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, 1999
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) 442-0270
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 there is no 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.
Issuer's revenues for its most recent fiscal year:
$3,332,848.
As of December 1, 1999, the aggregate value of the
273,282 shares of Common Stock of the Registrant issued
and outstanding on such date, which excludes 83,793
shares held by all directors and executives officers of the
Registrant was $2,869,461. This figure is based on the closing bid
price of $10.50 per share of the Registrant's Common Stock on December
1, 1999. Although directors and executive officers 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
1, 1999: 357,075
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, 1999, are incorporated into Part II, Items 5-7
and Part III, Item 13 on this Form 10-KSB.
(2) Portions of the Definitive Proxy Statement for the 1999
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, 1999, the Company had
consolidated total assets of $43.76 million, total
consolidated liabilities of $38.17 million, and total
consolidated stockholders' equity of $5.59 million.
The Company had net loss of $71,000 for fiscal 1999, as
compared to net income of $244,000 in fiscal 1998. 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 1999 the
Company's interest rate spread averaged 2.63% compared to 2.49%
fiscal year 1998. Net interest income, after provision for loan
losses, increased from $1.18 million to $1.28 million from 1998
to 1999, or 8.4%. The increase in net interest income from 1998
to 1999 was due primarily to a $243,000 increase in interest
income from loans and a $47,000 increase in interest income from
deposits with financial institutions, offset by a $139,000
decrease in interest income from investment securities. During
the same period deposit interest expense declined by $13,000,
interest expense on Federal Home Loan borrowings increased by
$78,000, and provision for loan losses decreased $12,000.
Total noninterest income increased by $57,000 in 1999 to $111,000
as compared to $55,000 in 1998, while total noninterest expense
increased $725,000 to $1.6 million. The increase in total
noninterest income for 1999 was due primarily to an increase of
$14,000 in loan fees, a $32,000 increase in other income, and an
increase in net realized gains on sales of available for
sale securities of $11,000. The increase in total noninterest
expense was primarily due to a $500,000 litigation settlement
expense (Frobose vs American Savings and Loan Association of
Danville, Case Number 97-1432 (Seventh Cir., July 31, 1998)),
an increase of $110,000 in salaries and employee benefits
which reflects the opening of the new branch facility, an
increase of $58,000 in net occupancy and equipment expense
which also relates to opening the new branch facility, a
$31,000 increase in data procesing expense which reflects the
changes made in conjunction with Y2k concerns, a $10,000
increase in printing and office supplies, an $8,000 increase
in advertising and promotion expense, a $6,000 increase in
legal and professional fees, a $9,000 increase in director
and committee fees, somewhat offset by a decrease of $6,000
other expenses.
The Company's assets totaled $43.76 million at September 30,
1999 as compared with $43.22 million at September 30, 1998.
The $547,000 increase in assets was primarily due to a $3.00
million increase in net loans, a $131,000 increase in premises
and equipment, an $83,000 increase in other assets, offset by a
decrease of $566,000 in cash and cash equivalents, and a decrease
of $2.08 million in total investment securities. The increase
in assets was funded primarily by an increase in deposits of
$1.6 million.
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 two facilities
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 service 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, 1999, the Company's net loan
portfolio amounted to $37.23 million, or 85.1% 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.
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,
----------------------------
1999 1998
----------------- ----------------
Percent Percent
Balance of Total Balance of Total
(Dollars in Thousands)
----------------------------------
Type of Loan:
Real estate mortgage loans:
One-to-four family $32,160 86.23% $28,409 82.86%
Multi-family 712 1.91 882 2.57
Commercial real estate 1,098 2.94 1,581 4.61
R.E. construction loans 225 0.60 492 1.44
Commercial business loans 1,005 2.69 997 2.91
Consumer loans 2,098 5.63 1,922 5.61
------ ------ ------ ------
Total loans 37,298 100.00 34,283 100.00%
Plus:
Deferred loan costs 115 97
Less:
Allowance for loan losses 179 154
Unearned interest -- --
------ ------
Total loans, net $37,234 $34,226
====== ======
Contractual Principal Repayments and Interest Rates.
The following table sets forth certain information at
September 30, 1999 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 $ 3,453 $ 3,600 $25,107 $32,160
Multi-family 29 44 639 712
Commercial real estate 93 400 605 1,098
Real estate construction loans 225 -- -- 225
Commercial business loans 110 819 76 1,005
Consumer Loans 471 1,371 256 2,098
----- ----- ------ ------
Total loans $ 4,381 $ 6,234 $26,683 $37,298
The following table sets forth the dollar amount of
all loans, before net items, due one year or more
after September 30, 1999 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 $26,902 $ 1,805 $28,707
Multi-family 683 -- 683
Commercial real estate 1,005 -- 1,005
Real estate construction loans -- -- --
Commercial business loans 895 -- 895
Consumer loans 1,627 -- 1,627
------ ----- ------
Total loans $31,112 $ 1,805 $32,917
====== ===== ======
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)
------------------------
1999 1998
---- ----
Net loans, beginning balance $34,226 $29,411
Loan originations:
Real estate mortgage loans:
One-to-four family 10,071 8,331
Multi-family -- 347
Commercial real estate -- 739
Real estate construction loans 425 889
Commercial business loans 846 424
Consumer loans 1,847 1,233
------ ------
Total loan originations 13,189 11,963
Loan principal reductions 10,174 7,188
Increase (decrease) due to
Other items, net(1) (7) 40
------ ------
Loan receivable, net end of period $37,234 $34,226
====== ======
(1) Includes changes in allowance for loan losses and
deferred loan fees.
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. The Bank
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, loans of $100,000 or less may
be reviewed and approved by the president and loans
$50,000 or less may be reviewed and approved by the
loan officer. All other real estate loans require
the approval of a majority of the Bank's Board of
Directors. Share loans may be approved by any
elected Bank officer, loan officer or Loan Committee
member. 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 exceed $500,000
without approval of the Board of Directors of the Bank.
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,
1999, $32.16 million, or 86.23%, 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, 1999, $25.86 million, or 80.40%, 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, 1999, 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, 1999, $6.30
million or 19.60% 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 loans is limited to
$500,000 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, 1999, the Bank had $1.81
million in outstanding loans secured by multi-family
residences or commercial real estate. Such loans
comprised 4.85% of the Bank's total loan portfolio at
September 30, 1999 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, 1999, the Bank had $712,000 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, 1999, the Bank had 10 loans
secured by multi-family residences with an
average balance of $71,000. As of that date none of
the multi family loans were non-performing loans.
At September 30, 1999, the Bank had $1.10 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, 1999, the Bank had 19 loans
secured by commercial real estate with an average
balance of $58,000. As of that date, one of the
Bank's commercial real estate loans was non-
performing totaling $68,000 or 6.2% of the outstanding
loans secured by commercial real estate.
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, 1999, the
Bank's construction loans amounted to $225,000, or
0.60% of the Bank's total loan portfolio. The Bank
originated $425,000 of single-family construction
loans to individuals during the year ended September
30, 1999. 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, 1999, 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, 1999,
$2.10 million, or 5.63%, 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 $1.8 million in 1999.
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 $55,000. 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
$30,000. 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, 1999, the
Bank had $968,000 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, 1999, the Bank had $182,000 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, 1999, $75,000 or 3.6% 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, 1999, the Bank's commercial business
loans amounted to $1.0 million or 2.69% 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. Commercial business
loans of 100,000 or less may be reviewed and approved
by the president and loans $50,000 or less may be
reviewed and approved by the loan officer. All other
commercial business loans require the approval of a
majority of the Bank's Board of Directors. The Bank
generally obtains personal guarantees from the
principals of the borrower with respect to all
commercial loans. The Bank had 32 commercial business
loans as of September 30, 1999 with an average loan
balance on that date of $66,000. As of September 30,
1999, $37,000 or 3.68% of the Bank's commercial
business loans were 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,
1999, the Bank's limit on loans-to-one borrower under
the Illinois Savings Bank Act was $847,000. At
September 30, 1999, the Bank's five largest groups of
loans-to one borrower ranged from $380,000 to
$662,000, with the largest single loan in such groups being a
$371,000 loan secured by residential investment properties.
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, 1999, 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, in
most cases, 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. As of September 30,
1999, the Bank had no real estate owned. It is the Bank's
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, 1999, 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, 1999
30-89 Days
----------------------
Amount Percent of
Loan Category
(Dollars in Thousands)
----------------------
Real estate mortgage loans:
One-to-four family $ 540 1.68%
Multi-family -- --
Commercial real estate -- --
Real estate construction -- --
Commercial business loans 26 2.59
Consumer loans 16 0.76
---- -----
Total $ 582 1.56%
September 30, 1999
90 days or more
----------------------
Amount Percent of
Loan Category
(Dollars in Thousands)
----------------------
Real estate mortgage loans:
One-to-four family $ 508 1.58%
Multi-family -- --
Commercial real estate 68 6.19
Real estate construction -- --
Commercial business loans 37 3.68
Consumer loans 75 3.57
---- ----
Total $ 688 1.84%
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,
1999 1998
(Dollars in Thousands)
----------------------
Non accruing loans:
Real estate mortgage loans:
One-to-four family $ -- $ --
Multi-family -- --
Commercial real estate -- --
Real estate construction loans -- --
Commercial business loans -- --
Consumer loans -- --
Total non-accruing loans -- --
Accruing loans greater than 90
days delinquent:
Real estate mortgage loans:
One-to-four family 508 256
Multi-family -- --
Commercial real estate 68 --
Real estate construction loans -- --
Commercial business loans 37 --
Consumer loans 75 46
---- ----
Total accruing loans greater than
90 days delinquent 688 302
Total non-performing loans 688 302
Real estate owned 0 87
---- ----
Total non-performing assets $688 $389
Total non-performing loans as a
percentage of total loans 1.84% 1.13%
Total non-performing assets as a
percentage of total assets 1.57% 0.90%
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, 1999, the Bank had $534,000 of
assets classified substandard, $180,000 of assets classified
doubtful and none classified as loss. At such
date, the aggregate of the Bank's classified assets
amounted to 1.63% 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, 1999, the Bank's
allowance for loan losses amounted to 26.02% and
0.48% of the Bank's non-performing loans and total
loans receivable, respectively.
