<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-20804
KANKAKEE BANCORP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3846489
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
310 S. SCHUYLER AVENUE, KANKAKEE, ILLINOIS 60901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (815) 937-4440
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- -------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE AMERICAN STOCK EXCHANGE
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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]
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<PAGE>
As of March 3, 1997, the Registrant had issued and outstanding 1,420,168 of
the Registrant's Common Stock. The aggregate market value of the voting stock
held by non-affiliates of the Registrant as of March 3, 1997, was $33,984,502.*
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and IV of Form 10-K--Portions of the 1996 Annual Report to
Stockholders.
PART III of Form 10-K--Portions of the Proxy Statement for the 1997 Annual
Meeting of Stockholders.
- ---------------
* Based on the last reported price ($27.375) of an actual transaction in the
Registrant's Common Stock on March 3, 1997, and reports of beneficial
ownership filed by directors and executive officers of the Registrant and
by beneficial owners of more than 5% of the outstanding shares of Common
Stock of the Registrant; however, such determination of shares owned by
affiliates does not constitute an admission of affiliate status or
beneficial interest in shares of the Registrant's Common Stock.
<PAGE>
KANKAKEE BANCORP, INC.
1996 ANNUAL REPORT ON FORM 10-K
Table of Contents
PAGE NUMBER
PART I
Item 1. Business............................................................ 4
Item 2. Properties......................................................... 46
Item 3. Legal Proceedings.................................................. 47
Item 4. Submission of Matters to a Vote of Security Holders................ 47
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters............................................ 47
Item 6. Selected Financial Data............................................ 47
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 47
Item 8. Financial Statements and Supplementary Data........................ 47
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................................ 47
PART III
Item 10. Directors and Executive Officers of the Registrant................. 48
Item 11. Executive Compensation............................................. 48
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................................... 48
Item 13. Certain Relationships and Related Transactions..................... 49
Item 14. Exhibits, Financial Statement Schedules, and Reports on 8-K........ 49
Form 10-K Signature Page......................................................51
3
<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
GENERAL
Kankakee Bancorp, Inc., a Delaware corporation (the "Company"), is a
savings and loan holding company registered under the Home Owner's Loan Act, as
amended (the "HOLA"). The Company's primary business activity is acting as the
holding company for Kankakee Federal Savings Bank, a federally chartered savings
bank (the "Bank"). The Bank has two subsidiaries, KFS Service Corp. ("KFS"),
and its wholly-owned subsidiary, KFS Insurance Agency, Inc., which engage in the
business of providing securities brokerage services and insurance and annuity
products to its customers and appraisal services to the Bank and other lenders
in the Kankakee area. All references to KFS include KFS Insurance Agency, Inc.,
unless clearly indicated otherwise. The Company was organized in 1992, in
connection with the Bank's conversion from the mutual to the stock form of
organization (the "Conversion") which was completed on December 30, 1992. As
part of the Conversion, the Company issued 1,750,000 shares of its common stock,
$.01 par value per share (the "Common Stock"), at a price of $9.875 per share.
On March 24, 1995, the Company's Common Stock was listed on the American Stock
Exchange ("AMEX") under the symbol "KNK". Prior to March 24, 1995, the
Company's Common Stock was quoted on the NASDAQ National Market under the symbol
"KNKB".
The Bank is the Company's only financial institution subsidiary and was
initially chartered as an Illinois state savings and loan association in 1885.
The Bank converted to a federally chartered savings and loan association in 1937
and changed its name to Kankakee Federal Savings Bank in connection with its
conversion to stock form in 1992. All references to the Company include the
Bank and KFS unless clearly indicated otherwise, except that references to the
Company at or before December 30, 1992 refer to the Bank and KFS on a
consolidated basis.
The Company and the Bank are subject to comprehensive regulation,
examination and supervision by the Office of Thrift Supervision (the "OTS") and
the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is a member of
the Federal Home Loan Bank System (the "FHLB System") and its deposits are
insured by the Savings Association Insurance Fund ("SAIF") to the maximum extent
permitted by the FDIC.
The Bank serves the financial needs of families and local businesses in its
primary market areas through its main office located at 310 S. Schuyler Avenue,
Kankakee, Illinois and eight branch offices located in the communities of
Bourbonnais, Herscher, Hoopeston, Manteno, Momence, Ashkum, Dwight, and
Champaign, Illinois. At December 31, 1996, the Company had consolidated assets
of $350.6 million, deposits of $277.3 million and stockholders' equity of $36.5
million.
4
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The Company engages in a general full service retail banking business and
offers a broad variety of consumer oriented products and services to residents
of its primary market areas. The Company is principally engaged in the business
of attracting deposits from the general public and originating residential
mortgage loans in its primary market areas. The Company also originates
commercial real estate, consumer, multi-family, commercial business and
construction loans. In addition, the Company invests in mortgage-backed
securities, investment securities, certificates of deposit and short-term liquid
assets. The Company also offers a Visa/MasterCard program and, on an agency
basis through KFS, securities brokerage services and insurance and annuity
products to the Company's customers and provides appraisal services for the Bank
and others.
The Company's revenues are derived from interest on loans, mortgage-backed
and related securities and investments, service charges and loan origination
fees, loan servicing fees and proceeds from the sale, through KFS, of securities
brokerage services, insurance and annuity products and appraisal services. The
Company's operations are materially affected by general economic conditions, the
monetary and fiscal policies of the federal government and the policies of the
various regulatory authorities, including the OTS and the Board of Governors of
the Federal Reserve System (the "FRB"). The Company's results of operations are
largely dependent upon its net interest income, which is the difference between
the interest it receives on its loan and investment securities portfolios and
the interest it pays on deposit accounts.
The executive offices of the Company are located at 310 S. Schuyler Avenue,
Kankakee, Illinois 60901 and its telephone number at that address is (815)
937-4440.
MARKET AREA
The Bank's main office is located at 310 S. Schuyler Avenue, Kankakee,
Illinois. The Bank also has eight branch offices located in the communities of
Bourbonnais, Herscher, Hoopeston, Momence, Manteno, Ashkum, Dwight, and
Champaign. The Company's market areas include Kankakee, Champaign, Iroquois and
Livingston Counties and portions of Will, Grundy and Vermilion Counties,
Illinois.
Kankakee is located approximately 35 miles south of the metropolitan
Chicago area. The metropolitan Kankakee area has a population of just under
60,000 and has experienced a slight decrease in population since 1990. Kankakee
County has a mixed agricultural and industrial economy with the largest number
of residents employed in the agricultural, health care, food processing,
chemical and retail redistribution industries. Major employers include
Riverside HealthCare, St. Mary's Hospital, the Baker and Taylor Company, CIGNA
Companies, Armstrong World Industries, CENTEON, Heinz Pet Products, Bunge Edible
Oil Corporation, Henkel Corporation and CBI Services. Kankakee County
experienced economic difficulties in the late 1970s and early 1980s when Roper
Corporation, Kroehler Furniture, A.O. Smith and others closed or moved their
plants causing a loss of approximately 5,000 jobs. The local economy has slowly
improved through the addition of service industry and manufacturing jobs and the
recovery of the agricultural sector, although household income and unemployment
remain less favorable than the national averages. The Company's future
performance will be highly dependent upon local economic conditions.
5
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Champaign is located approximately 75 miles south of Kankakee. It is the
location of the original campus of the University of Illinois which employs
17,000 people and has a student body of over 30,000. In addition, the economy
of the Champaign market area includes several major medical centers and
agricultural and industrial businesses. Major employers in the Champaign area
include Carle Clinic, Covenant Medical Center, Parkland College, Kraft General
Foods, Supervalu, Hobbico, and Solo Cup.
Hoopeston is located approximately 60 miles southeast of Kankakee in
Vermilion County Illinois. The local economy includes a mix of agriculture and
manufacturing. Other than agriculture, major employers are Silgan Containers,
Inc., Stokely U.S.A., Inc., Hoopeston Food, Food Machinery Corp. (FMC),
Hoopeston Community Memorial Hospital and Schumachers.
LENDING ACTIVITIES
GENERAL. The principal lending activity of the Company is originating
first mortgage loans secured by owner occupied one-to-four family residential
properties located in its primary market areas. In addition, in order to
increase the yield and interest rate sensitivity of its portfolio and in order
to provide more comprehensive financial services to families and community
businesses in the Company's market areas, the Company also originates commercial
real estate, consumer, commercial business, multi-family, and construction
loans. From time to time, the Company has also utilized loan purchases to
supplement loan originations.
6
<PAGE>
LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIO COMPOSITION. The following
table provides information concerning the composition of the Company's loan
and mortgage-backed securities portfolios in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowances for losses) as of the dates indicated. Loans held for sale are
included primarily in one-to-four family real estate loans.
<TABLE>
December 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ----------------- ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS (Dollars in thousands)
One-to-four family . . . . . $149,544 54.74% $147,007 54.28% $136,735 61.13% $122,522 59.55% $108,636 59.14%
Multi-family . . . . . . . . 14,172 5.19 14,475 5.35 14,551 6.51 13,336 6.48 14,064 7.66
Commercial . . . . . . . . . 28,721 10.51 28,273 10.44 25,300 11.31 25,404 12.35 22,195 12.08
Construction or
development. . . . . . . . 5,525 2.02 8,248 3.05 11,730 5.24 11,177 5.43 10,755 5.85
Mortgage-backed
securities and
participation
certificates . . . . . . . 34,713 12.71 36,481 13.47 6,357 2.84 8,488 4.12 3,807 2.07
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate
loans and mortgage-
backed securities. . . . 232,675 85.17 234,484 86.59 194,673 87.03 180,927 87.93 159,457 86.80
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
OTHER LOANS:
Consumer Loans:
Deposit account. . . . . . 588 0.21 745 0.27 504 0.23 593 0.29 573 0.31
Student. . . . . . . . . . 918 0.34 1,151 0.43 1,733 0.77 1,606 0.78 1,917 1.04
Automobile . . . . . . . . 4,033 1.48 3,219 1.19 2,232 1.00 1,228 0.60 1,107 0.60
7
<PAGE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ----------------- ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Home equity. . . . . . . . 14,166 5.19 12,847 4.74 8,881 3.97 7,033 3.42 5,828 3.17
Home improvement . . . . . 56 0.02 208 0.08 327 0.15 127 0.06 161 0.09
Mobile home. . . . . . . . 3,161 1.16 3,122 1.15 3,207 1.43 3,099 1.50 3,296 1.80
Credit cards . . . . . . . 1,705 0.62 1,870 0.69 1,804 0.81 1,988 0.97 2,219 1.21
Personal . . . . . . . . . 5,942 2.17 3,919 1.45 2,246 1.00 1,506 0.73 1,442 0.79
-------- -------- -------- -------- --------
Total consumer loans . . . 30,569 11.19 27,081 10.00 20,934 9.36 17,180 8.35 16,543 9.01
Commercial business loans. . . 9,943 3.64 9,246 3.41 8,074 3.61 7,649 3.72 7,703 4.19
-------- -------- -------- -------- --------
Total other loans. . . . . 40,512 14.83 36,327 13.41 29,008 12.97 24,829 12.07 24,246 13.20
-------- -------- -------- -------- --------
Total loans and mortgage-
backed securities
receivable . . . . . . . . . 273,187 100.00% 270,811 100.00% 223,681 100.00% 205,756 100.00% 183,703 100.00%
-------- -------- -------- -------- --------
LESS:
Loans in process . . . . . . 1,726 957 1,705 2,622 1 970
Deferred fees and
discounts. . . . . . . . . 425 517 555 627 590
Allowance for losses
on loans . . . . . . . . . 2,360 2,388 2,251 2,166 2,391
-------- -------- -------- -------- --------
Total loans and mortgage-
backed securities
receivable, net . . . . . $268,676 $266,949 $219,170 $200,341 $178,752
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
8
<PAGE>
The following table shows the composition of the Company's loan and
mortgage-backed securities portfolios by fixed and adjustable rate at the dates
indicated. Loans held for sale are included primarily as fixed-rate one-to-four
family residential loans.
