<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 0-19829
CALUMET BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3785272
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1350 EAST SIBLEY BOULEVARD, DOLTON, ILLINOIS 60419
(Address of principal executive offices) (Zip Code)
(708) 841-9010
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of November 12, 1998, the Company has 3,145,861 shares of
$0.01 par value common stock outstanding.
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS PAGE NO.
-------------------- --------
Consolidated Statements of Financial Condition
as of September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income
for the three months ended September 30, 1998 and 1997
and for the nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and 1997 5
Consolidated Statements of Stockholders' Equity
and Other Comprehensive Income
for the nine months ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS 9
-----------------------------------
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 17
-----------------
ITEM 2 - CHANGES IN SECURITIES 17
---------------------
ITEM 3 - DEFAULT UPON SENIOR SECURITIES 17
------------------------------
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
---------------------------------------------------
ITEM 5 - OTHER INFORMATION 17
-----------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17
--------------------------------
SIGNATURE PAGE 18
2
<PAGE> 3
CALUMET BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------------------------
<S> <C> <C>
ASSETS:
Cash $ 3,497 $ 2,932
Interest bearing deposits 17,329 5,351
---------- ---------
CASH AND CASH EQUIVALENTS 20,826 8,283
Securities available-for-sale 53,995 46,967
Securities held-to-maturity
(fair value: $15,245 (1998); $18,606 (1997)) 15,336 18,768
Loans receivable, net 368,992 376,988
Investment in limited partnerships 15,224 24,645
Real estate held for sale acquired
through foreclosure 2,366 2,491
Office properties and equipment, net 5,220 4,468
Accrued interest receivable and other assets 3,576 4,016
---------- ---------
TOTAL ASSETS $ 485,535 $ 486,626
========== =========
LIABILITIES:
Deposits $ 347,599 $ 348,461
Federal Home Loan Bank advances 41,310 45,060
Advance payments by borrowers for
taxes and insurance 3,833 3,237
Income taxes - 1,229
Accrued interest payable and other liabilities 6,010 7,025
---------- ---------
TOTAL LIABILITIES 398,752 405,012
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 shares authorized - -
Common stock, $.01 par value, 8,400,000 shares authorized,
3,620,454 shares issued 36 36
Additional paid-in capital 35,262 35,217
Retained earnings - substantially restricted 61,458 56,786
Accumulated other comprehensive income, net of tax 1,472 1,303
Unearned ESOP shares - (283)
Treasury stock (474,593 shares) (11,445) (11,445)
---------- ---------
TOTAL STOCKHOLDERS' EQUITY 86,783 81,614
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 485,535 $ 486,626
========== =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
CALUMET BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans $8,146 $ 8,582 $ 24,797 $ 25,421
Securities and deposits 1,272 1,175 3,504 3,868
--------------------------------------------------
Total interest and dividend income 9,418 9,757 28,301 29,289
INTEREST EXPENSE:
Deposits 4,197 4,493 12,708 13,225
Federal Home Loan Bank advances 721 837 2,114 2,615
--------------------------------------------------
Total interest expense 4,918 5,330 14,822 15,840
--------------------------------------------------
NET INTEREST INCOME 4,500 4,427 13,479 13,449
Provision for losses on loans 118 200 342 600
--------------------------------------------------
Net interest income after provision for losses 4,382 4,227 13,137 12,849
OTHER INCOME:
Gain on loans sold 34 55 126 126
Gain on sales of real estate (3) 16 145 54
Gains on sales of securities (13) (59) 12 41
Income from limited partnerships 3,925) 218 (173) 1,748
Insurance and brokerage commissions 85 69 247 153
Other 225 197 698 409
--------------------------------------------------
Total other income (3,597) 496 1,055 2,531
OTHER EXPENSES:
Compensation and benefits 1,177 1,242 4,052 4,254
Office occupancy and equipment 361 331 1,013 945
Federal insurance premiums 54 55 164 174
Advertising and promotion 97 99 240 235
Data processing 184 133 451 386
Other 410 387 1,351 1,186
--------------------------------------------------
Total other expenses 2,283 2,247 7,271 7,180
--------------------------------------------------
Income before income taxes (1,498) 2,476 6,921 8,200
Income taxes (benefit) (771) 800 2,249 2,688
--------------------------------------------------
NET INCOME (LOSS) $ (727) $ 1,676 $ 4,672 $ 5,512
==================================================
BASIC EARNINGS (LOSS) PER SHARE $(0.23) $ 0.53 $ 1.49 $ 1.68
==================================================
DILUTED EARNINGS (LOSS) PER SHARE $(0.23) $ 0.49 $ 1.37 $ 1.57
==================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CALUMET BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1998 1997
-------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,672 $ 5,512
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on loans 342 600
Provision for depreciation 316 259
Amortization of deferred loan and commitment fees (611) (638)
