<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL PERIOD ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 0-19829
CALUMET BANCORP, INC.
DELAWARE 36-3785272
(State of incorporation) (I.R.S. Employer Identification Number)
1350 EAST SIBLEY BOULEVARD, DOLTON, ILLINOIS 60419
TELEPHONE NUMBER (708) 841-9010
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
COMMON STOCK, PAR VALUE $.01 PER SHARE NASDAQ
<S> <C>
(Title of Class) (Name of each exchange on which registered)
</TABLE>
Indicate by check mark whether the 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 19, 1999 there were issued and outstanding 3,145,861 shares of the
registrant's Common Stock. The aggregate market value of the voting stock held
by non-affiliates of the registrant, based on the closing sales price of the
registrant's Common Stock as quoted on the NASDAQ/NMS on March 19, 1999 was
$93,982,597. Solely for purposes of this calculation, all directors and
executive officers of the registrant are considered non-affiliates of the
registrant.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS (Dollar amounts in thousands, except per share
data)
THE COMPANY
Calumet Bancorp, Inc. (the "Company"), a Delaware corporation, was organized on
September 20, 1991, to acquire all of the capital stock issued by Calumet
Federal Savings and Loan Association of Chicago (the "Association") upon its
conversion from the mutual to stock form of ownership. On February 20, 1992, the
Company sold 2,357,500 shares of its common stock to depositors and employees of
the Association. Total proceeds from the conversion in the amount of $33.9
million was recorded as common stock and additional paid-in capital. The Company
used $14.8 million of the proceeds to acquire all of the capital stock of the
Association.
The Company's principal business activity is the operation of its thrift
subsidiary, and consists of attracting deposits from the public and investing
those deposits, together with funds generated from operations and borrowings,
primarily in residential mortgage loans. The Association operates five financial
services offices -- Dolton, Lansing, Sauk Village and two in southeastern
Chicago. The Association's deposit accounts are insured to the maximum allowable
amount by the Federal Deposit Insurance Corporation (FDIC). The Company also
invests in equity securities and in various limited partnerships which have
invested in residential development, residential and commercial rental
properties, and mortgage loan servicing.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest and dividend income earned
on its loan and investment securities portfolios, and its cost of funds,
consisting of interest paid on its deposits and borrowings. The Company has also
invested in several limited partnerships at both the holding company and
subsidiary levels in order to diversify its sources of income. Through these
limited partnerships the Company has generated income from the construction and
sale of homes, rental of apartments and offices, and the servicing of mortgage
loans. In recent years these have become an important source of income.
The Company's operating results are also affected to a lesser extent by loan and
commitment fees, customer service charges, and by the sale of insurance, mutual
funds and annuities through its third tier subsidiaries. Operating expenses of
the Company are primarily employee compensation and benefits, office occupancy
and equipment costs, federal deposit insurance premiums, advertising and
promotion costs, data processing and other administrative expenses. The Company
employs a total of 135 full time equivalent employees as of December 31, 1998,
and management considers its relationship with employees excellent.
The Company's results of operations are further affected by economic and
competitive conditions, particularly changes in market interest rates,
government policies and the actions of regulatory authorities. The Company is
facing increasing competition for retail customer business, including deposit
accounts and loan originations. Competition for deposit accounts comes primarily
from other savings institutions, commercial banks, money market funds, mutual
funds, and insurance company annuity products. Competition for loan products
comes primarily from mortgage brokers, mortgage banking companies, other savings
institutions, and commercial banks.
The Company is subject to extensive regulation, supervision and examination by
the Office of Thrift Supervision (OTS), as its chartering authority and primary
federal regulator, and by the FDIC, which insures its deposits up to applicable
limits. Such regulation and supervision establish a comprehensive framework of
activities in which the Company can engage and is designed primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities. Any change in such regulation, whether
by the OTS, the FDIC or Congress, could have a material impact on the Company
and its operations.
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ITEM 2. PROPERTIES (Dollar amounts in thousands)
The following table sets forth information regarding the Company's
administrative, main and branch offices:
<TABLE>
<CAPTION>
Percent of Net Book
Year Total Value at
Properties: Opened Deposits 12/31/98
---------------------------------------
<S> <C> <C> <C>
Administrative Office
1350 East Sibley Boulevard, Dolton, Illinois 60419 1976 42.14% $ 1,192
Main Office
8905 South Commercial Avenue, Chicago, Illinois 60617 1910 12.05% 234
Branch Offices
3501 East 106th Street, Chicago, Illinois 60617 1979 21.90% 880
2600 Sauk Trail, Sauk Village, Illinois 60411 1978 6.11% 152
17150 South Torrence Avenue, Lansing, Illinois 60438 1985 17.80% 1,083
Other fixed assets 1,572
-----------------------------
Total 100.00% $ 5,113
=============================
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits involving the Company
as a defendent, such as claims to enforce liens, condemnation proceedings on
properties in which the Company holds security interests, claims involving the
making and servicing of real property loans and other issues incident to the
Company's business. In the opinion of management and the Company's legal
counsel, no significant loss is expected from any of such pending claims or
lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Calumet Bancorp, Inc.'s common stock is traded on the NASDAQ National Market
System under the symbol "CBCI". As of March 19, 1999, the Company has 329
stockholders of record (not including approximately 900 persons or entities
holding stock in nominee or street name through various brokerage firms) and
3,145,861 shares of common stock outstanding.
On September 9, 1998, the Company announced that a definitive agreement had been
signed pursuant to which FBOP Corporation would 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 was expected to be completed during the
first quarter of 1999, subject to the approvals of regulatory agencies and the
Company's shareholders. On November 20, 1998, the Company received a letter from
FBOP stating that FBOP was prepared to terminate the Merger Agreement unless the
Company agreed to a price reduction of $4.0 million. FBOP asserted that, since
the date of the Merger Agreement, actual and potential losses associated with
the Company's investment in mortgage loan servicing limited partnerships
constituted a "Material Adverse Change" under the Merger Agreement, which would
allow FBOP to terminate the Merger Agreement at its option.
The Company convened a special meeting of its Board of Directors on November 22,
1998, to consider FBOP's letter, and the Board rejected the various assertions
made in the FBOP letter, including, specifically, the assertion that a "Material
Adverse Change" had occurred. Nonetheless, in order to avoid additional costs
and time associated with litigation and without any prejudice to the
Company's' rights under the Merger Agreement, the Company offered to accept a
reduction in the aggregate merger consideration of $1.5 million provided that
the Merger Agreement was amended (i) to exclude the
3
<PAGE> 4
purchased mortgage servicing rights investments and changes in the value of
interest rate sensitive assets currently in the Company's portfolio from the
"Material Adverse Change" representation and condition under the Merger
Agreement and (ii) to provide for upward adjustment to the purchase price if the
Company recovers losses relating to the purchased mortgage servicing rights
prior to the closing of the merger.
FBOP subsequently proposed that the Company accept a $2.0 million reduction in
the aggregate merger consideration and share in any recovery in the value of the
purchased mortgage servicing rights investments. FBOP was advised that a
reduction of that magnitude had been considered by the Board at its special
meeting and had been rejected. In response to the counter proposal of FBOP it
was the position of the Company's Board that in view of the substantial
reduction in purchase price embodied in the original $111.6 million merger
consideration, any reduction in excess of $1.5 million would be unfair to
Calumet's shareholders. As of 5:00 P.M., Monday, November 23, 1998, the
Company's offer had not been accepted and, therefore, terminated at that time in
accordance with its terms.
On December 8, 1998, the Company advised FBOP in writing that unless it
received, by 5:00 P.M. on December 15, 1998, unequivocal written assurances that
FBOP will fully perform its obligations under the Merger Agreement, the Company
will treat the Merger Agreement as terminated by FBOP's anticipatory repudiation
of the contract, its failure to provide reasonable assurances of performances
thereunder, and its continuing failure to perform its obligations under the
Merger Agreement.
On December 11, 1998, the Company received a letter from FBOP stating in part
that "FBOP has and will fully perform its obligations under the Agreement and
Plan of Merger and reserves all of its rights under that Agreement." In that
letter FBOP also requested a meeting with management of the Company to discuss
the Merger Agreement. The Company met with representatives of FBOP on December
21, 1998. At that meeting FBOP would not give the Company any assurance that
FBOP would proceed with the Merger Agreement and informed the Company that they
would make no decisions on the Merger Agreement at that time but would continue
to reserve their rights under the Merger Agreement.
On October 21, 1997 the Board of Directors declared a three-for-two common stock
split, in the form of a 50% common stock dividend, which was distributed on
November 17, 1997 to stockholders of record on November 3, 1997. A total of
1,055,451 shares of common stock were distributed from Treasury stock previously
purchased under the Company's share repurchase program. All share and per share
data presented has been adjusted for the split.
During 1997 the Company repurchased 426,597 split adjusted shares of its common
stock, at an average cost of $23.50, continuing a share repurchase program begun
in 1992. The Company has repurchased a total of 2,282,566 split adjusted shares
of its common stock for $36.5 million, or an average cost of $15.97 per share.
The repurchase of the Company's shares at a significant discount to book value
enhanced shareholder value by having the effect of increasing earnings per share
and book value per share for the remaining shares outstanding. At December 31,
1998, the Company had 3,145,861 shares of common stock outstanding with a book
value of $27.92 per share. The closing price of the stock on December 31, 1998,
was $27.13 per share.
The Company has never paid a cash dividend, and does not anticipate paying a
cash dividend in 1999. The following table sets forth the reported high, low and
closing prices per share (restated for the stock split) of the Company's common
stock in 1998 and 1997:
<TABLE>
<CAPTION>
High Low Close
--------------------------------------
<S> <C> <C> <C>
1998
First quarter $ 39.00 $ 33.00 $ 36.00
Second quarter 38.25 33.00 33.50
Third quarter 35.56 26.00 30.06
Fourth quarter 30.44 26.63 27.13
1997
First quarter $ 24.83 $ 21.67 $ 23.75
Second quarter 26.50 22.83 25.33
Third quarter 31.58 24.83 30.83
Fourth quarter 34.63 31.00 33.25
</TABLE>
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain summary consolidated financial data at or
for the periods indicated. This information should be read in conjunction with
the Consolidated Financial Statements and notes thereto included at Item 8.
"Financial Statements and Supplementary Data."
<TABLE>
<CAPTION>
FIVE YEAR FINANCIAL SUMMARY At and for the year ended December 31,
-------------------------------------------------------------------------
(Dollars in thousands, except per share data) 1998 1997 1996 1995 1994
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income $ 37,234 $ 39,000 $ 38,919 $ 38,761 $ 36,609
Interest expense 19,472 21,027 21,054 20,177 16,621
-------------------------------------------------------------------------
Net interest income 17,762 17,973 17,865 18,584 19,988
Provision for losses on loans 460 700 800 800 800
-------------------------------------------------------------------------
Net interest income after provision
for losses on loans 17,302 17,273 17,065 17,784 19,188
Other income 861 4,238 2,992 972 2,593
Other expenses 9,521 9,536 12,231 9,931 10,340
Income taxes 2,761 3,988 2,427 2,860 4,022
-------------------------------------------------------------------------
Net Income $ 5,881 $ 7,987 $ 5,399 $ 5,965 $ 7,419
=========================================================================
Weighted average shares outstanding (1) 3,143,816 3,244,500 3,748,353 4,150,560 4,276,944
Basic earnings per share (1) $ 1.87 $ 2.46 $ 1.44 $ 1.44 $ 1.73
Wtd. average diluted shares outstanding (1) 3,396,336 3,488,061 3,955,899 4,352,501 4,497,887
Diluted earnings per share (1) $ 1.73 $ 2.29 $ 1.36 $ 1.37 $ 1.65
OTHER DATA (2):
Return on average assets 1.21% 1.61% 1.08% 1.19% 1.48%
Return on average equity 6.92% 10.20% 6.56% 7.20% 9.61%
Average equity to average assets 17.47% 15.80% 16.42% 16.60% 15.36%
Interest rate spread (3) 3.14% 3.29% 3.05% 3.21% 3.68%
Net interest margin (4) 3.91% 3.92% 3.79% 3.94% 4.21%
Non-interest income to average assets 0.18% 0.86% 0.60% 0.19% 0.52%
Non-interest expense to average assets 1.96% 1.93% 2.44% 1.98% 2.06%
Net charge-offs to average loans 0.13% 0.07% 0.01% 0.10% 0.35%
STATEMENT OF FINANCIAL CONDITION DATA:
Total assets $ 479,115 $ 486,626 $ 510,217 $ 509,528 $ 504,026
Total loans, net 356,544 376,988 381,200 372,946 358,187
Securities available-for-sale 50,672 46,967 57,362 68,153 73,491
Securities held-to-maturity 14,348 18,768 27,970 32,620 31,058
Cash and interest-bearing deposits 33,808 8,283 9,175 8,657 9,350
Investment in limited partnerships 12,905 24,645 24,458 16,226 16,911
Deposits $ 348,284 $ 348,461 $ 357,330 $ 359,251 $ 344,160
Borrowings 32,310 45,060 59,850 55,140 70,335
Stockholders' equity 87,826 81,614 81,764 84,110 78,286
Common shares outstanding 3,145,861 3,141,497 3,565,542 4,009,317 4,187,448
Book value per share $ 27.92 $ 25.98 $ 22.93 $ 20.98 $ 18.69
Allowance for losses on loans to total loans 1.62% 1.54% 1.42% 1.24% 1.18%
Nonperforming loans to total loans 0.91% 1.39% 1.60% 1.46% 1.27%
Nonperforming assets to total assets (5) 1.15% 1.64% 1.57% 1.62% 1.36%
Number of deposit accounts 36,681 37,424 38,206 37,567 36,763
</TABLE>
(1) All per share data has been adjusted for 3 for 2 stock split on November 17,
1997.
(2) All ratios are based on average monthly balances during the respective
periods.
(3) Computed as the difference between average yield on interest earning assets
and average cost of interest bearing funds.
(4) Net interest income divided by average interest earning assets.
(5) Nonperforming assets are defined as nonaccrual loans plus real estate owned
acquired through foreclosure.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Dollar amounts in thousands, except per share data.)
The following represents management's discussion and analysis of the results of
operations and financial condition of the Company as of the dates and for the
periods indicated. This discussion should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto and other
financial data appearing elsewhere in this form 10-K.
SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations and Item 1 - Description of
Business that are not historical facts are forward-looking statements subject to
the safe harbor created by the Private Securities Litigation Reform Act of 1995.
The Company cautions readers of this Annual Report on Form 10-K that a number of
important factors could cause the Company's actual results in 1999 and beyond to
differ materially from those expressed in any such forward-looking statements.
These factors include, without limitation, the general economic and business
conditions affecting the Company's customers; changes in interest rates; the
adequacy of the Association's allowance for loan losses; competition from, among
others, commercial banks, savings and loan associations, mutual funds, money
market funds, finance companies, credit unions, mortgage companies,and the
United States Government; limited partnership activities; federal and state
legislation, regulation and supervision of the Association and its subsidiaries;
the risk of defaults on loans; and contractual, statutory and regulatory
restrictions on the Association's ability to pay dividends to the Company.
FINANCIAL CONDITION
As of December 31, 1998, total assets decreased $7.5 million, or 1.5%, to $479.1
million, from $486.6 million at December 31, 1997. Net loans receivable
decreased $20.4 million, or 5.4%, to $356.5 million at December 31, 1998, from
$377.0 million at December 31, 1997. Investments in securities decreased $715,
or 1.10%, to $65.0 million at December 31, 1998, from $65.7 million at December
31, 1997. Cash and cash equivalents increased $25.5 million, to $33.8 million at
December 31, 1998, from $8.3 million at December 31, 1997, primarily due to loan
and security repayments not being reinvested under the terms of the Agreement
and Plan of Merger, which restricted the types of loans and securities in which
the Company could invest.
Excess funds were used during 1998 to pay down maturing advances from the
Federal Home Loan Bank in the amount of $12.8 million, reducing the balance to
$32.3 million at December 31, 1998, from $45.1 million at December 31, 1997.
Deposits decreased $177, to $348.3 million at December 31, 1998, from $348.5
million at December 31, 1997. The intensity of competition for deposit funds in
the south Chicago and suburban market, not only from other depository
institutions, but from insurance companies, mutual funds and the stock market,
has grown significantly during 1998, as it did in 1997, and shows no sign of
abatement in 1999. The result will be increased pressure on the cost of funds.
Stockholders' equity increased $6.2 million, to $87.8 million at December 31,
1998, from $81.6 million at December 31, 1997, primarily due to earnings. The
Company did not repurchase any stock during 1998, primarily due to ongoing
merger negotiations during the year. The closing price of the Company's common
stock on December 31, 1998, was $27.13, and its book value was $27.92 per share.
As of December 31, 1997, total assets decreased $23.6 million, or 4.6%, to
$486.6 million, from $510.2 million at December 31, 1996. Net loans receivable
decreased $4.2 million, or 1.1%, to $377.0 million at December 31, 1997, from
$381.2 million at December 31, 1996. Investments in securities decreased $19.6
million, or 23.0%, to $65.7 million at December 31, 1997, from $85.3 million at
December 31, 1996, with proceeds from repayment and sales of securities used
primarily to pay net deposit withdrawals of $8.9 million and to repay $14.8
million in borrowings.
Deposits decreased $8.9 million, or 2.5%, to $348.5 million at December 31,
1997, from $357.3 million at December 31, 1996, while advances from the Federal
Home Loan Bank of Chicago decreased $14.8 million, or 24.7%, to $45.1 million at
December 31, 1997, from $59.9 million at December 31, 1996. Stockholders' equity
decreased $150, or 0.2%, to $81.6 million at December 31, 1997, from $81.8
million at December 31, 1996, primarily as the result of $8.0 million in
earnings for 1997, reduced by $10.0 million in Treasury stock purchases, and
increased by $1.1 million of net unrealized gains on securities available for
sale. The exercise of options added $37 to stockholders' equity and amortization
and allocation of stock based benefits another $793. During 1997 the Company
repurchased 426,597 split adjusted shares of its common stock at an average cost
of $23.50. At December 31, 1997, the Company's closing price and book value per
share were $33.25 and $25.98, respectively.
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LENDING
The Company's lending activities have been concentrated primarily in residential
real property secured by first liens on such property. At December 31, 1998,
approximately 57.8% of the Company's mortgage loans are secured by one-to-four
family dwellings, 11.8% by multifamily income producing properties, and 30.4% by
commercial real estate properties and land. This compares to 58.7%, 12.4%, and
28.9%, respectively, at December 31, 1997.
During 1998 the Company invested $91.9 million in the origination and purchase
of primarily mortgage loans. Loan repayments of $112.7 million exceeded
originations and purchases by $20.8 million, with decreases in the portfolio
resulting primarily from a significant drop in interest rates which precipitated
a wave of refinance activity. Loans receivable decreased by $19.8 million, or
5.0%, to $373.1 million at December 31, 1998, from $392.9 million at December
31, 1997. One to four family mortgage loans decreased $7.8 million, or 3.7%, to
$202.2 million at December 31, 1998, from $210.0 million at December 31, 1997.
Multifamily mortgage loans decreased $5.4 million, or 13.3%, to $35.5 million at
December 31, 1998, from $40.9 million at December 31, 1997. Commercial,
construction and land loans decreased $8.0 million, or 5.8%, to $129.0 million
at December 31, 1998, from $137.0 million at December 31, 1997.
During 1997 the Company invested $94.9 million in the origination and purchase
of primarily mortgage loans. Loan fees and repayments of $97.9 million exceeded
originations and purchases by $3.0 million, with decreases in the portfolio
coming primarily in multifamily residential mortgage loans. Loans receivable
decreased by $2.8 million, or 0.7%, to $392.9 million at December 31, 1997, from
$395.7 million at December 31, 1996. The decrease came primarily in multifamily
residential loans, which decreased $6.6 million, or 13.8%, to $40.9 million at
December 31, 1997, from $47.5 million at December 31, 1996, and was partially
offset by a $2.3 million, or 1.1% increase in one-to-four family residential
loans and a $2.1 million, or 210.8% increase in consumer loans. The large
percentage increase in consumer loans came primarily through Calumet Financial
Corporation, a new third tier subsidiary established to expand the Company's
product line and reach more customers in the local market area.
