value of expected future cash flows, or the fair value of the
collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan
losses and the valuation of real estate is based on estimated
that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes
that as of September 30, 1997, the allowance for loan losses and
the valuation of real estate are adequate based on information
currently available. A worsening or protracted economic decline
in the area within which the Bank operates would increase the
likelihood of additional losses due to credit and market risks
and could create the need for additional loss reserves.
Premises and equipment are carried at cost net of accumulated
depreciation. Depreciation is computed using both the straight-
line and accelerated methods based on the estimated useful lives
of the assets. Maintenance and repairs are expensed as incurred
while major additions and improvements are capitalized. Gains
and losses on dispositions are included in current operations.
Federal Home Loan Bank stock is a required investment for
institutions that are members of the Federal Home Loan Bank
("FHLB") system. The required investment in the common stock is
based on a predetermined formula.
Income tax in the consolidated statement of income includes
deferred income tax provisions or benefits for all significant
temporary differences in recognizing income and expenses for
financial reporting and income tax purposes. The Company files
consolidated income tax returns with its subsidiary.
Employee Stock Ownership Plan
The Company accounts for its employee stock ownership plan (ESOP)
in accordance with American Institute of Certified Public
Accountants (AICPA) Statement of Position 93-6. The cost of
shares issued to the ESOP but not yet allocated to participants
are presented in the consolidated balance sheet as a reduction of
stockholders' equity. Compensation expense is recorded based on
the market price of the shares as they are committed to be
released for allocation to participant accounts. The difference
between the market price and the cost of shares committed to be
released is recorded as an adjustment to paid-in capital.
Dividends on allocated ESOP shares will be recorded as a
reduction of retained earnings, dividends on unallocated ESOP
shares will be reflected as a reduction of debt.
Shares are considered outstanding for earnings per share
calculations when they are committed to be released; unallocated
shares are not considered outstanding.
(24)
Vermilion Bancorp, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Earnings per share will be computed based upon the weighted
average common and common equivalent shares outstanding for
periods subsequent to the Bank's conversion to a stock savings
bank on March 25, 1997. Earnings per share for 1997 are not
meaningful.
Reclassifications of certain amounts in the 1996 consolidated
financial statements have been made to conform to the 1997
presentation.
Conversion to Stock Ownership
On March 25, 1997, the Bank consummated its conversion from a
state chartered mutual savings bank to a state chartered stock
savings bank pursuant to the Bank's Plan of Conversion.
Concurrent with the formation of the Company, the Company
acquired 100% of the stock of the Bank and issued 396,750 shares
of Company common stock, with $.01 par value, at $10.00 per
share. Net proceeds of the Company's stock issuance, after costs
and Employee Stock Ownership Plan shares, were approximately
$3,296,000.
The acquisition of the Bank by the Company is being accounted for
in a manner similar to "pooling-of-interests" under generally
accepted accounting principles. The application of the pooling-
of-interests method records the assets and liabilities of the
merged companies on a historical cost basis with no goodwill or
other intangible assets being recorded.
Investment Securities
1997
Gross Gross
Amortized Unrealized Unrealized Fair
September 30 Cost Gains Losses Value
Available for sale
U.S. Treasury $1,741,182 $17,508 $1,758,690
Federal agencies 1,364,750 1,529 $ (9,317) 1,356,962
Total available for sale 3,105,932 19,037 (9,317) 3,115,652
Held to maturity
State and municipal 362,153 6,390 368,543
Mortgage-backed securities 2,638,002 55,830 (5,271) 2,688,561
Total held to maturity 3,000,155 62,220 (5,271) 3,057,104
Total investment securities $6,106,087 $81,257 $(14,588) $6,172,756
(25)
Vermilion Bancorp, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
1996
Gross Gross
Amortized Unrealized Unrealized Fair
September 30 Cost Gains Losses Value
Available for sale
U.S. Treasury $ 250,000 $ 3,250 $
Federal agencies 1,992,166 5,025 $(28,748) 1,968,443
Total available for sale 2,242,166 8,275 (28,748) 2,221,693
Held to maturity
Federal agencies 499,798 (928) 498,870
State and municipal 361,177 (6,759) 354,418
Mortgage-backed securities 3,475,584 30,440 (32,713) 3,473,311
Total held to maturity 4,336,559 30,440 (40,400) 4,326,599
Total investment securities $6,578,725 $38,715 $(69,148) $6,548,292
The amortized cost and fair value of securities available for
sale and held to maturity at September 30, 1997, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities because issuers may have the right to call
or prepay obligations with or without call or prepayment
penalties.