Amortization and accretion of premiums and discounts 142 157
Amortization and allocation of stock based benefits 283 528
Gain on sales of securities available-for-sale (12) (41)
Equity (income) loss from limited partnerships 173 (1,748)
Net gain on sale of real estate (145) (54)
Originations of loans held for sale (9,052) (5,363)
Gain on loans sold (126) (126)
Proceeds from loans sold 9,178 5,489
Change in operating assets and liabilities:
Decrease in accrued interest receivable and other assets 440 64
Increase (decrease) in income taxes (1,207) 145
Decrease in accrued interest payable and other liabilities (1,015) (194)
--------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,378 4,590
INVESTING ACTIVITIES:
Securities available-for-sale:
Purchases (28,018) (40,733)
Proceeds from sale 9,572 48,892
Repayments and maturities 11,604 2,693
Securities held-to-maturity:
Purchases (151) (10)
Repayments and maturities 3,428 7,688
Principal and fees collected on loans 86,483 68,463
Loans originated (78,119) (67,081)
Loans purchased (260) (1,642)
Investments in limited partnerships (2,742) (3,732)
Return of investment in limited partnerships 11,990 3,246
Proceeds from sales of real estate 431 372
Purchases of office property and equipment (1,068) (169)
--------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 13,150 17,987
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
CALUMET BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in demand and passbook accounts $ 2,037 $ (3,896)
Net decrease in certificates of deposit (2,899) (7,865)
Proceeds of Federal Home Loan Bank advances 29,235 58,385
Repayment of Federal Home Loan Bank advances (32,985) (65,075)
Net increase (decrease) in advance payments by
borrowers for taxes and insurance 596 (1,016)
Net proceeds from exercise of stock options 31 15
Purchase of treasury stock - (9,236)
----------------------------
NET CASH USED IN FINANCING ACTIVITIES (3,985) (28,688)
----------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,543 (6,111)
Cash and cash equivalents at beginning of year 8,283 9,175
----------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 20,826 $ 3,064
============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest on deposits $ 13,271 $ 13,268
Cash paid during the year for interest on notes payable 2,115 2,643
----------------------------
$ 15,386 $ 15,911
============================
Cash paid during the year for income taxes $ 3,677 $ 2,147
============================
Noncash transactions:
Loans transferred to real estate owned $ 2,059 $ 88
Loans to facilitate sale of real estate owned 1,898 1,378
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
CALUMET BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
COMPREHENSIVE INCOME STOCKHOLDERS' EQUITY
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------
1998 1997 1998 1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock:
Beginning and end of period $ 36 $ 36
-------------------------
Additional paid-in capital:
Beginning of period 35,217 35,090
Proceeds of option stock exercised 31 15
Tax benefits of MRP and option deductions 14 84
-------------------------
End of period 35,262 35,189
-------------------------
Retained earnings:
Beginning of period 56,786 73,817
Common stock split from treasury stock - (25,013)
NET INCOME $ 4,672 $ 5,512 4,672 5,512
-------------------------
End of period 61,458 54,316
-------------------------
Accumulated other comprehensive income:
Beginning of period unrealized gains on securities,
net of income taxes 1,303 239
Unrealized holding gains (losses) on securities arising
during period, net of income taxes 113 583
Reclassification adjustment for gains on securities
included in net income, net of income taxes (8) (28)
Effect of tax rate adjustment on unrealized gains 64 (32)
--------------------------
Other comprehensive income 169 523 169 523
--------------------------------------------------------
End of period accumulated other comprehensive income 1,472 762
-------------------------
COMPREHENSIVE INCOME $ 4,841 $ 6,035
==========================
Less unearned ESOP shares:
Beginning of period (283) (849)
Shares to be released 283 425
-------------------------
End of period - (424)
-------------------------
Less stock held for MRP:
Beginning of period - (137)
Amortization - 103
-------------------------
End of period - (34)
-------------------------
Less treasury stock:
Beginning of period (11,445) (26,432)
Common stock split from treasury stock - 25,013
Purchases - (9,236)
-------------------------
End of period (11,445) (10,655)
-------------------------
Total stockholders' equity $ 86,783 $79,190
=========================
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Regulation S-X.
Accordingly, they do not include all of the information required by GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for fair
presentation have been included. The results of operations for the three months
and for the nine months ended September 30, 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998.
Certain 1997 amounts have been reclassified to conform to 1998 presentation.
For further information, refer to the consolidated financial statements and
notes thereto included in the Calumet Bancorp, Inc. (the "Company") Annual
Report on Form 10-K for the year ended December 31, 1997.