On November 24, 1998, the Securities and Exchange Commission,
Federal Deposit Insurance Corporation, Federal Reserve Board,
Office of the Comptroller of the Currency, and Office of Thrift
Supervision issued a Joint Interagency Statement on Loan Loss
Allowances. The Statement was designed to better ensure the
consistent application of loan loss accounting policy and to
improve the transparency of financial statements. The statement
noted that the agencies recognized the importance of meaningful
financial statements and disclosure for both the benefit of
investors and a safe and sound financial system and the
importance of depository institutions having prudent,
conservative, but not excessive loan loss allowances that fall
within an acceptable range of estimated losses. Referring to
previously issued documents, the agencies noted that the
allowance for loan losses should reflect estimated credit losses
for specifically identified loans, as well as esitimated probable
credit losses in the remainder of the loan portfolio at the
balance sheet date. When determining the appropriate level for
the allowance,the agencies said, management should always ensure
that the overall allowance appropriately reflects a margin for
the imprecision inherent in the most recent estimates of expected
credit losses. Management's judgement should be exercised in a
disciplined manner that is based on and reflective of adequate
detailed analyses of the loan portfolio.
On November 12, 1999, the Gramm-Leach-Bliley Act was signed into
law. Under this legislation. Under section 241 of the act, the
Securities and Exchange Commission is required to consult and
coordinate comments with the appropriate Federal banking agency,
the FDIC in the case of the Bank, before taking action or rendering
any opinion with respect to the manner in which the Company reports
loan loss reserves in its financial statements, including the amount
of any such loan loss reserve.
The agencies further indicated that although management's process
for determining allowance adequacy is judgemental and results in
a range of estimated losses, it must not be used to manipulate
earnings or mislead investors, funds providers regulators or
other affected parties. Management's process must be based on a
comprehensive, adequately documented, and consistently applied
analysis of the institution's loan portfolio. The depository
institution must ensure that its allowance is supportable in
light of the accompanying disclosures made to investors,
including those made in management's discussion and analysis and
financial footnotes, with respect to the underlying economics and
trends in the portfolio and any other factors that significantly
affect the collectibilty of loans. Management of the company
believes its allowances for loan and lease losses meets these
standards.
The following table describes the activity related to
the Bank's allowance for possible loan losses for the
periods indicated.
Year Ended September 30,
------------------------
1999 1998
(Dollars in Thousands)
------------------------
Balance at beginning of period $154 $152
Charge-offs:
One-to-four family real estate loans (32) (25)
Consumer loans (18) (53)
Recoveries:
One-to-four family real estate 6 5
Consumer loans 6 --
Net charge-offs (38) (79)
Provision for losses on loans 63 75
Balance at end of period $179 $154
Allowance for loan losses as a percentage
of total loans outstanding 0.48% 0.45%
Allowance for loan losses as a percentage
of total non-performing loans 26.02% 39.59%
Ratio of net charge-offs to
average loans outstanding 0.11% 0.24%
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,
--------------------------
1999 1998
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 $104 86.23 % $104 82.86%
Multi-family -- 1.91 -- 2.57
Commercial real estate 25 2.94 -- 4.61
Real estate construction -- 0.60 -- 1.44
Commercial business loans 5 2.69 5 2.91
Consumer loans 45 5.63 45 5.61
--- ----- --- -----
Total $179 100.00% $154 100.00%
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, 1999, the Bank's
investment securities portfolio amounted to
$3.02 million, including a net unrealized loss of
$4,000, with respect to its securities available for
sale.
Mortgage-Backed Securities. As of September 30,
1999 the Bank's mortgage-backed securities amounted
to $1.16 million, or 2.65% 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.
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, 1999, all of the Bank's $1.16
million of mortgage-backed securities were classified
as held to maturity.
At September 30, 1999, 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 $364,000 of securities all of which are
general obligations of Illinois municipalities. As
of September 30, 1999, $1.49 million of such
securities portfolio were classified available for sale. The
remaining $364,000 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, 1999, the estimated weighted average
life of the Bank's investment securities portfolio
was 2.82 years.
The following table sets forth certain information
regarding the Bank's investment securities at the
dates indicated.
September 30,
--------------------------------------
1999 1998
------------------- ------------------
Amortized Market Amortized Market
Cost Value Cost Value
(In Thousands)
--------------------------------------
Available for sale:
U.S. Treasury $ 499 $ 501 $1,745 $1,784
Federal agencies 999 993 1,000 1,001
----- ----- ----- -----
Total available for sale $1,498 $1,494 $2,745 $2,785
Held to maturity:(1)
State and municipal $364 $364 $363 $374
Mortgage-backed Securities 1,158 1,174 1,949 1,984
----- ----- ----- -----
Total held to maturity $1,522 $1,538 $2,312 $2,359
----- ----- ----- -----
Total Investment
Securities $3,020 $3,032 $5,057 $5,144
The following table sets forth certain information
regarding the maturities of the Bank's investment
securities at September 30, 1999.
Contractually Maturing
-----------------------------------------
Weighted Weighted
Under 1 Average 1-5 Average
Year Yield Years Yield
(Dollars in Thousands)
-----------------------------------------
Available for sale:
U.S. Treasury $ 501 5.88% $ -- --%
Federal agencies -- -- -- --
---- ---- ---- ----
Total available for sale 501 5.88 -- --
Held to maturity:
Federal agencies -- -- -- --
State and municipal(1) -- -- -- --
Mortgage-backed securities 88 6.00 -- --
---- ---- ---- ----
Total held to maturity 88 6.00 -- --
---- ---- ---- ----
Total investment securities 589 5.90 -- --
==== ==== ==== ====
Contractually Maturing
-------------------------------------------
Weighted Weighted
6-10 Average Over 10 Average
Years Yield Years Yield Total
(Dollars in Thousands)
-------------------------------------------
Available for sale:
U.S. Treasury $ -- -- % $ -- -- % $ 501
Federal agencies 993 7.15 -- -- 993
---- ---- ---- ---- -----
Total available for sale 993 7.15 -- -- 1,494
Held to maturity:
Federal agencies -- -- -- -- --
State and municipal(1) 364 4.76 -- -- 364
Mortgage-backed securities 108 9.01 962 6.48 1,158
---- ---- ---- ---- -----
Total held to maturity 472 5.73 962 6.48 1,522
---- ---- ----- ---- -----
Total investment
securities $1,267 6.98% $ 962 6.48% $3,016
===== ==== ===== ==== =====
(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, 1999, the
Bank's investment in stock of the FHLB of Chicago amounted
to $321,000. During the year ended September 30,
1999, the Bank received $21,000 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 two facilities. 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, MMI accounts, certificates
ranging in terms from one month 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,
---------------------------------
1999 1998
Percent Percent
Of Total of Total
Amount Deposits Amount Deposits
(Dollars in Thousands)
---------------------------------
Transaction accounts:
Demand accounts $ 698 2.20% $ 679 2.26%
NOW accounts 746 2.36 589 1.96
Money market investment 991 3.13 753 2.50
Savings and retirement 5,512 17.42 5,296 17.63
----- ----- ----- -----
Total transaction accounts 7,947 25.11 7,317 24.35
Certificates of deposit:
Within 1 year 15,720 49.69 14,944 49.74
1-2 years 6,912 21.85 5,991 19.94
2-3 years 686 2.17 1,430 4.76
3-4 years 285 0.90 81 0.27
4-5 years 89 0.28 281 0.94
------ ------ ------ ------
Total certificates 23,692 74.89 22,727 75.65
------ ------ ------ ------
Total deposits $31,639 100.00% $30,044 100.00%
====== ====== ====== ======
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,
--------------------------------------
1999 1998
(In Thousands)
--------------------
Net deposits (withdrawals)
before interest credited $ 384 $ (283)
Interest credited 1,211 1,229
----- -----
Total increase (decrease)in deposits 1,595 $ 946
The following table shows the interest rate and maturity
information for the Bank's certificates at September 30, 1999.
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
4.00 to 4.99% $6,058 $2,825 $ -- $ -- $ 39
5.00 to 5.99% 8,586 3,875 551 240 50
6.00 to 6.99% 1,076 212 135 45 --
----- ----- ----- ----- -----
Total $15,720 $6,912 $ 686 $ 285 $ 89
The following table sets forth the maturities of the
Bank's certificates having principal amounts of
$100,000 or more at September 30, 1999.
Maturity Period Amount
--------------- (In Thousands)
--------------
Three months or less $ 802
Over three through six months 1,217
Over six through twelve months 1,796
Over twelve months 400
-----
Total certificates of deposit
with balances of $100,000 or more $ 4,215
Return on Equity and Assets:
1999 1998
---- ----
Return on assets (0.17)% 0.61%
Return on equity (1.19) 3.98
Dividend payout ratio 0.00 0.00
Equity to asset ratio 13.67% 15.07%
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.
The following table sets forth the amounts of the
Bank's borrowings and the weighted average rates for
the year ended September 30, 1999.
For the Year Ended September 30,
--------------------------------
1999 1998
(Dollars in Thousands)
----------------------
FHLB advances:
Average balance outstanding during the period(1) $6,400 $4,754
Maximum amount outstanding
at any month-end during the period $6,400 $7,000
Balance outstanding at end of period $6,400 $6,400
Weighted average interest rate during the period 5.14% 5.37%
Weighted average interest rate at the end of period 5.14% 5.14%
(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 $118,000
as of September 30, 1999.
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 under "Legal
Proceedings, are believed by management to be
immaterial to the financial condition of 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 two
offices. Competition may increase as a result of the
continuing reduction of restrictions on the
interstate operations of financial institutions.
Employees
The Bank had 14 full-time employees and 2
part-time employees as of September 30, 1999. 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.
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.