<TABLE>
December 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ----------------- ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED-RATE LOANS AND
MORTGAGE-BACK SECURITIES (Dollars in thousands)
Real estate:
One-to-four family . . . . . $ 50,758 18.58% $ 51,620 19.06% $ 55,299 24.72% $ 61,499 29.89% $ 46,086 25.09%
Multi-family . . . . . . . . --- --- --- --- 37 0.02 97 0.05 163 0.09
Commercial . . . . . . . . . 3,520 1.29 6,128 2.26 2,984 1.33 4,209 2.05 5,853 3.19
Construction or
development. . . . . . . 690 0.25 1,583 0.58 8,844 3.96 7,817 3.80 4,965 2.70
Mortgage-backed securities . . 17,489 6.40 18,341 6.77 6,357 2.84 8,488 4.12 3,807 2.07
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans
and mortgage-backed
securities. . . . . . . . . 72,457 26.52 77,672 28.67 73,521 32.87 82,110 39.91 60,874 33.14
Consumer . . . . . . . . . . . 17,065 6.25 14,876 5.49 12,789 5.72 9,425 4.58 10,715 5.83
Commercial business. . . . . . 2,867 1.05 2,665 0.98 2,359 1.05 1,870 0.91 1,908 1.04
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total fixed-rate loans and
mortgage-backed
securities . . . . . . . 92,389 33.82 95,213 35.14 88,669 39.64 93,405 45.40 73,497 40.01
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
ADJUSTABLE-RATE LOANS AND
MORTGAGE-BACKED SECURITIES
Real estate:
One-to-four family . . . . 98,786 36.16 95,387 35.22 81,436 36.41 61,023 29.66 62,550 34.05
9
<PAGE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ----------------- ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Multi-family . . . . . . . 14,172 5.19 14,475 5.35 14,514 6.49 13,239 6.43 13,901 7.57
Commercial . . . . . . . . 25,201 9.22 22,145 8.18 22,316 9.97 21,195 10.30 16,342 8.90
Construction or
development. . . . . . . 4,835 1.77 6,665 2.47 2,886 1.29 3,360 1.63 5,790 3.15
Mortgage-backed
securities . . . . . . . 17,224 6.31 18,140 6.70 --- --- --- --- --- ---
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans
and mortgage-backed
securities . . . . . . 160,218 58.65 156,812 57.92 121,152 54.16 98,817 48.02 98,583 53.67
Consumer . . . . . . . . . . . 13,504 4.94 12,205 4.51 8,145 3.64 7,755 3.77 5,828 3.17
Commercial business. . . . . . 7,076 2.59 6,581 2.43 5,715 2.56 5,779 2.81 5,795 3.15
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total adjustable-rate
loans and mortgage-
backed securities. . . 180,798 66.18 175,598 64.86 135,012 60.36 112,351 54.60 110,206 59.99
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans and mortgage-
backed securities . . . . . . 273,187 100.00% 270,811 100.00% 223,681 100.00% 205,756 100.00% 183,703 100.00%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
------ ------ ------ ------ ------
Less:
Loans in process . . . . . . 1,726 957 1,705 2,622 1,970
Deferred fees and
discounts . . . . . . . . . 425 517 555 627 590
Allowance for losses on
loans . . . . . . . . . . . 2,360 2,388 2,251 2,166 2,391
-------- -------- -------- -------- --------
Total loans and mortgage-
backed securities
receivable, net. . . . . $268,676 $266,949 $219,170 $200,341 $178,752
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
10
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Company's loan and mortgage-backed securities portfolio at December 31, 1996.
Loans that have adjustable or renegotiable interest rates are shown as
maturing in the period during which the contract matures. The schedule does
not reflect the effects of possible prepayments or enforcement of due-on-sale
clauses.
<TABLE>
Real Estate
----------------------------------------------------
One-to-four
family and
Mortgage-Backed Multi-family Construction or Commercial
Securities and Commercial Development Consumer Business Total
---------------- ---------------- ---------------- ---------------- ----------------- ----------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due During Twelve
Month Periods
Ending
December 31,
- ------------
1997(1). . . . . $ 3,696 6.34% $ 9,296 8.31% $4,109 8.57% $ 4,132 11.24% $6,098 9.34% $ 27,331 8.75%
1998 and 1999. . 825 8.38 1,732 9.89 --- --- 6,592 9.33 2,262 9.32 11,411 9.34
2000 and 2001. . 2,083 8.37 2,810 7.80 91 9.25 11,385 9.47 993 9.31 17,362 9.06
2002 and 2006. . 15,206 7.88 8,895 8.57 298 8.51 6,494 9.94 498 9.37 31,391 8.53
2007 and 2021. . 71,586 7.28 19,349 9.26 210 9.64 1,966 10.29 92 9.25 93,203 7.76
2022 and
following . . . 90,861 7.12 811 9.19 817 7.17 --- --- --- --- 92,489 7.14
-------- ------- ------ ------- ------ --------
Total . . . . $184,257 $42,893 $5,525 $30,569 $9,943 $273,187
-------- ------- ------ ------- ------ --------
-------- ------- ------ ------- ------ --------
</TABLE>
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(1) Includes demand loans and loans having no stated maturity.
11
<PAGE>
As of December 31, 1996, the total amount of loans and mortgage-backed
securities due after December 31, 1997, which had predetermined interest
rates was $83.7 million, while the total amount of loans and mortgage-backed
and related securities due after such date which had floating or adjustable
interest rates was $162.2 million.
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), the aggregate amount of loans that the Bank is permitted to
make to any one borrower is generally limited to 15% of unimpaired capital
and surplus (25% if the security for such loan has a "readily ascertainable"
market value or 30% for certain residential development loans). At December
31, 1996, the Bank's regulatory loan-to-one borrower limit was $4.8 million.
On the same date, the Bank's largest total of loans to one borrower was $3.5
million.
All of the Company's lending activities are conducted in accordance with
policies adopted by its Board of Directors. The Company is an equal
opportunity lender. Decisions on loan applications are made on the basis of
detailed applications and property valuations (consistent with the Company's
written appraisal policy) prepared by qualified appraisers. The loan
applications are designed primarily to determine the borrower's ability to
repay and the more significant items on the application are verified through
use of credit reports, financial statements, tax returns and/or third-party
confirmations.
The Company requires evidence of marketable title and lien position as
well as appropriate title and other insurance on all loans secured by real
property in amounts at least equal to the principal amount of the loan or the
value of improvements on the property, depending on the type of loan.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LENDING. The cornerstone of
the Company's lending program is the origination of loans secured by
mortgages on owner-occupied one-to-four family residences. At December 31,
1996, $149.5 million, or 54.7% of the Company's loan and mortgage-backed
securities portfolio, consisted of loans secured by one-to-four family
residences. At that date, the average outstanding residential loan balance
was approximately $42,700 and the largest outstanding residential loan had a
book value of $488,800. Substantially all of the residential loans
originated by the Company are secured by properties located in the Company's
primary market areas.
Historically, the Company originated for retention in its own portfolio
25-year fixed-rate loans secured by one-to-four family residential real
estate. Beginning in 1980, in order to reduce its exposure to changes in
interest rates, the Company began to originate Adjustable Rate Mortgages
("ARM"), subject to market conditions and consumer preference. While the
Company continues to originate long term fixed-rate residential loans, the
Company has adopted a policy of selling substantially all of such loans in
the secondary market except as consistent with its asset/liability management
objectives. Currently, the Company retains most of its fixed-rate
residential loans having terms of 15 years or less.
The Company's fixed-rate loans are originated with terms which conform
to secondary market standards (I.E., Federal Home Loan Mortgage Corporation
("FHLMC") standards). Most of the
12
<PAGE>
Company's fixed-rate residential loans have contractual terms to maturity of
15 to 30 years. Although, under the Company's current policy, the Company
sells most of the fixed-rate loans with terms of more than 15 years that it
originates, the Company typically retains the servicing of loans that it
sells. At December 31, 1996, the Company had $37.3 million of 15 year
fixed-rate residential loans and $13.5 million of 30 year fixed-rate
residential loans in its portfolio.
Since 1980, the Company has offered ARM loans at rates, terms and fees
determined in accordance with market and competitive factors. The programs
currently offered generally meet the standards and requirements of the
secondary market for residential loans. The Company's current one-to-four
family residential ARMs are fully amortizing loans with contractual
maturities of up to 30 years. The interest rates on the ARMs originated by
the Company are subject to adjustment at stated intervals based on a margin
over a specified index and are subject to annual as well as lifetime
adjustment limits. The Company's current ARMs do not permit negative
amortization of principal and carry no prepayment penalty. At December 31,
1996, the Company had $67.7 million, $13.0 million, and $18.1 million of
one-year, three-year and five-year ARMs, respectively.
The Company's delinquency experience on its ARMs has generally been
similar to that on fixed-rate residential loans. Of the $703,000 of
one-to-four family loans delinquent 60 days or more at December 31, 1996,
$294,000 (or .2% of one-to-four family loans) consisted of ARMs and $409,000
(or .3% of the Company's one-to-four family loans) represented fixed-rate
loans.
The Company evaluates both the borrower's ability to make principal,
interest and escrow payments and the value of the property that will secure
the loan. The Company originates residential mortgage loans with
loan-to-value ratios generally up to 90% except for a program applicable to
first time homebuyers where this ratio can go up to 100% with private
mortgage insurance and/or other collateral. On any mortgage loan exceeding
an 80% loan-to-value ratio at the time of origination, the Company generally
requires private mortgage insurance in an amount intended to reduce the
Company's exposure to 80% or less of the appraised value of the underlying
property.
In view of the prevailing level of real estate values in the Company's
market areas, the Company rarely originates loans in excess of $207,000 (the
FHLMC maximum). As of December 31, 1996, the Company had 33 residential
mortgage loans having an aggregate balance of $8.8 million with original
balances in excess of $207,000 ("Jumbo Loans"). The Company's delinquency
experience on its Jumbo Loans has been similar to its experience on its other
residential loans.
During 1995, the Company requested and received approval as a
one-to-four family lender for both the Federal Housing Administration ("FHA")
and the Veterans' Administration ("VA"). The Company sells, with servicing
released, all FHA and VA loans it originates to other investors. During
1996, twelve such loans totaling $872,000 were originated and sold.
Borrowers are notified at the time of application that their loan will be
sold to, and serviced by, a party other than the Company.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Company also makes
multi-family and commercial real estate loans in its primary market areas.
At December 31, 1996, the Company had $42.9 million in multi-family and
commercial real estate loans, representing 15.7% of the
13
<PAGE>
Company's total loan and mortgage-backed securities portfolio. Included in
such loans were $5.6 million of participation interests in multi-family and
commercial real estate loans which were purchased from other lenders.
The Company's multi-family portfolio includes loans secured by
residential buildings (including university student housing) located
primarily in the Company's primary market areas. The Company's commercial
real estate portfolio consists of loans on a variety of non-residential
properties including nursing homes, churches and bowling alleys.
The Company has originated both adjustable and fixed-rate multi-family
and commercial real estate loans, although most recent originations have been
adjustable-rate loans. Rates on the Company's adjustable-rate multi-family
and commercial real estate loans generally adjust in a manner consistent with
the Company's ARMs. Multi-family and commercial real estate loans are
generally underwritten in amounts of up to 75% of the appraised value of the
underlying property.
The table below sets forth by type of property taken as collateral, the
number, loan amount and outstanding balance of the Company's multi-family and
commercial real estate loans (including purchased loan participations) at
December 31, 1996 and the amounts of such loans which were non-performing or
"of concern" at December 31, 1996. The amounts shown do not reflect
allowances for losses.
<TABLE>
Original Outstanding Amount
Number Loan Principal Non-Performing
of Loans Amount Balance or of Concern
-------- -------- ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Multi-family residential . . . . 29 $15,437 $14,172 $1,718
Nursing homes. . . . . . . . . . 2 2,065 579 ---
Churches . . . . . . . . . . . . 17 2,664 1,772 ---
Mobile home park . . . . . . . . 1 608 580 ---
Motels . . . . . . . . . . . . . 2 1,325 849 ---
Agricultural related . . . . . . 9 906 764 ---
Industrial and warehouse . . . . 40 16,961 14,190 ---
Recreation facilities. . . . . . 3 3,962 2,751 ---
Retail . . . . . . . . . . . . . 20 3,805 2,999 1,396
Office . . . . . . . . . . . . . 8 2,336 1,735 436
Other. . . . . . . . . . . . . . 20 3,939 2,502 590
--- ------- ------- ------
Total . . . . . . . . . . . . 151 $54,008 $42,893 $4,140
--- ------- ------- ------
--- ------- ------- ------
</TABLE>
Multi-family residential and commercial real estate loans generally
present a higher level of risk than loans secured by one-to-four family
residences. This greater risk is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
PURCHASED LOAN PARTICIPATIONS. In order to supplement lending
activities during periods of low loan volume, the Company has from time to
time purchased participation interests in multi-family
14
<PAGE>
and commercial real estate loans originated and serviced by other lenders.
Prior to purchase, the Company reviews each participation to ensure that the
underlying loan complies with the Company's lending policy as in effect at
the time of purchase.
The following table presents information regarding the Bank's
multi-family and commercial real estate loan participations at December 31,
1996. At December 31, 1996, the Bank had $1.3 million of purchased loans and
participation interests in one-to-four family loans.
<TABLE>
Original Outstanding Unfunded Amount
Month of Original Loan Participation Balance at Commitment at Non-Performing
Type of Security/Location Origination Amount Amount Dec. 31, 1996 Dec. 31, 1996 or of Concern
- ------------------------- ----------- ------------- ------------- ------------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
APARTMENT BUILDINGS:
Pleasant Hills, California 09/10/86 $11,900 $ 726 $ 668 $ --- $ ---
Santa Ana, California 08/26/86 13,750 839 753 --- ---
Everett, Washington 09/12/86 5,500 1,375 1,161 --- 1,161
Seabrook, Maryland 09/01/87 18,000 1,800 1,678 --- ---
MOTELS:
Gainesville, Florida 12/19/88 1,350 675 277 --- ---
Spring Lake, North Carolina 12/19/88 1,300 650 572 --- ---
NURSING HOME:
Arlington Heights, Illinois 03/01/73 1,980 990 175 --- ---
WAREHOUSE:
Bethune, South Carolina 12/30/93 725 551 296 --- ---
------ ----- ------
$5,580 $ --- $1,161
------ ----- ------
------ ----- ------
</TABLE>
The purchase of loan participations involves the same risks as the
origination of the same type of loans as well as additional risks related to
the purchaser's lower level of control over the origination and subsequent
administration of the loan. Also, many of the loan participations purchased
by the Company in the past have been on projects located out-of-state.
Out-of-state investments are considered to carry a higher degree of risk due
to the difficulty of monitoring such investments.
COMMERCIAL BUSINESS LENDING. Federally chartered savings institutions,
such as the Bank, are authorized to make secured or unsecured loans and issue
letters of credit for commercial, corporate, business and agricultural
purposes and to engage in commercial leasing activities, up to a maximum of
10% of total assets.
Since 1988, in order to increase the proportion of interest rate
sensitive and relatively high yielding loans in its portfolio and as a part
of its effort to provide more comprehensive financial services in the
communities serviced by its offices, the Company has significantly increased
its origination of secured and unsecured commercial loans to local
businesses. Currently, the Company's commercial business lending activities
encompass loans with a broad variety of purposes including working capital,
accounts receivable, inventory, equipment and agriculture. The Company does
not have any energy or foreign loans.