NOTE B - EARNINGS PER SHARE
In 1997, the FASB issued SFAS No. 128, Earnings per Share. SFAS No. 128 is
effective for the quarter ending December 31, 1997, and all prior earnings per
share amounts have been restated to be comparable. All earnings per share data
prior to the Company's November 17, 1997 three-for-two stock split have been
restated to be comparable. Basic earnings per share of common stock has been
determined by dividing net income for each period by the weighted average number
of shares of common stock outstanding. Diluted earnings per share has been
determined by dividing net income for the period by the weighted average number
of shares of common stock outstanding and additional shares issuable under stock
options. Common stock issuable under stock options assumes the exercise of
stock options and the use of proceeds to purchase treasury stock at the average
market price for the period. Shares of common stock purchased by the Company's
Employee Stock Ownership Plan ("ESOP") prior to December 31, 1992, are included
in shares outstanding for purposes of calculating earnings per share. Shares
committed to be released to the ESOP during the year are expensed during the
year based on original cost. The ESOP did not purchase any shares subsequent to
December 31, 1992, which would be subject to AICPA Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans." The average number
of uncommitted (unearned) shares held for the Company's Employee Stock Ownership
Plan ("ESOP") and included in the weighted average shares outstanding for the
three months ended September 30, 1998 and 1997 were none and 74,261,
respectively, and for the nine months then ended were 14,145 and 95,479,
respectively. The ESOP was terminated as of July 31, 1998.
The following table presents a reconciliation of the denominators used to
compute basic earnings per share and diluted earnings per share for the three
months and the nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------------
(Dollars in thousands, except per share data) 1998 1997 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average shares of common stock outstanding 3,145,453 3,166,196 3,143,127 3,271,757
Dilutive effects of assumed stock option exercises 249,833 251,048 254,991 240,372
-----------------------------------------------------------
Weighted average shares of common stock and
common stock equivalents 3,395,286 3,417,244 3,398,118 3,512,129
===========================================================
EARNINGS PER SHARE:
Net income available to common shareholders $ (727) $ 1,676 $ 4,672 $ 5,512
Basic earnings per share $ (0.23) $ 0.53 $ 1.49 $ 1.68
EARNINGS PER SHARE ASSUMING DILUTION:
Net income available to common shareholders $ (727) $ 1,676 $ 4,672 $ 5,512
Diluted earnings per share $ (0.23) $ 0.49 $ 1.37 $ 1.57
</TABLE>
<PAGE> 9
NOTE C - COMPREHENSIVE INCOME
During the first quarter of 1998 the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. Specifically,
the Company has reported the change in unrealized gains on securities as an
addition to net income to arrive at comprehensive income of $4.8 million for the
first nine months of 1998, compared to $6.0 million for the first nine months of
1997.
NOTE D - COMMITMENTS AND CONTINGENCIES
At September 30, 1998, the Company had approved loan commitments totalling $13.8
million to originate loans, $3.4 million to sell loans, $5.6 million in
undisbursed loans-in-process, $13.7 million in unused lines of credit, and $9.0
million in credit enhancement arrangements. Commitments to fund loans and those
under credit enhancement arrangements have credit risk essentially the same as
that involved in extending loans to customers and are subject to the Company's
normal credit policies.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Calumet Bancorp, Inc. (the "Company") completed its initial public offering of
Common Stock on February 20, 1992. It owns all of the outstanding Common Stock
of Calumet Federal Savings and Loan Association of Chicago (the "Association"),
a federally chartered stock savings and loan association which operates five
financial services offices in the Chicago area -- in Dolton, Lansing, Sauk
Village, and two in southeastern Chicago. The Association owns two first tier
subsidiaries, Calumet Savings Service Corporation and Calumet Residential
Corporation, both wholly owned. Calumet Residential Corporation owns 51% of a
second tier subsidiary, Calumet United Limited Liability Company. Calumet
Savings Service Corporation owns two second tier subsidiaries, Calumet Mortgage
Corporation of Idaho and Calumet Financial Corporation, both wholly owned.
The Company's business activities currently consist of investment in equity
securities, participation as a limited partner in real estate investment and
loan servicing partnerships, and operation of the Association. The
Association's principal business consists of attracting deposits from the public
and investing these deposits, together with funds generated from operations and
borrowings, primarily in residential mortgage loans. The Association's deposit
accounts are insured to the maximum allowable by the FDIC.