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, 1999, 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, 1999, the Bank paid approximately
$14,000 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, 1999 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. By approval of the regulators, the Bank
declared a $1.2 million dividend during September,
1999.) For the year ended September 30, 1999, the
Bank's capital was greater than that required by the
FDIC and higher than 3% of total assets.
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 $321,000 at
September 30, 1999.
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,
1999, the Bank had $6,400,000 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, 1999, 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"). 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 CRA
regulations will adversely affect the Bank.
Under the Gramm-Leach-Bliley Act, more fully described
below, the Bank will be subject to examination under
the Community Reinvestment Act ("CRA") not more
frequently than once every 60 months whereit receives
the highest CRA rating and not more frequently than
once every 48 months where its CRA rating is satisfactory.
The Bank's CRA rating is satisfactory.
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
are 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 are allowed to acquire banks
across state lines, without regard to whether the
transaction is prohibited by state law; however, they
are 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
is 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 banks are 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 is not 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 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.
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.
Financial Modernnization. On November 12, 1999,
President Clinton signed into law the Gramm-
Leach-Bliley Act which, amoung other things,
will, effective March 11, 2000, permit bank
holding companies to become financial holding
companies and thereby affiliate with securities
firms and insurance companies and engage in
other activities that are financial in nature.
A bank holding company may become a financial
holding company if each of its subsidiary banks
is well capitalized under the Fdicia prompt
corrective action provisions, is well managed
and has at least a satisfactory rating under
the Community Reinvestment Act by filing a
declaration that the bank holding company
wishes to become a financial holding
company. No regulatory approval will be
required for a financial holding company to
acquire a company, other than a bank or savings
association, engaged in activitie that are
financial in nature or incidental to activities
that are financial in nature, as determined
by the Federal Reseve Board.
The Gramm-Leach-Bliley Act defines "financial in
nature" to include securities underwriting,
dealing and market making; sponsoring mutual funds
and investment companies; insurance underwriting
and agency; merchant banking activities; and
activities that the Federal Reserv Board has
determined to be closely related to banking.
A national bank also may engage, subject to the
limitations on investment, in activities that
are financial in nature, other than insurance
underwriting, insurance company portfolio
investment, real estate development and real
estate investment, through a financial subsidiary
of the bank, if the bank is well capitalized,
well managed and has at least a satisfactory
Community Reinvestment Act rating. Subsidiary
banks of a financial holding company or national
banks with financial subsidiaries must continue
to be well capitalized and well managed in order
to continue to engage in activities that are
financial in nature without regulatory actions
or restictions, which cold in clude divestiture
of the financial in nature susidiary or
subsidiaries. In addition, a financial holding
company or a bank may not acquire a company
that is engaged in activities that are
financial in nature unless each of the
subsidiary banks of the financial holding
company or the bank has a Community
Reinvestment Act rating of satisfactory or
better.
The FDIC and Federal Reserve have yet to issue
implementing regulations for this new
legislation, and the effect of such regulations,
when adopted, cannot be predicted. However, the
legislation is expected to increase competition
for the Company as well as present opportunities
for activities and acqusitions, although no such
activities or acquisitions are presently planned.
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. The Bank is subject to the rules and
regulations of Internal Revenue Code Section 585 for
deducting it bad debt for tax purposes. Section 585 is
the reserve method of bad debts whereby the Bank can
establish a tax bad debt reserve utilizing its experience
method or its base year reserve level.
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.
At September 30, 1999, the Federal income tax
reserve 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 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 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.
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).
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, 1999, the Company conducted its
business from two locations 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, 1999.
Owned or
Location Leased
- -------------------------------------
714 North Vermilion
Danville, Illinois 61832 Owned
412 S. Gilbert Street
Danville, Illinois 61832 Owned
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 "whistle blower statute,"
12USC'1831j(a). On April 21, 1999 the Bank,
without admitting or denying liability, settled
the claim for $500,000.
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 44 of the Company's 1999 Annual Report to Stockholders
which is included herein as Exhibit 13 ("Annual Report").
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operation
The information required herein is incorporated by
reference from pages 5 to 18 of the 1999 Annual Report.
Item 7. Financial Statements
The information required herein is incorporated by reference from
pages 20 to 42 of the 1999 Annual Report.
Item 8. Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure
Not applicable
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons;Compliance with Section 6(a) of the Exchange Act.
The information required herein is incorporated by
reference from page 4 of the Company's definitive
Proxy Statement dated December 20, 1999.
Item 10. Executive Compensation
The information required herein is incorporated by
reference from pages 9 and 10 of the Company's definitive Proxy
Statement dated December 20, 1999.
Item 11. Security Ownership of Certain Beneficial
Owners and Management
The information required herein is incorporated by
reference from pages 2 and 3 of the Company's definitive
Proxy Statement dated December 20, 1999.
Item 12. Certain Relationships and Related Transactions
The information required herein is incorporated by
reference from page 11 of the Company's definitive
Proxy Statement dated December 20, 1999.
Item 13. 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 1999 Annual Report:
Independent Auditor's Report.
Consolidated Balance Sheet as of September 30, 1999 and 1998.
Consolidated Statement of Income for the Years Ended
September 30, 1999 and 1998.
Consolidated Statement of Changes in Stockholders'
Equity for the Years Ended September 30, 1999 and 1998.
Consolidated Statement of Cash Flows for the Years
Ended September 30, 1999 and 1998.
Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K.
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, 1999
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 27, 1999
/s/ THOMAS B. MEYER
Thomas B. Meyer
Chairman of the Board and Director December 27, 1999
/s/ WILLIAM T. INGRAM
William T. Ingram Director and Secretary December 27, 1999
/s/ CARL W. BUSBY
Carl W. Busby Director December 27, 1999
/s/ ROBERT L. EWBANK
Robert L. Ewbank Director December 27, 1999
VERMILION BANCORP, INC.
1999 ANNUAL REPORT
TO STOCKHOLDERS
TABLE OF CONTENTS
Page
President's Letter to Stockholders 2
Selected Consolidated Financial and Other Data 3
Management's Discussion and Analysis of Financial Condition
and Results of Operations 5
Independent Auditors' Report 19
Consolidated Balance Sheet 20
Consolidated Statements of Income 21
Consolidated Statements of Stockholders' Equity 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24
Directors and Executive Officers 43
Banking Locations, Stockholder Information, and 44
Market Prices and Dividends
(1)
Dear Stockholders:
Vermilion Bancorp, Inc. continues its operations as an independent
single bank holding company for American Savings Bank of Danville.
American Savings Bank has continued modest growth in deposits and loans.
Deposits grew about five percent and loans grew by about eight percent.
With our first branch opening in November 1998, we have enjoyed better
community recognition and have increased services to our customers.
Vermilion Bancorp's consolidated loss of twenty-one cents per share for
the year ending September 30, 1999 was primarily the result of a one
time cost of settling litigation filed in 1992. The new operating costs
associated with the branch were also significant. There were also
several substantial costs associated with changing data processing
providers completing the preparations for Year 2000.
For the new fiscal year end September 30, 2000, we expect continued
operating profits without the onetime expenses of last year.
In February 1999, Vermilion Bancorp, Inc. repurchased ten percent of the
amount of the original public offering which increased the book value
per share. The market for small financial institutions stocks remains
weak in general. The directors continue looking at alternatives to
increase value to the stockholders.
The directors and I continue to appreciate the customer and stockholder
support. We are optimistic that the future of Vermilion Bancorp, Inc.
remains strong.
Sincerely,
/s/Merrill G. Norton
Merrill G. Norton
President and Chief
Executive Officer
(2)
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,
1999 1998 1997 1996 1995
(Dollars in Thousands)
Selected Financial Condition
Data:
Total assets $43,763 $43,216 $37,816 $35,459 $33,977
Cash and cash equivalents 1,175 1,742 1,138 789 571
Interest-bearing time
deposits 20 20 99 99 99
Securities
Available for sale 1,494 2,785 3,116 2,222 1,486
Held to maturity 1,522 2,312 3,000 4,337 6,816
Loans, net 37,234 34,226 29,411 26,936 23,954
Premises and equipment 1,488 1,356 461 467 495
Federal Home Loan Bank of
Chicago stock, at cost 321 350 283 269 255
Deposits 31,639 30,044 29,098 30,724 31,331
Federal Home Loan
Bank advances 6,400 6,400 2,600 2,000 --
Total equity capital 5,588 6,321 5,955 2,355 2,442
Full service offices 2 1 1 1 1
Year Ended September 30,
1999 1998 1997 1996 1995
(In Thousands)
Selected Operating Data:
Total interest income $3,221 $ 3,070 $ 2,803 $ 2,634 $ 2,375
Total interest expense 1,883 1,818 1,741 1,778 1,588
----- ----- ----- ----- -----
Net interest income 1,338 1,252 1,062 856 787
Provision for
losses on loans 63 75 17 80 13
----- ----- ----- ----- -----
Net interest income after
provision for losses
on loans 1,275 1,177 1,045 776 774
Non-interest income 111 55 42 45 51
Non-interest expense 1,568 843 761 889(1) 710
----- ----- ----- ----- -----
Income (loss) before taxes (181) 389 326 (68) 115
Provision for income taxes (110) 144 74 3 15
----- ----- ----- ----- -----
Net income (loss) (71) 244 252 (71) 100
Net income per share (.21) .66 N/A N/A N/A
Book value per share 17.23 17.04 16.21 N/A N/A
Dividends per share $ 0.00 $ 0.00 0.00 N/A N/A
(1) Includes a special assessment of $206,000 to recapitalize the
Savings Association Insurance Fund ("SAIF").