At December 31, 1996, the Company had $9.9 million in commercial business
loans outstanding (representing 3.6% of the Company's total loan and
mortgage-backed securities portfolio) with additional commercial business
loan commitments totaling $4.6 million, most of which were undrawn lines of
credit. In addition, at December 31, 1996, the Company had thirteen letters
of credit
15
<PAGE>
outstanding, in an aggregate amount of $1.0 million. Most of the Company's
commercial business loans have terms to maturity of five years or less and
adjustable or floating interest rates. At December 31, 1996, the Company had
nine commercial business loans with balances of $200,000 or more, in an
aggregate amount of $2.9 million.
The Company recognizes the generally increased risks associated with
commercial business lending. The Company's commercial business lending
policy emphasizes credit file documentation and analysis of the borrower's
character, management capabilities, capacity to repay the loan, the adequacy
of the borrower's capital and collateral as well as an evaluation of the
industry conditions affecting the borrower. Analysis of the borrower's past,
present and future cash flows is also an important aspect of the Company's
credit analysis.
The following table sets forth information regarding the number and
amount of the Company's commercial business loans and the amounts of such
loans which were non-performing and "of concern" as of December 31, 1996.
<TABLE>
Original
Loan Outstanding Amount
Number Commit- Principal Non-Performing
of Loans ment Balance or of Concern
-------- -------- ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
SECURED LOANS:
Accounts receivable. . . . . . 14 $ 1,203 $ 775 $---
Inventory. . . . . . . . . . . 16 748 520 ---
Equipment. . . . . . . . . . . 41 2,135 1,421 ---
Other business assets. . . . . 6 1,459 705 ---
Certificates of deposits . . . 4 157 78 ---
Stocks and bonds . . . . . . . 8 812 569 ---
Heavy duty vehicles. . . . . . 43 1,817 1,141 25
Other motor vehicles . . . . . 17 856 434 ---
Crops. . . . . . . . . . . . . 7 1,546 1,026 ---
Livestock. . . . . . . . . . . 1 35 15 ---
Life insurance . . . . . . . . 3 86 59 ---
Stand-by letters of credit . . 7 897 --- ---
Beneficial interest in
real estate trust . . . . . . 21 3,888 2,364 ---
UNSECURED LOANS. . . . . . . . . 53 1,288 836 45
UNSECURED STAND-BY LETTERS
OF CREDIT . . . . . . . . . . . 6 144 --- ---
--- ------- ------ ----
Total commercial business
loans. . . . . . . . . . . . 247 $17,071 $9,943 $ 70
--- ------- ------ ----
--- ------- ------ ----
</TABLE>
CONSUMER LENDING. Management believes that offering consumer loan
products helps to expand the Company's customer base and to create stronger
ties to its existing customer base. In addition, because consumer loans
generally have shorter terms to maturity and/or adjustable-rates and carry
higher rates of interest than do residential mortgage loans, they can be
valuable asset/liability management tools. The Company currently originates
substantially all of its consumer loans in its market areas. At December 31,
1996, the Company's consumer loans totaled $30.6 million or 11.2% of the
Company's loan and mortgage-backed securities portfolio.
The Company offers a variety of secured consumer loans, including home
equity and home improvement loans, education loans (which carry a guaranty
from a State agency), loans secured by
16
<PAGE>
savings deposits, mobile home and automobile loans. Although the Company
primarily originates consumer loans secured by real estate, deposits or other
collateral, the Company also makes unsecured personal loans. In addition,
beginning in 1988, the Company began to offer unsecured consumer loans
through its Visa and MasterCard credit card programs.
The Company offers mobile home loans in order to provide affordable
housing. All of the Company's mobile home loans have been originated with
fixed-rates of interest and are generally made in amounts of up to a maximum
of 90% of the buyer's cost. As of December 31, 1996, mobile home loans
totaled $3.2 million or approximately 1.2% of the Company's gross loan and
mortgage-backed securities portfolio.
The Company also offers student loans in compliance with the guidelines
established by the Federal Family Education Loan Program. Historically, such
loans were 100% guaranteed as to principal and interest by the Illinois
Student Assistance Commission. Loans originated after October 1, 1993,
however, are 100% guaranteed as to interest and 98% guaranteed as to
principal. As of December 31, 1996, the Company held $918,000 of such loans,
which represents 0.3% of the Company's loan and mortgage-backed securities
portfolio.
Unsecured personal loans are made to borrowers for a variety of personal
needs and are usually limited to a maximum of $3,000, with a minimum loan
amount of $1,000. Lines of credit extended through the Company's Visa and
MasterCard credit card programs are generally limited to $5,000.
Underwriting standards for the Company's credit card program are
substantially the same as for personal loans.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. The greater risk inherent in
consumer loans has been emphasized by recent nationwide increases in personal
bankruptcies. Although the level of delinquencies in the Company's consumer
loan portfolio has generally been low (at December 31, 1996, $177,000, or
approximately .58% of the consumer loan portfolio was 90 days or more
delinquent), there can be no assurance that delinquencies will not increase
in the future.
CONSTRUCTION LENDING. Historically, construction lending was a
relatively minor part of the Company's business activities. However, in light
of the economic recovery in its principal market areas and in order to
increase the yield on, and the proportion of, interest rate sensitive loans
in its portfolio and to provide more comprehensive financial services to
families and community businesses within its market area, the Company
expanded its construction lending. At December 31, 1996, the Company had
$2.0 million of residential construction loans and $19,000 of lot loans to
borrowers intending to live in the properties upon completion of construction.
On occasion, the Company also originates construction loans to builders
and developers for the construction of one-to-four family residences,
multi-family residences and commercial real estate and the acquisition and
development of one-to-four family lots in the Company's primary market areas.
Construction loans to builders of one-to-four family residences generally
carry terms of up to
17
<PAGE>
one year and may provide for the payment of interest and loan fees from loan
proceeds. At December 31, 1996, the Bank had approximately $1.4 million in
loans to builders of residences, and $876,000 million in loans on commercial
construction. In addition, on the same date, the Company had $1.2 million of
subdivision loans to developers for the development of one-to-four family
lots.
Most of the Company's construction loans have been originated with fixed
rates and terms of 12 months or less. Construction loans to owner occupants
are generally made in amounts of up to a maximum loan-to-value ratio of 80%
(75% in the case of commercial real estate). The Company's construction
loans to persons other than owner occupants generally involve larger
principal balances than do its one-to-four family residential loans. At
December 31, 1996, only one of the Company's construction loans had a
principal balance in excess of $500,000. The principal balance of this loan
was $550,000.
The table below sets forth by type of security property the number and
amount of the Company's construction loans at December 31, 1996.
<TABLE>
Outstanding Amount
Number Total Loan Principal Non-Performing
of Loans Commitment Balance or of Concern
-------- ---------- ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-four family residential. . . 13 $1,958 $1,958 $---
Land acquisition and development. . 30 3,935 2,867 336
Church. . . . . . . . . . . . . . . 2 700 700 ---
-- ------ ------ ----
Total. . . . . . . . . . . . . . 45 $6,593 $5,525 $336
-- ------ ------ ----
-- ------ ------ ----
</TABLE>
Construction lending to persons other than owner occupants is generally
considered to involve a higher level of credit risk than one-to-four family
residential lending due to the concentration of principal in a limited number
of loans and borrowers and the effects of general economic conditions on
construction projects, real estate developers and managers. In addition, the
nature of these loans is such that they are more difficult to evaluate and
monitor.
ORIGINATIONS, PURCHASES AND SALES OF LOANS. The Company originates real
estate and other loans through employees located at each of the Company's
offices. Walk-in customers and referrals from real estate brokers and
builders are also important sources of loan originations. The Company does
not generally utilize the services of mortgage brokers.
From time to time, in order to supplement its loan production,
particularly during periods of low loan demand, the Company purchases
residential and other loans from third parties. Under its loan purchase
policies, prior to purchase, the Company reviews each loan to assure that it
complies with its normal underwriting standards. While the Company will
continue to evaluate loan purchase opportunities as they arise, the Company
currently anticipates limiting its future purchases of out-of-area
non-residential loans.
Consistent with the Company's asset/liability management strategy, the
Company sells a majority of its 30-year, fixed-rate loan production in the
secondary market. The Company's recent
18
<PAGE>
sales have been made through sales contracts entered into after the Company
has committed to fund the loan. The Company attempts to limit any interest
rate risk created by forward commitments by limiting the number of days
between the commitment and closing, charging fees for commitments and
limiting the amounts of its uncovered commitments outstanding at any one time.
When loans have been sold, the Company virtually always retains the
responsibility for servicing such loans. At December 31, 1996, excluding
mortgage-backed securities, approximately $6.9 million of the Company's loan
portfolio consisting of purchased loans and purchased participations was
serviced by others and the Company serviced $35.4 million of loans for
others. During the year ended December 31, 1996, the Company received fee
income of $91,000 in connection with loans serviced for others.
19
<PAGE>
The following table shows the loan origination, purchase and repayment
activities of the Company for the periods indicated.
<TABLE>
Year Ended December 31,
---------------------------------
1996 1995 1994
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
ORIGINATIONS BY TYPE:
Adjustable-Rate:
Real estate - one-to-four family. . . . . $21,433 $26,494 $30,763
- multi-family. . . . . . . . --- 2,100 2,250
- commercial. . . . . . . . . 7,745 4,417 7,377
Non-real estate - consumer. . . . . . . . 13,536 10,137 4,602
- commercial business . . 6,767 6,644 9,661
------- ------- -------
Total adjustable-rate . . . . . . . . . 49,481 49,792 54,653
Fixed-Rate:
Real estate - one-to-four family. . . . . . 13,728 6,657 12,516
- multi-family. . . . . . . . . --- --- ---
- commercial. . . . . . . . . . 1,829 1,126 10,217
Non-real estate - consumer. . . . . . . . . 14,525 13,395 11,694
- commercial business . . . 2,336 2,717 2,818
-------- ------- -------
Total fixed-rate . . . . . . . . . . . 32,418 23,895 37,245
Total loans originated . . . . . . . . 81,899 73,687 91,898
PURCHASES:
Real estate - one-to-four family . . . . . --- 3 150
- commercial. . . . . . . . . . 1,120 375 ---
Non-real estate - consumer . . . . . . . . --- --- ---
- commercial business . . . --- --- ---
-------- ------- -------
Total loans . . . . . . . . . . . . . . 1,120 378 150
Mortgage-backed securities. . . . . . . . . 12,999 34,707 ---
-------- ------- -------
Total purchased . . . . . . . . . . . . 14,119 35,085 150
-------- ------- -------
SALES AND REPAYMENTS:
Sales:
Real estate - one-to-four family. . . . . 4,834 2,246 6,922
- commercial. . . . . . . . . --- --- ---
Non-real estate - consumer. . . . . . . . 792 1,129 589
- commercial business . . --- --- ---
Loans sold with branch. . . . . . . . . . . . 3,845 --- ---
-------- ------- -------
Total loans . . . . . . . . . . . . . . 9,471 3,375 7,511
Mortgage-backed securities. . . . . . . . . . 4,913 --- ---
-------- ------- -------
Total sales . . . . . . . . . . . . . . 14,384 3,375 7,511
Principal repayments. . . . . . . . . . . . . 79,269 57,159 65,592
-------- ------- -------
Total reductions. . . . . . . . . . . . 93,653 60,534 73,103
Increase (decrease) in other items, net . . . 11 (1,108) (29)
-------- ------- -------
Net increase. . . . . . . . . . . . . . $ 2,376 $47,130 $18,916
-------- ------- -------
-------- ------- -------
</TABLE>
20
<PAGE>
DELINQUENCY PROCEDURES. When a borrower fails to make a required
payment on a loan, the Company attempts to cause the delinquency to be cured
by contacting the borrower. In the event a real estate loan payment is past
due for 90 days or more the Company performs an in- depth review of the loan
status, the condition of the property and circumstances of the borrower.
Based upon the results of its review, the Company may negotiate and accept a
repayment program with the borrower, accept a voluntary deed in lieu of
foreclosure or, when deemed necessary, initiate foreclosure proceedings.
Unsecured consumer loans are charged-off if they remain delinquent for
120 days. Secured consumer loans are liquidated and charged-off to the
extent the debt exceeds the fair value of the collateral. The Company's
procedures for repossession and sale of consumer collateral are subject to
various requirements under Illinois consumer protection laws.
Delinquencies in the Company's commercial business loan portfolio are
handled on a case-by-case basis under the direction of the chief lending
officer. Generally, personal contact is made with the borrower when the loan
is 6 to 7 days past due. Depending on the nature of the loan and the type of
collateral, if any, securing the loan, the Company may negotiate and accept a
modified payment program or take such other actions as the circumstances
warrant.
Real estate acquired by the Company as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired, it is recorded at its estimated fair value
at the date of acquisition, and any write-down resulting therefrom is charged
to the allowance for estimated loan losses. Upon acquisition, all costs
incurred in maintaining the property are expensed. Costs relating to the
development and improvement of the property, however, are capitalized to the
extent of its fair value.
21
<PAGE>
The following table sets forth the Company's loan delinquencies by
type, by amount and by percentage of type at December 31, 1996.