The Association's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on its loan
and securities portfolios and its cost of funds, consisting of interest paid on
its deposits and borrowings. The Association's operating results are also
affected by the sale of insurance, annuities and real estate through its second
tier subsidiaries, and to a lesser extent, loan commitment fees, customer
service charges and other income. Operating expenses of the Association are
primarily employee compensation and benefits, equipment and occupancy costs,
federal deposit insurance premiums, advertising, data processing, and other
administrative expenses. The Association's results of operations are further
affected by economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities.
On September 9, 1998, the Company announced that a definitive agreement had been
signed pursuant to which FBOP Corporation will acquire, for cash, all of the
outstanding stock of the Company in a transaction valued at approximately $111.6
million, or $32.00 per fully diluted share, after deducting the Company's
merger-related expenses. The transaction is expected to be completed during the
first quarter of 1999, and is subject to the approvals of regulatory agencies
and the Company's shareholders, and to the satisfaction of certain contractual
closing conditions.
9
<PAGE> 10
FBOP Corporation is a closely held bank holding company headquartered in Oak
Park, Illinois. As of September 30, 1998, FBOP reported consolidated total
assets of $3.3 billion and total deposits of $2.7 billion. Upon completion of
the merger, FBOP will operate 19 banking offices in Illinois, 17 in California,
and 3 in Texas, with consolidated total assets of approximately $3.8 billion.
FINANCIAL CONDITION
Total assets decreased $1.1 million, or less than 1.0%, to $485.5 million at
September 30, 1998, from $486.6 million at December 31, 1997. Net loans
receivable decreased $8.0 million, or 2.1%, to $369.0 million at September 30,
1998, from $377.0 million at December 31, 1997, with originations and purchases
of $78.4 million, and repayments of $86.5 million, during the first nine months
of 1998.
The Company's lending activities have been concentrated primarily in residential
real estate secured by first liens. At September 30, 1998, approximately 60.2%
of the Company's mortgage loans were secured by one-to-four family residential
properties, 11.8% by multifamily income producing properties, and 28.0% by
commercial properties and land. At December 31, 1997, these concentrations were
58.7%, 12.4%, and 28.9%, respectively. At September 30, 1998, the Company's
mortgage loan portfolio was geographically distributed primarily in Illinois
(35.6%), Colorado (18.1%), Idaho (21.6%), and New Mexico (15.9%). At December
31, 1997, these distributions were 33.1%, 24.1%, 20.6%, and 15.0%, respectively.
Deposits decreased $862,000, or less than 1.0%, to $347.6 million at September
30, 1998, from $348.5 million at December 31, 1997. Federal Home Loan Bank
advances were reduced by $3.8 million, or 8.3%, to $41.3 million at September
30, 1998, from $45.1 million at December 31, 1997.
Stockholders' equity increased $5.2 million, or 6.3%, to $86.8 million at
September 30, 1998, from $81.6 million at December 31, 1997, primarily as the
result of $4.7 million in net income. The Company has 3,145,861 shares of
common stock outstanding on September 30, 1998, with a book value of $27.59 per
share.
ASSET QUALITY
The allowance for losses on loans remained at 1.54% of loans receivable at
September 30, 1998, the same as it was at December 31, 1997. Nonperforming
loans to loans receivable decreased to 0.93% at September 30, 1998, from 1.39%
at December 31, 1997, primarily due to foreclosed loans transferred to real
estate acquired through foreclosure. Nonperforming assets to total assets
decreased to 1.22% at September 30, 1998, from 1.64% at December 31, 1997,
primarily due to the subsequent sale of property acquired through the
foreclosures. The allowance for losses on loans amounted to 166% of
nonperforming loans at September 30, 1998, increased from 111% at December 31,
1997.
RESULTS OF OPERATIONS
The Company reported a net loss of $727,000 for the third quarter of 1998,
compared to $1.7 million net income for the third quarter of 1997. Diluted
earnings (loss) per share decreased to ($0.23) for the third quarter of 1998,
compared to $0.49 for the third quarter of 1997. The primary reason for the
decrease was a $4.1 million decrease in income from limited partnerships, which
included a $4.3 million valuation allowance for mortgage servicing rights
resulting from a sharp drop in mortgage interest rates and increased prepayment
expectations for mortgage loans. Diluted earnings per share before the $4.3
million allowance was $0.56 for the third quarter of 1998.
Net income for the nine months ended September 30, 1998, decreased to $4.7
million, compared to $5.5 million for the nine months ended September 30, 1997.
Diluted earnings per share for the first nine months of 1998 was $1.37, compared
to $1.57 for the first nine months of 1997. The primary reason for the decrease
was a $1.9 million decrease in income from limited partnerships, which included
a $5.7 million valuation allowance for mortgage servicing rights, offset in part
by a $3.6 million gain on the sale of a limited partnership investment property
during
10
<PAGE> 11
the first quarter of 1998. The $5.7 million allowance reduced diluted earnings
per share by $1.04, while the $3.6 million gain increased diluted earnings per
share by $0.69 for the nine months ended September 30, 1998.