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
One to five years $3,105,932 $3,115,652
Five to ten years $ 362,153 $ 368,543
3,105,932 3,115,652 362,153 368,543
Mortgage-backed securities 2,638,002 2,688,561
Totals $3,105,932 $3,115,652 $3,000,155 $3,057,104
There were no pledged securities at September 30, 1997 or 1996.
Proceeds from the sale of securities available for sale during
1997 were $250,938. A gross gain of $938 was realized on the
sale. There were no sales of securities during 1996.
On December 31, 1995, the Bank transferred certain securities
from held to maturity to available for sale in accordance with a
transition reclassification allowed by the Financial Accounting
Standards Board. Such securities had a carrying value of
$1,600,000 and a fair value of $1,592,598.
(26)
Vermilion Bancorp, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Loans and Allowance
September 30 1997 1996
Real estate mortgage loans
One-to-four family $24,835,129 $21,418,924
Multi-family 1,083,000 1,236,140
Commercial real estate loans 1,090,000 780,848
Real estate sold on contract 300,000 373,846
Real estate construction loans 116,000 341,793
Commercial business loans 480,000 334,376
Consumer loans 1,567,878 2,581,152
Total loans 29,472,007 27,067,079
Plus
Deferred loan costs 73,418 38,121
Less
Undisbursed portion of loans (17,871) (25,376)
Unearned interest (240)
$29,563,296 $27,079,584
Allowance for loan losses
Balances, October 1 $143,349 $ 74,190
Provision for losses 17,000 80,000
Recoveries on loans 1,469 1,296
Loans charged off (9,950) (12,137)
Balances, September 30 $151,868 $143,349
The Company adopted SFAS No. 114 and No. 118, Accounting by
Creditors for Impairment of a Loan and Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures on
October 1, 1995. The Company's loan portfolio consists primarily
of smaller balance, homogeneous loans which are principally one-
to-four family residential loans. The Company did not have any
loans it considered impaired at September 30, 1997 and 1996 or
during the years then ended.
(27)
Vermilion Bancorp, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Loan Servicing
Mortgage loans serviced for others are not included in the
accompanying consolidated balance sheet. The unpaid principal
balances totaled approximately $327,000 and $432,000 at September
30, 1997 and 1996.