<TABLE>
Loans Delinquent For:
-------------------------------------------------------
Total 60 Days or More
60-89 Days 90 Days and Over Delinquent
-------------------------- -------------------------- --------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One-to-four family. . . . 6 $179 0.12% 12 $ 524 0.35% 18 $ 703 0.47%
Multi-family. . . . . . . --- --- --- 1 557 3.93 1 557 3.93
Commercial. . . . . . . . --- --- --- 6 2,401 8.36 6 2,401 8.36
Construction and
development . . . . . . 2 163 2.95 2 170 3.08 4 333 6.03
Consumer . . . . . . . . 19 138 0.45 38 177 0.58 57 315 1.03
Commercial business. . . --- --- --- 1 45 0.45 1 45 0.45
--- ---- --- ------ --- ------
Total. . . . . . . . . 27 $480 0.20 60 $3,874 1.63 87 $4,354 1.83
--- ---- --- ------ --- ------
--- ---- --- ------ --- ------
</TABLE>
The following table sets forth the Company's loan delinquencies by type,
by amount and by percentage of type at December 31, 1995.
<TABLE>
Loans Delinquent For:
-------------------------------------------------------
Total 60 Days or More
60-89 Days 90 Days and Over Delinquent
-------------------------- -------------------------- --------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One-to-four family. . . . 7 $147 0.10% 18 $ 515 0.35% 25 $ 662 0.45%
Multi-family. . . . . . . --- --- --- 1 557 3.85 1 557 3.85
Commercial. . . . . . . . --- --- --- 1 111 0.39 1 111 0.39
Construction and
development. . . . . . . --- --- --- 2 170 2.06 2 170 2.06
Consumer. . . . . . . . . . 14 108 0.40 23 108 0.40 37 216 0.80
Commercial business . . . . --- --- --- --- --- --- --- --- ---
--- ---- --- ------ --- ------
Total . . . . . . . . . 21 $255 0.11 45 $1,461 0.62 66 $1,716 .73
--- ---- --- ------ --- ------
--- ---- --- ------ --- ------
</TABLE>
22
<PAGE>
CLASSIFICATION OF ASSETS. Federal regulations require that each
savings institution classify its own assets on a regular basis. In addition,
in connection with examinations of savings institutions, OTS and FDIC
examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: Substandard, Doubtful and Loss. The regulations have also created a
Special Mention category, consisting of assets which do not currently expose
a savings institution to a sufficient degree of risk to warrant
classification, but do possess credit deficiencies or potential weaknesses
deserving management's close attention. Assets classified as Substandard or
Doubtful require the institution to establish prudent general allowances for
loan losses. If an asset or portion thereof is classified as Loss, the
institution must either establish specific allowances for loan losses in the
amount of 100% of the portion of the asset classified Loss, or charge off
such amount. If an institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the Regional
Director of the OTS. On the basis of management's review of its assets, at
December 31, 1996, on a net basis, the Company had classified $2.3 million of
its assets as Special Mention, $4.1 million as Substandard and $248,000 as
Loss. No assets were classified as Doubtful at December 31, 1996. The
Company's classified assets consist of the non-performing loans and loans and
other assets of concern discussed herein.
NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of non-performing assets of the Company. Loans are reviewed
quarterly and any loan whose collectibility is doubtful is placed on
non-accrual status. Real estate loans are placed on non-accrual status when
either principal or interest is 90 days or more past due, unless, in the
judgment of management, collectibility is considered highly probable and
collection efforts are in progress, in which case interest would continue to
accrue. At December 31, 1996, there were 45 loans with outstanding principal
balances totaling $2.0 million which were 90 days or more past due and
continuing to accrue interest.
Interest accrued and unpaid at the time a consumer loan is placed on
non-accrual status is charged against interest income. Subsequent payments
are either applied to the outstanding principal balance or recorded as
interest income, depending on the assessment of the ultimate collectibility
of the loan. For all years presented, the Company had no troubled debt
restructurings other than those included in the non-performing assets table
and discussed herein. Foreclosed assets include assets acquired in
settlement of loans. The loan and foreclosed asset amounts shown are stated
net of the specific reserves which have been established against such assets.
23
<PAGE>
December 31,
------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
Non-accruing loans:
One-to-four family(1)............. $ 524 $ 516 $ 485 $ 298 $ 372
Multi-family...................... --- --- 557 --- ---
Commercial........................ 1,396 111 111 116 399
Construction and development...... --- --- --- --- ---
Consumer.......................... --- --- --- --- ---
Commercial business............... --- --- --- --- ---
------ ------ ------ ------ -----
Total.......................... 1,920 627 1,153 414 771
------ ------ ------ ------ -----
Accruing loans delinquent more
than 90 days:
One-to-four family(1)............. --- --- --- --- ---
Multi-family...................... 557 557 296 --- ---
Commercial........................ 1,005 --- --- --- 378
Construction and development...... 170 169 --- --- ---
Consumer.......................... 177 108 133 113 208
Commercial business............... 45 --- --- --- 7
------ ------ ------ ------ -----
Total........................... 1,954 834 429 113 593
------ ------ ------ ------ -----
Foreclosed assets:
One-to-four family................ 96 84 27 132 264
Multi-family...................... --- 675 579 448 ---
Commercial........................ 69 69 73 251 151
Construction and development...... --- --- --- --- ---
Consumer.......................... 28 --- 16 15 7
Commercial business............... --- --- --- --- ---
------ ------ ------ ------ -----
Total foreclosed assets......... 193 828 695 846 422
------ ------ ------ ------ -----
Total non-performing assets....... $4,067 $2,289 $2,277 $1,373 $1,786
------ ------ ------ ------ -----
------ ------ ------ ------ -----
Total as a percentage of total
assets........................... 1.16% 0.64% 0.75% 0.49% 0.65%
------ ------ ------ ------ -----
------ ------ ------ ------ -----
_________________________
(1) Includes loans held for sale.
For the year ended December 31, 1996 and the year ended December 31,
1995, gross interest income which would have been recorded had the
non-accruing loans been current in accordance with their original terms
amounted to $37,648 and $37,488, respectively. The amount that was included
in interest income on such loans was $29,147 and $24,707 for the year ended
December 31, 1996 and the year ended December 31, 1995, respectively.
The Company's non-performing assets at December 31, 1996 included the
following: (i) an automobile dealership in Kankakee, Illinois; (ii) an
apartment complex in Kankakee, Illinois; (iii) a residential subdivision in
Bourbonnais, Illinois; (iv) a residential subdivision in Champaign, Illinois;
and (v) a commercial retail building in Champaign, Illinois.
24
<PAGE>
LOAN LOSS RESERVE ANALYSIS. The following table sets forth an analysis
of the Company's allowance for loan losses.
Nine
Months
Year Ended Ended
December 31, Dec 31,
------------------------------- -------
1996 1995 1994 1993 1992
---- ---- ---- ---- ------
(Dollar in thousands)
Balance at beginning of period..... $2,388 $2,251 $2,165 $2,391 $1,735
Charge-offs:
One-to-four family............... --- --- 31 20 ---
Multi-family..................... --- --- 108 176 ---
Commercial real estate........... --- --- 17 --- 145
Construction..................... --- --- --- --- ---
Consumer......................... 125 59 74 106 84
Commercial business.............. 1 --- 15 364 278
------ ------ ------ ------ ------
126 59 245 666 507
------ ------ ------ ------ ------
Recoveries:
One-to-four family............... --- --- --- --- ---
Multi-family..................... --- --- --- --- ---
Commercial real estate........... --- --- --- --- 312
Construction..................... --- --- --- --- ---
Consumer......................... 56 20 33 20 13
Commercial business.............. --- 3 2 --- ---
------ ------ ------ ------ ------
56 23 35 20 325
------ ------ ------ ------ ------
Net charge-offs.................... (70) (36) (210) (646) (182)
Additions charged to operations.... 42 173 296 420 838
------ ------ ------ ------ ------
Balance at end of period........... $2,360 $2,388 $2,251 $2,165 $2,391
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of net charge-offs during
the period to average loans
outstanding during the period..... 0.03% 0.02% 0.11% 0.36% 0.10%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of net charge-offs during
the period to average
non-performing assets............. 2.20% 1.58% 11.51% 40.90% 13.31%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
The balance in the allowance for loan losses and the related amount
charged to operations is based upon periodic evaluations of the loan
portfolio by management. These evaluations consider several factors
including, but not limited to, general economic conditions, loan portfolio
composition, prior loan loss experience, and management's estimate of future
potential losses.
25
<PAGE>
While management believes that it uses the best information available
to determine the allowance for estimated loan losses, unforeseen market
conditions could result in adjustments to the allowance for estimated loan
losses and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination.
<TABLE>
December 31,
-------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- -------------------- -------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family... $ 408 62.71% $ 403 62.74% $ 506 62.92% $ 299 62.11% $ 301 60.39%
Multi-family......... 451 5.94 437 6.18 460 6.70 399 6.76 536 7.82
Commercial real
estate.............. 496 12.04 561 12.07 470 14.34 519 12.88 463 12.34
Construction......... 294 2.32 272 3.52 424 2.70 264 5.66 262 5.98
Consumer............. 185 12.82 170 11.56 150 9.63 135 8.71 155 9.19
Commercial business.. 276 4.17 259 3.95 241 3.71 234 3.88 477 4.28
Unallocated.......... 250 --- 286 --- --- --- 315 --- 197 ---
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total.............. $2,360 100.00% $2,388 100.00% $2,251 100.00% $2,165 100.00% $2,391 100.00%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
26
<PAGE>
INVESTMENT ACTIVITIES
The Company has traditionally invested in U.S. government securities and
agency obligations of both long and short terms to supplement its lending
activities. During recent years, the Company has refocused its investment
activities on short and medium term securities, although the Company has
retained a number of longer term securities in its portfolio which are held
for investment. In addition, from time to time, the Bank has acquired
securities for trading purposes. The Company's securities held for trading
are recorded on the Company's books at market value. At December 31, 1996,
the Bank did not own any securities of a single issuer which exceeded 10% of
the Bank's stockholder's equity, other than U.S. Government or federal agency
obligations.
The Company is required by federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified securities and is
also permitted to make certain other securities investments. Cash flow
projections are regularly reviewed and updated to assure that adequate
liquidity is provided. As of December 31, 1996, the Bank's liquidity ratio
(liquid assets as a percentage of net withdrawable savings and current
borrowings) was 14.8% as compared to the OTS requirement of 5%.
27
<PAGE>
The following table sets forth the composition of the Company's
investment portfolio at the dates indicated.
<TABLE>
December 31,
----------------------------------------------------
1996 1995 1994
--------------- -------------- -------------
Book % of Book % of Book % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities (1):
U.S. government securities.................... $ 9,628 17.87% $12,961 25.98% $20,407 33.90%
Federal agency obligations.................... 41,386 76.82 34,426 69.01 36,806 61.14
Municipal bonds............................... 72 0.13 75 0.15 77 0.13
Non-marketable equity securities.............. 501 0.93 551 1.11 551 0.91
Mutual fund shares............................ 331 0.62 324 0.65 960 1.59
------- ----- ------- ------ ------- -----
Subtotal................................... 51,918 96.37 48,337 96.90 58,801 97.67
FHLB Stock....................................... 1,956 3.63 1,546 3.10 1,401 2.33
------- ----- ------- ------ ------- -----
Total investment securities and FHLB
stock..................................... $53,874 100.00% $49,883 100.00% $60,202 100.00%
------- ----- ------- ------ ------- -----
------- ----- ------- ------ ------- -----
Average remaining life or term to repricing of
investment securities excluding FHLB stock
and non-marketable securities................... 64 months 45 months 46 months
Other Interest-Earning Assets:
Federal funds sold............................ $ 7,985 55.59% $13,090 59.19% $ 2,340 23.60%
Money market funds............................ 4,883 33.99 3,755 16.98 1,592 16.06
FHLB overnight investments.................... 1,446 10.07 4,982 22.53 4,434 44.73
Certificates of deposit....................... 50 0.35 288 1.30 1,548 15.61
------- ----- ------- ------ ------- -----
Total...................................... $14,364 100.00% $22,115 100.00% $ 9,914 100.00%
------- ----- ------- ------ ------- -----
------- ----- ------- ------ ------- -----
</TABLE>
_____________________
(1) Includes securities held for sale.
28
<PAGE>
The composition and maturities of the investment securities portfolios,
excluding Federal Home Loan Bank of Chicago ("FHLB of Chicago") stock and
non-marketable equity securities at December 31, 1996, are indicated in the
following table.
<TABLE>
At December 31, 1996
------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over Total Investment
1 Year Years Years 10 Years Securities
---------- ---------- ---------- ---------- ----------
Book Value Book Value Book Value Book Value Book Value
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. government securities.......... $2,007 $ 7,621 $ --- $ --- $ 9,628
Federal agency obligations.......... 2,002 22,639 9,979 6,766 41,386
Mutual fund shares.................. 331 --- --- --- 331
------ ------- ------ ------- -------
Total............................... $4,340 $30,260 $9,979 $ 6,766 $51,345
------ ------- ------ ------- -------
------ ------- ------ ------- -------
Weighted average yield.............. 6.92% 5.82% 7.05% 7.15% 6.33%
------ ------- ------ ------- -------
------ ------- ------ ------- -------
SECURITIES HELD-TO-MATURITY:
Municipal Bonds..................... --- --- --- $ 72 $ 72
------ ------- ------ ------- -------
------ ------- ------ ------- -------
Weighted average yield.............. % % % 6.74% 6.74%
------ ------- ------ ------- -------
------ ------- ------ ------- -------
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposit accounts have traditionally been the principal source
of the Company's funds for use in lending and for other general business
purposes. In addition to deposits, the Company derives funds from loan
repayments and cash flows generated from operations. Scheduled loan payments
are a relatively stable source of funds, while deposit inflows and outflows
and the related cost of such funds have varied. Other potential sources of
funds available to the Bank include borrowings from the FHLB of Chicago and
reverse repurchase agreements.