Return on average assets for the third quarter of 1998 decreased to (0.59%),
compared to 1.36% for the third quarter last year. Return on average
stockholders' equity for the third quarter of 1998 decreased to (3.36%),
compared to 8.66% for the third quarter last year. Return on average assets was
1.56% for the third quarter of 1998, and return on average equity was 8.78%,
before the $4.3 million loss allowance for loan servicing rights.
Return on average assets for the first nine months of 1998 was 1.27%, compared
to 1.48% for the same period last year. Return on average stockholders' equity
for the first nine months of 1998 was 7.35%, compared to 9.44% for the same
period last year.
NET INTEREST INCOME
Net interest income increased $73,000, to $4.5 million for the third quarter of
1998, compared to $4.4 million for the third quarter of 1997. The average yield
on interest earning assets decreased to 8.19% during the third quarter of 1998,
from 8.58% during the third quarter of 1997, while the average cost of funds
decreased to 5.06%, from 5.30% for these same periods, resulting in a decrease
in the rate spread to 3.13% in 1998, from 3.28% in 1997. The net interest
margin increased to 3.91% for the third quarter of 1998, compared to 3.89% for
the third quarter of 1997.
Net interest income increased $30,000, to $13.5 million for the first nine
months of 1998, compared to $13.4 million for the first nine months of 1997. The
average yield on interest earning assets decreased to 8.29% during the first
nine months of 1998, from 8.47% during the first nine months of 1997, while the
average cost of funds decreased to 5.09%, from 5.20% for these same periods,
resulting in a decrease in the rate spread to 3.20% in 1998, from 3.27% in 1997.
The net interest margin increased to 3.95% for the first nine months of 1998,
compared to 3.89% for the first nine months of 1997.
PROVISION FOR LOAN LOSSES
The allowance for losses on loans is established through a provision for losses
on loans based on management's evaluation of the risk inherent in its loan
portfolio and general economic conditions. Management's evaluation includes a
review of all loans on which full collectibility may not be reasonably assured,
the estimated fair value of the underlying collateral, economic conditions,
historical loan loss experience and the Company's internal credit review
process. The Company's provision for losses on loans was reduced to $342,000 for
the first nine months of 1998, from $600,000 for the first nine months of 1997.
Net chargeoffs to the allowance for losses on loans were $526,000 during the
first nine months of 1998, compared to $255,000 during the first nine months of
1997. The reduction of the provision is the result of management's evaluation
of the adequacy of the allowance for losses on loans. The allowance for losses
on loans stayed at 1.54% of loans receivable at September 30, 1998, the same as
it was at December 31, 1997. Nonperforming loans to loans receivable decreased
to 0.93% at September 30, 1998, from 1.39% at December 31, 1997, primarily due
to foreclosed loans transferred to real estate acquired through foreclosure. The
allowance for losses on loans amounted to 166% of nonperforming loans at
September 30, 1998, increased from 111% at December 31, 1997.
OTHER INCOME
Other income decreased $4.1 million, to a loss of $3.6 million for the third
quarter of 1998, compared to income of $496,000 for the third quarter of 1997,
primarily due to the $4.1 million decrease in income from limited partnerships,
which included the $4.3 million valuation allowance for mortgage servicing
rights described above.. Other income decreased $1.5 million, to $1.1 million
during the first nine months of 1998, from $2.5 million during the first nine
months of 1997, primarily due to the $5.7 million valuation allowance for
mortgage servicing rights, which was partially offset by increased sales of
single family homes by Illinois real estate development partnerships and the
$3.6 million gain on sale of a partnership investment in an apartment complex
located in Florida.