(3)
At or For the Year Ended September 30,
1999 1998 1997 1996 1995
Other Data:
Profitability:
Return on average assets (.16)% .06% 0.67% (0.20)%(4) 0.29%
Return on average equity (1.20) 3.99 5.07 (2.89)(4) 4.18
Interest rate spread for
period(1) 2.63 2.75 2.20 2.17 2.11
Net interest margin(2) 3.23 3.18 2.92 2.48 2.39
Non-interest expenses to
average assets 3.60(5)2.07 2.03 2.49 2.08
Average interest-earning
assets to average
interest bearing
liabilities 113.08 114.98 115.18 106.05 104.04
Capital Ratios:
Average equity to
average assets 13.67 15.07 13.26 6.90 7.02
Asset Quality:
Non-performing assets
to total assets(3) 1.57 0.90 1.28 0.93 0.64
Net chargeoffs
(recoveries) to
average loans .11 0.24 0.03 0.04 0.03
Allowance for loan
losses to total loans .48 0.45 0.52 0.53 0.31
Allowance for loan
losses to
non-performing loans 26.02 50.99 31.34 43.60 34.26
Capital Ratios of the Bank
Tier 1 risk-based 16.30 22.40 26.50 14.45 14.59
Total risk-based 17.00 23.00 27.30 15.33 15.03
Tier 1 leverage 9.20% 12.40% 13.50% 6.61% 7.11%
(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) Includes litigation settlement expense of $500,000 which
represents 1.15%.
(4)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Vermilion Bancorp, Inc. (the "Company") is the holding
company for American Savings Bank of Danville(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, 1997, 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
1999 and any Current Reports on Form 8-K filed by the Company.
(5)
Changes in Financial Condition
General. Total assets of the Bank increased by $547,000, or 1.3%, to
$43.8 million at September 30, 1999 from $43.2 million at September 30,
1998. The increase in total assets during 1999 was due primarily to a
$3.0 million increase in net loans, an increase of $131,000 in premises
and equipment, and a $83,000 increase in other assets, partially offset
by a $2.08 million reduction in total investment securities and a
$566,000 reduction in cash and cash equivalents.
Cash and cash equivalents. Cash and cash equivalents, which consist of
cash and due from banks and interest-bearing demand deposits at other
institutions, decreased by $566,000, or 32.5%, to $1.2 million at
September 30, 1999 compared to $1.7 million at September 30, 1998. The
decrease in cash and cash equivalents in fiscal 1999 was primarily the
result of funding loan originations. At September 30, 1999, cash and
cash equivalents amounted to 2.7% 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 $37.2 million at September
30, 1999, a $3.0 million, or a 8.8% increase over net loans at September
30, 1998. The increase was due primarily to originations of residential
mortgage loans.
Investment securities. The Company's investment securities amounted to
$3.0 million at September 30, 1999 compared to $5.1 million at September
30, 1998. The decrease in investment securities was the result of a
$790,000 decrease in investment securities held to maturity and a $1.3
million decrease in investments available for sale. The decrease in
investments securities was due to sales and maturities being used to
fund a stock repurchase and loan growth.
Deposits. The Company's total deposits amounted to $31.6 million at
September 30, 1999 compared to $30.0 million at September 30, 1998.
During 1999, the Company's total deposits increased by $1.6 million, or
5.3%. Demand deposits increased $413,000, savings and retirement
accounts increased $216,000 and certificates of deposits increased
$965,000 from 1998 to 1999.
(6)
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
1999 Year Ended September 30, 1999
(Dollar in Thousands)
Yield/ Average Yield/
Rate Balance Interest Rate
Interest-earning assets:
Loans, net(1) 7.63% $35,730 $ 2,867 8.02%
Interest-bearing deposits
with financial institutions 4.95 2,557 135 5.28
Investment Securities(2) 6.34 1,570 106 6.75
Mortgage-backed securities 7.23 1,554 113 7.27
Total interest-earning assets 7.49 41,411 3,221 7.82
Non-interest-earning assets 2,166
Total assets $43,577
Interest-bearing liabilities:
Deposits:
Now 1.98 668 14 2.10
Money market investment 2.72 904 28 3.10
Savings and retirement 3.92 5,387 224 4.16
Certificates 5.20 23,209 1,283 5.53
Total deposits 4.82 30,168 1,549 5.13
FHLB advances 5.14 6,400 334 5.22
Total interest-bearing liabilities 4.88 36,568 1,883 5.15
Non-interest bearing liabilities 1,054
Total liabilities 37,622
Equity capital 5,955
Total liabilities and
equity capital $43,577
Net interest income; interest
rate spread(3) 2.61 $ 1,338 2.63
Net interest margin(4) 3.23
Ratio of interest-earning
assets to average interest-
bearing liabilities 113.24% 113.08%
(7)
At
Sept. 30
1998 Year Ended September 30, 1998
(Dollar in Thousands)
Yield/ Average Yield/
Rate Balance Interest Rate
Interest-earning assets:
Loans, net(1) 7.92% $32,128 $ 2,624 8.17%
Interest-bearing deposits
with financial institutions 4.38 2,030 87 4.29
Investment Securities(2) 5.67 2,115 132 6.24
Mortgage-backed securities 7.15 3,120 227 7.28
Total interest-earning assets 7.48 39,393 3,070 7.79
Non-interest-earning assets 1,251
Total assets $40,644
Interest-bearing liabilities:
Deposits:
Now 0.79 1,229 10 0.81
Money market investment 3.59 856 33 3.86
Savings and retirement 4.33 5,119 238 4.65
Certificates 5.62 22,238 1,282 5.76
Total deposits 5.09 29,442 1,563 5.31
FHLB advances 5.14 4,820 255 5.29
Total interest-bearing
liabilities 5.10 34,262 1,818 5.31
Non-interest bearing liabilities 257
Total liabilities 34,519
Equity capital 6,125
Total liabilities and
equity capital $40,644
Net interest income; interest
rate spread(3) 2.38 $ 1,252 2.48
Net interest margin(4) 3.18
Ratio of interest-earning
assets to average interest-
bearing liabilities 114.33% 114.98%
(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. The average balance of securities
available for sale is computed based on the average of the historical
amoratized cost balances without the effects of the fair value
adjustment.
(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,
1999 vs 1998
Increase
(Decrease) Total
Due To Increase
Rate Volume Decrease
(In Thousands)
Interest-earning assets:
Interest-bearing deposits with
financial institutions $ 23 $ 25 $ 48
Loans, net (47) 290 243
Investment Securities 10 (36) (26)
Mortgage-backed securities (0) (114) (114)
Total change in interest income (6) 157 151
Interest-bearing liabilities:
Deposits:
Now accounts 10 (6) 4
Money market investment 7 2 (5)
Savings and retirement (26) (12) (14)
Certificates (54) 55 1
FHLB advances (4) 83 79
Total change in interest expense (55) 120 65
Net change in net interest income $ 49 $ 37 $ 86
(9)
Year Ended September 30,
1998 vs 1997
Increase
(Decrease) Total
Due To Increase
Rate Volume (Decrease)
(In Thousands)
Interest-earning assets:
Interest-bearing deposits with
financial institutions $ (3) $ (10) $ (13)
Loans, net (20) 320 300
Investment Securities 5 (22) (17)
Mortgage-backed securities 25 (28) (3)
Total change in interest income 7 260 267
Interest-bearing liabilities:
Deposits:
Now accounts 1 1 2
Money market investment 6 (5) 1
Savings and retirement (16) (9) (25)
Certificates -- (33) (33)
FHLB advances (9) 141 132
Total change in interest expense (18) 95 77
Net change in net interest income $ 25 $ 165 $ 190
Results of Operations
Net Income(loss) The company reported a net loss of $71,000 and net
income of $244,000 during the years ended September 30, 1999 and
1998,respectively.
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 2.63% and 2.48% during the years ended September 30, 1999 and 1998,
respectively. The Bank's net interest margin (i.e., net interest income
as a percentage of average interest-earning assets) was 3.23% and 3.18%
during the years ended September 30, 1999 and 1998 respectively.
Net interest income increased by $86,000, or 6.9%, during the year
ended September 30, 1999 to $1.33 million compared to $1.25 million for
the year ended September 30, 1998. The primary reasons for this increase
were a $243,000 increase in interest income from loans, a $47,000
increase in interest income from deposits with financial institutions,
and a $13,000 decrease in deposit interest expense offset by a $139,000
decrease in interest income from investment securities, and an increase
in interest expense from FHLB borrowings of $78,000.
(10)
Interest Income. Total interest income increased by $152,000 or 4.9% in
the year ended September 30, 1999. Interest income on loans amounted to
$2.9 million in fiscal 1999 compared to $2.6 million in fiscal 1998. The
average balance of the Bank's total loans increased by $3.6 million, or
11.2%, in fiscal 1999 compared to fiscal 1998 and the average yield
earned on loans decreased by 15 basis points (with 100 basis points
being equal to 1.0%). Interest income on investment securities decreased
by $139,000 or 38.7% in fiscal 1999 compared to fiscal 1998 due
primarily to a $545,000 decrease in the average balance of investment
securities and a $1.6 million decrease in the average balance of
mortgage backed investment securities. Interest income on interest-
bearing deposits increased by $47,000, or 54.1%, in fiscal 1999 compared
to fiscal 1998 due primarily to a $527,000 increase in the average
balance in interest-bearing deposits. The average rate on interest-
bearing deposits increased by 99 basis points.
Interest Expense. The primary component of interest expense during
all periods presented is interest on deposits. Deposit interest expense
decreased by $13,000, or 0.8%, during the year ended September 30, 1999
compared to the year ended September 30, 1998. The decrease was due
primarily to a decrease in the rate paid on total deposits held by the
institution from 5.31% to 5.14%. Certificates of deposit (including
certificates of deposit of $100,000 or more) constituted 74.9% of the
Bank's total deposits at September 30, 1999 compared to 75.6% at
September 30, 1998. The average balance of the Bank's certificates
increased by $971,000 or 4.4% from fiscal year 1999 to 1998.
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 $63,000 in
fiscal 1999, compared to $75,000 in fiscal 1998. At September 30, 1999,
the Bank's allowance for loan losses amounted to 26.0% of total non-
performing loans and to 0.48% of total loans receivable.