Commercial real estate loans improve the interest rate sensitivity of the
Company's loan portfolio because they are generally made for a shorter term than
residential mortgage loans, carry a higher yield, and reprice more frequently.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than residential mortgage loans. Because
payments on loans secured by commercial real estate properties are often
dependent on the successful operation and management of the properties,
repayment of such loans may be subject to adverse conditions in the real estate
market or the economy. The Company seeks to minimize these risks by lending
primarily on existing income-producing properties and generally requires a net
operating income to debt service ratio of at least 1.20 times. The Company
analyzes the financial condition of the borrower and the reliability and
predictability of net income generated by the security property in determining
whether to extend credit.
Construction loans improve the interest rate sensitivity of the Company's loan
portfolio and yield higher rates than those afforded by loans on existing
properties. The higher yields correspond to higher risks attributable to the
fact that loan funds are advanced upon the security of the project under
construction, which is of uncertain value prior to its completion. Because of
the uncertainties inherent in estimating construction costs as well as the
market value of the completed project, it is relatively difficult to evaluate
accurately the total funds required to complete a project and the related
loan-to-value ratio. As a result, construction lending often involves the
disbursement of substantial funds with repayment dependent, in part, on the
success of the completed project, rather than the ability of the borrower or
guarantor to repay the loan. The Company has attempted to address these risks
through its conservative underwriting and construction disbursement procedures,
and limits its construction lending to primarily residential properties.
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The following table sets forth the composition of the Company's loan portfolio
by type of loan at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family residential (1) $202,240 $209,999 $207,697 $204,970 $204,246
Multi-family residential 35,494 40,933 47,510 54,216 49,900
Commercial real estate 92,786 97,186 97,093 87,066 84,388
Construction 25,213 27,645 27,442 31,055 21,711
Land 11,038 12,207 13,760 13,739 13,371
-------------------------------------------------------------
Total mortgage loans 366,771 387,970 393,502 391,046 373,616
Other loans:
Commercial business 2,021 1,887 1,208 2,342 1,981
Consumer 4,325 3,033 976 703 631
-------------------------------------------------------------
Total other loans 6,346 4,920 2,184 3,045 2,612
-------------------------------------------------------------
Total loans 373,117 392,890 395,686 394,091 376,228
Less:
Loans-in-process 8,868 7,820 6,386 13,531 10,419
Unearned discounts, premiums
and deferred loan fees, net 1,676 2,012 2,470 2,744 3,193
Allowance for losses on loans 6,029 6,070 5,630 4,870 4,429
-------------------------------------------------------------
Total loans, net $356,544 $376,988 $381,200 $372,946 $358,187
=============================================================
FHA and VA loans included in
one-to-four family residential $ 427 $ 627 $ 416 $ 597 $ 747
Second mortgages included in
total mortgage loans $ 284 $ 278 $ 2,698 $ 2,596 $ 113
</TABLE>
(1) Includes construction loans converted to permanent loans.
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The following table sets forth certain information at December 31, 1998
regarding the dollar amount of loans maturing in the Company's loan portfolio
based on contractual terms to maturity, but does not include scheduled payments
or potential prepayments. Demand loans, loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
After one After five
One year year through years through After
or less five years ten years ten years Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family residential $ 10,289 $ 6,456 $ 11,534 $ 173,961 $ 202,240
Multi-family residential 9 18,337 13,951 3,197 35,494
Commercial real estate 4,841 21,559 38,311 28,075 92,786
Construction 15,493 9,720 - - 25,213
Land 3,863 6,534 295 346 11,038
Other loans:
Commercial business 942 52 1,027 - 2,021
Consumer 843 1,731 514 1,237 4,325
------------------------------------------------------------------------------
Total loans $ 36,280 $ 64,389 $ 65,632 $ 206,816 $ 373,117
==============================================================================
</TABLE>
The following table sets forth the dollar amount of all loans at December 31,
1998 and due after December 31, 1999, that have fixed interest rates and those
that have floating or adjustable rates:
<TABLE>
<CAPTION>
Floating or
Adjustable
Fixed Rates Rates Total
----------------------------------------------
<S> <C> <C> <C>
Mortgage loans:
One-to-four family residential $ 128,242 $ 63,709 $ 191,951
Multi-family residential 20,826 14,659 35,485
Commercial real estate 29,737 58,208 87,945
Construction 3,700 6,020 9,720
Land 3,448 3,727 7,175
Other loans:
Commercial business 101 978 1,079
Consumer 2,658 824 3,482
----------------------------------------------
Total loans $ 188,712 $ 148,125 $ 336,837
==============================================
</TABLE>
At December 31, 1998, the Company's mortgage loan portfolio was geographically
diversified, with concentrations primarily in Illinois (35.2%), Colorado
(17.8%), Idaho (21.1%), and New Mexico (15.9%). Mortgage loans in Indiana and
Michigan, all within the Company's immediate lending area, represent another
5.8% of the portfolio at December 31,1998. At December 31, 1997, these
concentrations were Illinois (33.1%), Colorado (24.1%), Idaho (20.6%), New
Mexico (15.0%), and Indiana/Michigan (4.2%).
At December 31, 1998, approximately $104.6 million or 28.5% of the Company's
$366.8 million mortgage loan portfolio was secured by properties located in
mountain and ski resort areas, the economies of which may be more susceptible to
fluctuations in market and economic conditions. Furthermore, $36.2 million, or
34.6% of these loans are secured by second homes, which may be more susceptible
to delinquencies than loans secured by primary residences; $35.9 million, or
34.3% of these loans were secured by primary residences; and $32.6 million, or
31.1% were secured by multifamily and commercial properties and land.
9
<PAGE> 10
At December 31, 1997, approximately $118.6 million or 30.6% of the Company's
$388.0 million mortgage loan portfolio was secured by properties located in
mountain and ski resort areas. $43.7 million, or 36.8% of these loans are
secured by second homes, $35.7 million, or 30.1% of these loans were secured by
primary residences; and $39.2 million, or 33.1% were secured by multifamily and
commercial properties and land.
At December 31, 1998, the Company's out-of-state mortgage loan portfolio
amounted to $237.6 million and included $90.0 million in loans secured by
primary residences, $56.5 million secured by secondary residences, $16.3 million
secured by multifamily, and $74.7 million secured by commercial properties and
land. At December 31, 1997, the Company's out-of-state mortgage loan portfolio
amounted to $259.7 million and included $95.1 million in loans secured by
primary residences, $66.9 million secured by secondary residences, $21.3 million
secured by multifamily, and $76.4 million secured by commercial properties and
land. The Company has not experienced unusual losses as a result of geographic
diversification or lending in mountain and ski resort areas. The following table
sets forth information regarding the geographic distribution of the Company's
mortgage loan portfolio at December 31, 1998.
<TABLE>
<CAPTION>
One-to-four family
------------------------------- Total Land and Total
Primary Secondary One-to-four Multifamily Commercial Developed Mortgage
Residential Residential family Residential Real Estate Lots Loans
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Illinois $ 63,462 $ 1,967 $ 65,429 $ 26,992 $ 36,756 $ 31 $129,208
Indiana 10,326 584 10,910 808 - - 11,718
Michigan - 217 217 6,266 3,150 - 9,633
---------------------------------------------------------------------------------------------------------
Subtotal 73,788 2,768 76,556 34,066 39,906 31 150,559
---------------------------------------------------------------------------------------------------------
Idaho
Sun Valley area 32,246 21,583 53,829 138 8,611 8,505 71,083
Other mountain areas 1,137 1,197 2,334 - 3,563 380 6,277
---------------------------------------------------------------------------------------------------------
Subtotal 33,383 22,780 56,163 138 12,174 8,885 77,360
---------------------------------------------------------------------------------------------------------
Colorado
Denver area 11,456 1,423 12,879 6,738 13,676 46 33,339
Other urban areas - - - 1,463 3,091 - 4,554
Aspen area 1,137 7,562 8,699 - 4,197 - 12,896
Other mountain areas 1,356 5,853 7,209 - 7,177 - 14,386
---------------------------------------------------------------------------------------------------------
Subtotal 13,949 14,838 28,787 8,201 28,141 46 65,175
---------------------------------------------------------------------------------------------------------
New Mexico 27,326 14,739 42,065 536 14,092 1,663 58,356
Florida 637 2,309 2,946 375 2,108 413 5,842
Arizona 1,922 364 2,286 - - - 2,286
Other states 2,497 646 3,143 - 4,050 - 7,193
---------------------------------------------------------------------------------------------------------
Total $153,502 $ 58,444 $ 211,946 $ 43,316 $100,471 $ 11,038 $366,771
=========================================================================================================
</TABLE>
10
<PAGE> 11
The following table sets forth information regarding nonaccrual loans and
foreclosed real estate owned by the Company at the dates indicated. The Company
does not accrue interest on loans delinquent 90 days or more. Had nonaccrual
loans been current according to their original terms, the Company would have
recorded $385 of interest income during 1998, $495 during 1997, and $582 during
1996. Actual interest income from nonaccrual loans amounted to $288 during 1998,
$400 during 1997, and $384 during 1996.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
One-to-four family residential $ 1,384 $ 2,937 $ 3,959 $ 4,006 $ 4,067
Multifamily residential 1,460 477 242 58 216
Commercial real estate - 1,102 1,707 - -
Construction 409 939 - 549 499
Land - - 426 - -
Commercial business - - - 1,143 -
Consumer 138 17 - 2 5
-------------------------------------------------------------
Total nonaccrual loans 3,391 5,472 6,334 5,758 4,787
-------------------------------------------------------------
Real estate owned:
One-to-four family residential 1,845 2,491 1,665 2,483 1,196
Multifamily residential - - - - 20
Commercial real estate - - - - 865
Land 264 - - - -
-------------------------------------------------------------
Total real estate owned 2,109 2,491 1,665 2,483 2,081
-------------------------------------------------------------
Total nonperforming assets $ 5,500 $ 7,963 $ 7,999 $ 8,241 $ 6,868
=============================================================
Nonaccrual loans to total loans 0.91% 1.39% 1.60% 1.46% 1.27%
Nonperforming assets to total assets 1.15% 1.64% 1.57% 1.62% 1.36%
</TABLE>
At December 31, 1998, the Company had no loans that were considered impaired. At
December 31, 1997, the Company had two related loans that were considered
impaired with a recorded investment of $1.1 million. The loans were placed in
nonaccrual status. One of these loans was fully reserved in the amount of $350,
the other had no specific reserve. Both of these loans were foreclosed during
the first quarter of 1998 and no interest income was recorded. The average
recorded investment in impaired loans during the year ended December 31, 1997,
was approximately $1.1 million. For the year ended December 31, 1997, the
Company recognized interest income (using the cash basis method of income
recognition) on those impaired loans of $92.
11
<PAGE> 12
The following table sets forth an analysis of the Company's allowance for losses
on loans for the periods indicated. Where specific loan loss allowances have
been established, any difference between the loss allowance and the amount of
the loss realized has been charged to the allowance for losses on loans.
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance at beginning of year $ 6,070 $ 5,630 $ 4,870 $ 4,429 $ 4,825
Provision for losses on loans 460 700 800 800 800
Charge-offs:
Residential real estate 194 323 114 238 -
Commercial real estate 350 - - 236 1,054
Construction - - - - -
Land 41 - - - -
Commercial business - - - - 152
Consumer 45 - - - -
-------------------------------------------------------------
Total charge-offs 630 323 114 474 1,206
Recoveries 129 63 74 115 10
-------------------------------------------------------------
Net charge-offs 501 260 40 359 1,196
-------------------------------------------------------------
Allowance at end of year $ 6,029 $ 6,070 $ 5,630 $ 4,870 $ 4,429
=============================================================
Allowance for losses on loans to
loans receivable at end of year 1.62% 1.54% 1.42% 1.24% 1.18%
Net charge-offs to average
loans during the year 0.13% 0.07% 0.01% 0.10% 0.35%
Allowance for losses on loans to
nonaccrual loans at end of year 177.79% 110.93% 88.89% 84.58% 92.52%
</TABLE>
The Company regards the allowance for loan losses as a general reserve which is
available to absorb losses from all loans. However, for purposes of complying
with disclosure requirements of the Securities and Exchange Commission, the
following table presents an allocation of the allowance for loan losses among
the various loan categories and sets forth the percentage of loans in each
category to gross loans. The allocation of the allowance for loan losses as
shown in the table should neither be interpreted as an indication of future
charge-offs, nor as an indication that charge-offs in future periods will
necessarily occur in these amounts or in the indicated proportions.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
Residential $1,070 63.71% $1,217 63.86% $1,494 64.50% $1,490 65.77% $1,352 67.55%
Commercial 2,065 24.87% 2,593 24.74% 3,224 24.54% 2,351 22.09% 2,637 22.43%
Construction - 6.76% - 7.04% - 6.94% - 7.88% - 5.77%
Land 221 2.96% 242 3.11% 275 3.47% 275 3.49% 334 3.55%
OTHER LOANS:
Commercial business 155 0.54% 118 0.48% 50 0.30% 487 0.59% 101 0.53%
Consumer 146 1.16% 50 0.77% 13 0.25% 7 0.18% 5 0.17%
Unallocated 2,372 - 1,850 - 574 - 260 - - -
--------------------------------------------------------------------------------------------------------
Total $6,029 100.00% $6,070 100.00% $5,630 100.00% $4,870 100.00% $4,429 100.00%
========================================================================================================
</TABLE>
12
<PAGE> 13
SECURITIES
The following table sets forth securities classified as available-for-sale, at
fair value at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------
Fair Percent of Fair Percent of Fair Percent of
Value Portfolio Value Portfolio Value Portfolio
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency securities $ 25,934 51.18% $ 29,972 63.82% $ 10,986 19.15%
Government securities fund (1) 10,511 20.74% 6,957 14.81% 16,411 28.61%
Money market fund 7,855 15.50% 3,697 7.87% 888 1.55%
ARM securities fund - - - - 5,187 9.04%
CMO/REMIC securities - - - - 11,520 20.08%
Municipal bonds - - - - 861 1.50%
Preferred stock 4,233 8.35% 3,715 7.91% 9,387 16.37%
Common stock 2,139 4.23% 2,626 5.59% 2,122 3.70%
-----------------------------------------------------------------------
Total fair value $ 50,672 100.00% $ 46,967 100.00% $ 57,362 100.00%
=======================================================================
</TABLE>
(1) The Government securities fund is a diversified bond fund which invests in
U.S. Treasury and Federal Agency securities with remaining maturities of five
years or less, which are permissible under applicable federal law for federal
savings associations, national banks, and federal credit unions. At December 31,
1997, it was determined that the decline in fair value incurred by this fund
was other than temporary, and a $241 write-down to fair value was charged to
earnings.
The following table sets forth the maturities and weighted average yields of the
securities in the Company's available-for-sale portfolio at December 31, 1998.
Mutual funds and equity securities have no stated maturity and are included in
the total column only.
<TABLE>
<CAPTION>
After one year After five years
Within one year through five years through ten years
Amount Yield Amount Yield Amount Yield
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency securities $ 7,174 6.44% $ 10,075 5.93% $ 7,535 6.46%
Government securities fund - - - - - -
Money market fund - - - - - -
Preferred stock - - - - - -
Common stock (1) - - - - - -
--------------------------------------------------------------------------------
Total fair value $ 7,174 6.44% $ 10,075 5.93% $ 7,535 6.46%
================================================================================
</TABLE>
<TABLE>
<CAPTION>
After ten years Total
Amount Yield Amount Yield
--------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
agency securities $ 1,150 6.93% $25,934 6.26%
Government securities fund - - 10,511 5.54%
Money market fund - - 7,855 4.47%
Preferred stock - - 4,233 7.10%
Common stock (1) - - 2,139 4.88%
--------------------------------------------
Total fair value $ 1,150 6.93% $50,672 5.85%
============================================
</TABLE>
(1) Yield for common stocks based on current dividends paid, if any.
13
<PAGE> 14
The following table sets forth securities classified as held-to-maturity, at
amortized cost at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------
Amortized Percent of Amortized Percent of Amortized Percent of
Cost Portfolio Cost Portfolio Cost Portfolio
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency securities $ - - $ - - $ 5,000 17.88%
FHLMC/FNMA mortgage-
backed pass-through securities 10,529 73.39% 13,795 73.50% 17,209 61.52%
CMO/REMIC securities 1,028 7.16% 1,709 9.10% 2,406 8.60%
Municipal bonds 134 0.93% 140 0.75% 145 0.52%
Federal Home Loan Bank stock 2,657 18.52% 3,124 16.65% 3,210 11.48%
-----------------------------------------------------------------------
Total amortized cost $ 14,348 100.00% $ 18,768 100.00% $ 27,970 100.00%
=======================================================================
Total fair value $ 14,222 $ 18,606 $ 27,375
======== ======== ========
</TABLE>
The following table sets forth the maturities and weighted average yields of the
securities in the Company's held-to-maturity portfolio at December 31, 1998.
Federal Home Loan Bank stock has no stated maturity and is included in the total
column only.
<TABLE>
<CAPTION>
After one year After five years
through five years through ten years After ten years Total
Amount Yield Amount Yield Amount Yield Amount Yield
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FHLMC/FNMA mortgage-
backed pass-through securities $ 46 8.00% $ 9,154 5.82% $ 1,329 6.76% $ 10,529 5.94%
CMO/REMIC securities - - - - 1,028 6.58% 1,028 6.58%
Municipal bonds - - - - 134 6.40% 134 6.40%
Federal Home Loan Bank stock - - - - - - 2,657 6.63%
----------------------------------------------------------------------------------------------
Total amortized cost $ 46 8.00% $ 9,154 5.82% $ 2,491 6.67% $ 14,348 6.12%
==============================================================================================
</TABLE>
14
<PAGE> 15
LIMITED PARTNERSHIPS
The following table sets forth the Company's investment in limited partnerships
by type of investment at December 31, 1998 and 1997, and the related net income
(before income taxes) for the three years ended December 31, 1998:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
------------------------
<S> <C> <C>
Investment in:
Residential construction and sale $ 2,618 $ 6,003
Residential investment (rental) property 243 2,118
Commercial investment (rental) property 1,173 1,167
Mortgage loan servicing 8,871 15,357
------------------------
Total $ 12,905 $ 24,645
========================
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Income from:
Residential construction and sale $ 1,479 $ 821 $ 1,223
Residential investment (rental) property 3,438 (351) (470)
Commercial investment (rental) property 139 1,538 231
Mortgage loan servicing (5,768) 1,377 655
-------------------------------------
Total $ (712) $ 3,385 $ 1,639
-------------------------------------
</TABLE>
The Company invests in limited partnerships through both its holding company and
its subsidiaries. These limited partnerships engage in single family residential
development, rental of apartment and office buildings, condominium conversion
and sale, and mortgage loan servicing. (Also see "Subsidiary Activities.")
The Company's investment in limited partnerships decreased $11.7 million, or
47.6%, to $12.9 million at December 31, 1998, from $24.6 million at December 31,
1997. The Company invested $2.4 million in existing residential construction and
sale partnerships and $278 in an existing low income housing partnership. The
investment in residential construction added 189 single family homesites to an
existing project in Algonquin, Illinois. The construction and sale of single
family homes in the suburban Chicago market is in partnership with a nationally
known builder with whom the Company has completed several previous projects.
During 1998 the Company recorded $1.5 million in income, with $7.3 million in
cash returned from these partnerships.
During the first quarter of 1998 the Company disposed of its $1.8 million, 90%
limited partnership interest in a 288 unit apartment complex in Fort Lauderdale,
Florida. The partnership was organized in 1993 to purchase the apartment complex
and convert it to condominium units for sale. Various problems with the
conversion resulted in a decision to resell the property instead of converting
it. The Company originally invested $4.3 million in the partnership. The
property has a positive cash flow, but depreciation and conversion cost
write-offs have resulted in annual losses to the Company amounting to $1.9
million over five years. The Company's investment balance was also reduced by
partnership distributions in the amount of $615. Sale of the property was held
up by litigation with a potential buyer, which was settled in 1996, and in 1997
the partnership entered into a contract for sale, which was scheduled to close
during the fourth quarter of 1997. That contract failed to close, and the
partnership entered into a new contract for sale which closed in the first
quarter of 1998. The sale of the property resulted in $3.6 million in income,
with $5.6 million in cash proceeds for 1998.