11
<PAGE> 12
Purchased mortgage loan servicing rights represent the right to collect
servicing fees and ancillary income from a portfolios of mortgage loans owned by
third party investors. The value of this right to receive future income is
periodically reevaluated based on changes in the characteristics of the
underlying loan portfolios, including weighted average coupons, weighted average
maturities, scheduled loan payments, and unscheduled loan payments (or
prepayments). During the first nine months of 1998, prepayments significantly
exceeded expectations, resulting in an estimated $5.7 million impairment of the
asset at September 30, 1998. The Company, through its partnerships, actively
manages for retention of mortgages that would have otherwise paid off,
significantly improving the value of the servicing asset. However, further
reductions in mortgage loan interest rates could result in continued high levels
of prepayments, and would result in additional impairment to the servicing
asset. At September 30, 1998, the Company had a remaining investment of $9.5
million in three mortgage servicing limited partnerships. The following table
provides additional detail for miscellaneous other income:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------------------------------
1998 1997 1998 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
Miscellaneous other income:
Rental income $ 34 $ 26 $ 103 $ 108
Income from real estate owned, net (47) (49) (104) (240)
Checking account fees 126 99 320 273
ATM/debit card fees 64 51 174 144
Credit enhancement fees 28 31 90 51
Other miscellaneous 20 39 115 73
------------------------------------------------------
Total miscellaneous other income $ 225 $ 197 $ 698 $ 409
======================================================
</TABLE>
OPERATING EXPENSES
Operating expenses increased $36,000, to $2.3 million for the third quarter of
1998, compared to $2.2 million for the third quarter of 1997. Operating expenses
as a percent of average assets increased to 1.86% in the third quarter of 1998,
from 1.82% in the third quarter of 1997.
Operating expenses increased $91,000, to $7.3 million for the first nine months
of 1998, compared to $7.2 million for the first nine months of 1997.
Compensation expense decreased $202,000, to $4.1 million in 1998, from $4.3
million in 1997, offsetting an increase of $88,000 in professional fees. Data
processing and occupancy (equipment) expenses increased $133,000 in 1998,
primarily as the result of Year 2000 preparations. Operating expenses as a
percent of average assets increased to 1.98% in 1998, from 1.92% in 1997. The
following table provides additional information on miscellaneous other expenses:
12
<PAGE> 13
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------------------
1998 1997 1998 1997
-------------------------------------------------------
<S> <C> <C> <C> <C>
Miscellaneous other expense:
Stationery and supplies $ 51 $ 55 $ 167 $ 170
Telephone and postage 69 51 204 184
Loan expense 3 7 18 17
Insurance 26 28 72 83
Security 25 21 77 64
Audit and examination fees 46 51 147 150
Legal fees 18 28 128 54
Consulting fees 2 - 42 11
Benefit plan administration fees 8 9 25 39
Dues and subscriptions 5 1 32 20
Checking account expenses 6 5 19 15
ATM/debit card expenses 62 29 152 89
Minority interest 14 12 38 28
Other 75 90 230 262
-------------------------------------------------------
Total miscellaneous other expense $ 410 $ 387 $ 1,351 $ 1,186
=======================================================
</TABLE>
INCOME TAXES
The Company's effective income tax rate for the first nine months of 1998 was
32.50% compared to 32.78% for the first nine months of 1997. The effective tax
rate for both years is reduced from statutory rates by the dividends received
deduction and by low income housing tax credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds include deposits and Federal Home Loan
Bank advances, principal and interest payments on loans and securities, maturing
investment securities, and sales of securities from the available-for-sale
portfolio. While maturities and scheduled amortization of loans and
mortgage-backed securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by interest rates, general economic
conditions, and competition.
The primary investing activity of the Company is the origination and purchase of
mortgage loans and the purchase of securities. During the first nine months of
1998 and 1997, the Company originated and purchased mortgage loans in the
amounts of $78.4 million and $68.7 million, respectively. Loan repayments for
these same two periods were $86.5 million and $68.5 million, respectively. Much
of the increase in lending activity during the first nine months of 1998 was due
to refinances, and is reflected in the significant increase in prepayments for
the same period.
During the first nine months of 1998 the Company's deposits decreased by
$862,000. The Company repaid a net $3.8 million in borrowings from the FHLB
during the first nine months of 1998.
Federal regulations require a savings institution to maintain an average daily
balance of liquid assets equal to at least 4% of the average daily balance of
its net withdrawable deposits and short term borrowings. Management has
consistently maintained levels in excess of the regulatory requirement. The
Association's average liquidity ratios for the first nine months of 1998 and
1997 were 14.0% and 8.5%, respectively.
The Association is also required to maintain specific amounts of capital
pursuant to federal regulations. As of September 30, 1998, the Association was
in compliance with all regulatory capital requirements, with tangible and core
capital of 12.26%, risk-based capital of 20.13%, and tier one capital of 18.87%,
well above the requirements for
13
<PAGE> 14
capital adequacy of 1.5%, 3.0%, 8.0%, and 4.0%, respectively. The minimum
requirement for well capitalized institutions under the prompt corrective action
regulations are 10.0% risk-based capital and 6.0% tier one capital.
DISCLOSURES ABOUT MARKET RISK
The business of the Company and the composition of its balance sheet consists of
investments in interest-earning assets (primarily loans, mortgage-backed
securities, and other securities) which are primarily funded by interest-bearing
liabilities (deposits and borrowings). Such financial instruments have varying
levels of sensitivity to changes in market interest rates resulting in market
risk. All of the financial instruments of the Company are for other than
trading purposes. Approximately 95% of the Company's financial assets and 100%
of its financial liabilities are held and managed by the Association. The
following discussion pertains primarily to the financial instruments held by the
Association.