Non-interest Income. Non-interest income increased $57,000 or
104.4% for the year ended September 30, 1999 compared to the year ended
September 30, 1998. The increase is primarily due to a $11,000 gain on
the sale of investment securities by the Company to fund the February
1999 stock repurchase, a $14,000 or 129.2% increase in loan fees, and a
$26,000 or 275.9% increase in service charges collected on deposit
accounts.
Non-interest Expenses. Total non-interest expenses were $1.6
million in the year ended September 30, 1999 which amounted to a
$725,000 or 86.1% increase compared to the year ended September 30,
1998. The primary reason for the increase was due to the increase
(11)
litigation settlement expense of $500,000 that relates to a one time
settlement with a prior employee, a $110,000 or 30.3% increase in salary
and employee benefits expense that reflects the opening of the new
branch, a $58,000 or 65.4% increase in net occupancy expense that
reflects the opening of the new branch, a $31,000 or 55.1% increase in
data processing expense that reflects Y2K adjustments, a $10,000 or
71.7% increase in office supplies, an $8,000 or 53.6% increase in
advertising and promotion expense and a $9,000 or 12.5% increase in
director and committee fees which reflects the cost of the Company's
Recognition and Retention Plan.
Income Taxes. The Bank realized a $110,000 income tax benefit for
the year ended September 30, 1999, as compared to an expense of $144,000
for fiscal 1998. The benefit in fiscal 1999 was due to a net loss.
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, 1999, 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 $3.5 million or 8.01% 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, 1999, $28.7 million or 87.2% of the Bank's total loan
portfolio due one year or more, consisted of one-to-four-family
residential mortgage loans. Although the Bank anticipates that a
substantial portion of its loan portfolio will continue to consist of
residential mortgage loans, a majority of such loans have 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
(12)
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,
1999, $5.3 million or 14.2% of the Bank's total loan portfolio consisted
of one-to-four family fixed-rate balloon loans.
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, 1999, the
Bank had $1.2 million of variable-rate mortgage-backed securities and
had $589,000 of investments in various and federal agency government
securities with terms to maturity of less than five years. As of
September 30, 1999, $1.5 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, 1999, $23.7 million, or
74.9% of the Bank's total deposits were comprised of certificates of
deposit (including certificates of deposit of $100,000 or more) and
$15.7 million, or 49.7% 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 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.
(13)
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at September 30, 1999, 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, 1999, 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:
Investment
Securities(1)(2) $ 1,007 $ 534 $ 115 $ -- $ 1,365 $ 3,021
Loans, net(3) 5,494 5,495 16,485 3,253 6,507 37,234
Interest-bearing
deposits(4) 1,082 10 10 -- -- 1,102
-------------------------------------------------------
Total interest-earning
assets 7,583 6,039 16,610 3,253 7,872 41,357
-------------------------------------------------------
Interest-bearing
liabilities:
Deposits(5):
NOW accounts 187 186 373 -- -- 746
Money market
investment acct. 252 253 505 -- -- 1,010
Savings and
retirement acct. 276 276 1,102 1,102 2,756 5,512
Certificates 7,860 7,860 7,598 374 -- 23,692
-------------------------------------------------------
Total interest-
bearing deposits 8,575 8,575 9,578 1,476 2,756 30,960
Advances from FHLB -- -- -- 2,500 3,900 6,400
-------------------------------------------------------
Total interest-
bearing liabilities 8,575 8,575 9,578 3,976 6,656 37,360
Excess (deficiency)
of interest-earning
assets over int.-
bearing liabilities (992) (2,536) 7,032 (723) 1,216 3,997
Cumulative excess
(deficiency)of
interest-earning
assets over interest-
bearing liabilities (992) (3,528) 3,504 2,781 3,997 3,997
Cumulative excess
(deficiency) of
interest-earning
assets over interest-
bearing
liabilities as a
percent of total
assets (2.27)% (8.06)% 8.01% 6.35% 9.13% 9.13%
(14)
(1) Reflects repricing, contractual maturity or anticipated call date.
(2) Includes securities available for sale and held to maturity and FHLB of
Chicago stock.
(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.
(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%.
(15)
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 that provide liquidity to meet lending
requirements. The Bank used cash from cash and cash equilalents, from deposit
growth, and from maturing securities in its investment portfolio to fund loan
originations. As of September 30, 1999, the Bank had the ability to borrow up
to $22.0 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,
1999 the total approved loan commitments outstanding amounted to $343,000.
At the same date, the Bank had commitments of $22,000 under unused letters of
credit. Certificates scheduled to mature in one year or less at September
30, 1999 totaled $15.7 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 relative 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 atleast 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, 1999, the Bank was in compliance with applicable regulatory
capital requirements.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement requires companies to record derivatives on the balance sheet at
their fair value. Statement No. 133 also acknowledges that the method of
recording a gain or loss
(16)
depends on the use of the derivative. The New Statement applies to all entities.
If hedge accounting is elected by the entity, the method of assessing the
effectiveness of the hedging derivative and the measurement approach of
determining the hedge's ineffectiveness must be established at the inception of
the hedge. Statement No. 133 amends Statement No. 52 and supercedes Statements
No. 80, 105, and 119. Statement No. 107 is amended to include the disclosure
provisions about the concentrations of credit risk from Statement No. 105.
Several Emerging issues Task Force consensuses's are also changed or modified
by the provisions of Statement No. 133.
Statement No. 137 deferred the effective date of Statement No. 133 to all
fiscal years beginning after June 15, 2000. The Statement may not be applied
retroactively to financial statements of prior periods. The Statement's
adoption will have no material impact on the Corporation's financial
condition or result of operations.
Also in 1998, the FASB issued Statement No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." This statement establishes accounting standards
for certain activities of mortgage banking enterprises and for other enterprises
with similar mortgage operations. This Statement amends SFAS No. 65 which as
previously amended by SFAS Nos. 115 and 125, required a mortgage banking
enterprise to classify a mortgage-backed security as a trading security
following the securitization of the mortgage loan held for sale. This
Statement further amends SFAS No. 65 to require that after the securitization
of mortgage loans held for sale, an entity engaged in mortgage banking
activities must classify the resulting mortgage-backed security or
other retained interests based on the entity's ability and intent to sell or
hold those investments. The determination of the appropriate classification for
securities retained after the securitization of mortgage loans by a mortgage
banking enterprise now conforms to SFAS No. 115. The only new requirement is
that if an entity has a sales commitment in place, the security must be
classified into trading. This Statement is effective for the first fiscal
quarter beginning after December 15, 1998. The Statement's adoption had no
impact on the bank's financial condition and results of operations.
Year 2000 Compliance
The Year 2000 compliance issue exists because many computer systems and
applications currently use two digit fields to designate a year. As the
century date change occurs, date sensitive systems may either fail or not
operate properly unless the underlying programs are modified or replaced.
The Bank's lending and deposit activities, like those of most financial
institutions, depend significantly upon computer systems to process and record
transactions. The Company is aware of the potential Year 2000 problems that
may affect the operating systems that control our computers as well as those of
our third-party data service providers that maintain many of our records. In
1997, the Bank began the process of identifying Year 2000 related problems that
may affect the Bank's computer systems. A task force of Bank officers was
established to address the issues related to these problems. Outside consultants
were utilized when required to complete this project.
The task force analyzed the Bank's operations and both identified those
functions that would be affected by Year 2000 issues and determined which of
these functions were mission critical (i.e. vital to the day-to-day operations
of the Bank). A time table was established for completion of the various
sections of the project.
The Bank is working with the companies that supply or service the Bank's
computer systems that rely on computers to identify and remedy any Year 2000
related systems. The Board of Directors is monitoring the Bank's progress in
addressing Year 2000 issues.
The Bank converted to a new data processor during May 1999 and completed
its year 2000 testing of the system in July 1999 with no apparent year 2000
related problems being found.
Inventory and testing of the Bank's computer equipment is complete. No new
equipment purchases are anticipated because of the Year 2000 issue. The direct
(17)
expense to date (other than officer's salaries involved in the project) has
been less than $40,000.
Although the Company believes it is taking the necessary steps to address
the Year 2000 compliance issue, no assurances can be given that some problems
will not occur or that we will not incur significant additional expenses in
future periods. In the event that the Bank incurs substantial expenses to make
the Bank's current systems, programs and equipment Year 2000 compliant, the
Company's net income, and financial condition could be adversely affected.
Because the Bank's loan portfolio to individual borrowers is diversified
and its market area does not depend significantly upon one employer or industry,
the Bank does not expect any Year 2000 related difficulties to significantly
affect the Company's net earnings or cash flow.
The Bank has developed a contingency plan to deal with Year 2000 related
issues. This program provides for dealing with situations that might occur
that are both related to the Bank's operations (e.g. computer systems or
equipment, liquidity) and those beyond the Bank's control (e,g. power failure,
phone/communication line failure). The plan includes methods to deal with
these situations and continue to service the Bank's customers despite Year 2000
problems arising.
Impact of Inflation and Changing Prices
The Financial Statements of the Company 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 Company's revenues
and income.