Purchased mortgage loan servicing rights represent the right to collect
servicing fees and ancillary income from 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). 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.
15
<PAGE> 16
The Company's investment in mortgage loan servicing, through a limited
partnership, had been a steady source of income prior to 1998. However, as
interest rates fell precipitously in 1998, mortgage prepayments escalated,
increasing prepayment expectations, and eroding the value of mortgage servicing
rights, especially with respect to higher rate loans. The Company reviewed
appraisals of the mortgage servicing rights prepared quarterly for lenders to
the partnership for indications of impairment. Impairment reserves of $1.4
million, $4.3 million, and $700 were recorded in second, third, and fourth
quarters of 1998, respectively, based on the Company's share of reserves
established by the partnerships. Income from the servicing partnerships reduced
the net loss on servicing partnerships to $5.8 million, with $717 cash returned
by the partnerships.
The Company's investment in limited partnerships increased $187, or 0.8%, to
$24.6 million at December 31, 1997, from $24.5 million at December 31, 1996. The
Company invested $2.4 million in an existing residential construction and sale
partnership, $544 in existing residential rental property partnerships, and $900
in a commercial rental property partnership. The $2.4 million investment added
121 single family home sites to 132 single family homesites being developed in a
project in Naperville, Illinois, which was started in 1996. The $544 included
$344 used to fund a commitment to low income housing which is generating
significant tax credits for the Company, and $200 to fund improvements to an
existing multifamily rental property.
During 1997 the Company received distributions from two limited partnerships
representing the Company's share of gains on the sale of the underlying rental
properties. An apartment complex located near Denver, Colorado was sold at a
gain of $317 during the first quarter, and during the fourth quarter an office
complex, also located near Denver, was sold at a gain of $1.3 million.
DEPOSITS
Total deposits at December 31, 1998, were $348.3 million, a decrease of $177,
from $348.5 million at December 31, 1997. The Company opened a new ATM site at
its East Side (Chicago) office first quarter of 1998, which will improve
convenience for its customers. The Company's ATM program has proven successful
in providing additional fee income and helping to retain deposits. However,
increased competition for depositor funds from the stock market, mutual funds,
and annuity programs, as well as traditional competitors like banks and other
thrifts, has made it difficult to retain deposits without overpaying. Total
deposits at December 31, 1997, were $348.5 million, a decrease of $8.8 million,
or 2.5%, from $357.3 million at December 31, 1996.
The following table sets forth the average balance of deposit categories and the
average rates paid for each of the periods indicated.
<TABLE>
<CAPTION>
For the year ended December 31,
1998 1997 1996
Balance Rate Balance Rate Balance Rate
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non interest bearing demand $ 6,252 - $ 5,251 - $ 5,073 -
Interest bearing demand 29,063 3.03% 25,965 3.07% 25,369 3.02%
Passbook accounts 60,796 2.73% 62,830 2.75% 64,919 2.72%
Certificates of deposit 253,238 5.64% 259,300 5.83% 268,599 5.89%
------------------------------------------------------------------------------
Total $349,349 4.81% $353,346 4.99% $363,960 5.04%
==============================================================================
</TABLE>
The following table sets forth the maturities of certificates of deposit of
$100,000 or more at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Three months or less $ 5,311
Over three months through six months 4,233
Over six months through twelve months 5,763
Over twelve months 5,412
---------
Total $ 20,719
=========
</TABLE>
16
<PAGE> 17
SHORT TERM BORROWINGS
Substantially all of the Company's borrowing needs are satisfied through
advances from the Federal Home Loan Bank which are available on terms with
maturities from daily to ten years. At December 31, 1998, the Company had no
daily advances, $20.0 million in term advances maturing in 1999 and $12.3
million in term advances maturing in 2001 through 2003. The following table sets
forth certain information regarding Federal Home Loan Bank (FHLB) advances for
the dates indicated.
<TABLE>
<CAPTION>
For the year ended December 31,
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Average balance outstanding $ 42,772 $ 53,677 $ 45,136
Maximum amount outstanding at any month end 45,060 61,850 59,850
Balance outstanding at end of year 32,310 45,060 59,850
Weighted average interest rate during year 6.22% 6.19% 6.00%
Weighted average interest rate at end of year 6.00% 6.10% 6.14%
</TABLE>
RESULTS OF OPERATIONS
Net income for the year ended December 31, 1998, decreased $2.1 million, to $5.9
million, compared to $8.0 million for the year ended December 31, 1997. Diluted
earnings per share for 1998 was $1.73, compared to $2.29 for 1997. The primary
reason for the decrease was a $4.1 million decrease in income from limited
partnerships. The decrease included a $5.8 million loss from the Company's
limited partnership investments in mortgage loan servicing, primarily due to
impairment allowances for purchased mortgage servicing rights, offset in part by
a $3.6 million gain on the sale of a limited partnership investment property
during the first quarter of 1998. The $5.8 million loss reduced diluted earnings
per share, net of income taxes, by approximately $1.12, while the $3.6 million
gain increased diluted earnings per share, net of income taxes, by approximately
$0.71 for the year ended December 31, 1998. Return on average assets (ROA)
decreased to 1.21% for the year ended December 31, 1998, from 1.61% in 1997.
Return on average stockholders' equity (ROE) for 1998 was 6.92%, compared to
10.20% in 1997.
Net income for the year ended December 31, 1997 was $8.0 million, compared to
$5.4 million for the year ended December 31, 1996. The primary reason for the
increase in earnings for 1997 was that in 1996 the Company made a payment of
$2.3 million for the FDIC special assessment to recapitalize the SAIF pursuant
to legislation signed by President Clinton on September 30, 1996. Net income for
1997 also benefited by a $570 reduction in the FDIC premium for insurance of
accounts. Income from limited partnerships increased by $1.8 million, to $3.4
million in 1997, from $1.6 million in 1996, primarily because of gains on the
sale of two rental properties in the amount of $317 (first quarter) and $1.3
million (fourth quarter), respectively. Basic earnings per share increased to
$2.46 for the year ended December 31, 1997, compared to $1.44 for 1996, while
diluted earnings per share increased to $2.29 for 1997, from $1.36 for 1996. The
FDIC special assessment, net of income taxes, reduced earnings per share by
$0.43 ($0.40 diluted) for the year ended December 31, 1996. The FDIC premium for
insurance of accounts decreased from 23 cents per $100 of deposits in 1996 to
approximately 6.4 cents per $100 of deposits in 1997. Return on average assets
(ROA) increased to 1.61% for the year ended December 31, 1997, from 1.08% in
1996. Return on average stockholders' equity (ROE) for 1997 was 10.20%, compared
to 6.56% in 1996.
NET INTEREST INCOME
Net interest income decreased $211, to $17.8 million for the year ended December
31, 1998, compared to $18.0 million for the year ended December 31, 1997. The
average yield on interest earning assets decreased to 8.19% during 1998, from
8.51% during 1997, while the average cost of funds decreased to 5.05%, from
5.22% for these same periods, resulting in a decrease in the rate spread to
3.14% in 1998, from 3.29% in 1997. The net interest margin decreased to 3.91%
for 1998, compared to 3.92% for 1997.
Net interest income increased by $108, to $18.0 million for the year ended
December 31, 1997, from $17.9 million for 1996. The average yield on interest
earning assets increased to 8.51% during 1997, compared to 8.26% during 1996,
while the average cost of funds increased to 5.22% in 1997, from 5.21% in 1996,
resulting in an increase in the rate spread to 3.29% in 1997, compared to 3.05%
in 1996.
17
<PAGE> 18
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------------------------------------------------
1998 1997
-----------------------------------------------------------------------------
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance (3) Dividends Cost Balance (3) Dividends Cost
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Mortgage loans (1) $ 370,485 $ 31,637 8.54% $ 380,092 $ 33,612 8.84%
Consumer loans (1) 1,598 388 24.28% 1,242 174 14.01%
Commercial loans (1) 4,094 518 12.65% 1,431 227 15.86%
-----------------------------------------------------------------------------
Total loans 376,177 32,543 8.65% 382,765 34,013 8.89%
-----------------------------------------------------------------------------
Mortgage-backed securities (2) 13,640 804 5.89% 23,783 1,453 6.11%
Other securities (2) 48,504 3,099 6.39% 46,623 3,274 7.02%
Daily interest-bearing deposits 16,226 788 4.86% 4,877 260 5.33%
-----------------------------------------------------------------------------
Total investments 78,370 4,691 5.99% 75,283 4,987 6.62%
-----------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 454,547 37,234 8.19% 458,048 39,000 8.51%
Office properties and equipment 4,690 4,244
Real estate 2,354 2,316
Other assets 25,158 30,737
--------- ---------
TOTAL ASSETS $ 486,749 $ 495,345
========= =========
INTEREST BEARING LIABILITIES:
Passbook accounts $ 60,796 $ 1,659 2.73% $ 62,830 $ 1,728 2.75%
NOW accounts 20,271 580 2.86% 18,232 535 2.93%
Money market accounts 8,792 301 3.42% 7,733 262 3.39%
Certificates of deposit 253,238 14,272 5.64% 259,300 15,116 5.83%
-----------------------------------------------------------------------------
Total deposits 343,097 16,812 4.90% 348,095 17,641 5.07%
Borrowings 42,772 2,660 6.22% 54,365 3,386 6.23%
-----------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 385,869 19,472 5.05% 402,460 21,027 5.22%
Non-interest-bearing deposits 6,252 5,251
Other liabilities 9,582 9,351
--------- ---------
TOTAL LIABILITIES 401,703 417,062
Stockholders' equity 85,046 78,283
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 486,749 $ 495,345
========= -------- ========= -------
Net interest income $ 17,762 $17,973
======== =======
Interest rate spread 3.14% 3.29%
Net interest margin 3.91% 3.92%
Ratio of average interest-earning assets
to average interest-bearing liabilities 117.80% 113.81%
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------
Interest Average
Average and Yield/
Balance (3) Dividends Cost
-----------------------------------
<S> <C> <C> <C>
INTEREST EARNING ASSETS:
Mortgage loans (1) $ 372,231 $ 32,507 8.73%
Consumer loans (1) 832 63 7.57%
Commercial loans (1) 1,866 240 12.86%
-----------------------------------
Total loans 374,929 32,810 8.75%
-----------------------------------
Mortgage-backed securities (2) 34,111 2,098 6.15%
Other securities (2) 56,944 3,844 6.75%
Daily interest-bearing deposits 5,276 167 3.17%
-----------------------------------
Total investments 96,331 6,109 6.34%
-----------------------------------
TOTAL INTEREST-EARNING ASSETS 471,260 38,919 8.26%
Office properties and equipment 4,170
Real estate 2,069
Other assets 23,647
---------
TOTAL ASSETS $ 501,146
=========
INTEREST BEARING LIABILITIES:
Passbook accounts $ 64,919 $ 1,767 2.72%
NOW accounts 18,515 551 2.98%
Money market accounts 6,854 215 3.14%
Certificates of deposit 268,599 15,815 5.89%
-----------------------------------
Total deposits 358,887 18,348 5.11%
Borrowings 45,136 2,706 6.00%
-----------------------------------
TOTAL INTEREST-BEARING LIABILITIES 404,023 21,054 5.21%
Non-interest-bearing deposits 5,073
Other liabilities 9,758
---------
TOTAL LIABILITIES 418,854
Stockholders' equity 82,292
---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 501,146
========= -------
Net interest income $17,865
=======
Interest rate spread 3.05%
Net interest margin 3.79%
Ratio of average interest-earning assets
to average interest-bearing liabilities 116.64%
</TABLE>
(1) Includes nonaccrual loans.
(2) Includes securities available-for-sale at amortized cost.
(3) Based on monthly average balances.
18
<PAGE> 19
RATE/VOLUME ANALYSIS
The table below presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
For the year ended December 31,
1998 vs. 1997 1997 vs. 1996
Increase (Decrease) Increase (Decrease)
Due to Due to Due to Due to
Rate Volume Net Rate Volume Net
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Mortgage loans $ (1,138) $ (837) $ (1,975) $ 413 $ 692 $ 1,105
Consumer loans 154 60 214 70 41 111
Commercial loans (54) 345 291 49 (62) (13)
-------------------------------------------------------------------
Total loan interest (1,038) (432) (1,470) 532 671 1,203
-------------------------------------------------------------------
Mortgage-backed securities (49) (600) (649) (14) (631) (645)
Other securities (303) 128 (175) 150 (720) (570)
Daily interest-bearing deposits (25) 553 528 106 (13) 93
-------------------------------------------------------------------
Total investment interest (377) 81 (296) 242 (1,364) (1,122)
-------------------------------------------------------------------
Total interest income (1,415) (351) (1,766) 774 (693) 81
-------------------------------------------------------------------
INTEREST BEARING LIABILITIES:
Interest-bearing deposits (525) (304) (829) (127) (580) (707)
Borrowings (5) (721) (726) 109 571 680
-------------------------------------------------------------------
Total interest expense (530) (1,025) (1,555) (18) (9) (27)
-------------------------------------------------------------------
Net interest income $ (885) $ 674 $ (211) $ 792 $ (684) $ 108
===================================================================
</TABLE>
ASSET/LIABILITY MANAGEMENT
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest earning assets
anticipated, based upon certain assumptions, to mature or reprice within a
specific time period and the amount of interest bearing liabilities anticipated,
based upon certain assumptions, to mature or reprice within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities, and negative when the
amount of interest rate sensitive liabilities exceeds the amount of interest
rate sensitive assets.
During a period of rising interest rates, a positive gap would tend to result in
an increase in net interest income, while a negative gap would tend to adversely
affect net interest income. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income, while a
positive gap would tend to adversely affect net interest income.
At December 31, 1998, total interest earning assets maturing or repricing within
one year exceeded total interest bearing liabilities maturing or repricing
within one year by $40.2 million, representing a positive one year gap ratio of
8.4%. If interest rates continue to fall in 1999, as they have in 1998, the
positive gap would indicate decreased net interest income in 1999.
19
<PAGE> 20
<TABLE>
<CAPTION>
At December 31,
Within Over 1-3 Over 3-5 Over
1 year years years 5 years Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans receivable $188,745 $ 94,523 $ 44,795 $ 36,186 $ 364,249
Mortgage-backed securities 2,603 3,544 2,075 3,335 11,557
Other securities 50,672 - - 2,791 53,463
Interest earning deposits 30,130 - - - 30,130
-------------------------------------------------------------------
Total interest earning assets 272,150 98,067 46,870 42,312 459,399
-------------------------------------------------------------------
INTEREST BEARING LIABILITIES:
NOW accounts 5,627 7,385 4,154 5,342 22,508
Money market accounts 2,284 3,101 1,748 2,278 9,411
Passbook accounts 15,228 19,986 11,242 14,454 60,910
Certificates of deposit 200,731 41,089 7,860 1,189 250,869
FHLB advances 8,000 18,235 6,075 - 32,310
-------------------------------------------------------------------
Total interest bearing liabilities 231,870 89,796 31,079 23,263 376,008
-------------------------------------------------------------------
INTEREST SENSITIVITY GAP $ 40,280 $ 8,271 $ 15,791 $ 19,049 $ 83,391
===================================================================
CUMULATIVE INTEREST SENSITIVITY GAP $ 40,280 $ 48,551 $ 64,342 $ 83,391
====================================================
Cumulative gap as a percentage
of total assets 8.41% 10.13% 13.43% 17.41%
Cumulative interest earning assets as a
percentage of interest bearing liabilities 117.37% 115.09% 118.24% 122.18%
</TABLE>
The above table sets forth the amount of interest earning assets and interest
bearing liabilities outstanding at December 31, 1998, which are expected to
reprice or mature in each of the future time periods shown, based on certain
assumptions. Except as stated, the amounts 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 terms of the asset or
liability. Equity securities and mutual fund investments held as
available-for-sale are included in the "within 1 year" column; FHLB stock is
included in "over 5 years". Fixed rate loans are assumed to prepay at rates of
11% to 26%, dependent upon the interest rate of the loan. Adjustable rate loans
are assumed to prepay at 45%. Multifamily and commercial real estate loans are
assumed to prepay at 11% for fixed rate and 18% for adjustable rate loans. The
Company has assumed transaction accounts reprice at the rate of 7% to 12% in
year one, 33% in years two and three, 18% in years four through ten, and 5%
thereafter. Fixed rate/maturity accounts reprice at maturity. (Also see Item 7a.
"Quantitative and Qualitative Disclosures About Market Risk.")
PROVISION FOR LOAN LOSSES
The allowance for losses on loans is established through a provision for loan
losses based on management's evaluation of the risk inherent in its loan
portfolio and the general economy. 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, review of larger and known problem loans, and
the Company's internal credit review process.
The Company's provision for losses on loans was reduced to $460 for the year
ended December 31, 1998, from $700 for the year ended December 31, 1997,
primarily due to reductions in non-performing loans and loans receivable. Net
chargeoffs to the allowance for losses on loans were $501 during 1998, compared
to $260 during 1997. The allowance for losses on loans increased to 1.62% of
loans receivable at December 31, 1998, compared to 1.54% of loans receivable at
December 31, 1997. Nonperforming loans to loans receivable decreased to 0.91% at
December 31, 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 1.15% at December 31, 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 178% of
nonperforming loans at December 31, 1998, increased from 111% at December 31,
1997.
20
<PAGE> 21
The Company reduced its annual provision for losses on loans to $700 for the
year ended December 31, 1997, from $800 for the three years ended December 31,
1996. Average net charge-offs during this four year period were $464, or 60% of
the provision, although individual year's charge-offs were highly variable, from
a high of $1.2 million in 1994, to a low of $40 in 1996. This variability is due
primarily to the Company's commercial real estate lending, where individual
loans can have a significant impact in any one year.
Charge-offs of $323 were partially offset by recoveries of $63 during the year
ended December 31, 1997, compared to charge-offs of $114 and recoveries of $74
for 1996. The allowance for losses on loans increased to 1.54% of loans
receivable at December 31, 1997, from 1.42% at December 31, 1996. Non-performing
loans to loans receivable decreased to 1.39% at December 31, 1997, from 1.60% at
December 31, 1996, while non-performing assets to total assets increased to
1.64% at December 31, 1997, from 1.57% at December 31, 1996. The allowance for
losses on loans amounted to 110.93% of non-performing loans at December 31,
1997, increased from 88.89% at December 31, 1996.
OTHER INCOME
Other income decreased $3.4 million, to $861 during the year ended December 31,
1998, from $4.2 million during 1997, primarily due to the $4.1 million decrease
in income from limited partnerships, which included a $5.8 million loss in
mortgage loan servicing limited partnerships, which was partially offset by
increased sales of single family homes by Illinois real estate development
limited partnerships and the $3.6 million gain on sale of a limited partnership
residential investment property located in Florida.
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 1998, prepayments significantly exceeded expectations,
resulting in an estimated $6.4 million impairment of the asset at December 31,
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 December 31, 1998, the Company
had a remaining investment of $8.9 million in mortgage loan servicing, $2.6
million in residential development, and $1.4 million in other real estate
limited partnerships.
Other income increased to $4.2 million for the year ended December 31, 1997,
from $3.0 million for the year ended December 31, 1996, primarily due to the
$1.8 million increase in income from limited partnerships, partially offset by
the $283 change from gains to losses on the sale of securities. The increase in
income from limited partnerships came primarily from gains recorded on the sale
of partnership rental properties. A $317 gain was recorded during the first
quarter of 1997, and a $1.3 million gain was recorded during the fourth quarter
of 1997. Gains on loans sold decreased $53, to $167 for the year ended December
31, 1997, from $220 in 1996, primarily due to a decrease in loans sold in the
secondary market (more were retained for portfolio), and also to a more
competitive fee structure. The following table presents additional detail on
miscellaneous other income for the years indicated:
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Miscellaneous other income:
Rental income $ 135 $ 144 $ 170
Income from real estate owned, net (127) (257) (292)
ATM/debit card fees 228 195 152
Credit enhancement fees 111 78 67
Other miscellaneous 187 78 310
-----------------------------------
Total miscellaneous other income $ 534 $ 238 $ 407
===================================
</TABLE>
21
<PAGE> 22
OPERATING EXPENSES
Operating expenses remained at approximately $9.5 million for years 1998 and
1997. Compensation expense decreased $311, to $5.2 million in 1998, from $5.5
million in 1997, offsetting in part an increase of $94 in professional fees.