DEPOSITS. The Company attracts both short-term and long-term deposits
by offering a wide assortment of accounts and rates. The Company offers
commercial demand, regular statement savings accounts, NOW accounts, money
market accounts, fixed interest rate certificates of deposits with varying
maturities and individual retirement accounts. Deposit account terms vary,
according to the minimum balance required, the time period the funds must
remain on deposit and the interest rate, among other factors. The Company has
not actively sought deposits outside of its primary market area.
29
<PAGE>
The following table sets forth the savings flows at the Company during
the periods indicated:
Year Ended December 31,
---------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in thousands)
Opening balance........................ $286,080 $265,570 $242,703
Deposits............................... 562,775 517,300 620,613
Withdrawals............................ 573,994 522,551 621,390
Purchased deposits..................... --- 16,071 16,568
Sold deposits.......................... (8,608) --- ---
Increase (decrease) before interest
credited.............................. (19,827) 10,820 15,791
Interest credited...................... 11,095 9,690 7,076
-------- -------- --------
Ending balance......................... $277,348 $286,080 $265,570
-------- -------- --------
-------- -------- --------
Net increase (decrease)................ $ (8,732) $ 20,510 $ 22,867
-------- -------- --------
-------- -------- --------
Percent increase (decrease)............ (3.05)% 7.72% 9.42%
-------- -------- --------
-------- -------- --------
30
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Company at the dates
indicated.
<TABLE>
December 31,
-----------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction and Savings
Deposits(1):
- ------------
Commercial Demand 0%........ $ 7,644 2.76% $ 7,850 2.75% $ 6,892 2.60%
Passbook Accounts 2.66%..... 51,966 18.74 53,760 18.79 60,324 22.71
NOW Accounts 3.47%.......... 34,756 12.53 34,842 12.18 40,109 15.10
Money Market Accounts 2.83%. 6,612 2.38 8,937 3.12 11,650 5.39
-------- ------ -------- ------ -------- ------
Total Non-Certificates...... 100,978 36.41 105,389 36.84 118,975 44.80
-------- ------ -------- ------ -------- ------
Certificates:
- -------------
0.00 - 3.99%................ 3 0.00 1,325 0.46 27,835 10.48
4.00 - 4.99%................ 6,560 2.37 15,528 5.43 54,566 20.55
5.00 - 5.49%................ 65,714 23.69 40,919 14.31 22,148 8.34
5.50 - 5.99%................ 64,930 23.41 45,292 15.83 20,703 7.80
6.00 - 7.99%................ 38,666 13.94 76,729 26.82 17,001 6.40
8.00 - 9.99%................ 273 0.10 572 0.20 3,858 1.45
10.00 and over.............. --- --- --- --- 287 0.11
-------- ------ -------- ------ -------- ------
Total Certificates.......... 176,146 63.51 180,365 63.05 146,398 55.13
-------- ------ -------- ------ -------- ------
Accrued Interest............ 224 0.08 326 0.11 197 0.07
-------- ------ -------- ------ -------- ------
Total Deposits.............. $277,348 100.00% $286,080 100.00% $265,570 100.00%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
</TABLE>
____________
(1) Rates on transaction and savings deposits are those in effect on
December 31, 1996.
31
<PAGE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of December 31, 1996.
<TABLE>
0.00- 5.00- 5.50- 6.00- 8% and Percent
4.99% 5.49% 5.99% 7.99% Over Total of Total
----- ----- ----- ----- ---- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Certificate Accounts
Maturing
In Quarter Ending:
- ------------------
March 31, 1997............. $4,507 $19,601 $ 6,207 $ 8,672 $ 13 $ 39,000 22.14%
June 30, 1997.............. 927 16,811 7,489 3,335 24 28,586 16.23
September 30, 1997......... 263 10,899 6,382 3,014 37 20,595 11.69
December 31, 1997.......... 482 8,437 10,432 1,102 110 20,563 11.67
March 31, 1998............. 252 3,884 5,925 1,478 45 11,584 6.58
June 30, 1998.............. 38 2,196 8,766 536 13 11,549 6.56
September 30, 1998......... 43 1,547 1,480 732 11 3,813 2.16
December 31, 1998.......... 37 652 4,878 278 --- 5,845 3.32
March 31, 1999............. 11 1,008 9,767 1,150 15 11,951 6.79
June 30, 1999.............. --- 433 684 1,154 --- 2,271 1.29
September 30, 1999......... --- 64 441 1,949 --- 2,454 1.39
December 31, 1999.......... --- 78 116 1,958 --- 2,152 1.22
Thereafter................. 3 104 2,363 13,308 5 15,783 8.96
------ ------- ------- ------- ---- -------- ------
Total.................... $6,563 $65,714 $64,930 $38,666 $273 $176,146 100.00%
------ ------- ------- ------- ---- -------- ------
------ ------- ------- ------- ---- -------- ------
Percent of total......... 3.73% 37.31% 36.86% 21.95% 0.15%
------ ------- ------- ------- ----
------ ------- ------- ------- ----
</TABLE>
32
<PAGE>
The following table indicates the amount of the Company's certificates
of deposit and other deposits by time remaining until maturity as of December
31, 1996.
<TABLE>
Maturity
----------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
------- ------ ------ --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000 . . . . . . . . . . $35,211 $26,432 $38,291 $61,341 $161,275
Certificates of deposit of
$100,000 or more(1) . . . . . . . 2,956 1,693 2,222 5,192 12,063
Public funds(2). . . . . . . . . . 833 461 645 869 2,808
------- ------- ------- ------- --------
Total certificates of
deposit . . . . . . . . . . . . . $39,000 $28,586 $41,158 $67,402 $176,146
------- ------- ------- ------- --------
------- ------- ------- ------- --------
</TABLE>
- -------------
(1) Excluding public funds of $100,000 or more.
(2) Deposits from governmental and other public entities.
BORROWINGS. During 1996, the Company continued its program of borrowing
money to purchase mortgage-backed securities in order to generate additional
net interest income and as a method of increasing the leverage on its
capital. A portion of these borrowings was derived from securities sold
under agreements to repurchase and the remainder was in advances from the
FHLB of Chicago. Additionally, the Company borrowed money from the FHLB of
Chicago as part of the management of short term cash requirements. As a
member of the FHLB of Chicago, the Company is authorized to apply for
advances from the FHLB of Chicago. Each FHLB of Chicago credit program has
its own interest rate, which may be fixed or variable, and range of
maturities. The FHLB of Chicago may prescribe the acceptable uses for these
advances, as well as limitations on the size of the advances and repayment
provisions. At December 31, 1996, borrowed money totaled $34.5 million, of
which $19.8 million was related to securities sold under agreements to
repurchase, and $14.7 million was in advances from the FHLB of Chicago.
Interest expense on borrowed money totaled $1.7 million during 1996 and
$630,000 during 1995 as the result of these borrowings.
SERVICE CORPORATION
Federal savings associations generally may invest up to 2% of their
assets in service corporations, plus an additional 1% of assets if used for
community purposes. In addition, federal savings associations may invest up
to 50% of their regulatory capital in conforming loans to their service
corporations. In addition to investments in service corporations, federal
associations are
33
<PAGE>
permitted to invest an unlimited amount in operating subsidiaries engaged
solely in activities which a federal savings association may engage in
directly.
KFS was organized by the Company to provide appraisal services to the
Company and others. In addition, since 1983, KFS has offered, on an agency
basis, brokerage services to the Company's customers utilizing the services
of INVEST Financial Corporation, a registered broker-dealer. Finally, KFS
has also invested in an insurance agency. At December 31, 1996, the
Company's equity investment in KFS was approximately $853,000. During the
year ended December 31, 1996, KFS recorded net consolidated income of
$125,000. During the years ended December 31, 1996 and December 31, 1995,
gross revenues related to securities and annuities brokerage, appraisal
activities and insurance agency activities totaled approximately $205,000,
$201,000 and $47,000, and $124,000, $184,000 and $38,000, respectively.
COMPETITION
The Company faces competition both in originating loans and in
attracting deposits. Competition in originating loans comes primarily from
other savings institutions, commercial banks, credit unions and mortgage
bankers who also make loans secured by real estate located in the Company's
primary market area. The Company competes for loans principally on the basis
of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
The Company faces substantial competition in attracting deposits from
other savings institutions, commercial banks, securities firms, money market
and mutual funds, credit unions and other investment vehicles. The ability
of the Company to attract and retain deposits depends on its ability to
provide an investment opportunity that satisfies the requirements of
investors as to rate of return, liquidity, risk, convenient locations and
other factors. The Company competes for these deposits by offering a variety
of deposit accounts at competitive rates, convenient business hours and a
customer oriented staff. The Company estimates its market share of savings
deposits in the Kankakee and Champaign market areas to be 15.6% and less than
1%, respectively.
The authority to offer money market deposits, and the expanded lending
and other powers authorized for savings institutions by federal legislation,
has resulted in increased competition for both deposits and loans between
savings institutions and other financial institutions such as commercial
banks. Competition may increase further as a result of the continuing
reduction of restrictions on the interstate operations of financial
institutions.
EMPLOYEES
As of December 31, 1996, the Company had 103 full-time employees and 25
part-time employees. The Company places a high priority on staff development
which involves extensive training, including customer service and sales
training. New employees are selected on the basis of both technical skills
and customer service capabilities. None of the Company's employees are
34
<PAGE>
represented by any collective bargaining group. The Company offers a variety
of employee benefits and management considers its relations with its
employees to be excellent.
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively
regulated under federal and state law. As a result, the growth and earnings
performance of the Company can be affected not only by management decisions
and general economic conditions, but also by the requirements of applicable
state and federal statutes and regulations and the policies of various
governmental regulatory authorities including, but not limited to, the OTS,
the FRB, the FDIC, the Internal Revenue Service and state taxing authorities
and the Securities and Exchange Commission (the "SEC"). The effect of such
statutes, regulations and policies can be significant, and cannot be
predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and its subsidiaries, regulate, among other
things, the scope of business, investments, reserves against deposits,
capital levels relative to operations, the nature and amount of collateral
for loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to the Company
and its subsidiaries establishes a comprehensive framework for their
respective operations and is intended primarily for the protection of the
FDIC's deposit insurance funds and the depositors, rather than the
shareholders, of financial institutions.
The following references to material statutes and regulations affecting
the Company and its subsidiaries are brief summaries thereof and do not
purport to be complete, and are qualified in their entirety by reference to
such statutes and regulations. Any change in applicable law or regulations
may have a material effect on the business of the Company and its
subsidiaries.
RECENT REGULATORY DEVELOPMENTS
On September 30, 1996, President Clinton signed into law the "Economic
Growth and Regulatory Paperwork Reduction Act of 1996" (the "Regulatory
Reduction Act"). Subtitle G of the Regulatory Reduction Act consists of the
"Deposit Insurance Funds Act of 1996" (the "DIFA"). The DIFA provides for a
one-time special assessment on each depository institution holding deposits
subject to assessment by the FDIC for the SAIF in an amount which, in the
aggregate, will increase the designated reserve ratio of the SAIF (I.E., the
ratio of the insurance reserves of the SAIF to total SAIF-insured deposits)
to 1.25% on October 1, 1996. Subject to certain exceptions, the special
assessment was payable in full on November 27, 1996. As a SAIF-member, the
Bank was subject to the special assessment.
Under the DIFA, the amount of the special assessment payable by an
institution was determined on the basis of the amount of SAIF-assessable
deposits held by the institution on March
35
<PAGE>
31, 1995, or acquired by the institution after March 31, 1995 from another
institution which held the deposits on March 31, 1995, but was no longer in
existence on November 27, 1996. The DIFA provides for a 20% discount in
calculating the SAIF-assessable deposits of certain "Oakar" banks (I.E., Bank
Insurance Fund ("BIF") member banks that hold deposits acquired from a SAIF
member that remain SAIF insured) and certain "Sasser" banks (I.E.,
institutions that converted from thrift to bank charters but remain SAIF
members). The DIFA also exempts certain institutions from payment of the
special assessment (including institutions that are undercapitalized or that
would become undercapitalized as a result of payment of the special
assessment), and allows an institution to pay the special assessment in two
installments if there is a significant risk that by paying the special
assessment in a lump sum, the institution or its holding company would be in
default under or in violation of terms or conditions of debt obligations or
preferred stock issued by the institution or its holding company and
outstanding on September 13, 1995.
On October 8, 1996, the FDIC adopted a final regulation implementing the
SAIF special assessment. In that regulation, the FDIC set the special
assessment rate at 0.657% of SAIF-assessable deposits held on March 31, 1995.
The amount of the special assessment paid by the Bank was $1.7 million, the
full amount of which was recorded as a charge against earnings for the
quarter ended September 30, 1996. As discussed below, however, the
recapitalization of the SAIF resulting from the special assessment should
significantly reduce the Bank's ongoing deposit insurance expense.
In light of the recapitalization of the SAIF pursuant to the special
assessment authorized by the DIFA, the FDIC, on December 11, 1996, took
action to reduce regular semi-annual SAIF assessments from the range of 0.23%
- - 0.31% of deposits to a range of 0% -0.27% of deposits. The new rates were
effective October 1, 1996 for Oakar and Sasser banks, but did not take effect
for other SAIF-assessable institutions until January 1, 1997. From October
1, 1996 through December 31, 1996, assessments payable by SAIF-assessable
institutions other than Oakar and Sasser banks ranged from 0.18% to 0.27% of
deposits, which represents the amount the FDIC calculates as necessary to
cover the interest due for that period on outstanding obligations of the
Financing Corporation (the "FICO"), discussed below. Because SAIF-assessable
institutions were previously assessed at higher rates (I.E., 0.23% - 0.31% of
deposits) for the semi-annual period ending December 31, 1996, the FDIC will
refund or credit back the amount collected from such institutions for the
period from October 1, 1996 through December 31, 1996 which exceeds the
amount due for that period under the reduced assessment schedule. As a
result of the FDIC's action, the deposit insurance assessments payable by the
Bank have been reduced significantly.