(18)
Independent Auditor's Report
To the Stockholders and
Board of Directors
Vermilion Bancorp, Inc. and Subsidiary
Danville, Illinois
We have audited the accompanying consolidated balance sheet of Vermilion
Bancorp, Inc. and subsidiary as of September 30, 1999 and 1998, and the related
consolidated statements of income, 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
all material respects, the consolidated financial position of Vermilion
Bancorp, Inc. and subsidiary as of September 30, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
Decatur, Illinois
October 8, 1999
(19)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Consolidated Balance Sheet
September 30 1999 1998
Assets
Cash and due from banks $ 93,054 $ 53,430
Interest-bearing demand deposits 1,082,406 1,688,212
--------- ---------
Cash and cash equivalents 1,175,460 1,741,642
Interest-bearing deposits 20,000 20,000
Investment securities
Available for sale 1,493,750 2,784,515
Held to maturity (fair value of
$1,537,648 and $2,358,553) 1,522,407 2,312,447
--------- ---------
Total investment securities 3,016,157 5,096,962
Loans, net of allowance for loan
losses of $179,420 and $154,199 37,233,535 34,225,943
Premises and equipment 1,487,666 1,356,263
Federal Home Loan Bank stock 321,400 350,000
Other assets 509,063 425,628
---------- ----------
Total assets $43,763,281 $43,216,438
========== ==========
Liabilities
Deposits
Noninterest bearing $ 678,971 $ 669,725
Interest bearing 30,960,093 29,374,750
---------- ----------
Total deposits 31,639,064 30,044,475
Federal Home Loan
Bank borrowings 6,400,000 6,400,000
Other liabilities 135,677 450,681
---------- ----------
Total liabilities 38,174,741 36,895,156
---------- ----------
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 and
outstanding - 396,750 shares 3,968 3,968
Additional paid-in-capital 3,653,868 3,627,258
Retained earnings 2,795,510 2,866,968
Accumulated other comprehensive
income (loss) (2,947) 24,826
Management retention plan payable 56,587
--------- ---------
6,450,399 6,579,607
Less:
Unearned incentive
compensation - 10,145 shares
for 1999 (129,410)
Unearned employee stock
ownership plan shares - 22,658
and 25,832 shares (226,585) (258,325)
Treasury stock, at cost -
39,675 shares for 1999 (505,864)
------- -------
Total stockholders' equity 5,588,540 6,321,282
---------- ----------
Total liabilities and
stockholders' equity $43,763,281 $43,216,438
========== ==========
See notes to consolidated financial statements.
(20)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Consolidated Statement of Income
Year Ended September 30 1999 1998
Interest Income
Loans receivable $ 2,867,236 $ 2,623,857
Investment securities
Taxable 202,300 341,211
Tax exempt 17,373 17,373
Deposits with financial institutions 134,508 87,282
-------------------------
Total interest income 3,221,417 3,069,723
-------------------------
Interest Expense
Deposits 1,549,427 1,562,329
Federal Home Loan Bank borrowings 333,630 255,390
-------------------------
Total interest expense 1,883,057 1,817,719
-------------------------
Net Interest Income 1,338,360 1,252,004
Provision for loan losses 63,004 75,000
-------------------------
Net Interest Income After
Provision for Loan Losses 1,275,356 1,177,004
-------------------------
Other Income
Loan fees 25,279 11,029
Net realized gains on sales of
available-for-sale securities 10,786
Other income 75,366 43,476
-------------------------
Total other income 111,431 54,505
-------------------------
Other Expenses
Salaries and employee benefits 472,330 362,604
Net occupancy and equipment expenses 147,915 89,424
Data processing fees 86,430 55,727
Deposit insurance expense 17,993 18,059
Printing and office supplies 24,286 14,146
Legal and professional fees 104,023 97,877
Advertising and promotion 22,745 14,812
Director and committee fees 77,031 68,483
Litigation settlement 500,000
Other expenses 115,489 121,701
-------------------------
Total other expenses 1,568,242 842,833
-------------------------
Income (Loss) Before Income Tax (181,455) 388,676
Income tax expense (benefit) (109,997) 144,224
-------------------------
Net Income (Loss) $ (71,458) $ 244,452
=========================
Earnings Per Share
Basic
Net income (loss) $ (0.21) $ 0.66
Average number of shares 345,129 369,342
Diluted
Net income (loss) $ (0.21) $ 0.66
Average number of shares 345,129 370,575
See notes to consolidated financial statements.
(21)
VERMILION BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Accumulated
Other
Common Paid-in Comprehensive Retained Comprehensive
Stock Capital Income (Loss) Earnings Income (Loss)
- --------------------------------------------------------------------------------
Balance, Oct. 1, 1997 $3,968 $3,614,922 $2,622,516 $ 6,437
Comprehensive income
Net income $ 244,452 244,452
Other comprehensive
income (loss),
net of tax
Unrealized gains on
securities 18,389 18,389
---------
Comprehensive income $ 262,841
=========
Management retention plan
compensation
Employee stock ownership
plan shares allocated 12,336
--------------------------------------------------------
Balance, Sept. 30, 1998 3,968 3,627,258 2,866,968 24,826
Comprehensive
income (loss)
Net loss $ (71,458) (71,458)
Other comprehensive
income (loss),
net of tax
Unrealized losses on
securities (27,773) (27,773)
--------
Comprehensive income (loss) $ (99,231)
========
Purchase of stock for
management retention plan
Purchase of treasury stock
Employee stock ownership
plan shares allocated 3,016
Management retention plan
shares earned 23,594
--------------------------------------------------------
Balance, Sept. 30, 1999 $3,968 $3,653,868 $2,795,510 $ (2,947)
Unearned
Management Employee
Retention Unearned Stock
Plan Incentive Ownership Treasury
Payable Compensation Plan Shares Stock Total
- --------------------------------------------------------------------------------
Balance, Oct. 1, 1997 $(292,711) $5,955,132
Comprehensive income
Net income 244,452
Other comprehensive
income (loss),
net of tax
Unrealized gains on
securities 18,389
Comprehensive income
Management retention plan
compensation $ 56,587 56,587
Employee stock ownership
plan shares allocated 34,386 46,722
-----------------------------------------------------
Balance, Sept. 30, 1998 56,587 (258,325) 6,321,282
Comprehensive income (loss)
Net loss (71,458)
Other comprehensive
income (loss),
net of tax
Unrealized losses on
securities (27,773)
Comprehensive income (loss)
Purchase of stock for
management retention plan (56,587)$ (145,758) (202,345)
Purchase of treasury stock $(505,864) (505,864)
Employee stock ownership
plan shares allocated 31,740 34,756
Management retention plan
shares earned 16,348 39,942
----------------------------------------------------
Balance, Sept. 30, 1999 $ 0 $(129,410) $(226,585)$(505,864)$5,588,540
====================================================
See notes to consolidated financial statements.
(22)
VERMILION BANCORP, INC
AND SUBSIDIARY
Consolidated Statement of Cash Flows
Year Ended September 30 1999 1998
- --------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ (71,458) $ 244,452
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Provision for loan losses 63,004 75,000
Investment securities gains (10,786)
Deferred income tax (8,211) (26,623)
Investment securities amortization, net (3,307) 5,551
Depreciation 74,705 36,514
Compensation expense related to ESOP and MRP 74,698 103,309
Change in
Other assets (58,752) (103,019)
Other liabilities (315,004) 287,422
---------------------------
Net cash provided (used) by operating activities (255,111) 622,606
---------------------------
Investing Activities
Net change in interest bearing deposits 79,000
Purchases of securities available for sale (999,096)
Proceeds from maturities of securities
available for sale 1,750,442 333,647
Proceeds from sales of securities
available for sale 508,203
Proceeds from maturities of securities
held to maturity 791,104 710,176
Net change in loans (3,070,596) (4,889,515)
Purchases of premises and equipment (206,108) (932,160)
Purchase of Federal Home Loan Bank stock (66,800)
Proceeds from sale of Federal Home Loan Bank stock 28,600
---------------------------
Net cash used by investing activities (1,197,451) (4,765,652)
--------------------------
Financing Activities
Net change in deposits 1,594,589 946,791
Proceeds of Federal Home Loan Bank borrowings 3,800,000
Purchase of common stock for
management retirement plan (202,345)
Purchase of treasury stock (505,864)
--------------------------
Net cash provided by financing activities 886,380 4,746,791
--------------------------
Net Change in Cash and Cash Equivalents (566,182) 603,745
Cash and Cash Equivalents, Beginning of Year 1,741,642 1,137,897
--------------------------
Cash and Cash Equivalents, End of Year $1,175,460 $ 1,741,642
==========================
Additional Cash Flows Information
Interest paid $1,891,553 $ 1,800,515
Income tax paid 199,191 9,601
See notes to consolidated financial statements.
(23)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Vermilion Bancorp, Inc. (Company) and
its wholly owned subsidiary, American Savings Bank of Danville (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 bank 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 Company 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 as accumulated other
comprehensive income 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.
(24)
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. When interest accrual is
discontinued, all unpaid accrued interest is reversed when considered
uncollectible. 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 estimates that are particularly
susceptible to significant changes in the economic environment and market
conditions. Management believes that as of September 30, 1999, 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.
Treasury Stock is stated at cost. Cost is determined by the first-in,
first-out method.
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.
(25)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Earnings Per Share - Basic earnings per share have been computed based upon the
weighted average common shares outstanding during each year. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the Company.
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.
Stock Option Plan - Stock options are granted for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for and will continue to account for stock
option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued
to Employees, and, accordingly, recognizes no compensation expense for the stock
option grants.
Note 2 - Investment Securities
1999
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
September 30 Cost Gains Losses Value
- -----------------------------------------------------------------------------
Available for sale
U.S. Treasury $ 499,053 $ 2,297 $ 501,350
Federal agencies 999,096 $ (6,696) 992,400
--------------------------------------------
Total available for sale 1,498,149 2,297 (6,696) 1,493,750
Held to maturity
State and municipal 364,104 425 (441) 364,088
Mortgage-backed securities 1,158,303 16,499 (1,242) 1,173,560
--------------------------------------------
Total held to maturity 1,522,407 16,924 (1,683) 1,537,648
--------------------------------------------
Total investment securities $3,020,556 $ 19,221 $ (8,379) $3,031,398
============================================
(26)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
1998
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
September 30 Cost Gains Losses Value
- -----------------------------------------------------------------------------
Available for sale
U.S. Treasury $1,744,669 $ 39,166 $1,783,835
Federal agencies 1,000,000 680 1,000,680
---------------------------------------------
Total available for sale 2,744,669 39,846 2,784,515
---------------------------------------------
Held to maturity
State and municipal 363,128 11,134 374,262
Mortgage-backed securities 1,949,319 36,180 $ (1,208) 1,984,291
---------------------------------------------
Total held to maturity 2,312,447 47,314 (1,208) 2,358,553
---------------------------------------------
Total investment securities $5,057,116 $ 87,160 $ (1,208) $5,143,068
=============================================
The amortized cost and fair value of securities available for sale and held to
maturity at September 30, 1999, 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 $ 499,053 $ 501,350
Five to ten years 999,096 992,400 $ 364,104 $ 364,088
---------------------------------------------
1,498,149 1,493,750 364,104 364,088
Mortgage-backed securities 1,158,303 1,173,560
---------------------------------------------
Totals $1,498,149 $1,493,750 $1,522,407 $1,537,648
=============================================
There were no pledged securities at September 30, 1999 or 1998.