Data processing and occupancy (including equipment) expenses increased $82 in
1998, primarily as the result of Year 2000 preparations. ATM/debit card expenses
increased $82, to $208 in 1998, compared to $126 in 1997, primarily due to the
introduction of the Company's debit card program in 1998 and the related front
end fixed costs not yet absorbed by volume. Operating expenses as a percent of
average assets increased to 1.96% in 1998, from 1.93% in 1997. The Company's
efficiency ratio was 52.4% in 1998, compared to 44.3% in 1997, primarily due to
a $3.4 million decrease in other income.
Operating expenses decreased $2.7 million, to $9.5 million for the year ended
December 31, 1997, from $12.2 million in 1996, primarily due to the $2.3 million
FDIC special assessment paid in 1996. The FDIC premium for insurance of accounts
decreased $570, to $231 in 1997, from $801 in 1996, due to a reduction in the
assessment rate. Compensation expense increased $214, or 4.0%, to $5.5 million
in 1997, from $5.3 million in 1996. Professional fees decreased $124, to $348
for 1997, from $472 in 1996, primarily due to a $130 decrease in legal fees.
Operating expenses as a percent of average assets decreased to 1.93% in 1997,
from 1.98% (before the special assessment) in 1996. The Company's efficiency
ratio was 44.3% in 1997, compared to 49.4% (before the special assessment) in
1996.
The following table provides additional detail on miscellaneous other expenses
for the years indicated:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Miscellaneous other expense:
Stationery and supplies $ 187 $ 213 $ 214
Telephone and postage 278 249 222
Loan expense 21 24 22
Insurance 97 111 133
Security 100 89 77
Audit and examination fees 188 186 193
Legal fees 145 99 229
Consulting fees 57 11 18
Benefit plan administration fees 44 52 32
Due and subscriptions 37 40 65
Checking account expenses 24 20 28
ATM/debit card expenses 208 126 99
Minority interest 54 41 28
Other 328 376 342
-------------------------------------
Total miscellaneous other expense $1,768 $1,637 $1,702
=====================================
</TABLE>
INCOME TAXES
The Company's effective income tax rate for 1998 was 31.95%, compared to 33.30%
for 1997, and 31.0% for 1996. The effective tax rate for all three years was
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 are deposits, proceeds from principal and
interest payments on loans, securities, including mortgage-backed securities,
and Federal Home Loan Bank advances. While maturities and scheduled amortization
of loans and mortgage-backed securities are predictable sources of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions, and competition. The Company's liquidity,
represented by cash equivalents, is a product of its operating, investing and
financing activities. These activities for the three years ended December 31,
1998, are summarized in the following table.
22
<PAGE> 23
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 5,881 $ 7,987 $ 5,399
Adjustments to reconcile net income to net cash
provided by (used in) operating activities 1,123 (2,465) 85
Net cash provided by investing activities 31,640 27,144 701
Net cash used in financing activities (13,119) (33,558) (5,667)
-------------------------------------------
Net increase (decrease) in cash and cash equivalents 25,525 (892) 518
Cash and cash equivalents at beginning of year 8,283 9,175 8,657
-------------------------------------------
Cash and cash equivalents at end of year $ 33,808 $ 8,283 $ 9,175
===========================================
</TABLE>
The primary investing activity of the Company is the origination and purchase of
mortgage loans for its own portfolio. The Company originated or purchased $91.9
million, $94.9 million, and $86.7 million in loans for the years ended December
31, 1998, 1997, and 1996, respectively. Repayments and prepayments of loans were
$112.7 million, $97.9 million, and $83.1 million for these same periods.
The Company also made significant investments in both debt and equity
securities. The company invested $29.2 million, $45.1 million, and $30.8 million
in these securities for the years ended December 31, 1998, 1997, and 1996,
respectively. Proceeds from sales, repayments and maturities of $29.7 million,
$65.9 million, and $45.8 million for these same periods.
Financing activities during 1998 consisted primarily of a $12.8 million decrease
in Federal Home Loan Bank advances. Financing activities during 1997 included a
$14.8 million decrease in Federal Home Loan Bank advances, a $8.9 million
decrease in deposits and the repurchase of 426,597 shares of Treasury stock for
$10.0 million, at an average cost of $23.50 per share. Financing activities
during 1996 included a $4.7 million increase in Federal Home Loan Bank advances,
offset by a $1.9 million decrease in deposits and the repurchase of 466,229
shares of Treasury stock for $8.7 million, at an average cost of $18.63 per
share.
At December 31, 1998, the Company had approved mortgage loan commitments
totalling $4.1 million, $8.9 million of undisbursed loans-in-process, a $1.1
million commitment to invest in low income housing, $9.0 million in credit
enhancement arrangements (secured by securities and a letter of credit from the
Federal Home Loan Bank), and $12.7 million in unused lines of credit, primarily
to mortgage brokers.
Federal regulations require a savings institution to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least 4% of
the average daily balance of its net withdrawable deposits and short term
borrowings. Management has consistently maintained liquidity levels in excess of
these regulatory requirements. The Association's average liquidity ratios were
14.6%, 8.8%, and 7.9% during 1998, 1997, and 1996, respectively.
The Association is also required to maintain specific amounts of capital
pursuant to federal regulations. As of December 31, 1998, the Association was in
compliance with all regulatory capital requirements with tangible and core
capital of 12.8%, and risk-based capital of 20.9%, well above the requirements
of 1.5%, 4.0%, and 8.0%, respectively.
SUBSIDIARY ACTIVITIES
Calumet Residential Corporation (CRC) is a second tier subsidiary of the
Company, formed for the purpose of investing in real estate development and
sale. CRC is currently invested as a limited partner in three Illinois single
family home developments in Algonquin, Lake Villa and Naperville Illinois.
As of December 31, 1998, the Algonquin development has delivered 885 of 1,092
single family homes, with 46 homes under contract and 158 homesites remaining to
be sold. During 1998 CRC increased its investment in this project by $2.4
million, adding 189 homesites to the project. During 1998 the project generated
$344 income to CRC on closings of 92 units, and $3.1 million to date. CRC has a
remaining investment of $2.2 million in the project at December 31, 1998.
23
<PAGE> 24
As of December 31, 1998, the Lake Villa development has delivered 132 of 166
single family homes, with 18 homes under contract and 14 homesites remaining to
be sold. During 1998 the project generated $130 income to CRC on closings of 48
units, and $590 to date. CRC has a remaining investment of $161 in the project
at December 31, 1998.
As of December 31, 1998, the Naperville development has delivered 77 of 203
single family homes and 50 developed lots, with 60 homes under contract and 50
homesites remaining to be sold. During 1998 CRC recognized $1.0 million income
from this project and has no remaining investment in the project at December 31,
1998.
CRC also participates as a limited partner in an office building rental property
in a suburb of Denver, Colorado. During 1998 the investment generated $113
income, and at December 31, 1998 had a remaining investment balance of $274.
Calumet Savings Service Corporation (CSSC) is a second tier subsidiary of the
Company and is engaged in the sale of insurance, annuity and investment products
through its independent insurance agency and through its franchise arrangement
with Investor Services. Calumet Financial Corporation (CFC) is a wholly owned
subsidiary of CSSC, formed in 1997 to make consumer loans and small business
loans.
Calumet Mortgage Corporation of Idaho (CMCID) was formed as a subsidiary of CSSC
in January, 1995, to incorporate the existing loan origination office of the
Association located in Ketchum, Idaho. This office originates and sells mortgage
loans, primarily in Sun Valley and the surrounding areas. The Company increased
its portfolio of Idaho mortgage loans primarily through this subsidiary. CMCID
originated $35.4 million in mortgage loans in 1998, equal to its production in
1997.
THE YEAR 2000
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.
The Company has spent approximately $800,000 to date to upgrade and install new
systems, completely replacing all teller and new, state of the art account
terminals and software. 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 capital expenditures will be amortized over a three to five
year period. The Company does not track the internal costs incurred for the Y2K
project. Such internal costs are principally related to the payroll costs
attributable to the employees working on the project.
The hardware to process all teller, platform and general ledger systems was
installed and in service during the third quarter of 1998. 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 begun testing for
all clients 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. Tests on this system were successfully performed
during the fourth quarter of 1998.
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.
24
<PAGE> 25
Calumet Savings Service Corporation has installed the necessary hardware to
render its accounting and insurance systems Y2K compliant. New software was
obtained, installed, and successfully tested in the fourth quarter of 1998.
Calumet Financial Corporation utilizes the same service bureau as the Company
for processing their consumer loans. CFC began testing in the fourth quarter of
1998. In addition, CFC utilizes a loan origination package that was 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
were successfully completed during 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.
ITEM 7a. QUANTITATIVE AND QUALITATIVE 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.
Interest rate risk results when the maturity or repricing intervals and interest
rate indices of the interest-earning assets, interest-bearing liabilities, and
off-balance sheet financial instruments are different, creating a risk that
changes in the level of market interest rates will result in disproportionate
changes in the value of, and the net earnings generated from, the Association's
interest-earning assets, interest-bearing liabilities, and off-balance sheet
financial instruments. The Association's exposure to interest rate risk is
managed primarily through the Association's strategy of selecting the types of
terms of interest-earning assets and interest-bearing liabilities which generate
favorable earnings, while limiting the potential negative effect of changes in
market interest rates. Since the Association's primary source of
interest-bearing liabilities is customer deposits, the Association's ability to
manage the types and terms of such deposits may be somewhat limited by customer
preferences in the market areas in which the Association operates. Borrowings,
which include FHLB advances, both short-term borrowings, and long-term
borrowings, are generally structured with specific terms which in management's
judgment, when aggregated with the terms for outstanding deposits and matched
with interest-earning assets, mitigate the Association's exposure to interest
rate risk. The rates, terms and interest rate indices of the Association's
interest-earning assets result primarily from the Association's strategy of
investing in loans and securities (a substantial portion of which have
adjustable-rate terms) which permit the Association to limit its exposure to
interest rate risk, together with credit risk, while at the same time achieving
a positive interest rate spread from the difference between the income earned on
interest-earning assets and the cost of interest-bearing liabilities (see
"Asset/ Liability Management" for a further discussion of rate sensitive assets,
rate sensitive liabilities and net interest spread).
SIGNIFICANT ASSUMPTIONS UTILIZED IN MANAGING INTEREST RATE RISK
Managing the Association's exposure to interest rate risk involves significant
assumptions about the exercise of imbedded options and the relationship of
various interest rate indices of certain financial instruments.
IMBEDDED OPTIONS: A substantial portion of the Association's loans and
mortgage-backed securities are residential mortgage loans containing significant
imbedded options which permit the borrower to prepay the principal balance of
the loan prior to maturity ("prepayments") without penalty. A loan's propensity
for prepayment is dependent upon a number of factors, including, the current
interest rate and interest rate index (if any) on the loan, the financial
ability of the borrower to refinance, the economic benefit to be obtained from
refinancing, availability of refinancing at attractive terms as well as
25
<PAGE> 26
economic and other factors in specific geographic areas which affect the sales
and price levels of residential property. In a changing interest rate
environment, prepayments may increase or decrease on fixed- and adjustable-rate
loans depending on the current relative levels and expectations of future short-
and long-term interest rates. Since a significant portion of the Association's
loans are ARM loans, prepayments on such loans generally increase when long-term
interest rates fall or are at historically low levels relative to short-term
interest rates, making fixed-rate loans more desirable.
Securities, other than those with early call provisions, generally do not have
significant imbedded options and repay pursuant to specific terms until
maturity. While savings and checking deposits generally may be withdrawn upon
the customer's request without prior notice, a continuing relationship with
customers resulting in future deposits and withdrawals is generally predictable
resulting in a dependable and uninterrupted source of funds. Time deposits
generally have early withdrawal penalties, while term FHLB advances have
prepayment penalties, which discourage customer withdrawal of time deposits and
prepayment of FHLB advances prior to maturity.
INTEREST RATE INDICES: The Association's ARM loans are primarily indexed to the
One Year Constant Maturity Treasury Index. When such loans are funded by
interest-bearing liabilities which are determined by other indices, primarily
deposits and FHLB advances, a changing interest rate environment may result in
different levels of change in the different indices leading to disproportionate
changes in the value of, and the net earnings generated from, the Association's
financial instruments. Each index is unique and is influenced by different
external factors, therefore, the historical relationships in various indices may
not necessarily be indicative of the actual change which may result in the
changing interest rate environment.
INTEREST RATE RISK MEASUREMENT
In addition to periodic gap reports (see "Asset/Liability Management") comparing
the repricing periods of interest-earning assets and interest-bearing
liabilities, management also 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.
26
<PAGE> 27
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 December 31,
1998, at current interest rates and at hypothetical higher and lower interest
rates of one and two percent.
<TABLE>
<CAPTION>
Present Value at December 31, 1998
--------------------------------------------------------------------
Down 2% Down 1% Current Up 1% Up 2%
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans, including mortgage-
backed securities:
Adjustable rate $ 166,674 $ 164,819 $ 163,085 $ 161,317 $ 159,354
Fixed rate 207,928 203,473 198,628 191,881 183,955
Commercial and consumer loans 15,395 15,313 15,234 15,158 15,084
Securities 68,788 67,378 66,010 64,624 63,202
--------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 458,785 450,983 442,957 432,980 421,595
Other assets 17,040 17,169 17,397 17,669 17,908
--------------------------------------------------------------------
Total assets $ 475,825 $ 468,152 $ 460,354 $ 450,649 $ 439,503
====================================================================
INTEREST BEARING LIABILITIES:
Passbook accounts $ 61,087 $ 60,971 $ 60,624 $ 59,022 $ 57,000
NOW accounts 29,537 29,202 28,563 27,792 27,056
Money market accounts 9,394 9,346 9,253 9,133 9,016
Certificates of deposit 256,679 254,488 252,351 250,270 248,240
--------------------------------------------------------------------
TOTAL DEPOSITS 356,697 354,007 350,791 346,217 341,312
Borrowings 33,732 33,223 32,729 32,249 31,783
--------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 390,429 387,230 383,520 378,466 373,095
Other liabilities 7,658 7,655 7,652 7,650 7,647
--------------------------------------------------------------------
Total liabilities $ 398,087 $ 394,885 $ 391,172 $ 386,116 $ 380,742
====================================================================
Loan commitments $ 132 $ 114 $ 89 $ 47 $ (11)
====================================================================
NET PORTFOLIO VALUE $ 77,870 $ 73,381 $ 69,271 $ 64,580 $ 58,750
====================================================================
</TABLE>
27
<PAGE> 28
For comparison purposes, 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
December 31, 1997, at current interest rates and at hypothetical higher and
lower interest rates of one and two percent.
<TABLE>
<CAPTION>
Present Value at December 31, 1997
----------------------------------------------------------
Down 2% Down 1% Current Up 1% Up 2%
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans, including mortgage-
backed securities:
Adjustable rate $228,046 $225,376 $222,736 $219,929 $216,675
Fixed rate 173,247 170,385 165,515 158,982 152,010
Commercial and consumer loans 9,925 9,882 9,840 9,800 9,759
Securities 46,676 45,407 44,101 42,663 41,139
----------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 457,894 451,050 442,192 431,374 419,583
Other assets 22,640 22,767 22,928 23,076 23,201
----------------------------------------------------------
Total assets $480,534 $473,817 $465,120 $454,450 $442,784
==========================================================
INTEREST BEARING LIABILITIES:
Passbook accounts $ 60,775 $ 60,538 $ 59,044 $ 56,944 $ 54,995
NOW accounts 24,046 23,632 22,976 22,357 21,779
Money market accounts 8,412 8,322 8,215 8,110 8,006
Certificates of deposit 261,784 259,691 257,663 255,653 253,706
----------------------------------------------------------
TOTAL DEPOSITS 355,017 352,183 347,898 343,064 338,486
Borrowings 46,411 45,685 44,976 44,283 43,606
----------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 401,428 397,868 392,874 387,347 382,092
Other liabilities 8,706 8,705 8,705 8,704 8,703
----------------------------------------------------------
Total liabilities $410,134 $406,573 $401,579 $396,051 $390,795
==========================================================
Loan commitments $ 315 $ 230 $ 99 $ (62) $ (237)
==========================================================
NET PORTFOLIO VALUE $ 70,715 $ 67,474 $ 63,640 $ 58,337 $ 51,752
==========================================================
</TABLE>
The calculations of present value have certain shortcomings. The discount rates
utilized for loans and mortgage-backed securities are based on estimated market
interest rate levels for similar loans and securities nationwide, with
prepayment levels generally assumed based on global statistics. The unique
characteristics of the Association's loans and mortgage-backed securities may
not necessarily parallel those assumed in the model, and therefore, would likely
result in different discount rates, prepayment experiences, and present values.
The discount rates utilized for deposits and borrowings are based upon available
alternative types and sources of funds which are not necessarily indicative of
the present value of deposits and FHLB advances since such deposits and advances
are unique to, and have certain price and customer relationship advantages for,
depository institutions. The present values are determined based on the
discounted cash flows over the remaining estimated lives of the financial
instruments and assumes that the resulting cash flows are reinvested in
financial instruments with virtually identical terms. The total measurement of
the Association's exposure to interest rate risk as presented in the above table
may not be representative of the actual values which might result from a higher
or lower interest rate environment. A higher or lower interest rate environment
will most likely result in different investment and borrowing strategies by the
Association designed to further mitigate the effect on the value of, and the net
earnings generated from, the Association's net assets from any change in
interest rates.
NET PORTFOLIO VALUE: The OTS adopted a final rule in August of 1993
incorporating an interest rate risk ("IRR") component into the risk-based
capital rules. The IRR component is a dollar amount that is deducted from total
capital for the purpose of calculating an institution's risk-based capital
requirement and is measured in terms of the sensitivity of its net portfolio
value ("NPV") to changes in interest rates. An institution's NPV is calculated
as the net discounted cash flows from assets, liabilities, and off-balance sheet
contracts. An institution's IRR component is measured as the change in the ratio
of NPV to the net present value of total assets as a result of a hypothetical
200 basis point change in market interest
28
<PAGE> 29
rates. A resulting decline in this ratio of more than 2% of the estimated
present value of an institution's total assets prior to the hypothetical 200
basis point change will require the institution to deduct from its regulatory
capital 50% of that excess decline. Implementation of the rule has been
postponed indefinitely.
The following table presents the Association's ratio of NPV to the present value
of total assets as of December 31, 1998 and 1997, as calculated by the OTS,
based on information provided to the OTS by the Association.
<TABLE>
<CAPTION>
Change in interest Net Present Present Value Ratio of NPV Percentage
rates (basis points) Value of Total Assets to PV of TA Change
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
+200 $ 58,750 $ 439,503 13.37% -1.68%
+100 64,580 450,649 14.33% -0.72%
Static 69,271 460,354 15.05% --
-100 73,381 468,152 15.67% 0.63%
-200 77,870 475,825 16.37% 1.32%
1997
+200 $ 51,752 $ 442,784 11.69% -1.99%
+100 58,337 454,450 12.84% -0.85%
Static 63,640 465,120 13.68% --
-100 67,474 473,817 14.24% 0.56%
-200 70,715 480,534 14.72% 1.03%
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate mortgage loans,
have features that restrict changes in interest rates on a short-term basis and
over the life of the loan. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels could deviate significantly from those
assumed in calculating the tables. Finally, the ability of many borrowers to
service their debt may decrease in the event of a significant interest rate
increase.
In addition, the previous table does not necessarily indicate the impact of
general interest rate movements on the Association's net interest income because
the repricing of certain categories of assets and liabilities are subject to
competitive and other pressures beyond the Association's control. As a result,
certain assets and liabilities indicated as maturing or otherwise repricing
within a stated period may in fact mature or reprice at different times and at
different volumes.