Prior to the enactment of the DIFA, a substantial amount of the SAIF
assessment revenue was used to pay the interest due on bonds issued by the
FICO, the entity created in 1987 to finance the recapitalization of the
Federal Savings and Loan Insurance Corporation (the "FSLIC"), the SAIF's
predecessor insurance fund. Pursuant to the DIFA, the interest due on
outstanding FICO bonds will be covered by assessments against both SAIF and
BIF member institutions beginning January 1, 1997. Between January 1, 1997
and December 31, 1999, FICO assessments against BIF-member institutions
cannot exceed 20% of the FICO assessments charged SAIF-member institutions.
From January 1, 2000 until the FICO bonds mature in 2019, FICO assessments
will be shared by all FDIC-insured institutions on a PRO RATA basis. It has
been estimated that the FICO assessments for the
36
<PAGE>
period January 1, 1997 through December 31, 1999 will be approximately 0.013%
of deposits for BIF members versus approximately 0.064% of deposits for SAIF
members, and will be less than 0.025% of deposits thereafter.
The DIFA also provides for a merger of the BIF and the SAIF on January
1, 1999, provided there are no state or federally chartered, FDIC-insured
savings associations existing on that date. To facilitate the merger of the
BIF and the SAIF, the DIFA directs the Treasury Department to conduct a study
on the development of a common charter and to submit a report, along with
appropriate legislative recommendations, to the Congress by March 31, 1997.
In addition to the DIFA, the Regulatory Reduction Act includes a number
of statutory changes designed to eliminate duplicative, redundant or
unnecessary regulatory requirements. Among other things, the Regulatory
Reduction Act removes the percentage of assets limitations on the aggregate
amount of credit card and education loans that may be made by a savings
association, such as the Bank; increases from 10% to 20% of total assets the
aggregate amount of commercial loans that a savings association may make,
provided that any amount in excess of 10% of total assets represents small
business loans; allows education, small business and credit card loans to be
counted in full in determining a savings association's compliance with the
qualified thrift lender ("QTL") test; and provides that a savings association
may be deemed to meet the QTL test if it qualifies as a domestic building and
loan association under the Internal Revenue Code. The Regulatory Reduction
Act also clarifies the liability of a financial institution, when acting as a
lender or in a fiduciary capacity, under the federal environmental laws.
Although the full impact of the Regulatory Reduction Act on the operations of
the Company and the Bank cannot be determined at this time, management
believes that the legislation may reduce compliance costs to some extent and
allow the Company and the Bank somewhat greater operating flexibility.
On August 10, 1996, President Clinton signed into law the Small Business
Job Protection Act of 1996 (the "Job Protection Act"). Among other things,
the Job Protection Act eliminates the percent-of-taxable-income ("PTI")
method for computing additions to a savings association's tax bad debt
reserves for tax years beginning after December 31, 1995, and requires all
savings associations that have used the PTI method to recapture, over a six
year period, all or a portion of their tax bad debt reserves added since the
last taxable year beginning before January 1, 1988. The Job Protection Act
allows a savings association to postpone the recapture of bad debt reserves
for up to two years if the institution meets a minimum level of mortgage
lending activity during those years. The Bank believes that it will engage in
sufficient mortgage lending activity during 1996 and 1997 to be able to
postpone any recapture of its bad debt reserves until 1998. As a result of
these provisions of the Job Protection Act, the Bank will determine additions
to its tax bad debt reserves using the same method as a commercial bank of
comparable size, and, if the Bank were to decide to convert to a commercial
bank charter, the changes in the tax bad debt recapture rules enacted in the
Job Protection Act should make such conversion less costly.
37
<PAGE>
THE COMPANY
GENERAL. The Company, as the sole stockholder of the Bank, is a savings
and loan holding company. As a savings and loan holding company, the Company
is registered with, and is subject to regulation by, the OTS under the HOLA.
Under the HOLA, the Company is subject to periodic examination by the OTS and
is required to file with the OTS periodic reports of its operations and such
additional information as the OTS may require.
INVESTMENTS AND ACTIVITIES. The HOLA prohibits a savings and loan
holding company, directly or indirectly, or through one or more subsidiaries
from (i) acquiring control of, or acquiring by merger or purchase of assets,
another savings association or savings and loan holding company without the
prior written approval of the OTS; (ii) subject to certain exceptions,
acquiring more than 5% of the issued and outstanding shares of voting stock
of a savings association or savings and loan holding company except as part
of an acquisition of control approved by the OTS; or (iii) acquiring or
retaining control of a financial institution that does not have SAIF or BIF
insurance of accounts.
A savings and loan holding company may acquire savings associations
located in more than one state in both supervisory transactions involving
failing savings associations and nonsupervisory acquisitions of healthy
institutions, subject to the requirement that in any nonsupervisory
transaction, the law of the state in which the savings association to be
acquired is located must specifically authorize the proposed acquisition, by
language to that effect and not merely by implication. State laws vary in
the extent to which interstate acquisitions of savings associations are
permitted. Illinois law presently permits savings and loan holding companies
located in any state of the United States to acquire savings associations or
savings and loan holding companies located in Illinois, subject to certain
conditions, including the requirement that the laws of the state in which the
acquiror is located permit savings and loan holding companies located in
Illinois to acquire savings associations or savings and loan holding
companies in the acquiror's state.
A savings and loan holding company that controls only one savings
association subsidiary is generally not subject to any restrictions on the
non-banking activities that the holding company may conduct either directly
or through a non-banking subsidiary, so long as the holding company's savings
association subsidiary constitutes a qualified thrift lender. If, however,
the OTS determines that there is reasonable cause to believe that the
continuation by a savings and loan holding company of a particular activity
constitutes a serious risk to the financial safety, soundness or stability of
its savings association subsidiary, the OTS may require the holding company
to cease engaging in the activity (or divest any subsidiary which engages in
the activity) or may impose such restrictions on the holding company and the
subsidiary savings association as the OTS deems necessary to address the
risk, including imposing limitations on (i) the payment of dividends by the
savings association to the holding company, (ii) transactions between the
savings association and its affiliates and (iii) any activities of the
savings association that might create a serious risk that liabilities of the
holding company and its affiliates may be imposed on the savings association.
Federal legislation also prohibits acquisition of "control" of a savings
association or savings and loan holding company, such as the Company, without
prior notice to certain federal bank
38
<PAGE>
regulators. "Control" is defined in certain cases as acquisition of 10% of
the outstanding shares of a savings association or savings and loan holding
company.
DIVIDENDS. The OTS possesses enforcement powers over savings and loan
holding companies to prevent or remedy actions that represent unsafe or
unsound practices or violations of applicable statutes and regulations.
Among these powers is the ability to proscribe the payment of dividends by
savings and loan holding companies. In addition to the restrictions on
dividends that may be imposed by the OTS, the Delaware General Corporation
Law would allow the Company to pay dividends only out of its surplus, or if
the Company has no such surplus, out of its net profits for the fiscal year
in which the dividend is declared and/or the preceding fiscal year.
FEDERAL SECURITIES REGULATION. The Company's common stock is registered
with the SEC under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the
Company is subject to the information, proxy solicitation, insider trading
and other restrictions and requirements of the SEC under the Exchange Act.
THE BANK
GENERAL. The Bank is a federally chartered savings association, the
deposits of which are insured by the SAIF of the FDIC. As a SAIF-insured,
federally chartered savings association, the Bank is subject to the
examination, supervision, reporting and enforcement requirements of the OTS,
as the chartering authority for federal savings associations, and the FDIC as
administrator of the SAIF. The Bank is also a member of the FHLB System,
which provides a central credit facility primarily for member institutions.
DEPOSIT INSURANCE. As an FDIC-insured institution, the Bank is required
to pay deposit insurance premium assessments to the FDIC. The FDIC has
adopted a risk-based assessment system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their respective levels of capital and supervisory
evaluations. Institutions classified as well-capitalized (as defined by the
FDIC) and considered healthy pay the lowest premium while institutions that
are less than adequately capitalized (as defined by the FDIC) and considered
of substantial supervisory concern pay the highest premium. Risk
classification of all insured institutions is made by the FDIC for each
semi-annual assessment period.
During the period January 1, 1996 through September 30, 1996, SAIF
assessment rates ranged from 0.23% of deposits to 0.31% of deposits. As a
result of the recapitalization of the SAIF on October 1, 1996, SAIF
assessment rates were reduced, effective October 1, 1996, to a range of 0.18%
of deposits to 0.27% of deposits and were further reduced, effective January
1, 1997, to a range of 0% of deposits to 0.27% of deposits. SEE "--Recent
Regulatory Developments."
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or written
agreement with, the FDIC.
39
<PAGE>
The FDIC may also suspend deposit insurance temporarily during the hearing
process for a permanent termination of insurance if the institution has no
tangible capital. Management of the Company is not aware of any activity or
condition that could result in termination of the deposit insurance of the
Bank.
FICO ASSESSMENTS. Since 1987, a portion of the deposit insurance
assessments paid by SAIF members has been used to cover interest payments due
on the outstanding obligations of the FICO, the entity created to finance the
recapitalization of the FSLIC, the SAIF's predecessor insurance fund.
Pursuant to federal legislation enacted September 30, 1996, commencing
January 1, 1997, both SAIF members and BIF members will be subject to
assessments to cover the interest payment on outstanding FICO obligations.
Such FICO assessments will be in addition to amounts assessed by the FDIC for
deposit insurance. Until January 1, 2000, the FICO assessments made against
BIF members may not exceed 20% of the amount of the FICO assessments made
against SAIF members. It is estimated that SAIF members will pay FICO
assessments equal to 0.064% of deposits while BIF members will pay FICO
assessments equal to 0.013% of deposits. Between January 1, 2000 and the
maturity of the outstanding FICO obligations in 2019, BIF members and SAIF
members will share the cost of the interest on the FICO bonds on a PRO RATA
basis. It is estimated that FICO assessments during this period will be less
than 0.025% of deposits.
OTS ASSESSMENTS. Federal savings associations are required to pay
supervisory fees to the OTS to fund the operations of the OTS. The amount of
such supervisory fees is based upon each institution's total assets,
including consolidated subsidiaries, as reported to the OTS. During the year
ended December 31, 1996 the Bank paid supervisory fees to the OTS totaling
$85,000.
CAPITAL REQUIREMENTS. The OTS has established the following minimum
capital standards for savings associations, such as the Bank: a core capital
requirement, consisting of a minimum ratio of core capital to total assets of
3%; a tangible capital requirement consisting of a minimum ratio of tangible
capital to total assets of 1.5%; and a risk-based capital requirement,
consisting of a minimum ratio of total capital to total risk-weighted assets
of 8%, at least one-half of which must consist of core capital. For purposes
of these capital standards, core capital consists primarily of permanent
stockholders' equity less intangible assets other than certain supervisory
goodwill, certain mortgage servicing rights and certain purchased credit card
relationships and less investments in subsidiaries engaged in activities not
permitted for national banks; tangible capital is substantially the same as
core capital except that all intangible assets other than certain mortgage
servicing rights must be deducted; and total capital means core capital plus
certain debt and equity instruments that do not qualify as core capital and a
portion of the Bank's allowances for loan and lease losses.
The capital requirements described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual institutions. For example, the
regulations of the OTS provide that additional capital may be required to
take adequate account of interest rate risk or the risks posed by
concentrations of credit or nontraditional activities.
40
<PAGE>
During the year ended December 31, 1996, the Bank was not required by
the OTS to increase its capital to an amount in excess of the minimum
regulatory requirements. As of December 31, 1996 the Bank exceeded its
minimum regulatory capital requirements with a core capital ratio of 8.41%, a
tangible capital ratio of 8.41% and a risk-based capital ratio of 14.53%.
Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Depending upon the capital category to which an
institution is assigned, the regulators' corrective powers include:
requiring the submission of a capital restoration plan; placing limits on
asset growth and restrictions on activities; requiring the institution to
issue additional capital stock (including additional voting stock) or to be
acquired; restricting transactions with affiliates; restricting the interest
rate the institution may pay on deposits; ordering a new election of
directors of the institution; requiring that senior executive officers or
directors be dismissed; prohibiting the institution from accepting deposits
from correspondent banks; requiring the institution to divest certain
subsidiaries; prohibiting the payment of principal or interest on
subordinated debt; and ultimately, appointing a receiver for the institution.
DIVIDENDS. OTS regulations impose limitations upon all capital
distributions by savings associations, including cash dividends. The rule
establishes three tiers of institutions. An institution that exceeds all
fully phased-in capital requirements before and after the proposed capital
distribution (a "Tier 1 Institution") could, after prior notice to, but
without the approval of, the OTS, make capital distributions during a
calendar year of up to the higher of (i) 100% of its net income to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (I.E., the excess capital over its fully phased-in
capital requirements) at the beginning of the calendar year, or (ii) 75% of
its net income over the most recent preceding four quarter period. Any
additional capital distributions would require prior regulatory approval. As
of December 31, 1996, the Bank was a Tier 1 Institution.
The payment of dividends by any financial institution or its holding
company is affected by the requirement to maintain adequate capital pursuant
to applicable capital adequacy guidelines and regulations, and a financial
institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized. As described
above, the Bank exceeded its minimum capital requirements under applicable
guidelines as of December 31, 1996. Further, under applicable regulations of
the OTS, the Bank may not pay dividends in an amount which would reduce its
capital below the amount required for the liquidation account established in
connection with the Bank's conversion from the mutual to the stock form of
ownership in 1992. As of December 31, 1996, approximately $8.2 million was
available to be paid as dividends to the Company by the Bank.