In order to measure the market risk inherent in the Association's financial
assets and liabilities, management utilizes a quarterly report ("model")
prepared for the Association by the Office of Thrift Supervision ("OTS") based
on information provided by the Association which measures the Association's
exposure to interest rate risk. The model calculates the present value of
assets, liabilities, off-balance sheet financial instruments, and equity at
current interest rates, and at hypothetical higher and lower interest rates at
one percent intervals. The present value of each major category of financial
instrument is calculated by the model using estimated cash flows based on
weighted average contractual rates and terms at discount rates representing the
estimated current market interest rate for similar financial instruments. The
resulting present value of longer term fixed-rate financial instruments are more
sensitive to change in a higher or lower market interest rate scenario, while
adjustable-rate financial instruments largely reflect only a change in present
value representing the difference between the contractual and discounted rates
until the next interest rate repricing date. For further information regarding
the underlying assumptions of the model, as well as its shortcomings, refer to
management's discussion and analysis included in the Calumet Bancorp, Inc.
Annual Report on Form 10-K for the year ended December 31, 1997.
The following table reflects the estimated present value of interest-earning
assets, interest-bearing liabilities, and off-balance sheet financial
instruments as calculated by the OTS for the Association as of June 30, 1998, at
then current interest rates and at hypothetical higher and lower interest rates
of one and two percent. (Because of the time needed by OTS to prepare their
reports, September 30, 1998 values are not yet available.)
14
<PAGE> 15
<TABLE>
<CAPTION>
Present Value at June 30, 1998
-----------------------------------------------------------------------------
Down 2% Down 1% Current Up 1% Up 2%
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans, including mortgage-
backed securities:
Adjustable rate $ 189,354 $ 187,345 $ 185,387 $ 183,289 $180,822
Fixed rate 201,473 197,434 192,100 184,817 176,798
Commercial and consumer loans 16,875 16,801 16,730 16,661 16,593
Securities 55,056 53,821 52,589 51,331 50,064
-----------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 462,758 455,401 446,806 436,098 424,277
Other assets 20,408 21,167 22,932 26,151 29,135
-----------------------------------------------------------------------------
Total assets $ 483,166 $ 476,568 $ 469,738 $ 462,249 $453,412
=============================================================================
INTEREST BEARING LIABILITIES:
Passbook accounts 61,811 61,811 61,811 61,811 61,811
NOW accounts 25,502 25,502 25,502 25,502 25,502
Money market accounts 9,272 9,272 9,272 9,272 9,272
Certificates of deposit 256,963 255,215 253,511 251,841 250,209
-----------------------------------------------------------------------------
TOTAL DEPOSITS 353,548 351,800 350,096 348,426 346,794
Borrowings 46,141 45,631 45,135 44,653 44,185
-----------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 399,689 397,431 395,231 393,079 390,979
Other liabilities 8,707 8,704 8,702 8,699 8,697
-----------------------------------------------------------------------------
Total liabilities $ 408,396 $ 406,135 $ 403,933 $ 401,778 $ 399,676
=============================================================================
Loan commitments $ 540 $ 425 $ 260 $ 33 $ (250)
=============================================================================
NET PORTFOLIO VALUE (NPV) $ 75,310 $ 70,858 $ 66,065 $ 60,504 $ 53,486
=============================================================================
RATIO OF NPV TO PV OF TOTAL ASSETS 15.59% 14.87% 14.06% 13.09% 11.80%
=============================================================================
</TABLE>
YEAR 2000 PREPARATIONS
The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The Year 2000 problem is
pervasive and complex as virtually every computer operation will be affected in
some way by the rollover of the two digit year value to 00. The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail.
The Company has been working on the Y2K issues since early 1997. Of primary
concern are the mission critical functions that are essential to the Company
performing as a quality financial services provider for all the customers the
Company serves. The Company has identified those items to include the teller
and platform systems that process the financial transactions for all deposit and
mortgage loan customers including general ledger processing, the mortgage loan
department's loan origination system, the automated teller machines and their
related network, and the processing systems associated with Calumet Financial
Corporation, Calumet Savings Service Corporation, and Calumet Mortgage
Corporation of Idaho.
Calumet Financial Corporation has identified its consumer loan system as mission
critical. Calumet Savings Service Corporation has identified its local area
network, which processes its accounting and insurance applications, as mission
critical. Calumet Mortgage Corporation of Idaho has determined its loan
origination system to be mission critical.