Premises and Equipment
September 30 1997 1996
Land $209,431 $209,431
Office building 574,192 568,593
Furniture and fixtures 306,357 292,129
Total cost 1,089,980 1,070,153
Accumulated depreciation (629,363) (603,225)
Net $460,617 $466,928
Other Assets and Other Liabilities
September 30 1997 1996
Other assets
Interest receivable $172,377 $147,719
Cash value of life insurance annuity 51,037 53,284
Deferred income tax asset 37,045 97,963
Prepaid expenses and other 47,667 41,633
Total $308,126 $340,599
Other liabilities
Interest payable on deposits $ 20,083 $ 17,917
Interest payable on borrowings 12,722 9,717
Deferred compensation payable 84,831 79,831
Federal income tax payable 21,709 30,229
SAIF Assessment 207,307
Other 23,914 35,009
Total $163,259 $380,010
(28)
Vermilion Bancorp, Inc
and Subsidiary
Notes to Consolidated Financial Statements
Deposits
September 30 1997 1996
Demand deposits $ 1,680,835 $ 1,619,923
Savings and retirement accounts 5,067,584 5,350,222
Certificates of deposit of $100,000 or more 2,863,566 2,775,000
Other certificates of deposit 19,485,699 20,978,908
Total deposits $29,097,684 $30,724,053
Certificates maturing in years ending September 30:
1998 $14,406,148
1999 6,668,289
2000 636,646
2001 442,449
2002 195,733
$22,349,265
Federal Home Loan Bank Borrowings
September 30 1997 1996
Federal Home Loan Bank advances:
At 6.02%; due October, 1997 $ 500,000 $ 500,000
At 5.98%; due October, 1997 500,000 500,000
At 5.66%; due November, 1997 1,000,000 1,000,000
At 6.01%; due August, 1998 600,000
Total FHLB borrowings $2,600,000 $2,000,000
The terms of security agreements with the FHLB require the Bank
to pledge as collateral for the advances qualifying first
mortgage loans in an amount equal to at least 167 percent of the
advances and all stock in the FHLB.
(29)
Vermilion Bancorp, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Income Tax
Year Ended September 30 1997 1996
Income tax expense
Current federal $18,480 $44,460
Deferred federal 55,059 (41,577)
Total income tax expense $73,539 $2,883
Reconciliation of federal statutory
to actual tax expense
Federal statutory income tax at 34% $110,687 $(23,217)
Tax exempt interest (6,068) (5,048)
Graduated tax rates (27,985) 7,467
Change in tax rate applicable to deferred taxes 18,404
Other (3,095) 5,277
Actual tax expense $ 73,539 $ 2,883
A cumulative net deferred tax asset is included in other assets.
The components are as follows:
September 30 1997 1996
Differences in depreciation methods $ 1,295 $ (530)
Differences in accounting for loan losses 34,538 32,408
Deferred compensation 21,208 19,958
Unrealized (gain) loss on securities available
for sale (741) 5,118
Deferred loan costs (18,355) (9,530)
SAIF assessment 51,439
Other (900) (900)
$ 37,045 $97,963
Assets $ 57,041 $108,923
Liabilities (19,996) (10,960)
$ 37,045 $97,963
(30)
Vermilion Bancorp, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
There was no state income tax expense for 1997 or 1996.
Retained earnings at September 30, 1997 and 1996, include
approximately $995,000 for which no deferred income tax liability
has been recognized. This amount represents an allocation of
income to bad debt deductions as of September 30, 1988, for tax
purposes only. Reduction of amounts so allocated for purposes
other than tax bad debt losses or adjustments arising from
carryback of net operating losses would create income for tax
purposes only, which income tax liability on the above amounts
was approximately $338,300 at September 30, 1997 and 1996.
Commitments and Contingent Liabilities
In the normal course of business there are outstanding
commitments and contingent liabilities, such as commitments to
extend credit and standby letters of credit, which are not
included in the accompanying financial statements. The Bank's
exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to
extend credit and standby letters of credit is represented by the
contractual or notional amount of those instruments. The Bank
uses the same credit policies in making such commitments as it
does for instruments that are included in the consolidated
balance sheet.
Financial instruments whose contract amount represents credit
risk as of September 30 were as follows:
1997 1996
Mortgage loan commitments at fixed rates $254,000 $576,000
Construction, home improvement and other loan
commitments at fixed rates 324,000 606,000
Standby letters of credit 23,000 23,000
At September 30, 1997, mortgage loan commitments have terms up to
30 days and rates ranging from 7.25% to 7.625% while construction
and home improvement loan commitments have terms up to six months
and rates ranging from 8.25% to 10.0%.
At September 30, 1996, mortgage loan commitments have terms up to
30 days and rates ranging from 7.25% to 9.00%. Construction and
home improvement loan commitments have terms up to 6 months and
rates ranging from 9.50% to 10.50%.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation.