Notwithstanding the availability of funds for dividends, however, the OTS may
prohibit the payment of any dividends if the OTS determines such payment
would constitute an unsafe or unsound practice.
41
<PAGE>
INSIDER TRANSACTIONS. The Bank is subject to certain restrictions
imposed by the Federal Reserve Act on extensions of credit to the Company and
its subsidiaries, on investments in the stock or other securities of the
Company and its subsidiaries and the acceptance of the stock or other
securities of the Company or its subsidiaries as collateral for loans.
Certain limitations and reporting requirements are also placed on extensions
of credit by the Bank to its directors and officers, to directors and
officers of the Company and its subsidiaries, to principal stockholders of
the Company, and to "related interests" of such directors, officers and
principal stockholders. In addition, such legislation and regulations may
affect the terms upon which any person becoming a director or officer of the
Company or one of its subsidiaries or a principal stockholder of the Company
may obtain credit from banks with which the Bank maintains a correspondent
relationship.
SAFETY AND SOUNDNESS STANDARDS. The OTS has adopted guidelines which
establish operational and managerial standards to promote the safety and
soundness of savings associations. The guidelines set forth standards for
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits, asset quality and earnings. In general, the
guidelines prescribe the goals to be achieved in each area, and each
institution is responsible for establishing its own procedures to achieve
those goals. If an institution fails to comply with any of the standards set
forth in the guidelines, the OTS may require the institution to submit a plan
for achieving and maintaining compliance. The preamble to the guidelines
states that the OTS expects to require a compliance plan from an institution
whose failure to meet one or more of the guidelines is of such severity that
it could threaten the safety and soundness of the institution. Failure to
submit an acceptable plan, or failure to comply with a plan that has been
accepted by the OTS, would constitute grounds for further enforcement action.
BRANCHING AUTHORITY. Federally chartered savings associations which
qualify as "domestic building and loan associations," as defined in the
Internal Revenue Code, or meet the QTL test (SEE "-The Bank -- Qualified
Thrift Lender Test") have the authority, subject to receipt of OTS approval,
to establish branch offices anywhere in the United States, either DE NOVO or
through acquisitions of all or part of another financial institution. If a
federal savings association fails to qualify as a "domestic building and loan
association," as defined in the Internal Revenue Code, or fails to meet the
QTL test the association generally may establish a branch in a state other
than the state of its home office only to the extent authorized by the law of
the state in which the branch is to be located. As of December 31, 1996, the
Bank qualified as a "domestic building and loan association," as defined in
the Internal Revenue Code and met the QTL test.
QUALIFIED THRIFT LENDER TEST. Under the QTL test in effect prior to
September 30, 1996, the Bank generally was required to invest at least 65% of
its portfolio assets in "qualified thrift investments," as measured on a
monthly average basis in nine out of every 12 months. Qualified thrift
investments for purposes of the QTL test consist principally of residential
mortgage loans, mortgage-backed securities and other housing and
consumer-related investments. The term "portfolio assets" is statutorily
defined to mean a savings association's total assets less goodwill and other
intangible assets, the association's business property and a limited amount
of its liquid assets. Under amendments to the HOLA enacted September 30,
1996, the Bank will be deemed to satisfy the QTL test if it either holds
qualified thrift investments equaling 65% or more of its portfolio assets or
42
<PAGE>
qualifies as a domestic building and loan association under the Internal
Revenue Code. The new legislation also expanded somewhat the definition of
qualified thrift investments. SEE "--Recent Regulatory Developments." As of
December 31, 1996, the Bank satisfied with the QTL test, with a ratio of
qualified thrift investments to portfolio assets of 80.0% and qualified as a
"domestic building and loan association," as defined in the Internal Revenue
Code.
LIQUIDITY REQUIREMENTS. OTS regulations currently require each savings
association to maintain, for each calendar month, an average daily balance of
liquid assets (including cash, certain time deposits, bankers' acceptances,
and specified United States Government, state or federal agency obligations)
equal to at least 5% of the average daily balance of its net withdrawable
accounts plus short-term borrowings (I.E., those repayable in 12 months or
less) during the preceding calendar month. This liquidity requirement may be
changed from time to time by the OTS to an amount within a range of 4% to 10%
of such accounts and borrowings, depending upon economic conditions and the
deposit flows of savings associations. OTS regulations also require each
savings association to maintain, for each calendar month, an average daily
balance of short-term liquid assets (generally liquid assets having
maturities of 12 months or less) equal to at least 1% of the average daily
balance of its net withdrawable accounts plus short-term borrowings during
the preceding calendar month. Penalties may be imposed for failure to meet
liquidity ratio requirements. At December 31, 1996, the Bank was in
compliance with OTS liquidity requirements, with an overall liquidity ratio
of 14.8% and a short-term liquidity ratio of 4.7%.
FEDERAL RESERVE SYSTEM. FRB regulations, as presently in effect,
require depository institutions to maintain non-interest earning reserves
against their transaction accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $49.3 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $49.3 million, the reserve
requirement is $1.479 million plus 10% of the aggregate amount of total
transaction accounts in excess of $49.3 million. The first $4.4 million of
otherwise reservable balances are exempted from the reserve requirements.
These reserve requirements are subject to annual adjustment by the FRB. The
Bank is in compliance with the foregoing requirements. The balances used to
meet the reserve requirements imposed by the FRB may be used to satisfy
liquidity requirements imposed by the OTS.
FEDERAL AND STATE TAXATION
GENERAL. Prior to 1996, savings associations such as the Bank that met
certain definitional tests relating to the composition of assets and income
as defined in the Internal Revenue Code of 1986 were allowed to establish
reserves for bad debts on "qualifying real property loans" based either upon
a percentage of taxable income or the experience method, whichever resulted
in a larger deduction. Reserves for bad debts on nonqualifying loans were
based solely upon the experience method. The experience method reserve
amount is calculated as a function of the actual bad debt experience
sustained by the institution over a period of years, whereas the percentage
of taxable income method is a strict numeric calculation not dependent on
actual loss experience.
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<PAGE>
The Small Business Job Protection Act of 1996 became law on August 20,
1996. One of the provisions in the new law repealed the special bad debt
reserve methods that had existed for thrifts prior to 1996. The Bank is now
required to compute reserves on all loans under the experience method. The
new law freezes the reserves for bad debts that existed at end of the last
tax year beginning before January 1, 1988 and requires the Bank to recapture
into taxable income over a six year period the "applicable excess reserve."
For the Bank, the applicable excess reserve is approximately $648,000 which
represents the difference between the reserve balance at December 31, 1995,
and the balance of the reserve at end of the last tax year beginning before
January 1, 1988. One-sixth of the applicable excess reserve of $108,000 has
been recaptured into 1996 taxable income. Deferred taxes have previously
been established on the applicable excess reserve.
Retained income of the Bank includes approximately $8,998,000 that
represents tax provisions for loan losses that have been deducted in excess
of amounts that have been charged against income on the financial statements.
No provision for federal income tax has been made against this amount. If,
in the future, the Bank ceases to qualify as a "bank" for federal income tax
purposes or if these retained earnings are liquidated, federal income taxes
may be imposed at the then-applicable rates. If federal income taxes had
been provided, the deferred liability would have been approximately
$3,059,000.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on
alternative minimum taxable income, which is the sum of a corporation's
regular taxable income (with certain adjustments) and tax preference items,
less any available exemption. The alternative minimum tax is imposed to the
extent it exceeds the corporation's regular income tax and net operating
losses can offset no more than 90% of alternative minimum taxable income.
For taxable years beginning after 1986 and before 1996, corporations,
including savings associations such as the Bank, are also subject to an
environmental tax equal to 0.12% of the excess of alternative minimum taxable
income for the taxable year (determined without regard to net operating
losses and the deduction for the environmental tax) over $2 million. During
the year ended December 31, 1996, the Bank was not required to pay
alternative minimum tax.
The Company, the Bank and its subsidiary file consolidated federal
income tax returns on a calendar year basis using the accrual method of
accounting.
The Bank and its consolidated subsidiaries have been audited by the IRS
with respect to consolidated federal income tax returns through December 31,
1982. With respect to years examined by the IRS, all deficiencies have been
satisfied. In the opinion of management, any examination of still open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of the Company and its consolidated
subsidiaries.
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EXECUTIVE OFFICERS OF THE COMPANY
The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Company and
the Bank who do not serve on the Company's Board of Directors. Each officer
is elected annually to serve until his or her successor is elected and
qualified, or until he or she is no longer employed by the Company or its
subsidiaries or is removed by the Board of Directors. There are no
arrangements or understandings between the persons named and any other person
pursuant to which such officers were selected.
Ronald J. Walters, age 47, is Vice President, Treasurer and Chief
Financial Officer of the Company and Senior Vice President, Treasurer and
Chief Financial Officer of the Bank, positions he has held since August 1992
and January 1985, respectively. As the Chief Financial Officer of the Bank,
Mr. Walters is responsible for the establishment and supervision of the
Bank's accounting and data processing activities. Mr. Walters joined the
Bank in 1984 as Controller and was promoted to his present position in 1985.
Mr. Walters is a certified public accountant.
David B. Cox, age 58, was elected President of the Bank in 1993, and a
Director of the Bank in 1995. Prior to his election as President, Mr. Cox
had served as Vice President of Operations for the Bank since 1985. Mr. Cox
is responsible for overseeing the day-to-day operation of the Bank. Mr. Cox
joined the Bank in 1956 and has held a variety of positions including
Assistant Vice President, Branch Manager and Assistant Secretary. Mr. Cox
has served as Vice President of the Company since 1992.
Gerald C. Chantome, age 60, is a Senior Vice President and Chief Lending
Officer of the Bank, a position he was appointed to in 1995. Previously he
was Vice President of Commercial and Consumer Lending for the Bank, a
position he held since 1988. Mr. Chantome is responsible for oversight of
the Bank's lending departments. Prior to joining the Bank, from 1981 to
1988, Mr. Chantome served as Senior Vice President and director of City
National Bank and Keystone Bancshares located in Kankakee, Illinois. Mr.
Chantome was an employee and officer of City National since 1954.
Lois Swartz, age 54, has been Vice President of Human Resources of the
Bank since January 1993. She is responsible for administering the Human
Resources Department and the Company's employee benefit plans. She joined
the Bank in 1960.
Monte S. Crowl, age 32, has been Vice President of Marketing of the Bank
since January 1993. He is responsible for the Marketing Department. Prior
to joining the Bank in 1989, Mr. Crowl was employed by the Central Bank
Corporation, Cincinnati, Ohio, as a marketing representative from August 1987
to August 1989.
Lois Jean Phelps, age 58, was elected Vice President of Operations in
1994. She is responsible for the day-to-day operations of the Bank. Ms.
Phelps has served the Bank in various capacities in Ashkum and Kankakee
including head teller, branch manager and assistant secretary since 1977.
She was named operations manager in 1993.
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<PAGE>
Carol Hoekstra, age 41, was elected a Vice President of the Bank in
1995. She is also an Assistant Secretary of the Company, a position she has
held since 1992. Previously, she was an Assistant Vice President of the Bank
since 1991. She is responsible for overseeing the day-to-day administration
of the Bank's consumer lending operation and has recently been given
additional responsibilities in lending. Ms. Hoekstra first joined the Bank
in 1977. She rejoined the Bank in 1991 as consumer loan manager, following
her return to the area from Texas where she worked at a commercial bank in
consumer lending.
ITEM 2. PROPERTIES
OFFICES
The following table sets forth information concerning the main office
and each branch office of the Bank at December 31, 1996. At December 31,
1996, the Company's premises had an aggregate net book value of approximately
$2.7 million.
Lease
Year Owned Expiration Net
Location Opened(1) or Leased Date Book Value
- -------- --------- --------- ---------- ----------
(In thousands)
MAIN OFFICE
310 S. Schuyler Avenue
Kankakee, Illinois 1958 Owned N/A $552
FULL SERVICE BRANCHES
Main Street and U.S. 45
Ashkum, Illinois 1977 Owned N/A 13
680 S. Main Street
Bourbonnais, Illinois 1974 Owned N/A 315
1001 S. Neil Street
Champaign, Illinois 1992 Owned N/A 698
302 W. Mazon Avenue
Dwight, Illinois 1987 Owned N/A 451
161 S. Main Street
Herscher, Illinois 1987 Owned N/A 36
323 E. Main Street
Hoopeston, Illinois 1994 Owned N/A 182
310 Section Line Road
Manteno, Illinois 1975 Owned N/A 279
200 W. Washington Street
Momence, Illinois 1995 Owned N/A 168
------
$2,694
------
------
(1) Year opened refers to the year in which the current facility opened.
The Company believes that its current facilities are adequate to meet
present and immediately foreseeable needs.
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The Company maintains depositor and borrower customer files on an
in-house system. The net book value of the data processing and computer
equipment utilized by the Company at December 31, 1996 was $325,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved as plaintiff or defendant in various legal
actions arising in the normal course of its business. While the ultimate
outcome of current legal proceedings cannot be predicted with certainty, it
is the opinion of management that the resolution of these legal actions
should not have a material effect on the Company's consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 49 of the 1996 Annual Report to Stockholders is herein incorporated
by reference.