29
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Calumet Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Calumet Bancorp, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of income, cash flows , and stockholders' equity for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Calumet Bancorp,
Inc. at December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Crowe,Chizek and Company LLP
--------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 18, 1999
30
<PAGE> 31
CALUMET BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1998 1997
--------------------------
<S> <C> <C>
Assets:
Cash $ 3,678 $ 2,932
Interest bearing deposits 30,130 5,351
--------------------------
CASH AND CASH EQUIVALENTS 33,808 8,283
Securities available-for-sale 50,672 46,967
Securities held-to-maturity
(fair value: $14,222 (1998); $18,606 (1997)) 14,348 18,768
Loans receivable, net 356,544 376,988
Investment in limited partnerships 12,905 24,645
Real estate held for sale acquired
through foreclosure 2,109 2,491
Office properties and equipment, net 5,113 4,468
Accrued interest receivable and other assets 3,616 4,016
--------------------------
TOTAL ASSETS $ 479,115 $ 486,626
==========================
LIABILITIES:
Deposits $ 348,284 $ 348,461
Federal Home Loan Bank advances 32,310 45,060
Advance payments by borrowers for
taxes and insurance 3,014 3,237
Income taxes 506 1,229
Accrued interest payable and other liabilities 7,175 7,025
--------------------------
TOTAL LIABILITIES 391,289 405,012
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 (1998) and 3,616,090 (1997) shares issued 36 36
Additional paid-in capital 35,262 35,217
Accumulated other comprehensive income 1,306 1,303
Retained earnings - substantially restricted 62,667 56,786
Unearned ESOP shares - (283)
Treasury stock (474,593 shares) (11,445) (11,445)
--------------------------
TOTAL STOCKHOLDERS' EQUITY 87,826 81,614
--------------------------
Total liabilities and stockholders' equity $ 479,115 $ 486,626
==========================
</TABLE>
See notes to consolidated financial statements.
31
<PAGE> 32
CALUMET BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Interest and Dividend Income:
Loans $ 32,543 $ 34,013 $ 32,810
Securities and deposits 4,691 4,987 6,109
----------------------------------------
Total interest and dividend income 37,234 39,000 38,919
INTEREST EXPENSE:
Deposits 16,812 17,641 18,348
Federal Home Loan Bank advances 2,660 3,386 2,706
----------------------------------------
Total interest expense 19,472 21,027 21,054
----------------------------------------
NET INTEREST INCOME 17,762 17,973 17,865
Provision for losses on loans 460 700 800
----------------------------------------
Net interest income after provision for losses 17,302 17,273 17,065
OTHER INCOME:
Gain on loans sold 193 167 220
Gain (loss) on sales of real estate 137 70 (4)
Gain (loss) on sales of securities 12 (230) 53
Income (loss) from limited partnerships (712) 3,385 1,639
Insurance and brokerage commissions 273 233 352
Checking account fees 424 375 325
Other 534 238 407
----------------------------------------
Total other income 861 4,238 2,992
Other Expenses:
Compensation and benefits 5,194 5,505 5,291
Office occupancy and equipment 1,402 1,295 1,302
Federal insurance premiums 215 231 801
FDIC special assessment - - 2,316
Advertising and promotion 335 343 375
Data processing 607 525 444
Other 1,768 1,637 1,702
----------------------------------------
Total other expenses 9,521 9,536 12,231
----------------------------------------
Income before income taxes 8,642 11,975 7,826
Income taxes 2,761 3,988 2,427
----------------------------------------
NET INCOME $ 5,881 $ 7,987 $ 5,399
========================================
BASIC EARNINGS PER SHARE $ 1.87 $ 2.46 $ 1.44
========================================
DILUTED EARNINGS PER SHARE $ 1.73 $ 2.29 $ 1.36
========================================
</TABLE>
See notes to consolidated financial statements.
32
<PAGE> 33
CALUMET BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 5,881 $ 7,987 $ 5,399
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on loans 460 700 800
Provision for depreciation 457 357 361
Amortization of deferred loan and commitment fees (753) (851) (939)
Amortization and accretion of premiums and discounts 178 205 233
Amortization and allocation of stock based benefits 283 703 701
Loss (gain) on sales of securities available-for-sale (12) 230 (53)
Equity in loss (income) from limited partnerships 712 (3,385) (1,639)
Net loss (gain) on sale of real estate (137) (70) 4
Originations of loans held for sale (12,617) (6,503) (5,945)
Gain on loans sold (193) (167) (220)
Proceeds from loans sold 12,810 6,670 6,165
Change in operating assets and liabilities:
Decrease in accrued interest receivable and other assets 400 51 178
Increase (decrease) in income taxes (615) (23) 473
(Decrease) increase in accrued interest payable and other liabilities 150 (382) (34)
-------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,004 5,522 5,484
INVESTING ACTIVITIES:
Securities available-for-sale:
Purchases (29,083) (45,063) (30,238)
Proceeds from sale 9,722 53,883 35,075
Repayments and maturities 15,604 3,036 5,755
Securities held-to-maturity:
Purchases (151) (10) (557)
Repayments and maturities 4,366 8,998 4,974
Principal and fees collected on loans 112,681 97,898 79,034
Loans originated (91,379) (89,035) (83,116)
Loans purchased (510) (5,844) (3,567)
Investments in limited partnerships (2,742) (3,882) (11,563)
Return of investment in limited partnerships 13,770 7,080 4,970
Proceeds from sales of real estate 464 588 348
Purchases of office property and equipment (1,102) (505) (414)
-------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 31,640 27,144 701
</TABLE>
See notes to consolidated financial statements.
33
<PAGE> 34
CALUMET BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in demand and passbook accounts $ 5,934 $ (1,539) $ 1,602
Net decrease in certificates of deposit (6,111) (7,330) (3,523)
Proceeds of Federal Home Loan Bank advances 32,235 77,285 100,675
Repayment of Federal Home Loan Bank advances (44,985) (92,075) (95,965)
Net increase (decrease) in advance payments by
borrowers for taxes and insurance (223) 113 66
Net proceeds from exercise of stock options 31 15 165
Purchase of treasury stock - (10,027) (8,687)
-------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (13,119) (33,558) (5,667)
-------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 25,525 (892) 518
Cash and cash equivalents at beginning of year 8,283 9,175 8,657
-------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 33,808 $ 8,283 $ 9,175
===========================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest on deposits $ 17,364 $ 17,568 $ 18,371
Cash paid during the year for interest on notes payable 2,728 3,451 2,663
-------------------------------------------
$ 20,092 $ 21,019 $ 21,034
===========================================
Cash paid during the year for income taxes $ 3,649 $ 3,788 $ 2,382
===========================================
Noncash transactions:
Loans to facilitate sales of real estate owned $ 2,114 $ 88 $ 935
Loans transferred to real estate owned 2,059 1,432 553
</TABLE>
See notes to consolidated financial statements.
34
<PAGE> 35
CALUMET BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned
Common Paid-in Comprehensive Retained ESOP
Stock Capital Income Earnings Shares
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 36 $ 34,665 $ 423 $ 68,418 $ (1,414)
Comprehensive income:
Net income - - - 5,399 -
Change in net unrealized gain
on securities available-for-sale, net
of reclassification and tax effects - - (184) - -
Total comprehensive income
Proceeds from exercise of stock
options - 14,969 shares - 351 - - -
Amortization of purchase price
of MRP stock - 74 - - -
Allocation of shares to ESOP
participants - - - - 565
Repurchase of 310,819 shares
of treasury stock - - - - -
----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 36 35,090 239 73,817 (849)
Comprehensive income:
Net income - - - 7,987 -
Change in net unrealized gain
on securities available-for-sale, net
of reclassification and tax effects - - 1,064 - -
Total comprehensive income
Proceeds from exercise of stock
options - 1,749 shares - 37 - - -
Amortization of purchase price
of MRP stock - 90 - - -
Allocation of shares to ESOP
participants - - - - 566
Repurchase of 292,731 shares
of treasury stock - - - - -
Transfer 1,055,451 shares in three-
for-two stock split - - - (25,018) -
----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 36 35,217 1,303 56,786 (283)
Comprehensive income:
Net income - - - 5,881 -
Change in net unrealized gain
on securities available-for-sale, net
of reclassification and tax effects - - 3 - -
Total comprehensive income
Proceeds from exercise of stock
options - 4,364 shares - 45 - - -
Allocation of shares to ESOP
participants - - - - 283
----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ 36 $ 35,262 $ 1,306 $ 62,667 $ -
======================================================================
</TABLE>
<TABLE>
<CAPTION>
Total
Stock Stock-
Held for Treasury holders'
MRP Stock Equity
----------------------------------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ (273) $(17,745) $ 84,110
Comprehensive income:
Net income - - 5,399
Change in net unrealized gain
on securities available-for-sale, net
of reclassification and tax effects - - (184)
--------
Total comprehensive income 5,215
Proceeds from exercise of stock
options - 14,969 shares - - 351
Amortization of purchase price
of MRP stock 136 - 210
Allocation of shares to ESOP
participants - - 565
Repurchase of 310,819 shares
of treasury stock - (8,687) (8,687)
----------------------------------------
BALANCE AT DECEMBER 31, 1996 (137) (26,432) 81,764
Comprehensive income:
Net income - - 7,987
Change in net unrealized gain
on securities available-for-sale, net
of reclassification and tax effects - - 1,064
--------
Total comprehensive income 9,051
Proceeds from exercise of stock
options - 1,749 shares - - 37
Amortization of purchase price
of MRP stock 137 - 227
Allocation of shares to ESOP
participants - - 566
Repurchase of 292,731 shares
of treasury stock - (10,027) (10,027)
Transfer 1,055,451 shares in three-
for-two stock split - 25,014 (4)
----------------------------------------
BALANCE AT DECEMBER 31, 1997 - (11,445) 81,614
Comprehensive income:
Net income - - 5,881
Change in net unrealized gain
on securities available-for-sale, net
of reclassification and tax effects - - 3
--------
Total comprehensive income 5,884
Proceeds from exercise of stock
options - 4,364 shares - - 45
Allocation of shares to ESOP
participants - - 283
----------------------------------------
BALANCE AT DECEMBER 31, 1998 $ - $(11,445) $ 87,826
========================================
</TABLE>
See notes to consolidated financial statements.
35
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Calumet Bancorp, Inc.'s (the "Company's") principal business activity is the
operation of Calumet Federal Savings and Loan Association of Chicago (the
"Association"), its wholly owned subsidiary, and consists of attracting deposits
from the public and investing those deposits, together with funds generated from
operations and borrowings, primarily in residential mortgage loans. The
Association operates five financial services offices -- Dolton, Lansing, Sauk
Village and two in southeastern Chicago. The Association's deposit accounts are
insured to the maximum allowable amount by the FDIC. The Company also invests in
equity securities and in various limited partnerships which have invested in
residential development, residential and commercial rental properties, and
mortgage loan servicing.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on its loan
and investment securities portfolios, and its cost of funds, consisting of
interest paid on its deposits and borrowings. The Company's operating results
are also affected to a lesser extent by loan and commitment fees, customer
service charges, and by the sale of real estate, insurance and annuities through
its third tier subsidiaries. Operating expenses of the Company are primarily
employee compensation and benefits, office occupancy and equipment costs,
federal deposit insurance premiums, advertising and promotion costs, data
processing and other administrative expenses.
The accounting policies of Calumet Bancorp, Inc. and subsidiaries which
significantly affect the determination of consolidated financial position and
results of operations are described below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and results of
operations of the Company, the Association, and the Association's two first-tier
subsidiaries: wholly owned Calumet Residential Corporation, which owns 51% of
Calumet United Limited Liability Company (Wyoming); and wholly owned Calumet
Savings Service Corporation, which wholly owns Calumet Financial Corporation,
and Calumet Mortgage Corporation of Idaho.
USE OF ESTIMATES
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 the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The allowance for losses on
loans, impairment allowances for limited partnership investments, and the fair
value of financial instruments are particularly subject to change.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent highly liquid investments with maturities of
90 days or less at the time of purchase and include cash and interest-bearing
deposits. Net cash flows are reported for deposit transactions.
SECURITIES
Securities classified as held-to-maturity are carried at amortized cost if
management has the positive intent and ability to hold the securities to
maturity. Securities not classified as held-to-maturity are designated
securities available-for-sale and carried at fair value with unrealized gains
and losses reported in other comprehensive income. Other securities such as
Federal Home Loan Bank stock are carried at cost.
The carrying value of securities reflects amortization of premiums and accretion
of discounts over the estimated lives of the securities using the level yield
method. Such amortization is included in interest income. Interest and dividends
are included in interest income from securities as earned. Realized gains and
losses on all securities are computed using the specific identification method.
Securities are written down to fair value when a decline in fair value is not
temporary.
36
<PAGE> 37
LOANS RECEIVABLE
Loans receivable are stated at outstanding unpaid principal balances net of any
deferred fees or costs on originated loans or unamortized premiums or discounts
on purchased loans.
Premiums paid and discounts received in connection with mortgage loans purchased
are deferred and amortized to income over the estimated life of the loans using
the level-yield method. Loan origination fees and certain direct origination
costs related to processing successful loan applications are deferred and the
net amount amortized to income over the contractual life of the loans as an
adjustment to interest income using the level yield method. Costs associated
with processing unsuccessful loan applications are charged to expense as
incurred.
Interest on loans is recorded when earned. The Company places loans (including
impaired loans) on nonaccrual status when they have been delinquent 90 or more
days. When a loan is placed on nonaccrual status, previously accrued but
uncollected interest is fully reserved.
ALLOWANCE FOR LOSSES ON LOANS
The Company provides for possible losses on loans based on evaluations of the
loan portfolio, past credit loss experience, current economic conditions, the
amount and timing of future cash flows expected to be received on impaired
loans, and other pertinent factors which form a basis for determining the
adequacy of the allowance for losses. Management believes that the allowance for
losses on loans is adequate to absorb probable losses in the portfolio; however,
future additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
losses on loans. Such agencies may require the Company to recognize additions to
the allowance based on their judgments of information available to them at the
time of their examination.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage and consumer loans, and on an individual
basis for other loans. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported net, at the present value of estimated
future cash flows, using the loan's existing rate, or at the fair value of
collateral if repayment is expected solely from the collateral. Loans are
evaluated for impairment when payments are delayed, typically 90 days or more,
or when it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate which has been acquired through, or in lieu of, foreclosure is
carried at the lower of fair value, less estimated selling costs, or the related
loan balance at the date of foreclosure. Valuations are periodically performed
by management and the carrying value is reduced by a charge to operations if the
carrying value of a property exceeds its estimated fair value less estimated
selling costs determined by management on valuation dates subsequent to
foreclosure. A loan is classified as real estate-owned when the Company has
taken possession of the collateral even though foreclosure proceedings may not
have been completed.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost, less accumulated
depreciation. Provisions for depreciation are computed using the straight-line
method over the estimated useful lives of the assets. Useful lives for office
buildings are 30 to 40 years and for furniture, fixtures and equipment, 3 to 10
years.
INVESTMENT IN LIMITED PARTNERSHIPS
The Company invests in limited partnerships engaged in real estate development
and sale and in loan servicing. As a limited partner without a controlling
interest, the Company accounts for these investments using the equity method.
The Company periodically reviews these investments for impairment based on
review of independent appraisals, financial statements, and other relevant
operating data. At December 31, 1998, the Company had recorded impairment
reserves of $6.4 million against the value of its investment in certain limited
partnerships engaged in mortgage loan servicing.
37
<PAGE> 38
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return.
Deferred income taxes are provided for all significant items of income and
expense that are recognized in different periods for financial reporting
purposes and income tax reporting purposes. The asset and liability approach is
used for the financial accounting and reporting of income taxes. This approach
requires companies to take into account changes in income tax rates when valuing
the deferred income tax accounts recorded on the balance sheet. In addition, it
provides that a deferred income tax liability or asset shall be recognized for
the estimated future tax effects attributable to "temporary differences" and
loss and tax credit carryforwards. Temporary differences include differences
between financial statement income and tax return income which are expected to
reverse in future periods as well as differences between tax bases of assets and
liabilities and their amounts for financial reporting purposes which are also
expected to be settled in future periods. To the extent a deferred tax asset is
established which, more likely than not, is not expected to be realized, a
valuation allowance shall be established against such account.
DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument includes futures, forwards, interest rate
swaps, options and other financial instruments with similar characteristics. The
Company currently does not enter into futures, forwards, swaps or options.
However, the Company is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. The financial instruments include commitments to make loans and
standby letters of credit, which involve to varying degrees elements of credit
risk and interest rate risk in excess of amounts recognized on the balance
sheet. Commitments to make loans are agreements to lend to a customer as long as
there is no violation of any contract condition. Commitments generally have
fixed expiration dates and may require collateral if deemed necessary. Standby
letters of credit are conditional commitments issued by the company to guarantee
the performance of a customer to a third party up to a stipulated amount and
with specific terms and conditions. Commitments to make loans and standby
letters of credit are not recorded as an asset or liability by the Company until
the instrument is exercised.
EARNINGS PER SHARE
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."
COMPREHENSIVE INCOME
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securities
available for sale which are also recognized as separate components of equity.
The accounting standard that requires reporting comprehensive income first
applies for 1998, with prior information restated to be comparable.
INDUSTRY SEGMENT
The Company reports and evaluates internal financial information based on legal
entities. This information is reviewed and evaluated on a consolidated basis and
separately for each individual legal entity. Therefore, the Company determines
segment information required to be disclosed under generally accepted accounting
standards based upon legal entity.
NEW ACCOUNTING PRONOUNCEMENTS
Beginning January 1, 2000, Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" will require all derivatives to be recorded
38
<PAGE> 39
at fair value. Unless designated as hedges, changes in these fair values will be
recorded in the income statement. Fair value changes involving hedges will
generally be recorded by offsetting gains and losses on the hedge and on the
hedged item, even if the fair value of the hedged item is not otherwise
recorded. This new accounting standard is not expected to have any effect on the
Company, but will depend on derivative holdings when the standard applies.
Beginning January 1, 1999, Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standard No. 134, "Accounting for Mortgage-backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" will allow for classifying mortgage loans
originated in mortgage banking which are converted into securities as available
for sale, trading, or held to maturity. Currently, these securities are required
to be classified as trading. This new accounting standard is not expected to
have any effect on the Company.
RECLASSIFICATION
Certain items in the 1996 and 1997 financial statements have been reclassified
to conform to the 1998 presentation.
2. SECURITIES
Securities at December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Government and agency securities $25,030 $ 904 $ - $25,934
U.S. Government securities fund 10,441 70 - 10,511
Money market fund 7,855 - - 7,855
Equity securities 5,367 1,282 277 6,372
-------------------------------------------------
Total $48,693 $ 2,256 $ 277 $50,672
=================================================
HELD-TO-MATURITY
FHLMC/FNMA mortgage securities $10,529 $ 30 $ 152 $10,407
CMO securities 1,028 - 4 1,024
Municipal bonds 134 - - 134
Federal Home Loan Bank stock 2,657 - - 2,657
-------------------------------------------------
Total $14,348 $ 30 $ 156 $14,222
=================================================
</TABLE>
Securities at December 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Government and agency securities $29,504 $ 468 $ - $29,972
U.S. Government securities fund 6,957 - - 6,957
Money market fund 3,697 - - 3,697
Equity securities 4,739 1,604 2 6,341
-------------------------------------------------
Total $44,897 $ 2,072 $ 2 $46,967
=================================================
HELD-TO-MATURITY
FHLMC/FNMA mortgage securities $13,795 $ 44 $ 199 $13,640
CMO securities 1,709 - 7 1,702
Municipal bonds 140 - - 140
Federal Home Loan Bank stock 3,124 - - 3,124
-------------------------------------------------
Total $18,768 $ 44 $ 206 $18,606
=================================================
</TABLE>
Securities with carrying amounts of $4.6 million and $6.0 million at December
31, 1998 and 1997, respectively, are pledged under credit enhancement
agreements.