15
<PAGE> 16
The Company has spent approximately $800,000 to date to upgrade and install new
systems. The total cost to render all systems, including non-mission critical
systems, Y2K compliant is estimated to be between $800,000 and $900,000. These
costs will be amortized over a three to five year period.
The hardware to process all teller, platform and general ledger systems was
installed and in service this quarter. The system includes a network of pentium
PCs that have been certified and tested for Y2K compliance. The outside service
bureau utilized by the Company to process in this environment has completed
their programming changes and has established dates for all clients to begin
testing during the fourth quarter of 1998. The mortgage loan origination
software and hardware located at the Company's headquarters has been certified
and tested to be Y2K compliant. These tests were performed this quarter.
The Company's ATM network will require minimal hardware upgrades to be Y2K
compliant The testing of the ATM network switch interface with the Company's
service bureau was completed successfully during the third quarter of 1998.
Calumet Savings Service Corporation has installed the necessary hardware to
render its accounting and insurance systems Y2K compliant. New software has
been obtained and will be installed and tested in the fourth quarter of 1998.
Calumet Financial Corporation utilizes the same service bureau as the Company
for processing their consumer loans. CFC will begin testing in the fourth
quarter of 1998. In addition, CFC utilizes a loan origination package that
will be upgraded to a new Y2K compliant version in the fourth quarter of 1998.
Calumet Mortgage Corporation of Idaho utilizes software that has been certified
by their vendor as Y2K compliant. Tests of their mortgage origination system
will take place the fourth quarter of 1998.
The Company has queried certain large commercial mortgage loan borrowers as to
their Y2K compliance. As of this date, the Company has not identified any that
pose a credit risk as a result of Y2K issues.
The Company presently believes that with the modifications, upgrades and new
software and hardware currently in place, or soon to be installed and tested,
the Y2K issue will not pose significant operational problems for the Company's
computer systems or business operations. However, there can be no assurance
that unforseen problems in the Company's computer systems, or the systems of
third parties on which the Company's computers rely, will not have a material
adverse effect on the Company's systems or operations.
16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Holding Company and the Association are not engaged in any legal
proceedings of a material nature at the present time.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On September 17, 1998, the Registrant filed on Form 8-K a copy of the
Agreement and Plan of Merger among Calumet Bancorp, Inc., FBOP
Corporation and FBOP Acquisition Corp. dated as of September 9, 1998,
and a copy of the related Press Release issued September 9, 1998
announcing the signing of the agreement. Under the terms of the merger
FBOP Acquisition Corp., a wholly owned subsidiary of FBOP Corporation,
will acquire for cash all of the outstanding stock of Registrant for a
purchase price of approximately $111.6 million less Registrant's merger
related expenses, or $32.00 per fully diluted share. The transaction is
expected to be completed during the first quarter of 1999 and is subject
to the approval of the regulatory agencies and the Registrant's
shareholders and to the satisfaction of certain contractual closing
conditions under the Merger Agreement.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
CALUMET BANCORP, INC.
DATE: NOVEMBER 12, 1998 /S/ THADDEUS WALCZAK
------------------------------
THADDEUS WALCZAK,
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
DATE: NOVEMBER 12, 1998 /S/ JOHN GARLANGER
------------------------------
JOHN GARLANGER,
CHIEF FINANCIAL OFFICER
18
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUN-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,497
<INT-BEARING-DEPOSITS> 17,329
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,995
<INVESTMENTS-CARRYING> 15,336
<INVESTMENTS-MARKET> 15,245
<LOANS> 382,438
<ALLOWANCE> 5,886
<TOTAL-ASSETS> 485,535
<DEPOSITS> 347,599
<SHORT-TERM> 28,985
<LIABILITIES-OTHER> 9,843
<LONG-TERM> 12,325
0
0
<COMMON> 36
<OTHER-SE> 86,747
<TOTAL-LIABILITIES-AND-EQUITY> 485,535
<INTEREST-LOAN> 8,146
<INTEREST-INVEST> 1,272
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 9,418
<INTEREST-DEPOSIT> 4,197
<INTEREST-EXPENSE> 4,918
<INTEREST-INCOME-NET> 4,500
<LOAN-LOSSES> 118
<SECURITIES-GAINS> (3)
<EXPENSE-OTHER> 2,283
<INCOME-PRETAX> (1,498)
<INCOME-PRE-EXTRAORDINARY> (727)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (727)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.21)
<YIELD-ACTUAL> 3.91
<LOANS-NON> 3,551
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,913
<CHARGE-OFFS> 176
<RECOVERIES> 31
<ALLOWANCE-CLOSE> 5,886
<ALLOWANCE-DOMESTIC> 5,886
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