Proceeds from the sale of securities available for sale during 1999 were
$508,203. A gross gain of $10,786 was realized on the sale. The tax effect of
the gain was approximately $3,670. There were no sales of securities available
for sale during 1998. There were no sales of securities held to maturity.
There were no securities transferred between classifications during 1999 or
1998.
(27)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 3 - Loans and Allowance
September 30 1999 1998
- --------------------------------------------------------------------------
Real estate mortgage loans
One-to-four family $31,932,833 $28,182,333
Multi-family 711,606 882,000
Commercial real estate loans 1,098,240 1,581,000
Real estate sold on contract 227,072 227,000
Real estate construction loans 225,403 492,000
Commercial business loans 1,004,646 997,000
Consumer loans 2,079,765 1,921,744
Other loans 18,505
-----------------------------------
37,298,070 34,283,077
Deferred loan costs 114,885 97,065
Allowance for loan losses (179,420) (154,199)
-----------------------------------
Total loans $37,233,535 $34,225,943
===================================
Year Ended September 30 1999 1998
- -------------------------------------------------------------------------
Allowance for loan losses
Balances, October 1 $ 154,199 $ 151,868
Provision for losses 63,004 75,000
Recoveries on loans 12,142 5,333
Loans charged off (49,925) (78,002)
-----------------------------------
Balances, September 30 $ 179,420 $ 154,199
===================================
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, 1999 or 1998 or
during the years then ended.
(28)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 4 - Premises and Equipment
September 30 1999 1998
- -----------------------------------------------------------------------
Land $ 662,607 $ 209,431
Office building 1,017,143 689,604
Furniture and fixtures 548,498 338,900
Construction in progress 784,205
---------------------------------
Total cost 2,228,248 2,022,140
Accumulated depreciation (740,582) (665,877)
---------------------------------
Net $1,487,666 $1,356,263
=================================
Note 5 - Other Assets and Other Liabilities
September 30 1999 1998
- ----------------------------------------------------------------------
Other assets
Interest receivable $ 216,358 $ 214,340
Cash value of life
insurance annuity 47,243 49,194
Deferred income tax asset 74,072 48,989
Federal income tax receivable 145,030
Other real estate 86,553
Prepaid expenses and other 26,360 26,552
---------------------------------
Total $ 509,063 $ 425,628
=================================
Other liabilities
Interest payable on deposits $ 14,091 $ 22,587
Interest payable on borrowings 27,422 27,422
Deferred compensation payable 76,408 75,866
Federal income tax payable 152,955
Accounts payable 16,768 142,082
Other 988 29,769
---------------------------------
Total $ 135,677 $ 450,681
=================================
(29)
VERMILION BANCORP, INC
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 6 - Deposits
September 30 1999 1998
- -----------------------------------------------------------------
Demand deposits $ 2,435,255 $ 2,021,812
Savings and retirement accounts 5,511,837 5,295,784
Certificates of deposit of
$100,000 or more 4,214,711 3,334,764
Other certificates of deposit 19,477,261 19,392,115
---------------------------------
Total deposits $31,639,064 $30,044,475
Certificates maturing in years ending September 30:
2000 $15,719,857
2001 6,912,025
2002 685,752
2003 285,340
2004 88,998
------------
$23,691,972
============
Note 7 - Long-Term Debt
September 30 1999 1998
- -------------------------------------------------------------------
Federal Home Loan Bank
advances, rates ranging
from 5.03% to 6.02%,
due at various dates
through May 29, 2006 $6,400,000 $6,400,000
==================================
The terms of security agreements with the FHLB require the Company 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. Advances
are subject to restriction or penalties in the event of prepayment.
Maturities in year ending September 30,
2003 $2,500,000
2004
Thereafter 3,900,000
-----------
$6,400,000
===========
(30)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 8 - Loan Servicing
Loans serviced for others are not included in the accompanying consolidated
balance sheet. The unpaid principal balances of loans serviced for others
totaled $11,845 and $181,000 at September 30, 1999 and 1998.
Note 9 - Income Tax
Year Ended September 30 1999 1998
- ---------------------------------------------------------------------------
Income tax expense (benefit)
Current federal $ (82,906) $ 165,458
Current state (18,880) 5,389
Deferred federal (8,211) (26,623)
-----------------------------
Total income tax expense (benefit) $(109,997) $ 144,224
=============================
Reconciliation of federal statutory to
actual tax expense (benefit)
Federal statutory income tax at 34% $ (61,695) $ 132,150
ESOP 3,587 2,938
Effect of state income taxes (12,460) 3,557
Change in tax rate applicable
to deferred taxes (5,177)
Other (39,429) 10,756
----------------------------
Actual tax expense (benefit) $(109,997) $ 144,224
============================
A cumulative net deferred tax asset is included in other assets. The
components are as follows:
September 30 1999 1998
- -----------------------------------------------------------------------
Assets
Differences in accounting
for loan losses $ 66,073 $ 54,367
Deferred compensation 58,399 51,259
Unrealized loss or securities
available for sale 1,452
----------------------------
Total assets 125,924 105,626
----------------------------
Liabilities
Differences in depreciation methods 7,346 2,260
Unrealized gain on securities
available for sale 15,420
Deferred loan costs 44,506 37,564
Other 1,393
----------------------------
Total liabilities 51,852 56,637
----------------------------
$ 74,072 $ 48,989
============================
(31)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
There was no state income tax expense for 1998 or 1997.
Retained earnings at September 30, 1999 and 1998, 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,
1999 and 1998.
Note 10 - Other Comprehensive Income
1999
--------------------------------------------
Tax
Before-Tax Expense Net-of-Tax
Year Ended September 30 Amount (Benefit) Amount
- --------------------------------------------------------------------------------
Unrealized gains (losses)
on securities:
Unrealized holding gains
(losses) arising during the year $ (33,459) $ (12,805) $ (20,654)
Less: reclassification adjustment
for gains (losses)
realized in net income 10,786 3,667 7,119
-------------------------------------------
Net unrealized losses (44,245) (16,472) (27,773)
-------------------------------------------
Other comprehensive loss $ (44,245) $ (16,472) $ (27,773)
===========================================
1998
--------------------------------------------
Tax
Before-Tax Expense Net-of-Tax
Year Ended September 30 Amount (Benefit) Amount
- --------------------------------------------------------------------------------
Unrealized gains (losses)
on securities:
Unrealized holding gains
(losses) arising during the year $ 30,126 $ 11,737 $ 18,389
Less: reclassification adjustment
for gains (losses)
realized in net income
--------------------------------------------
Net unrealized gains 30,126 11,737 18,389
--------------------------------------------
Other comprehensive income $ 30,126 $ 11,737 $ 18,389
(32)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 11 - 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:
1999 1998
- -------------------------------------------------------------------------------
Mortgage loan commitments at fixed rates $ 326,653 $ 371,000
Construction, home improvement and other loan
commitments at fixed rates 39,861 29,000
Standby letters of credit 22,000 22,000
At September 30, 1999, mortgage loan commitments have terms up to 30 days and
rates ranging from 7.0% to 10.0% while construction and home improvement loan
commitments have terms up to six months and rates ranging from 9.5% to 14.0%.
At September 30, 1998, mortgage loan commitments have terms up to 30 days and
rates ranging from 6.75% to 7.75%. Construction and home improvement loan
commitments have terms up to 6 months and rates ranging from 10.5% to 16%.
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.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.
(33)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
On December 30, 1992, a former employee filed a lawsuit against the Bank
which involved various accusations. A summary judgement was issued by the
court in favor of the Bank on each count. The former employee appealed
several of the judgements and the Appellate Court reversed the entry of
summary judgement. In May 1999, the Bank settled with the former employee
for $500,000. As a result of the settlement, the Bank was released from
all other obligations related to the lawsuit.
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.
Note 12 - Year 2000
Like all entities, the Company and subsidiary are exposed to risks associated
with the Year 2000 Issue, which affects computer software and hardware;
transactions with customers, vendors, and other entities; and equipment
dependent upon microchips. The Company has begun, but not yet completed,
the process of identifying and remediating potential Year 2000 problems.
It is not possible for any entity to guarantee the results of its own
remediation efforts or to accurately predict the impact of the Year 2000
Issue on third parties with which the Company and subsidiary does business.
If remediation efforts of the Company and subsidiary or third parties with
which Company and subsidiary does business are not successful, the Year
2000 Issue could have negative effects on the Company's financial condition
and results of operations in the near term.
Note 13 - 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.
(34)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Bank is permitted to pay dividends to the Company in an amount equal
to its net profits in any fiscal year; however, in the event that
capital is less than 6% of total assets, the Bank can pay up to 50%
of its net profits for that year without prior approval of the State of
Illinois law Office of Banks and Real Estate. 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.
Note 14 - Regulatory Capital
The Company and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies and are assigned to a capital
category. The assigned capital category is largely determined by three
ratios that are calculated according to the regulations: total risk
adjusted capital, Tier 1 capital, and Tier 1 leverage ratios. The ratios
are intended to measure capital relative to assets and credit risk
associated with those assets and off-balance sheet exposures of the
entity. The capital category assigned to an entity can also be affected
by qualitative judgments made by regulatory agencies about the risk
inherent to the entity's activities that are not part of the calculated
ratios.
There are five capital categories defined in the regulations, ranging from
well capitalized to critically undercapitalized. Classification of a bank
in any of the undercapitalized categories can result in actions by
regulators that could have a material effect on a bank's operations.
At September 30, 1999 and 1998, the Company and its Bank are categorized
as well capitalized and met all subject capital adequacy requirements.