39
<PAGE> 40
The amortized cost and fair value of debt securities available-for-sale and
held-to-maturity at December 31, 1998, by contractual maturity are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---------------------
<S> <C> <C>
AVAILABLE-FOR-SALE
Due in one year or less $ 7,132 $ 7,174
Due after one year through five years 9,996 10,075
Due after five years through ten years 6,939 7,535
Due after ten years 963 1,150
---------------------
25,030 25,934
Equity securities 5,367 6,372
Mutual funds 18,296 18,366
---------------------
Total $48,693 $50,672
=====================
HELD-TO-MATURITY
Due after one year through five years $ 46 $ 48
Due after five years through ten years 9,154 9,029
Due after ten years 2,491 2,488
---------------------
11,691 11,565
Federal Home Loan Bank stock 2,657 2,657
---------------------
Total $14,348 $14,222
=====================
</TABLE>
The table below provides information concerning sales of securities
available-for-sale:
<TABLE>
<CAPTION>
For the year ended December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Gross proceeds from sales $ 9,722 $ 53,883 $ 35,075
Gross realized gains 25 484 68
Gross realized losses (including impairment) 13 714 15
Income tax expense (credit) arising from net gains (losses) 4 (78) 19
</TABLE>
3. LOANS RECEIVABLE
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
At December 31,
-----------------------
1998 1997
-----------------------
<S> <C> <C>
Mortgage loans:
One-to-four family residential $202,240 $209,999
Multifamily residential 35,494 40,933
Commercial real estate 92,786 97,186
Construction loans 25,213 27,645
Land loans 11,038 12,207
-----------------------
Total mortgage loans 366,771 387,970
Other loans 6,346 4,920
-----------------------
Total loans receivable 373,117 392,890
Less: Undisbursed portion of loan proceeds 8,868 7,820
Unearned income 1,676 2,012
Allowance for losses on loans 6,029 6,070
-----------------------
Net loans receivable $356,544 $376,988
=======================
</TABLE>
40
<PAGE> 41
The Company has pledged residential mortgage loans as collateral to borrowings
from the Federal Home Loan Bank of Chicago in an amount not less than 167% of
outstanding advances and letters of credit.
The Company's lending activities have been concentrated primarily in residential
real property secured by first liens on such property. The Company requires
collateral on all loans and generally maintains loan-to-value ratios of no
greater than 80% on mortgage loans. At December 31, 1998, the Company's mortgage
loan portfolio was geographically diversified, with concentrations primarily in
Illinois (35%), Colorado (18%), Idaho (21%), and New Mexico (16%). Mortgage
loans in Indiana and Michigan, all within the company's immediate lending area,
represent another 6% of the portfolio at December 31, 1998. At December 31,
1997, these concentrations were: Illinois (33%); Colorado (24%); Idaho (21%);
New Mexico (15%); and Indiana/Michigan (4%).
At December 31, 1998, approximately $104.6 million or 28.5% of the Company's
$366.8 million mortgage loan portfolio was secured by properties located in
mountain and ski resort areas, the economies of which may be more susceptible to
fluctuations in market and economic conditions. Furthermore, $36.2 million, or
34.6% of these loans are secured by second homes, which may be more susceptible
to delinquencies than loans secured by primary residences; $35.9 million, or
34.3% of these loans were secured by primary residences; and $32.6 million, or
31.1% were secured by multifamily and commercial properties and land. At
December 31, 1997, approximately $118.6 million or 30.6% of the Company's $388.0
million mortgage loan portfolio was secured by properties located in mountain
and ski resort areas. $43.7 million, or 36.8% of these loans are secured by
second homes, $35.7 million, or 30.1% of these loans were secured by primary
residences; and $39.2 million, or 33.1% were secured by multifamily and
commercial properties and land. The Company has not experienced unusual losses
as a result of geographic diversification or lending in mountain or ski resort
areas.
4. ALLOWANCE FOR LOSSES ON LOANS
Changes in the allowance for losses on loans are as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 6,070 $ 5,630 $ 4,870
Provision for losses 460 700 800
Charge-offs (630) (323) (114)
Recoveries 129 63 74
-------------------------------------
Balance at end of year $ 6,029 $ 6,070 $ 5,630
=====================================
</TABLE>
At December 31, 1998, the Company had no loans that were considered impaired. At
December 31, 1997, the Company had two related loans that were considered
impaired with a recorded investment of $1.1 million. One of these loans was
fully reserved in the amount of $350, the other had no specific reserve. Both of
these loans were foreclosed during the first quarter of 1998 and no interest
income was recorded. The average recorded investment in impaired loans during
the year ended December 31, 1997, was approximately $1.1 million. For the year
ended December 31, 1997, the Company recognized interest income on those
impaired loans of $92.
5. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
At December 31,
-------------------
1998 1997
-------------------
<S> <C> <C>
Land $ 939 $ 939
Buildings 4,679 4,485
Furniture and equipment 3,773 3,364
-------------------
9,391 8,788
Less accumulated depreciation 4,278 4,320
-------------------
Office properties and equipment, net $5,113 $4,468
===================
</TABLE>
41
<PAGE> 42
6. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
At December 31,
-----------------------
1998 1997
-----------------------
<S> <C> <C>
Non-interest-bearing deposits $ 4,586 $ 3,766
N.O.W. accounts 22,508 18,565
Money market accounts 9,411 8,436
Passbook savings 60,910 60,714
Certificates of deposit 250,869 256,980
-----------------------
$348,284 $348,461
=======================
Deposit accounts with balances in excess of $100,000 $ 26,040 $ 23,112
=======================
</TABLE>
Scheduled maturities of certificates of deposit at December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999 $200,731
2000 36,252
2001 4,837
2002 3,412
2003 4,448
After 2003 1,189
--------
Total $250,869
========
</TABLE>
Substantially all of the Association's depositors are residents of the State of
Illinois.
7. FEDERAL HOME LOAN BANK ADVANCES
Scheduled maturities of Federal Home Loan Bank advances are as follows:
<TABLE>
<CAPTION>
At December 31,
---------------------
1998 1997
---------------------
<S> <C> <C>
1998 $ - $19,000
1999 19,985 19,985
2001 6,250 -
2002 4,900 4,900
2003 1,175 1,175
---------------------
Total $32,310 $45,060
=====================
</TABLE>
The Federal Home Loan Bank advances all have fixed rates of interest, are
payable at maturity, and contain prepayment penalties. At December 31, 1998, the
interest rates on advances ranged from 5.56% to 6.48%, with a weighted average
rate of 6.00%. At December 31, 1997, the interest rates on advances ranged from
5.90% to 6.51%, with a weighted average rate of 6.10%. The Company is required
to maintain qualifying loans in its portfolio of at least 170% of outstanding
advances and letters of credit as collateral to notes payable to the Federal
Home Loan Bank of Chicago (FHLB). FHLB stock is also pledged as collateral.
42
<PAGE> 43
8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
For the year ended December 31
------------------------------------
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Current expense:
Federal $ 3,707 $ 3,101 $ 2,771
State 196 325 264
Deferred expense (benefit) (1,142) 562 (608)
------------------------------------
Total income tax expense $ 2,761 $ 3,988 $ 2,427
====================================
</TABLE>
Reconciliations of the income tax expense included in the consolidated financial
statements and amounts computed by applying the statutory federal income tax
rate are as follows:
<TABLE>
<CAPTION>
For the year ended December 31
-------------------------------------
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Federal income taxes at the statutory rate $ 2,938 $ 4,072 $ 2,661
Items affecting federal income tax rate:
State income taxes, net of federal benefit 135 365 152
Dividends received deduction (80) (142) (176)
Low income housing tax credits (233) (222) (218)
Other, net 1 (85) 8
-------------------------------------
Total $ 2,761 $ 3,988 $ 2,427
=====================================
</TABLE>
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
At December 31,
---------------------
1998 1997
---------------------
<S> <C> <C>
Deferred tax assets:
Income from limited partnerships $ 63 $ -
Allowance for losses on loans 1,954 1,866
---------------------
2,017 1,866
---------------------
Deferred tax liabilities:
Depreciation 357 346
Stock dividends on FHLB stock 73 91
Loan fees 294 144
Tax effect of tax bad debt reserves in excess of base year 335 419
Net unrealized gains on securities available-for-sale 673 767
Income from limited partnerships - 871
Other, net 21 12
---------------------
1,753 2,650
---------------------
Net deferred tax asset (liability) $ 264 $ (784)
=====================
</TABLE>
The net deferred tax asset (liability) is included in other assets (income taxes
payable) on the Consolidated Statements of Financial Condition in 1998 and 1997,
respectively. Retained earnings at December 31, 1998 includes approximately $6.7
million for which no provision for federal income taxes has been recognized. Tax
legislation passed in August 1996 now requires all thrift institutions to deduct
a provision for bad debts for tax purposes based on actual loss experience and
recapture the excess bad debt reserve accumulated in the tax years after 1986.
The Company recaptured $254 in 1998 and 1997 and will recapture a like amount
for the next four years.
43
<PAGE> 44
9. EARNINGS PER SHARE
The following table presents a reconciliation of the denominators used to
compute basic earnings per share and diluted earnings per share for the three
years ended December 31, 1998.
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Weighted average shares of common stock outstanding 3,143,816 3,244,500 3,748,353
Dilutive effects of assumed stock option exercises 252,520 243,561 207,546
--------------------------------------------
Weighted average shares of common stock and
common stock equivalents 3,396,336 3,488,061 3,955,899
============================================
EARNINGS PER SHARE:
Net income available to common shareholders $ 5,881 $ 7,987 $ 5,399
============================================
Basic earnings per share $ 1.87 $ 2.46 $ 1.44
============================================
EARNINGS PER SHARE ASSUMING DILUTION:
Net income available to common shareholders $ 5,881 $ 7,987 $ 5,399
============================================
Diluted earnings per share $ 1.73 $ 2.29 $ 1.36
============================================
</TABLE>
10. OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) on
available for sale securities $ (79) $ 1,452 $ (199)
Less reclassification adjustments for gains
(losses) later recognized in income 12 (230) 53
-------------------------------------
Net unrealized gains (losses) (91) 1,682 (252)
Income tax effect 94 (618) 68
-------------------------------------
Other comprehensive income $ 3 $ 1,064 $ (184)
=====================================
</TABLE>
11. REGULATORY MATTERS
The Association is subject to regulatory capital requirements administered by
federal regulatory agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. At December 31, 1998
and 1997, actual capital levels and minimum required levels of the Association
were:
44
<PAGE> 45
<TABLE>
<CAPTION>
Minimum Required To
Be Well Capitalized
Minimum Required for Under Prompt
Actual Capital Adequacy Corrective Action
--------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
- ------------------------
Total risk-based capital
to risk-weighted assets $ 60,818 20.94% $ 23,236 8.00% $ 29,045 10.00%
Tier 1 (core) capital to risk-weighted assets 57,126 19.67% 11,618 4.00% 17,427 6.00%
Tier 1 (core) capital to average assets 57,126 12.46% 18,337 4.00% 22,921 5.00%
Tier 1 (core) capital to adjusted total assets 57,126 12.75% 13,442 3.00% N/A N/A
Tangible capital to adjusted total assets 57,126 12.75% 6,721 1.50% N/A N/A
1997
- ------------------------
Total risk-based capital
to risk-weighted assets $ 52,176 17.38% $ 24,022 8.00% $ 30,027 10.00%
Tier 1 (core) capital to risk-weighted assets 48,399 16.12% 12,011 4.00% 18,016 6.00%
Tier 1 (core) capital to average assets 48,399 10.50% 18,463 4.00% 23,079 5.00%
Tier 1 (core) capital to adjusted total assets 48,399 10.69% 13,583 3.00% N/A N/A
Tangible capital to adjusted total assets 48,399 10.69% 6,792 1.50% N/A N/A
</TABLE>
As of December 31, 1998, the most recent notification from the Office of Thrift
Supervision categorized the association as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the Association's
category.
Dividends paid during the year by the Association to the Company are restricted
to one half of excess capital as of the end of the prior year plus current
earnings. At December 31, 1998, this restriction limited the potential dividend
to $18.8 million. The Association paid no dividends in 1998, and $6.0 million
and $9.0 million in dividends to the Company during 1997 and 1996, respectively.
The Association meets the Qualified Thrift Lender test, which requires at least
65% of assets to be housing-related or other specified assets. A failure to meet
the QTL test places limits on growth, branching, new investment, FHLB advances
and dividends.
12. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) profit-sharing plan which covers all employees
with one year of service who are at least 21 years of age. Contributions to the
401(k) profit-sharing plan are made at the discretion of the Board of Directors.
There were no contributions to the plan in 1998, 1997 or 1996. The plan was
terminated as of July 31, 1998, and is in process of being distributed to
employees. The Company has received a favorable determination letter from the
Internal Revenue Service regarding termination of the plan.
The Company sponsors an employee stock ownership plan (ESOP) that covers all
employees with one year of service who are at least 21 years of age. The ESOP is
funded by discretionary contributions made by the Association. The Association
recorded $283, $566 and $565 of compensation expense during 1998, 1997 and 1996,
respectively, based on the cost of shares released for those years. Unearned
ESOP shares are considered to be outstanding for purposes of computing earnings
per share. The average (split adjusted) unearned ESOP shares outstanding during
1998, 1997, and 1996 were 10,609, 84,870, and 169,740, respectively. The plan
was terminated as of July 31, 1998, and is in process of being distributed to
employees. The Company has received a favorable determination letter from the
Internal Revenue Service regarding termination of the plan. All unallocated ESOP
shares were allocated to eligible employees as of July 31, 1998.
In connection with the conversion to stock ownership, the Company adopted a
Management Recognition and Retention Plan (MRP). The Association contributed
$1.4 million allowing the MRP to acquire 187,425 (split adjusted) shares of
common stock of the Company, at an average cost of $7.55 per share. Under the
MRP, 133,074 (split adjusted) shares of common stock were awarded to key
employees in 1992. One third of these shares vested in 1992, 1993, and 1994 at
an amortized
45
<PAGE> 46
cost of $335 each year. The remaining 54,351 (split adjusted) shares were
awarded in 1995 and vested in 1995, 1996, and 1997. The amortized cost of the
vested shares was $137 and $136 in 1997 and 1996, respectively.
The Company has a stock option plan under the terms of which 530,438 (split
adjusted) shares of the Company's common stock were reserved for issuance. The
options become exercisable on a cumulative basis in equal installments over a
five year period from the date of grant. The options expire ten years from the
date of grant.
A summary of the status of the Company's stock option plan as of December 31,
1998, 1997, and 1996, and changes during the years then ended is presented
below. Share and per share data has been adjusted for the 1997 three-for-two
split:
<TABLE>
<CAPTION>
Weighted- Weighted- Weighted-
average average average
1998 Exercise 1997 Exercise 1996 Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 409,522 $ 7.61 412,146 $ 7.61 434,600 $ 7.59
Forfeited (55) 14.92 - - - -
Exercised (4,364) 7.07 (2,624) 7.33 (22,454) 7.35
--------------------------------------------------------------------------
Outstanding at end of year 405,103 $ 7.61 409,522 $ 7.61 412,146 $ 7.61
==========================================================================
Options exercisable at end of year 395,768 $ 7.44 390,741 $ 7.25 383,976 $ 7.07
</TABLE>
Of the outstanding options at December 31, 1998, 358,741 relate to options
granted in 1992 at an exercise price of $6.67 and having a remaining life of
three years before expiration. All of these options are fully vested and
exercisable. The remaining 46,362 options outstanding at December 31, 1998,
relate to those granted in 1995 at an exercise price of $14.92 and have a
remaining life of six years before expiration. These options vest in equal
installments over a five year period from the date of grant and were 80% vested
at December 31, 1998. Of these options, 37,090 were exercisable at December 31,
1998. The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has been
recognized at the date of grant. If the stock options granted in 1995 had been
valued under SFAS No. 123 "Accounting for Stock-Based Compensation," at their
fair value at the date of grant, those options would have been valued at $7.14
per share and resulted in an annual cost of $70 for 1995 through 1999.
Had compensation cost been determined based on the fair value at the grant dates
for awards under the stock option plan in 1995, the Company's net income and
earnings per share would have been reduced to the proforma amounts in the table
below. For purposes of proforma disclosure, the estimated fair value of the
stock options awarded is amortized to expense over their respective vesting
periods.
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Proforma net income $ 5,833 $ 7,940 $ 5,349
Proforma basic earnings per share $ 1.86 $ 2.45 $ 1.43
Proforma diluted earnings per share $ 1.72 $ 2.27 $ 1.35
</TABLE>
The fair value of options granted in 1995 was estimated at the date of grant
using a Black-Scholes option pricing model using the following assumptions:
dividend yield of 0%; expected volatility factor of the expected market price of
the Company's common stock of 0.22; risk-free interest rate of 7.98%; and
expected option term of 7 years.
The Black-Scholes option pricing valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The current year
proforma amounts may not be indicative of future amounts if additional stock
options are granted.
46
<PAGE> 47
13. COMMITMENTS AND CONTINGENCIES
The Company had outstanding commitments as follows:
<TABLE>
<CAPTION>
At December 31,
---------------------
1998 1997
---------------------
<S> <C> <C>
Residential property loans $ 2,564 $ 7,682
Nonresidential property loans 1,517 491
Credit enhancements 8,973 9,225
Lines of credit 12,667 10,669
Letters of credit - 1,491
Residential property investment 1,070 1,349
</TABLE>
At December 31, 1998, the Company's residential property loan commitments
included approximately $1.5 million of adjustable rate mortgages and $1.1
million of fixed rate mortgages. Interest rates on the fixed rate commitments
ranged from 6.50% to 7.38%. The Company's residential loan commitments include
$675 of commitments as a result of its mortgage banking activities. These loans
will be sold to third-party investors under existing investor commitments to
purchase. The nonresidential property loan commitments included $1.2 million of
adjustable rate mortgages and $277 of fixed rate mortgages. The fixed rate
commitment was at 8.5%.
The Company has entered into three credit enhancement agreements with local
municipalities to guarantee the repayment of an aggregate of $6.0 million of
municipal revenue bonds which are secured by first mortgages on an apartment and
on a commercial office building project. To secure its guaranty of the bonds,
the Company has agreed to pledge and deposit with the designated trustees
certain securities or has provided an irrevocable standby letter of credit from
the FHLB as security. In the event of default on the bonds, the Company's
maximum liability is the amount of the credit guaranty. Fees for providing these
credit enhancements were $111, $78, and $67 for the years ended December 31,
1998, 1997 and 1996, respectively.
The Company has committed to invest $2.0 million in low income housing projects
located in the Chicago area. The investment is being made through a limited
partnership and will be funded over a ten year period. At December 31, 1998, the
Company has funded $930 of the $2.0 million commitment. The projects qualify for
the low income housing tax credits applied against the Company's current income
tax liability.
The Company and its subsidiaries are involved in litigation arising in the
ordinary course of business. The resolution of these matters is not expected,
either individually or in the aggregate, to have a material effect on the
Company's financial condition or results of operations.
At December 31, 1998, the Company held an equity investment in a limited
partnership engaged in mortgage loan servicing. The investment was valued at
$667, based on the independent fair market value estimate of purchased mortgage
servicing rights provided by the general partner. The servicing rights served as
collateral for a bank loan used to purchase the rights, and the loan was in
default at December 31, 1998. The general partner is working with the bank to
restructure the loan, which may include sale of some of the rights to reduce the
loan balance and additional equity investments by the limited partners. If the
plan to restructure the loan fails, a forced sale of the mortgage loan servicing
rights to pay off the loan could result in a loss of the Company's remaining
investment.
14. STOCKHOLDERS' EQUITY
In connection with its conversion to stock ownership, the Company established a
liquidation account in the amount of $36.6 million for the benefit of eligible
account holders who continue to maintain their accounts at the Company after the
conversion. The liquidation account is reduced annually to the extent that
eligible account holders have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each account holder
would be entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for accounts
then held.
47
<PAGE> 48
The Company may not declare or pay cash dividends on or repurchase any of its
shares of common stock if the effect thereof would cause stockholders' equity to
be reduced below the balance of the liquidation account or if such declaration
would otherwise violate regulatory requirements.
On April 29, 1998, at the annual meeting of the Company's shareholders, an
Amendment to the Certificate of Incorporation of the Company was approved
increasing the authorized common shares from 4,200,000 to 8,400,000 shares.
On October 21, 1997, the Board of Directors of the Company declared a
three-for-two common stock split in the form of a 50% common stock dividend to
stockholders of record on November 3, 1997. The share amounts shown in the
consolidated statements of stockholders' equity reflect actual share amounts for
each period. A total of 1,055,451 previously acquired treasury shares were used
in the distribution. During 1997, the Company repurchased 426,597 (split
adjusted) shares of its common stock at an average cost of $23.50 per share. The
Company did not repurchase any shares in 1998. The Company has 3,145,861 shares
of common stock outstanding at December 31, 1998, with a book value of $27.86
per share.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosures about Fair Values of Financial Instruments" requires
disclosures of information about the fair value of financial instruments for
which it is practicable to estimate a value, whether or not such value is
recognized in the consolidated statements of financial condition.