Collateral held varies, but may include residential real estate,
income-producing commercial properties, or other assets of the
borrower.
(31)
Vermilion Bancorp, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Standby letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third
party.
On December 30, 1992, a former employee filed a lawsuit against
the Bank which involves various accusations. A summary judgement
has been issued by the court in favor of the Bank on each count.
The employee has appealed several of the judgements. Based on
the current status of the litigation, the Bank's attorneys have
advised that, while they are unable to express an opinion as to
the ultimate disposition of the claim, they believe that it is
unlikely that the former employee will prevail. No accrual for
loss from this action has been recognized in the accompanying
financial statements.
In addition, the Company and Bank are also subject to other
claims and lawsuits which arise primarily in the ordinary course
of business. It is the opinion of management that the
disposition or ultimate determination of such possible claims or
lawsuits will not have a material adverse effect on the
consolidated financial position of the Company.
Restriction on Dividends
The Company is regulated by the Federal Reserve Board which has
enforcement powers over bank 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 prescribe the payments of dividends by
bank holding companies.
In addition, Delaware general corporate 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.
Without prior approval of the State of Illinois law Office of
Banks and Real Estate, the Bank is restricted by regulation as to
the maximum amount of dividends it may pay in any fiscal year to
50 percent of its net profits for that year. In addition, the
Bank is unable to pay dividends in an amount which would reduce
its capital below the greater of (i) the amount required by the
FDIC or (ii) the amount required by the Bank's liquidation
account. The FDIC and the Commissioner also have the authority
to prohibit the payment of any dividends by the Bank if they
determine that the distribution would constitute an unsafe or
unsound practice.
At the time of conversion, a liquidation account was established
in an amount equal to the Bank's net worth as reflected in the
latest statement of condition used in its final conversion
offering circular. The liquidation account is maintained for the
benefit of eligible deposit account holders who maintain their
deposit accounts in the Bank after conversion. In the event of a
complete liquidation (and only in such event), each eligible
deposit account holder will be entitled to receive a liquidation
distribution from the liquidation account in the amount of the
then current adjusted subaccount balance for deposit accounts
then held, before any liquidation distribution may be made to
stockholders. Except for the repurchase of stock and payment of
dividends, the existence of the liquidation account will not
restrict the use or application of net worth. The initial
balance of the liquidation account was $2,439,000.
(32)
Vermilion Bancorp, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Regulatory Capital
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate actions by the
regulatory agencies that, if undertaken, could have a material
effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings,
and other factors.
At September 30, 1997, the management of the Bank believes that
it meets all capital adequacy requirements to which it is
subject. The most recent notification from the regulatory agency
categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. There have been no
conditions or events since that notification that management
believes have changed this categorization.
<TABLE>
The Bank's actual and required capital amounts (in thousands) and
ratios are as follows:
1997
Required for To Be Well
Actual Adequate Capital1 Capitalized1
September 30 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital 1
(to risk-weighted assets) $5,198,000 27.3% $1,522,000 8.0% $1,903,000 10.0%
Tier 1 capital 1 (to risk-
weighted-assets) 5,046,000 26.5% 761,000 4.0% 1,142,000 6.0%
Tier 1 capital 1 (to
adjusted total assets) 5,046,000 13.5% 1,497,000 4.0% 1,871,000 5.0%
1 As defined by regulatory agencies
</TABLE>
On September 30, 1996, legislation was enacted to recapitalize
the Federal Deposit Insurance Corporation's Savings Association
Insurance Fund ("SAIF") as well as to provide regulatory relief
to SAIF insured institutions. As a result of this legislation, a
special assessment was levied on all SAIF assessable deposits
outstanding on March 31, 1995, at a rate of approximately .657
percent of deposits. Accordingly, the Bank recorded an expense
related to this special assessment of approximately $155,000 net
of taxes, on the date of enactment.