There are no conditions or events since September 30, 1999 that management
believes have changed the Company's and Bank's classification.
(35)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Bank's actual and required capital amounts (in thousands) and ratios
are as follows:
1999
----------------------------------------------
Required for To Be Well
Actual Adequate Capital 1 Capitalized 1
----------------------------------------------
September 30 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------
Total risk-based capital 1
(to risk-weighted assets) $4,177,000 17.0% $1,967,000 8.0% $2,459,000 10.0%
Tier 1 capital 1 (to
risk-weightedassets) 3,998,000 16.3% 984,000 4.0% 1,475,000 6.0%
Tier 1 capital 1 (to
adjusted total assets) 3,998,000 9.2% 1,745,000 4.0% 2,181,000 5.0%
1998
----------------------------------------------
Required for To Be Well
Actual Adequate Capital 1 Capitalized 1
----------------------------------------------
September 30 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------
Total risk-based capital 1
(to risk-weighted assets) $5,379,000 23.0% $1,870,000 8.0% $2,340,000 10.0%
Tier 1 capital 1 (to
risk-weighted assets) 5,225,000 22.4% 936,000 4.0% 1,404,000 6.0%
Tier 1 capital 1 (to
adjusted total assets) 5,225,000 12.4% 1,687,000 4.0% 2,108,000 5.0%
1 As defined by regulatory agencies
Note 15 - Benefit Plans
The Bank 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 $13,678 and $4,000 for 1999 and 1998.
(36)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
During 1997, 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 earnings 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.
Stock totaling 3,174 and 3,439 shares for 1999 and 1998 with an average
fair value of $10.95 and $13.59 per share, respectively, were committed
to be released, resulting in ESOP compensation expense of $34,756 and
$46,722. Shares held by the ESOP at September 30 are as follows:
1999 1998
- ---------------------------------------------------------------------------
Allocated shares 9,082 5,908
Unallocated shares 22,658 25,832
-------------------------
Total ESOP shares 31,740 31,740
=========================
Fair value of unallocated
shares at September 30 $226,585 $309,984
=========================
During May 1998, the Company adopted a management retention plan (MRP)
as a method of providing directors, employees and officers of the Bank
with a proprietary interest in the Company and to encourage such
persons to remain with the Bank.
The MRP covers key employees and directors and is authorized to acquire
and grant 15,870 shares of the Company's common stock or 4% of the
shares issued in the Company's initial public offering. The funds used
to acquire these shares will be contributed by the Bank. Participants
in the incentive plan vest over three years, commencing on the date of
grant. As of September 30, 1999, 7,110 shares authorized under the plan
had been granted with fair market value date of grant at $16.875 per
share. During 1999, the Company purchased 15,870 shares of the Company's
stock at a price of $12.75 per share. As of September 30, 1999, 5,725
shares have been earned. No shares were distributed as of September 30,
1999. None of these shares were forfeited during 1999 or 1998. For the
year ended September 30, 1999 and 1998, $39,942 and $56,587, respectively,
were recorded as compensation expense under the plan.
(37)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 16 - Related Party Transactions
The Bank has entered into transactions with certain directors, executive
officers, significant stockholders and their affiliates or associates
(related parties). Such transactions were made in the ordinary course
of business on substantially the same terms and conditions, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present
other unfavorable features.
The aggregate amount of loans, as defined, to such related parties
were as follows:
Balances, October 1, 1998 $ 100,886
Payments, etc., including renewals (10,020)
--------------
Balances, September 30, 1999 $ 90,866
==============
Deposits from related parties held by the Banks at September 30, 1999 and
1998 totaled $890,104 and $720,846.
Note 17 - Stock Option Plan
Under the Company's stock option plan, which is accounted for in accordance
with APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations, the Company grants selected executives and other key
employees stock option awards which vest and become fully exercisable at
the end of five years of continued employment. During May 1998, the
Company authorized the grant of options for up to 39,675 shares of the
Company's common stock or 10% of the shares issued in the Company's initial
public offering, that expire ten years from the date of grant. During 1998,
the Company granted 29,420 options at an exercise price of $16.88 per share
which vest over three years. The exercise price of each option was equal
to the market price of the Company's stock on the date of grant; therefore,
no compensation expense was recognized.
(38)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Although the Company has elected to follow APB No. 25, SFAS No. 123 requires
pro forma disclosures of net income and earnings per share as if the Company
had accounted for its employee stock options under that Statement. The
fair value of each option grant was estimated on the grant date using an
option-pricing model with the following assumptions:
1998
--------------
Risk-free interest rate 5.25%
Dividend yield 0.00%
Volatility factor of expected market price of common stock 28.00%
Weighted-average expected life of the options 9.6 years
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the
options' vesting period. The pro forma effect on net income and earnings
per share of this statement are as follows:
1999 1998
-----------------------
Net income (loss) As reported $ (71,458) $ 244,452
Pro forma (81,554) 240,245
Basic earnings per share As reported $ (0.21) $ 0.66
Pro forma (0.24) 0.65
Diluted earnings per share As reported $ (0.21) $ 0.66
Pro forma (0.24) 0.65
The following is a summary of the status of the Company's stock option plan
and changes in that plan as of and for the years ended September 30, 1999
and 1998.
1999 1998
- ---------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Shares Price Shares Price
- ---------------------------------------------------------------------------
Outstanding, beginning of year 29,420 $16.88
Granted 29,420 $16.88
-------- ---------
Outstanding, end of year 29,420 $16.88 29,420 $16.88
======== =========
Options exercisable at year end 23,639 13,892
Weighted-average fair value of options
granted during the year $ 4.66
(39)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
As of September 30, 1999, all 29,420 options outstanding have an exercise
price of $16.88 and a weighted-average remaining contractual life of 8.6
years. No options were exercised, forfeited or expired during 1999.
Note 18 - Basic Earnings Per Share
Earnings per share (EPS) were computed as follows:
Year Ended September 30, 1998
------------------------------------
Weighted Per-Share
Income Average Amount
Shares
------------------------------------
Basic Earnings Per Share $244,452 369,342 $0.66
Income available to common stockholders
Effect of Dilutive Securities
MRP 1,233
------------------------------------
Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions $244,452 370,575 $0.66
====================================
Options to purchase 29,420 shares of common stock at $16.88 were
outstanding at September 30, 1999 and 1998, but were not included in the
computation of the diluted EPS because the options' exercise price was
greater than the average market price of the common shares. MRP shares were
excluded in the year ended September 30, 1999 earnings per share calculation
as they were anti-dilutive due to the loss.
Note 19 - 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.
(40)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
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.
(41)
VERMILION BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
The estimated fair values of the Company's financial instruments
are as follows:
1999 1998
---------------------------------------------
September 30 Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 1,175,460 $ 1,175,460 $ 1,741,642 $ 1,741,642
Interest-bearing
time deposits 20,000 20,000 20,000 20,000
Investment securities
available for sale 1,493,750 1,493,750 2,748,515 2,748,515
Investment securities
held to maturity 1,522,407 1,537,648 2,312,447 2,358,553
Loans, net 37,233,535 36,814,000 34,225,943 35,224,447
Interest receivable 216,358 216,358 214,340 214,340
Federal Home Loan
Bank stock 321,400 321,400 350,000 350,000
Cash surrender value
of life insurance 47,243 47,243 49,194 49,194
Liabilities
Deposits 31,639,064 30,663,000 30,044,475 30,054,000
FHLB borrowings 6,400,000 5,713,000 6,400,000 6,223,000
Interest payable 41,513 41,513 50,008 50,008
Off-Balance Sheet
Assets (liabilities)
Commitments to extend
credit 0 0 0 0
Standby letters of credit 0 0 0 0
(42)
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 of 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
(43)
BANKING LOCATION
714 North Vermilion Street, Danville, Illinois 61832
412 S Gilbert 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.
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 01, 1999, the Company had 128 stockholders of record.
The number of shares of common stock outstanding as of December 01,
1999 was 357,075. 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, 1998.
Quotations
Dividend Amount
Quarter Ended High Bid Low Bid Per Share
March 31, 1998 $16.25 $14.50 --
June 30, 1998 16.00 16.875 --
September 30, 1998 16.125 11.25 --
December 31, 1998 11.50 10.0625 --
March 31, 1999 12.75 11.00 --
June 30, 1999 12.75 11.00 --
September 30, 1999 11.25 9.00 --
(44)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 93,054
<INT-BEARING-DEPOSITS> 1,082,406
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,493,750
<INVESTMENTS-CARRYING> 1,522,407
<INVESTMENTS-MARKET> 1,537,648
<LOANS> 37,412,959
<ALLOWANCE> 179,420
<TOTAL-ASSETS> 43,763,281
<DEPOSITS> 31,639,064
<SHORT-TERM> 4,500,000
<LIABILITIES-OTHER> 135,677
<LONG-TERM> 1,900,000
0
0
<COMMON> 3,968
<OTHER-SE> 5,584,572
<TOTAL-LIABILITIES-AND-EQUITY> 43,763,281
<INTEREST-LOAN> 2,867,236
<INTEREST-INVEST> 219,673
<INTEREST-OTHER> 134,508
<INTEREST-TOTAL> 3,221,417
<INTEREST-DEPOSIT> 1,549,427
<INTEREST-EXPENSE> 1,883,057
<INTEREST-INCOME-NET> 1,338,360
<LOAN-LOSSES> 63,004
<SECURITIES-GAINS> 10,786
<EXPENSE-OTHER> 1,568,242
<INCOME-PRETAX> (181,455)
<INCOME-PRE-EXTRAORDINARY> (181,455)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (71,458)
<EPS-BASIC> (0.21)
<EPS-DILUTED> (0.21)
<YIELD-ACTUAL> .078
<LOANS-NON> 0
<LOANS-PAST> 688,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 154,199
<CHARGE-OFFS> 49,925
<RECOVERIES> 12,142
<ALLOWANCE-CLOSE> 179,420
<ALLOWANCE-DOMESTIC> 179,420
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