The carrying value and the estimated fair value of financial instruments are as
follows:
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
----------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 33,808 $ 33,808 $ 8,283 $ 8,283
Securities available-for-sale 50,672 50,672 46,967 46,967
Securities held-to-maturity 14,348 14,222 18,768 18,606
Loans receivable 356,544 361,998 376,988 385,847
Accrued interest receivable 2,948 2,948 3,115 3,115
Liabilities
Demand, NOW and savings deposits $ 97,415 $ 97,415 $ 91,481 $ 91,481
Certificates of deposit (time deposits) 250,869 252,896 256,980 258,988
FHLB advances 32,310 32,577 45,060 45,032
Accrued interest payable 3,337 3,337 3,957 3,957
</TABLE>
Whenever possible, quoted market prices are used to develop fair values. Where
quoted market prices are not available, market prices of similar instruments are
used for reference and to develop indices of estimated fair value. In other
cases, it is necessary to use present values or other valuation techniques. Fair
values derived can be significantly affected by the assumptions used, including
the similarity of other instruments, discount rates, and estimates of future
cash flows. Therefore, in many cases, the estimated fair values may not be
realized in an immediate sale of the instrument. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Therefore, the aggregate of the estimated fair value amounts is
not intended to represent the underlying market value of the Company.
General methods utilized to estimate fair values are summarized below:
Cash and cash equivalents: The carrying amounts shown approximate fair value.
Securities: Quoted market values were used to estimate fair values. FHLB stock
is carried at its redemption value.
Loans receivable: The fair value of fixed rate mortgage loans was estimated by
discounting projected cash flows at market interest rates. The fair value of
adjustable rate mortgage loans was estimated by using carrying amounts for loans
repricing within one year and by discounting projected cash flows at market
interest rates for loans repricing beyond one year. The fair value of commercial
and consumer loans was estimated by discounting projected cash flows at market
interest rates.
Demand, NOW, and savings deposits: All such account balances are withdrawable on
demand without penalty; therefore, for purposes of SFAS No. 107, the carrying
amount is deemed to be fair value.
48
<PAGE> 49
Certificates of deposit (time deposits): The fair value of time deposit accounts
which have fixed rates of interest was estimated using a discounted cash flow
calculation and current interest rates for similar accounts with the same
remaining term to maturity. The Company does not have any material, variable
rate time deposits.
FHLB advances: The fair value of fixed rate FHLB advances was estimated using a
discounted cash flow calculation and current interest rates for advances with
the same remaining term to maturity.
Commitments: The fair value of commitments to extend credit and standby letters
of credit is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed rate loan commitments,
fair value also considers the difference between current levels of interest
rates and the committed rates. The fair value of these commitments is not
material.
16. OPERATING SEGMENT DATA
The segment financial information provided below has been derived from the
internal financial reporting system used by management to monitor and manage the
financial performance of the Company. The accounting policies of the three
segments are the same as those described in the significant accounting policies.
The three segments identified below, by legal entity, are the Company's banking
operations of the Association, the residential construction and sale limited
partnership investments of Calumet Residential Corporation ("CRC"), and the
other investing activities at the holding company. All operations are domestic.
The banking operations of the Association consist of traditional community
banking services, such as accepting deposits and making primarily residential
real estate loans. Deposits are primarily gathered from the Association's five
financial services offices in the Chicagoland area. The loan portfolio is
geographically diversified, with concentrations primarily in Illinois, Colorado,
Idaho, New Mexico, Indiana, and Michigan.
The residential construction and sale limited partnership investments of CRC
are through one well-known Chicago area residential developer. Each of the
developments in which CRC has invested are in the Chicagoland area.
The other investing activities of the holding company consist primarily of
securities and limited partnership investments. The securities are generally
comprised of U.S. Government money market funds, U.S. agencies, and common and
preferred equities. The limited partnership investments consist of mortgage
servicing rights and commercial investment properties.
The information presented below regarding the reportable segment assets, other
revenues, and net income exclude activities associated with the each segment's
investment in consolidated subsidiaries.
<TABLE>
<CAPTION>
Residential
Construction &
Sale Limited
Banking Partnership Other
Operations Investments Investments Totals
------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Net interest income (expense) $ 17,038 $ (154) $ 799 $ 17,683
Equity in net income (loss) of
limited partnerships (170) 1,479 (2,133) (824)
Other revenues 1,201 - (4) 1,197
Provision for losses on loans 328 - - 328
Income tax expense (benefit) 3,205 537 (861) 2,881
Segment net income (loss) 6,364 782 (1,107) 6,039
Investment in limited partnerships 243 2,371 10,018 12,632
Segment assets 446,576 4,051 26,438 477,065
</TABLE>
49
<PAGE> 50
<TABLE>
<CAPTION>
Residential
Construction &
Sale Limited
Banking Partnership Other
Operations Investments Investments Totals
------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Net interest income (expense) $ 17,773 $ (366) $ 562 $ 17,969
Equity in net income (loss) of
limited partnerships (158) 821 2,638 3,301
Other revenues 41 - 463 504
Provision for losses on loans 682 - - 682
Income tax expense 2,846 201 1,018 4,065
Segment net income 5,819 250 2,019 8,088
Investment in limited partnerships 135 5,853 18,390 24,378
Segment assets 450,217 5,914 29,094 485,225
1996
Net interest income (expense) $ 17,215 $ (167) $ 886 $ 17,934
Equity in net income of
limited partnerships - 1,223 613 1,836
Other revenues 716 - 114 830
Provision for losses on loans 800 - - 800
Income tax expense 1,754 403 268 2,425
Segment net income 4,203 649 757 5,609
Investment in limited partnerships - 6,679 17,393 24,072
Segment assets 476,642 6,701 29,983 513,326
</TABLE>
Segment information is reconciled to the financial statements for the
information presented above as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Revenues
Total revenues for reportable segments $ 18,056 $ 21,774 $ 20,600
Other revenues 683 500 612
Elimination of intercompany revenues (116) (63) (355)
-------------------------------------------
Total consolidated revenues $ 18,623 $ 22,211 $ 20,857
===========================================
Net income
Total net income for reportable segments $ 6,039 $ 8,088 $ 5,609
Other net income (loss) (158) (101) (210)
-------------------------------------------
Total consolidated net income $ 5,881 $ 7,987 $ 5,399
===========================================
Assets
Total assets for reportable segments $ 477,065 $ 485,225 $ 513,326
Other assets 4,747 3,057 1,691
Elimination of intercompany assets (2,697) (1,656) (4,800)
-------------------------------------------
Consolidated total assets $ 479,115 $ 486,626 $ 510,217
===========================================
</TABLE>
50
<PAGE> 51
17. CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed statements of financial condition, income, and cash flows for Calumet
Bancorp, Inc. (parent company only) are presented below and should be read in
connection with the consolidated financial statements and notes thereto.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------
Statements of Financial Condition 1998 1997
------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 9 $ 29
Securities available-for-sale 16,235 10,038
Loan receivable from ESOP - 283
Equity in net assets of Association 61,694 54,082
Investment in limited partnerships 10,017 18,390
Other assets 486 354
------------------------
TOTAL ASSETS $ 88,441 $ 83,176
========================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities $ 615 $ 1,562
Common stock 36 36
Additional paid-in capital 35,262 35,217
Net unrealized gains on securities available-for-sale,
including unrealized gains of the Association of
$638 in 1998 and $297 in 1997 1,306 1,303
Retained earnings 62,667 56,786
Unearned ESOP shares - (283)
Treasury stock (11,445) (11,445)
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 88,441 $ 83,176
========================
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
Statements of Income 1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Dividends received from the Association $ - $ 6,000 $ 9,000
Interest and dividend income 799 621 886
Interest expense - (58) -
Gain on sale of real estate - 19 70
Gain (loss) on sale of securities available-for-sale (13) 454 68
Income (loss) from limited partnerships (2,133) 2,638 613
Equity in undistributed (overdistributed) earnings of Association 6,989 (33) (4,358)
----------------------------------------
Total income 5,642 9,641 6,279
General and administrative expenses 621 635 612
----------------------------------------
Income before income taxes 5,021 9,006 5,667
Income tax expense (benefit) (860) 1,019 268
----------------------------------------
NET INCOME $ 5,881 $ 7,987 $ 5,399
========================================
</TABLE>
51
<PAGE> 52
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
Statements of Cash Flows 1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 5,881 $ 7,987 $ 5,399
Equity in (undistributed) overdistributed earnings of Association (6,989) 33 4,358
Gain on sale of real estate - (19) (70)
Loss (gain) on sales of securities 13 (454) (68)
Equity (income) loss from limited partnerships 2,133 (2,638) (613)
Decrease (increase) in other assets (132) (265) 269
Increase (decrease) in other liabilities (681) 540 (12)
----------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 225 5,184 9,263
INVESTING ACTIVITIES:
Purchase of securities (12,370) (21,951) (23,883)
Proceeds of sales and maturities of securities 5,571 22,296 27,076
Loans originated - - (7,000)
Principal payments on loans receivable 283 2,566 5,565
Investments in limited partnerships (101) (1,250) (5,000)
Return of investment in limited partnerships 6,341 2,891 1,288
Proceeds from sale of real estate - 166 1,123
----------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (276) 4,718 (831)
FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 31 16 165
Purchase of treasury stock - (10,027) (8,687)
----------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 31 (10,011) (8,522)
----------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (20) (109) (90)
Cash and cash equivalents at beginning of year 29 138 228
----------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9 $ 29 $ 138
========================================
</TABLE>
52
<PAGE> 53
18. QUARTERLY RESULTS OF OPERATIONS(UNAUDITED)
<TABLE>
<CAPTION>
For the year ended December 31, 1998 For the year ended December 31, 1997
--------------------------------------------------------------------------------
Three months ended Three months ended
--------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 9,534 $ 9,349 $ 9,418 $ 8,933 $ 9,756 $ 9,776 $ 9,757 $ 9,711
Interest expense 4,986 4,918 4,918 4,650 5,231 5,279 5,330 5,187
--------------------------------------------------------------------------------
Net interest income 4,548 4,431 4,500 4,283 4,525 4,497 4,427 4,524
Provision for losses
on loans 106 118 118 118 200 200 200 100
--------------------------------------------------------------------------------
Net interest income
after provision for
losses on loans 4,442 4,313 4,382 4,165 4,325 4,297 4,227 4,424
Gains (losses) on
sales of securities 25 - (13) - 31 69 (59) (271)
Other income (1) 4,507 120 (3,584) (194) 984 951 555 1,978
Other expenses 2,744 2,244 2,283 2,250 2,748 2,185 2,247 2,356
--------------------------------------------------------------------------------
Income before income
taxes 6,230 2,189 (1,498) 1,721 2,592 3,132 2,476 3,775
Income taxes 2,236 784 (771) 512 821 1,067 800 1,300
--------------------------------------------------------------------------------
Net income $ 3,994 $ 1,405 $ (727) $ 1,209 $ 1,771 $ 2,065 $ 1,676 $ 2,475
================================================================================
Basic earnings per share (2) $ 1.27 $ 0.45 $ (0.23) $ 0.38 $ 0.52 $ 0.64 $ 0.53 $ 0.78
================================================================================
Diluted earnings per share (2) $ 1.17 $ 0.41 $ (0.23) $ 0.36 $ 0.48 $ 0.60 $ 0.49 $ 0.72
================================================================================
Reported stock prices (2):
High $ 39.00 $ 38.25 $ 35.56 $ 30.44 $ 24.83 $ 26.50 $ 31.58 $ 34.63
Low 33.00 33.00 26.00 26.63 21.67 22.83 24.83 31.00
Close 36.00 33.50 30.06 27.13 23.75 25.33 30.83 33.25
</TABLE>
(1) Other income for the fourth quarter of 1997 includes a gain of $1.2 million
on the sale of a limited partnership investment. Other income for the first
quarter of 1998 includes a gain of $3.6 million on the sale of a limited
partnership investment. Other income for the second quarter of 1998
includes a $1.4 million write down of purchased mortgage servicing rights.
Other income for the third quarter of 1998 includes a $4.3 million write
down of purchased mortgage servicing rights. Other income for the fourth
quarter of 1998 includes a $1.0 million write down of purchased mortgage
servicing rights.
(2) Stock prices and per share data have been restated for the November 17,
1997, three-for-two stock split.
53
<PAGE> 54
19. MERGER WITH FBOP CORPORATION
On September 9, 1998, the Company announced that a definitive agreement had been
signed pursuant to which FBOP Corporation ("FBOP") would 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 was expected to be completed during the
first quarter of 1999, subject to the approvals of regulatory agencies and the
Company's shareholders. On November 20, 1998, the Company received a letter from
FBOP stating that FBOP was prepared to terminate the Merger Agreement unless the
Company agreed to a price reduction of $4.0 million. FBOP asserted that, since
the date of the Merger Agreement, actual and potential losses associated with
the Company's investment in mortgage loan servicing limited partnerships
constituted a "Material Adverse Change" under the Merger Agreement, which would
allow FBOP to terminate the Merger Agreement at its option.
The Company convened a special meeting of its Board of Directors on November 22,
1998, to consider FBOP's letter, and the Board rejected the various assertions
made in the FBOP letter, including, specifically, the assertion that a "Material
Adverse Change" had occurred. Nonetheless, in order to avoid additional costs
and time associated with litigation and without any prejudice to the
Company's rights under the Merger Agreement, the Company offered to accept a
reduction in the aggregate merger consideration of $1.5 million provided that
the Merger Agreement was amended (i) to exclude the purchased mortgage servicing
rights investments and changes in the value of interest rate sensitive assets
currently in the Company's portfolio from the "Material Adverse Change"
representation and condition under the Merger Agreement and (ii) to provide for
upward adjustment to the purchase price if the Company recovers losses relating
to the purchased mortgage servicing rights prior to the closing of the merger.
FBOP subsequently proposed that the Company accept a $2.0 million reduction in
the aggregate merger consideration and share in any recovery in the value of the
purchased mortgage servicing rights investments. FBOP was advised that a
reduction of that magnitude had been considered by the Board at its special
meeting and had been rejected. In response to the counter proposal of FBOP it
was the position of the Company's Board that in view of the substantial
reduction in purchase price embodied in the original $111.6 million merger
consideration, any reduction in excess of $1.5 million would be unfair to
Calumet's shareholders. As of 5:00 P.M., Monday, November 23, 1998, the
Company's offer had not been accepted and, therefore, terminated at that time in
accordance with its terms.
On December 8, 1998, the Company advised FBOP in writing that unless it
received, by 5:00 P.M. on December 15, 1998, unequivocal written assurances that
FBOP will fully perform its obligations under the Merger Agreement, the Company
will treat the Merger Agreement as terminated by FBOP's anticipatory repudiation
of the contract, its failure to provide reasonable assurances of performances
thereunder, and its continuing failure to perform its obligations under the
Merger Agreement.
On December 11, 1998, the Company received a letter from FBOP stating in part
that "FBOP has and will fully perform its obligations under the Agreement and
Plan of Merger and reserves all of its rights under that Agreement." In that
letter FBOP also requested a meeting with management of the Company to discuss
the Merger Agreement. The Company met with representatives of FBOP on December
21, 1998. At that meeting FBOP would not give the Company any assurance that
FBOP would proceed with the Merger Agreement and informed the Company that they
would make no decisions on the Merger Agreement at that time but would continue
to reserve their rights under the Merger Agreement.
54
<PAGE> 55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The following table sets forth as to each director, his or her name, age, the
year he or she first became a director and the number of shares of Common Stock
and the percent thereof beneficially owned at December 31, 1998. The table also
sets forth the number of shares of Common Stock and the percent thereof
beneficially owned by non-director executive officers and by all directors and
executive officers as a group at December 31, 1998.
<TABLE>
<CAPTION>
Shares of
Year First Year Common Stock Percent
Elected Term Beneficially of
Name Age (1) Director(2) Expires Owned (3) Class
---- ------- ----------- ------- ------------ -------
<S> <C> <C> <C> <C> <C>
DIRECTORS
Thaddeus Walczak (5) 70 1950 2001 395,202 12.6%
Dr. Henry Urban (5) 74 1953 2001 44,059 1.4%
William A. McCann 61 1991 2000 54,972 1.8%
Darryl Erlandson (6) 38 1996 2000 13,168 0.4%
Carole J. Lewis (6) 60 1975 1999 306,941 9.8%
Louise Czarobski 74 1982 1999 18,848 0.6%
Tytus Bulicz 54 1991 1999 1,966 0.1%
OTHER EXECUTIVE OFFICERS
John Garlanger 52 N/A N/A 106,078 3.4%
All directors and executive (14 persons) N/A N/A 1,108,490 35.2%
officers as a group
</TABLE>
(1) At December 31, 1998.
(2) Includes prior service on the Board of Directors of Calumet Federal.
(3) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be the beneficial owner, for purposes of this table, of any shares of
Common Stock if he or she has shared voting and/or investment power with
respect to such security. The table includes shares owned by spouses, other
immediate family members in trust, shares held in retirement accounts or
funds for the benefit of the named individuals, and other forms of
ownership, over which shares the persons named in the table possess voting
and investment power. This table also includes 387,382 shares of Common
Stock subject to outstanding options which will be exercisable within sixty
days from December 31, 1998.
(4) Assuming re-election at the Meeting.
(5) Thaddeus Walczak is a first cousin to Dr. Henry J. Urban.
(6) Darryl Erlandson is the son-in-law of Carole J. Lewis.
Set forth below is certain information with respect to the directors of the
Company. Unless otherwise indicated, the principal occupation listed for each
person below has been his or her occupation for the past five years.
THADDEUS WALCZAK joined Calumet Federal in 1955 and has served as Chairman of
the Board and Chief Executive Officer since January, 1987. For the past
forty-two years Mr. Walczak has been a member of the Association's Board of
Directors.
55
<PAGE> 56
He was appointed President of the Association in 1961 and served in that
capacity until January, 1987.
DR. HENRY J. URBAN is a self-employed dentist in Chicago, Illinois.
WILLIAM A. MCCANN is the President and sole stockholder of William A. McCann
Associates, Inc., a real estate appraisal and consulting firm in Chicago,
Illinois. William A. McCann Associates, Inc. has been periodically engaged by
the Association to provide real estate appraisal services. Mr. McCann serves on
the Mayor of Chicago's Task Force Committee on institutional land uses.
DARRYL ERLANDSON is a Vice President of the Association and president of its
subsidiaries, Calumet Savings Service Corporation and Calumet Financial
Corporation. Mr. Erlandson was elected to the Board of the Company and
Association in June, 1996.
CAROLE J. LEWIS has been with Calumet Federal since 1965. Ms. Lewis was
appointed President and Chief Operating Officer of the Association in January,
1987 and has been a director since 1975. Prior to being appointed President of
the Association, Ms. Lewis has served as Executive Vice President, Chief Loan
Officer and Marketing Director of the Association.
LOUISE CZAROBSKI, now retired, was previously an executive secretary for
Continental Bank of Illinois, now known as Bank of America Illinois.
TYTUS R. BULICZ is a Senior Development Engineer for the Advanced Combustion
Group of Navistar International Transportation Corporation. Mr. Bulicz has been
a member of the Board of Directors of the Association since November, 1991 and a
director of Calumet Bancorp since August, 1995.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company and Association conduct their business
through meetings of the Board and through their committees. During the fiscal
year ended December 31, 1998, the Board of Directors of the Company held 14
meetings and the Board of Directors of Calumet Federal held 13 meetings. No
director of the Company or Calumet Federal attended fewer than 75% of the total
meetings of the Board and committee meetings on which such Board member served
during this period.
The Board of Directors of the Company has also established a Stock Option
Committee. This committee did not meet during the year ended December 31, 1998.
The Board of Directors of the Association has established Executive, Audit and
Compliance, Compensation and Community Reinvestment Act ("CRA") Committees.