(33)
Vermilion Bancorp, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Benefit Plans
The Bank has a retirement savings Section 401(k) plan in which
substantially all employees may participate. Prior to its
conversion in March 1997, the Bank contributed three percent of
base salary for each participant. In addition, the Bank matched
100 percent of the first four percent of employees' base salary
contributions and 50 percent of the next 4 percent of base salary
contributed by the participants. Upon formation of the Bank's
ESOP, it suspended payments to the Bank's 401(k) plan. The
Bank's expense for the plan was approximately $8,900 for 1997 and
$19,000 for 1996.
The Bank also has a deferred compensation plan for directors
whereby participating directors can elect to defer directors'
fees in return for inclusion in a deferred compensation plan
which pays benefits to such participating directors upon
retirement or death. The Bank purchased a deferred annuity,
which is included in other assets, to fund the deferred
compensation plan benefits; however, this annuity is not
restricted for that purpose. A deferred compensation liability
has been calculated and recorded in other liabilities, which
represents the present value of future benefits to be paid at
retirement for each participating director. Deferred
compensation plan expense included in the financial statements
was $13,000 for both 1997 and 1996.
In connection with the conversion, the Bank established an
employee stock ownership plan ("ESOP") for the benefit of
substantially all employees. The ESOP borrowed $317,400 from the
Company and used those funds to acquire 31,740 shares of the
Company's stock at $10 per share.
Shares issued to the ESOP are allocated to ESOP participants
based on principal repayments made by the ESOP on the loan from
the Company. The loan is secured by shares purchased with the
loan proceeds and will be repaid by the ESOP with funds from the
Bank's discretionary contributions to the ESOP and earning on
ESOP assets. Dividends on unallocated ESOP shares will be
applied to reduce the loan. Principal payments are scheduled to
occur in even annual amounts over a seven year period. However,
in the event Bank contributions exceed the minimum debt service
requirements, additional principal payments will be made.
During 1997, 2,469 shares of stock with an average fair value of
$12.21 per share were committed to be released, resulting in ESOP
compensation expense of $30,156. Shares held by the ESOP at
September 30 are as follows:
1997
Allocated shares 2,469
Unallocated shares 29,271
Total ESOP shares 31,740
Fair value of unallocated shares at September 30 $436,425
(34)
Vermilion Bancorp, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the
fair value of each class of financial instrument:
Cash and Cash Equivalents - The fair value of cash and cash
equivalents approximates carrying value.
Interest-Bearing Time Deposits - The fair value of interest-
bearing time deposits approximates carrying value.
Investment Securities - Fair values are based on quoted market
prices.
Loans - For both short-term loans and variable-rate loans that
reprice frequently and with no significant change in credit risk,
fair values are based on carrying values. The fair values for
other loans are estimated using discounted cash flows analyses
using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
Interest Receivable/Payable - The fair values of interest
receivable/payable approximate carrying values.
Federal Home Loan Bank Stock - Fair value of FHLB stock is based
on the price at which it may be resold to the FHLB.
Cash Surrender Value of Life Insurance Fair value of life
insurance is based on cash values quoted by the insurance
underwriter.
Deposits - The fair values of noninterest-bearing, interest-
bearing demand and savings accounts are equal to the amount
payable on demand at the balance sheet date. Fair values for
fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of
aggregated expected monthly maturities on such time deposits.
Federal Home Loan Bank Borrowings - The fair value of these
borrowings are estimated using a discounted cash flow
calculation, based on current rates for similar debt.
Off-Balance Sheet Commitments - Commitments include commitments
to originate mortgage loans and standby letters of credit and are
generally of a short-term nature. The fair value of such
commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of
the agreements and the counterparties' credit standing. The Bank
currently does not charge a commitment fee; accordingly, no value
has been assigned to the Bank's commitments to extend credit.