The Executive Committee consists of Mr. Walczak, Ms. Lewis and Dr. Urban. This
Committee has the authority to exercise most powers of the Board of Directors
between meetings of the full Board of Directors. The Executive Committee also
recommends employee salaries and benefits (except with regard to its members),
as well as the election of officers, the establishment of Association committees
and various other organizational activities of the Association on an annual
basis. All activities of this Committee are reported to the Association's Board
of Directors on a periodic basis. This Committee met twice during 1998.
The Audit and Compliance Committee consists of Dr. Urban, Mr. Bulicz and Ms.
Czarobski. This Committee reviews the Company's budget and audit performance and
meets with the Company's auditors. This Committee met four times in 1998. In
addition, this Committee oversees and monitors the Company's system of internal
control by, among other things, monitoring and reviewing regulatory reports and
the internal audit activities.
The members of the Compensation Committee are William McCann, who serves as
Chairman, Tytus R. Bulicz, Louise Czarobski and Dr. Henry J. Urban. This
Committee met once during 1998.
The board members of the CRA Committee are William McCann, Henry J. Urban,
Carole J. Lewis and Tytus Bulicz. This committee implements CRA policies and
programs and monitors the Association's activities in the CRA area. This
Committee met four times during 1998.
56
<PAGE> 57
ITEM 11. EXECUTIVE COMPENSATION
Under rules established by the Securities and Exchange Commission, the Company
is required to provide certain data and information in regard to the
compensation and benefits provided to the Company's Chief Executive Officer and
other executive officers of the Company. The disclosure requirements for the
Chief Executive Officer and such executive officers include the use of tables
and a report explaining the rationale and considerations that led to fundamental
compensation decisions affecting those individuals. In fulfillment of this
requirement, the Compensation Committee of the Company, at the direction of the
Board of Directors has prepared the following report.
The Compensation Committee is responsible for establishing the compensation for
the senior executive officers of the Company and its subsidiaries consistent
with the Company's and the Association's business plans, strategies, and goals.
The Compensation Committee establishes the factors and criteria upon which the
executive officers' compensation is based and how such compensation relates to
the Company's performance, general compensation policies, competitive realities,
and regulatory requirements.
The Compensation Committee's functions and objectives are to: (a) determine the
competitiveness of current base salary, annual incentives and long-term
incentives relative to specific competitive markets for the Chairman and
President; (b) develop a performance review mechanism that has written
objectives and goals which are used to make salary increase determinations; (c)
develop an annual incentive plan for senior management; and (d) provide guidance
to the Board of Directors in their role in establishing objectives regarding
executive compensation.
The overall compensation philosophy of the Company is as follows:
- to attract and retain quality talent, which is critical to both the
short-term and long-term success of this Company;
- to reinforce strategic performance objectives through the use of
incentive compensation programs;
- to create a mutuality of interest between executive officers and
shareholders through compensation structures that share the rewards
and risks of strategic decision-making; and
- to encourage executives to achieve substantial levels of ownership of
stock in the Company.
The compensation package offered to executive officers consists of a mix of
salary, incentive bonus awards, and stock option awards as well as benefits
under several employee benefit plans offered by the Association.
For the fiscal year ended December 31, 1998, the Company experienced strong core
earnings. In setting executive compensation, for the Chairman and Chief
Executive Officer, and the President and Chief Operating Officer, the
Compensation Committee considered the return on assets, return on equity, asset
quality and the maintenance of an appropriate interest rate spread as it relates
to overall industry performance.
At June 30, 1998 those measures were: Return on Assets 1.62%, Return on Equity
13.26%, Non-performing Loans to Total Loans 1.52%, and Interest Rate Spread
3.33%. These are the primary factors, although not the exclusive ones
considered, on which the Compensation Committee bases executive compensation.
This Committee expects to review these standards, adjusting them for unique
factors, such as the increase in equity of the Association as a result of its
conversion to a stock company and the lower interest rate environment of the
last year, which helped maintain favorable interest rate spreads, in the
consideration of executive compensation and incentive compensation.
The Compensation Committee investigates the competitiveness of the compensation
of the Chairman and the President by having the following survey data updated at
least annually. Among the sources consulted are the America's Community Bankers
Peer Group Report, and SNL Securities L.P. Peer Group Analysis.
These surveys encompass Financial Service Companies, Banks, Savings Banks, and
Thrifts throughout the United States with assets ranging from $200 million to $1
billion. The information is used as a frame of reference for annual salary
adjustments. The base compensation of the Chairman, as given on the summary
compensation table as compared with the base compensation for similar
executives, is in the 75th percentile and that of the President is in the 75th
percentile. The Committee viewed work performance as the most important
measurement factor in setting base compensation.
57
<PAGE> 58
The Committee established certain goals and objectives in 1998 with which to
measure the performance of the Chairman and the President for the purpose of
awarding incentive bonuses based on the attainment of certain goals which were
measured as of June 30, 1998. The goals were: Return on Assets 1%; Return on
Equity 11%; Asset Quality (ratio of non-performing loans to total loans) 2.75%;
Interest rate spread 2.50%. Notwithstanding the attainment of the goals no
incentive bonus would be paid unless an incentive plan "trigger" was achieved.
The Committee determined that the "trigger" would be equal to 75% of the
performance level of the Association's peer group. The peer group selected for
this comparison consists of those savings institutions included in the America's
Community Bankers Peer Group Report. This report is prepared on a quarterly
basis and submitted to the Company and special attention is given to the peer
group referred to as the East North Central Financial Institutions Having an
Asset Size of $300 to $500 Million Residential Lenders, Utilizing Savings and
Time Funding and those that are Well Capitalized. The Peer Group Report covers
14 profit, efficiency and exposure measures.
The Committee adopted the weighting factors establishing the importance of the
corporate goals compared to its peer group as follows:
<TABLE>
<CAPTION>
Performance
Relative to
Description Goals Weighting Calumet Peer Group Peer Group
- ----------- ----- --------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Return on assets 1.00% 60% 1.62% .97% 167%
Return on equity 11.00% 20% 13.26% 9.24% 143%
Asset quality (ration 2.75% 15% 1.52% 1.07% 70%
of non-performing
loans to total loans)
Interest rate spread 2.50% 5% 3.33% 2.79% 119%
</TABLE>
Based on this weighting, average bonuses would be awarded in a range of 25% of
base salary to 85% of base salary in the case of the Chairman and in a range of
25% to 65% of base salary for President, absent special circumstances or
non-recurring items that would mandate the payment of a bonus in excess of these
limitations or the elimination of a bonus entirely. The Committee stated such
items that could be excluded in their consideration of incentive bonuses would
be profits resulting from an extraordinary or non-recurring item, profits or
losses resulting from imposition of Generally Accepted Accounting Principle
changes, regulatory changes, acquisition as a result of a merger or bulk
purchase of assets by the Company or similar circumstances. The Compensation
Committee members in the exercise of their fiduciary duty and with their
dedication to operating a safe and sound Company reserved unto themselves the
right to amend or alter, based on general economic conditions and other factors
governing the performance of the Company, the guidelines and goals established
at any time.
The members of the Compensation Committee are William McCann, who serves as
Chairman, Tytus R. Bulicz, Louise Czarobski and Dr. Henry J. Urban. No member of
the Compensation Committee is or was an officer of the Company or the
Association. McCann and Associates, a company controlled by Mr. McCann was paid
$22,750 during 1998 for appraisal work performed by that company for the
Association.
The complete Board of Directors serves as the Compensation Committee for the
remainder of the executive employees of the Company. Both the Compensation
Committee and the Board will continue to review the standards of performance of
the Association and the appropriate peer group to which comparisons may be made.
They reserve the right to change the standard and peer group comparables as they
see fit in order to assure that the standards reflect the reality of the market
place and the actual performance of the Company.
The following tables set forth for the fiscal years ended December 31, 1998,
1997 and 1996 certain information as to the
58
<PAGE> 59
total compensation received by each of the four most highly compensated
executive officers of the Company and the Association receiving total cash
compensation in excess of $100,000 during this period for services in all
capacities to the Company and the Association. These amounts reflect total cash
compensation paid by the Association to these individuals during the period. For
the fiscal year ended December 31, 1998 forty percent (40%) of the compensation
paid to Mr. Walczak, thirty percent (30%) of the compensation paid to Mr.
Garlanger, and twenty-five percent (25%) of the compensation paid to Ms. Lewis
was reimbursed by the Company to the Association, to compensate the Association
for the time devoted by those individuals to Company business. Mr. Erlandson's
compensation was paid solely by the Association.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------------------- --------------------------------
Awards Payouts
Other ----------------------- -------
Annual Restricted Securities All Other
Name and Compen- Stock Underlying LTIP Compen-
Principal Position Year Salary Bonus sation (1) Awards Options (#) Payouts sation (2)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thaddeus Walczak 1998 $ 378,735 $ 265,115 $ 24,600 $ - - $ - $ 63,934
Chairman - CEO 1997 360,700 225,438 19,900 - - - 149,625
1996 350,200 249,500 19,900 - - - 99,750
Carole J. Lewis 1998 225,000 120,375 24,600 - - - 63,934
President - COO 1997 214,300 102,864 19,900 - - - 149,625
Director 1996 208,060 114,430 19,900 - - - 99,750
John Garlanger 1998 128,800 22,000 - - - - 63,934
Sr. Vice President 1997 123,900 24,000 - - - - 149,625
Treasurer - CFO 1996 119,600 27,000 - - - - 99,750
Darryl Erlandson 1998 77,700 10,000 21,850 - - - 40,064
Vice President 1997 74,000 10,000 17,400 - - - 40,997
Director 1996 68,500 12,000 10,150 - - - 26,534
</TABLE>
(1) Directors' and committee fees
(2) Fair value of ESOP shares allocated
<TABLE>
<CAPTION>
Option Value at December 31, 1998
-------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
at December 31, 1998 at December 31, 1998 (1)
Option --------------------------------- -----------------------------
Name Price Exercisable # Unexercisable # Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Thaddeus Walczak $ 6.67 145,962 - $ 2,986,383 $ -
$ 14.92 15,348 3,837 187,399 46,850
Carole J. Lewis $ 6.67 89,989 - 1,841,175 -
$ 14.92 9,379 2,345 114,518 28,632
John Garlanger $ 6.67 25,461 - 520,932 -
$ 14.92 2,046 512 24,982 6,252
</TABLE>
(1) Based on a market value of $27.13 at December 31, 1998, less the option
price indicated.
59
<PAGE> 60
CALUMET BANCORP, INC.
Performance Graph for 1998
[LINE GRAPH]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NASDAQ Index 100.0 97.8 138.3 170.0 208.3 293.5
Peer Index 100.0 101.3 155.4 202.2 336.8 302.6
CBCI Index 100.0 93.8 128.6 154.1 232.4 188.5
- ----------------------------------------------------------------------------------------
</TABLE>
The above performance graph was prepared from data obtained from the Center for
Research in Security Prices at the University of Chicago. The market index being
used is the CRSP Total Return Index for the NASDAQ Stock Market (US Companies).
The peer group index was based on data from all companies listed on NASDAQ as
depository institutions and includes both banks and thrifts.
60
<PAGE> 61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as to those persons believed
by management to be beneficial owners of more than 5% of the outstanding shares
of Common Stock on December 31, 1998. Persons and groups owning in excess of 5%
of the Common Stock are required to file certain reports regarding such
ownership with the Company and with the Securities and Exchange Commission, in
accordance with the Securities Exchange Act of 1934 (the "Exchange Act").
Additionally, certain other publicly available Exchange Act reports may provide
information regarding the identities of persons or groups who hold in excess of
5% of the common stock. Other than those persons listed below, the Company is
not aware of any person or group, as such term is defined in the Exchange Act,
that owns more than 5% of the Common Stock as of December 31, 1998.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percent of Common
Beneficial Owner Ownership Stock Outstanding (a)
- ------------------- ------------------ ---------------------
<S> <C> <C>
Thaddeus Walczak 395,202 (b) 12.6%
38 East Road
Chesterton, Indiana 46304
Carole J. Lewis 306,941 (c) 9.8%
38 East Road
Chesterton, Indiana 46304
John Hancock Advisers, Inc. 207,000 (d) 6.6%
101 Huntington Avenue
Boston, Massachusetts 02199
</TABLE>
(a) The total number of shares of Common Stock outstanding on December 31, 1998
was 3,145,861.
(b) The number of shares owned by Mr. Walczak, an Officer and Director of the
Company, include 165,147 shares of the Common Stock of the Company which
may be acquired pursuant to presently exercisable options.
(c) The number of shares owned by Ms. Lewis, an Officer and Director of the
Company, includes 101,713 shares of Common Stock of the Company which may
be acquired pursuant to presently exercisable options.
(d) Based on information filed in a Schedule 13G by John Hancock Advisers, Inc.
on January 29, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under Section 16(a) of the Exchange Act, the Company's directors, executive
officers and any person holding more than 10% of the Company's Common Stock are
required to report their initial ownership of the Company's Common Stock and any
subsequent changes in that ownership to the Securities and Exchange Commission.
Specific due dates for these reports have been established and the Corporation
is required to disclose in this Proxy Statement any failure to file such reports
by these dates during 1998. Based solely on a review of copies of such reports
furnished to the Company, or written representations that no reports were
required, the Company believes that during 1998 all filing requirements
applicable to its directors and executive officers were satisfied.
TRANSACTIONS WITH MANAGEMENT
Prior to the enactment of the Financial Institution Reform, Recovery and
Enforcement Act of 1989, Calumet Federal offered residential mortgage loans to
officers, directors and employees at current market rates but reduced points and
waived application fees on a case-by-case basis. Since FIRREA, all loans are
made to officers, directors and employees on the same terms as loans granted to
members of the general public, except the Association may waive application fees
for non-management employees. No director or executive officer or member of
their immediate families or affiliates had any loans with Calumet Federal at
December 31, 1998. McCann and Associates, a company controlled by Mr. McCann
(director) was paid $22,750 during 1998 for appraisal work performed by that
company for the Association.
61
<PAGE> 62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements of the registrant and its
subsidiaries are filed as a part of this document under Item 8. Financial
Statements and Supplementary Data.
Consolidated Statements of Financial Condition at December 31, 1998 and
1997
Consolidated Statements of Income for the years ended December 31, 1998,
1997,and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996
Notes to Consolidated Financial Statements
Report of Independent Auditor at December 31, 1998, and for the three years
then ended
(a)(2) All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or the required information has been
included elsewhere herein, and therefore have been omitted.
(a)(3) Listing of Exhibits
(3)(i) and (ii) The registrant hereby incorporates by reference its Articles of
Incorporation and By-Laws as exhibits to its registration statement on form S-1,
which was filed with the Securities and Exchange Commission.
(21) Subsidiaries of the Registrant
(23) Consent of Independent Auditors
(b) 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.
On December 1, 1998, the Registrant filed on Form 8-K a copy of a Press
Release issued November 23, 1998, describing the receipt of a letter from
FBOP stating that FBOP was prepared to terminate the Merger Agreement
unless the Company agreed to a price reduction of $4.0 million, and events
following the receipt of that letter.
62
<PAGE> 63
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, thereto duly authorized.
CALUMET BANCORP, INC.
Date: March 23, 1999 By: /s/ Thaddeus Walczak
--------------------
Thaddeus Walczak
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: /s/ Carole J. Lewis By: /s/ Thaddeus Walczak
------------------- --------------------
Carole J. Lewis Thaddeus Walczak
President, Chief Operating Chairman of the Board and
Officer and Director Chief Executive Officer
Date: March 23, 1999 Date: March 23, 1999
By: /s/ John L. Garlanger By: /s/ William A. McCann
--------------------- ---------------------
John L. Garlanger William A. McCann
Senior Vice President and Director
Treasurer Date: March 23, 1999
(Principal Financial and
Accounting Officer)
Date: March 23, 1999
By: /s/ Dr. Henry J. Urban By: /s/ Tytus R. Bulicz
---------------------- -------------------
Dr. Henry J. Urban Tytus R. Bulicz
Director Director
Date: March 23, 1999 Date: March 23, 1999
By: /s/ Louise Czarobski By: /s/ Darryl Erlandson
---------------------- --------------------
Louise Czarobski Darryl Erlandson
Director Director
Date: March 23, 1999 Date: March 23, 1999
63
<PAGE> 64
SHAREHOLDERS' INFORMATION
CORPORATE HEADQUARTERS
Calumet Bancorp, Inc.
1350 East Sibley Boulevard
Dolton, Illinois 60419
(708) 841-9010
GENERAL COUNSEL
Kemp & Grzelakowski, Ltd.
1900 Spring Road, Suite 500
Oak Brook, Illinois 60523
STOCK TRANSFER AGENT AND REGISTRAR
Inquiries regarding stock transfer, registration, lost certificates or changes
in name and address should be directed to the stock transfer agent and registrar
by writing:
Harris Trust and Savings Bank
Attention: Shareholder Services
Post Office Box 755
Chicago, Illinois 60690
INDEPENDENT AUDITORS
Crowe, Chizek and Company, LLP
One Mid America Plaza
Oak Brook, Illinois 60523
INVESTOR INFORMATION
Shareholders, investors, and analysts interested in additional information may
contact John Garlanger, Senior Vice President and Treasurer, at the corporate
headquarters.
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders of Calumet Bancorp, Inc. has been postponed
to an undetermined date pending the results of the Special Meeting of
Shareholders of Calumet Bancorp, Inc. to vote on the Agreement and Plan of
Merger with FBOP Corporation, to be held at 1:00 p.m. (Central time) on
Wednesday, April 14, 1999, at the Company's corporate headquarters.
At March 19, 1999, the Company had 329 shareholders of record and approximately
900 beneficial owners registered in street name.
66
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
PARENT
- ------
Calumet Bancorp, Inc.
<TABLE>
<CAPTION>
PERCENTAGE JURISDICTION OR
SUBSIDIARY OWNED STATE OF INCORPORATION
--------------------------------------------------------
<S> <C> <C>
Calumet Federal Savings and Loan Association of Chicago 100% United States
Calumet Savings Service Corporation ("CSSC") (1) 100% Illinois
Calumet Residential Corporation ("CRC") (1) 100% Illinois
Calumet Financial Corporation ("CFC") (2) 100% Illinois
Calumet Mortgage Corporation of Idaho ("CMCID") (2) 100% Idaho
Calumet United Limited Liability Corporation ("CULLC") (3) 51% Wyoming
</TABLE>
(1) First tier subsidiary of Calumet Federal Savings
(2) First tier subsidiary of Calumet Savings Service Corporation
(3) 51% owned by Calumet Residential Corporation and 49% by two individuals
64
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-43063) pertaining to Calumet Bancorp, Inc. 1992 Stock Option Plan of
our report dated February 18, 1999, with respect to the consolidated financial
statements of Calumet Bancorp, Inc. included elsewhere herein.
/s/ Crowe, Chizek and Company LLP
---------------------------------
CROWE, CHIZEK AND COMPANY LLP
Oak Brook, Illinois
March 19, 1999
65
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,678
<INT-BEARING-DEPOSITS> 30,130
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,672
<INVESTMENTS-CARRYING> 14,348
<INVESTMENTS-MARKET> 14,222
<LOANS> 362,573
<ALLOWANCE> 6,029
<TOTAL-ASSETS> 479,115
<DEPOSITS> 348,284
<SHORT-TERM> 19,985
<LIABILITIES-OTHER> 10,695
<LONG-TERM> 12,325
0
0
<COMMON> 36
<OTHER-SE> 87,790
<TOTAL-LIABILITIES-AND-EQUITY> 479,115
<INTEREST-LOAN> 32,543
<INTEREST-INVEST> 4,691
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 37,234
<INTEREST-DEPOSIT> 16,812
<INTEREST-EXPENSE> 2,660
<INTEREST-INCOME-NET> 17,762
<LOAN-LOSSES> 460
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,521
<INCOME-PRETAX> 8,642
<INCOME-PRE-EXTRAORDINARY> 5,881
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,881
<EPS-PRIMARY> 1.87
<EPS-DILUTED> 1.73
<YIELD-ACTUAL> 3.91
<LOANS-NON> 3,391
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,070
<CHARGE-OFFS> 630
<RECOVERIES> 129
<ALLOWANCE-CLOSE> 6,029
<ALLOWANCE-DOMESTIC> 6,029
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