(35)
Vermilion Bancorp, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
The estimated fair values of the Company's financial instruments
are as follows:
1997 1996
September 30 Carrying Fair Carrying Fair
Amount Value Amount Value
Assets
Cash and cash equivalents $1,137,897 $1,137,897 $789,189 $789,189
Interest-bearing time
deposit 99,000 99,000 99,000 99,000
Investme securities
available for sale 3,115,652 3,115,652 2,221,693 2,221,693
Investment securities
held to maturity 3,000,155 3,057,104 4,336,559 4,326,599
Loans, net 29,411,428 31,965,000 26,936,235 27,000,354
Interest receivable 172,377 172,377 147,719 147,719
Federal Home Loan Bank stock 283,200 283,200 269,000 269,000
Cash surrender value of life
insurance 51,037 51,037 53,284 53,284
Liabilities
Deposits 29,097,684 29,037,000 30,724,053 30,852,791
FHLB borrowings 2,600,000 2,599,000 2,000,000 1,991,610
Interest payable 32,805 32,805 27,634 27,634
Off-Balance Sheet Assets (liabilities)
Commitments to extend credit
Standby letters of credit
(36)
DIRECTORS
Thomas B. Meyer Merrill G. Norton
Chairman of the Board of President and Chief Executive
the Company, Attorney in Officer
Private Practice of the Company, Director
Carl W. Busby Dr. Robert L. Ewbank.
Director, President of Busby Director, Medical consultant,
Farms, Inc. and Busby Land and retired oral and maxillofacial
Auction Co., Inc. surgeon
William T. Ingram
Secretary and Director the
Company, Area Businessman,
operator of Automobile
Diagnostics, Quick Air Freight,
Ingram's Quicklube and Ingram's
Apartments.
EXECUTIVE OFFICER
Merrill G. Norton
President and Chief Executive
Officer of the Company
BANKING LOCATION
714 North Vermilion Street, Danville, Illinois 61832
STOCKHOLDER INFORMATION
Vermilion Bancorp, Inc. is a Delaware-incorporated bank
holding company conducting business through its wholly-owned
subsidiary, American Savings Bank (the "Bank"). The Bank is an
Illinois-chartered, SAIF-insured stock savings bank operating
through its office located in Danville, Illinois.
TRANSFER AGENT/REGISTRAR:
American Securities Transfer and Trust
938 Quail Street
Lakewood, Colorado 80215
(800) 962-4284
STOCKHOLDER REQUESTS:
Requests for annual reports, quarterly reports and related
stockholder literature should be directed to Merrill G. Norton,
President and Chief Executive Officer, Vermilion Bancorp, Inc.,
714 North Vermilion Street, Danville, Illinois 61832.
Stockholders needing assistance with stock records, transfers
or lost certificates, please contact the Company's transfer agent,
Registrar and Transfer Company.
MARKET PRICES AND DIVIDENDS:
The Company's shares are listed on the National Daily Quotation
Service "pink sheets" published by the National Quotation Bureau, Inc.
At December 12, 1997, the Company had 128 stockholders of record. The
number of shares of common stock outstanding as of December 12, 1997 was
396,750 The table below sets forth the range of high and low bid information
for the common stock for each quarter as well as dividends paid since
March 25, 1997 the date of the Bank's conversion from the mutual form of
ownership to the stock form of ownership.
Quotations
Dividend Amount
Quarter Ended High Bid Low Bid Per Share
March 31, 1997 12.50 12.375 --
June 30, 1997 12.25 11.75 --
September 30, 1997 13.75 12.00 --
<TABLE> <S> <C>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 55,354
<INT-BEARING-DEPOSITS> 1,082,543
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,115,652
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<LOANS> 29,563,296
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<TOTAL-ASSETS> 37,816,075
<DEPOSITS> 29,097,684
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0
0
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<SECURITIES-GAINS> 938
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<INCOME-PRETAX> 325,551
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 252,012
<EPS-PRIMARY> 0
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<LOANS-NON> 0
<LOANS-PAST> 485,000
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<ALLOWANCE-CLOSE> 151,868
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