ITEM 6. SELECTED FINANCIAL DATA
Pages 7 and 8 of the 1996 Annual Report to Stockholders is herein
incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Pages 9 through 23 of the 1996 Annual Report to Stockholders are herein
incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 24 through 49 of the 1996 Annual Report to Stockholders are herein
incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company hereby incorporates by reference the information called for
by Item 9 of this Form 10-K from the Form 8-K dated October 20, 1994 filed by
the Company with the SEC in connection with the dismissal of Ernst & Young
LLP as the Company's independent auditors and the engagement of McGladrey &
Pullen, LLP as the Company's independent auditors for the fiscal year ending
December 31, 1995 (Exhibit 99.2 to this Form 10-K).
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<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Information concerning directors of the Company is incorporated herein
by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held in 1997 (the "1997 Proxy Statement"), a
copy of which was filed on March 14, 1997.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Information regarding the business experience during the past five years
with respect to the executive officers of the Company contained in Part I of
this Form 10-K is incorporated herein by reference.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's executive officers and directors and persons who own more than 10%
of the Company Common Stock file reports of ownership and changes in
ownership with the SEC and with the exchange on which the Company's shares of
Common Stock are traded. Such persons are also required to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on
the Company's review of the copies of such forms furnished to the Company
and, if appropriate, representations made to the Company by any such
reporting person concerning whether a Form 5 was required to be filed for
1996, the Company is not aware that any of its directors and executive
officers or 10% stockholders failed to comply with the filing requirements of
Section 16(a) during the period commencing January 1, 1996 through December
31, 1996.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation called for by Item 11 of
this Form 10-K is incorporated herein by reference from the section in the
Company's 1997 Proxy Statement entitled "Executive Compensation." The report
of the Company's Compensation Committee is not incorporated into this Form
10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management called for by Item 12 of this Form 10-K is incorporated herein
by reference from the section in the Company's 1997 Proxy Statement entitled
"Voting Securities and Principal Holder Thereof."
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
called for by Item 13 of this Form 10-K is incorporated herein by reference
from the section in the Company's 1997 Proxy Statement entitled "Certain
Relationships and Related Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS:
The following information appearing in the Registrant's 1996 Annual
Report to Stockholders is incorporated by reference in this Annual Report on
Form 10-K as Exhibit 13.
PAGES IN
ANNUAL REPORT SECTION ANNUAL REPORT
- --------------------- -------------
Selected Financial Data....................................... 7-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 9-23
Report of Independent Auditors................................ 24
Consolidated Statements of Financial Condition................ 25-26
Consolidated Statements of Operations......................... 27
Consolidated Statements of Changes in Stockholders' Equity.... 28
Consolidated Statements of Cash Flows......................... 29-30
Notes to Consolidated Financial Statements.................... 31-47
Quarterly Financial Information............................... 47
With the exception of those sections specifically incorporated by
reference, the Registrant's 1996 Annual Report to Stockholders is not deemed
filed as part of this Annual Report on Form 10-K.
(a)(2) FINANCIAL STATEMENT SCHEDULES:
Financial statement schedules have been omitted as the required information
is contained in the consolidated financial statements and notes thereto, or
because such schedules are not required or applicable.
49
<PAGE>
(a)(3) EXHIBITS:
<TABLE>
<CAPTION>
Regulation Reference to Prior Sequential Page Number Where
S-K Exhibit Filing or Exhibit Attached Exhibits Are Located in
Number Document Number Attached Hereto Form 10-K
----------- ---------------------------------------- ---------------------- --------------------------------
<S> <C> <C> <C>
3 Articles of Incorporation (1) N/A
3 Bylaws (1) N/A
4 Instruments defining the rights of (1) N/A
security holders, including
debentures
10 Executive Compensation Plans and
Arrangements
a. Stock Option Plan (2) N/A
b. Management Recognition Plan (2) N/A
and Trusts
c. Employee Stock Ownership (1) N/A
Plan
(1) N/A
d. Money Purchase Pension Plan
(1) N/A
e. 401(k) Plan
f. Kankakee Bancorp, Inc. Bank
Incentive Plan and Trust (3) N/A
13 Incorporated portions of
1996 Annual Report to Stockholders N/A 53
22 Subsidiaries of Registrant N/A 94
23.1 Consent of Independent Auditor N/A 95
23.2 Consent of Independent Auditor N/A 96
27 Financial Data Schedule N/A 97
99.1 1997 Proxy Statement N/A 102
99.2 Form 8-K dated October 20, 1994 (4) N/A
</TABLE>
- --------------
(1) Filed on September 11, 1992, as exhibits to the Registrant's Registration
Statement No. 33-51950 on Form S-1. Such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-K.
(2) Filed on March 29, 1993, as exhibits to the Registrant's Annual Report on
Form 10-K. Such previously filed documents are hereby incorporated herein
by reference in accordance with Item 601 of Regulation S-K.
(3) Filed on March 30, 1994, as an exhibit to the Registrant's Annual Report on
Form 10-K. Such previously filed documents are hereby incorporated herein
by reference in accordance with Item 601 of Regulation S-K.
(4) Filed on March 31, 1995, as an exhibit to the Registrant's Annual Report on
Form 10-K. Such previously filed documents are hereby incorporated herein
by reference in accordance with Item 601 of Regulation S-K.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K have been filed during the three-month period ended
December 31, 1996.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KANKAKEE BANCORP, INC.
Date: March 21, 1997 By: /s/ James G. Schneider
-------------- -----------------------------------
James G. Schneider
Chief Executive Officer and
Chairman of the Board
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.
/s/ James G. Schneider 3-21-97 Chief Executive Officer and
- ------------------------- -------- Chairman of the Board (Principal
James G. Schneider Date Executive and Operating Officer)
/s/ Ronald J. Walters 3-21-97 Vice President and Treasurer (Principal
- ------------------------- -------- Financial and Accounting Officer)
Ronald J. Walters Date
/s/ William Cheffer 3-21-97 Director
- ------------------------- --------
William Cheffer Date
/s/ Charles C. Huber 3-21-97 Director
- ------------------------- --------
Charles C. Huber Date
/s/ Wesley E. Walker 3-21-97 Director
- ------------------------- --------
Wesley E. Walker Date
/s/ Larry D. Huffman 3-21-97 Director
- ------------------------- --------
Larry D. Huffman Date
/s/ Thomas M. Schneider 3-21-97 Director
- ------------------------- --------
Thomas M. Schneider Date
/s/ Michael A. Stanfa 3-21-97 Director
- ------------------------- --------
Michael A. Stanfa Date
The foregoing constitute all of the Board of Directors of the Company.
51
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Regulation Reference to Prior Sequential Page Number Where
S-K Exhibit Filing or Exhibit Attached Exhibits Are Located in
Number Document Number Attached Hereto Form 10-K
----------- ---------------------------------------- ---------------------- --------------------------------
<S> <C> <C> <C>
3 Articles of Incorporation (1) N/A
3 Bylaws (1) N/A
4 Instruments defining the rights of (1) N/A
security holders, including
debentures
10 Executive Compensation Plans and
Arrangements
a. Stock Option Plan (2) N/A
b. Management Recognition Plan (2) N/A
and Trusts
c. Employee Stock Ownership Plan (1) N/A
d. Money Purchase Pension Plan (1) N/A
e. 401(k) Plan (1) N/A
f. Kankakee Bancorp, Inc. Bank (3) N/A
Incentive Plan and Trust
13 Incorporated portions of
1996 Annual Report to Stockholders N/A 53
22 Subsidiaries of Registrant N/A 94
23.1 Consent of Independent Auditor N/A 95
23.2 Consent of Independent Auditor N/A 96
27 Financial Data Schedule N/A 97
99.1 1997 Proxy Statement N/A 102
99.2 Form 8-K dated October 20, 1994 (4) N/A
- --------------------
</TABLE>
(1) Filed on September 11, 1992, as exhibits to the Registrant's Registration
Statement No. 33-51950 on Form S-1. Such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-K.
(2) Filed on March 29, 1993, as exhibits to the Registrant's Annual Report on
Form 10-K. Such previously filed documents are hereby incorporated herein
by reference in accordance with Item 601 of Regulation S-K.
(3) Filed on March 30, 1994, as an exhibit to the Registrant's Annual Report on
Form 10-K. Such previously filed documents are hereby incorporated herein
by reference in accordance with Item 601 of Regulation S-K.
(4) Filed on March 31, 1995, as an exhibit to the Registrant's Annual Report on
Form 10-K. Such previously filed documents are hereby incorporated herein
by reference in accordance with Item 601 of Regulation S-K.
52
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
-------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets................................ $ 350,643 $ 355,103 $ 304,425 $ 281,895 $ 276,859
Loans, net, including loans held for sale... 233,963 230,467 212,813 191,854 174,945
Mortgage-backed securities held-to-
maturity.................................. 246 363 6,357 8,488 3,807
Mortgage-backed securities available-for-
sale...................................... 34,467 36,119 0 0 0
Investment securities held-to-maturity (1).. 623 913 43,031 61,027 43,273
Investment securities available-for-sale.... 51,345 47,711 17,318 0 10,108
Deposits.................................... 277,348 286,080 265,570 242,703 240,745
Total borrowings............................ 34,545 29,645 0 0 0
Stockholders' equity........................ 36,494 36,451 35,526 36,075 33,389
Shares outstanding.......................... 1,414,918 1,453,418 1,522,918 1,676,268 1,750,000
Stockholders' equity per share.............. $ 25.79 $ 25.08 $ 23.32 $ 21.52 $ 19.08
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------------------------------- DECEMBER 31,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income....................... $ 25,808 $ 22,830 $ 20,297 $ 20,374 $ 16,034
Total interest expense...................... 15,199 12,562 9,222 9,248 8,593
----------------------------------------------------------------
Net interest income....................... 10,609 10,268 11,075 11,126 7,441
Provision for losses on loans............... 42 173 296 420 838
----------------------------------------------------------------
Net interest income after provision for
losses on loans........................... 10,567 10,095 10,779 10,706 6,603
----------------------------------------------------------------
Loan fees and other fee income.............. 791 620 659 747 568
Gain on sales of loans, mortgage-backed
securities and investment securities...... 109 69 43 2,013 367
Other non-interest income................... 1,237 492 484 546 560
----------------------------------------------------------------
Total non-interest income................. 2,137 1,181 1,186 3,306 1,495
----------------------------------------------------------------
Other expenses.............................. 10,215 8,494 8,330 8,415 5,606
Income tax expense.......................... 713 934 1,240 1,904 848
----------------------------------------------------------------
Total non-interest expense................ 10,928 9,428 9,570 10,319 6,454
----------------------------------------------------------------
Net income before cumulative effect of
accounting change......................... 1,776 1,848 2,395 3,693 1,644
Cumulative effect of changing method of
accounting for post-retirement health
benefits, net of income taxes............. 0 0 0 (156) 0
----------------------------------------------------------------
Net income after cumulative effect
adjustment................................ $ 1,776 $ 1,848 $ 2,395 $ 3,537 $ 1,644
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
</TABLE>
- ----------
(1) Includes certificates of deposit and non-marketable equity securities.
7
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION (continued)
-------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------------------------ DECEMBER 31,
1996 1995 1994 1993 1992
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total
assets).................................................... 0.50 (5) 0.58% 0.82% 1.31 (3) 0.82%(4)
Interest rate spread information:
Average during the year.................................... 2.78% 2.98% 3.60% 3.73% 3.77%(4)
End of year................................................ 2.88% 2.64% 3.14% 3.68% 3.36%
Net interest margin (1)...................................... 3.11% 3.37% 3.96% 4.11% 3.93%(4)
Ratio of operating expense to average total assets........... 2.87 (6) 2.67% 2.86% 2.98% 2.81%(4)
Return on equity (ratio of net income to average equity)..... 4.95 (7) 5.10% 6.66% 10.59 (3) 11.20%(4)
Ratio of average interest-earning assets to average
interest-bearing liabilities............................... 107.40% 109.33% 110.83% 110.97% 103.49%
Quality Ratios:
Non-performing assets to total assets at end of period....... 1.16% 0.64% 0.75% 0.49% 0.65%
Allowance for losses on loans to non-performing loans........ 60.92% 163.45% 114.85% 410.82% 175.29%
Classified assets to total assets at end of period (2)....... 1.88% 2.15% 3.14% 3.37% 3.79%
Allowance for losses on loans to classified assets........... 35.80% 31.30% 23.52% 22.77% 22.68%
Capital Ratios:
Equity to total assets at end of period...................... 10.41% 10.26% 11.67% 12.80% 12.06%
Average equity to average assets............................. 10.06% 11.38% 12.34% 12.37% 7.36%
Dividend payout ratio........................................ 33.90% 33.90% -- -- --
Other data:
Number of full service branch offices........................ 9 10 10 9 9
</TABLE>
- ----------
(1) Net interest income divided by average interest earning assets.
(2) Includes items classified as special mention.
(3) Excludes cumulative effect of changing method of accounting for
post-retirement health benefits.
(4) Annualized.
(5) Without the effect of the special one-time assessment on SAIF-insured
deposits and the gain on the sale of a branch, the return on average assets
would have been 0.67%.
(6) Without the effect of the special one-time assessment on SAIF-insured
deposits, the ratio of operating expenses to average assets would have been
2.40%.
(7) Without the effect of the special one-time assessment on SAIF-insured
deposits and the gain on the sale of a branch, the return on average
stockholders' equity would have been 6.71%.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------
General
Kankakee Bancorp, Inc. (the "Company") was formed as part of the conversion of
Kankakee Federal Savings and Loan Association from a mutual savings and loan
association to a federal stock savings bank known as Kankakee Federal Savings
Bank (the "Bank"), which was completed on December 30, 1992. The Company's
primary business activity is acting as the holding company for the Bank. All
references to the Company in the following discussion include the Bank and the
Bank's wholly-owned service corporation, KFS Service Corporation ("KFS"), unless
indicated otherwise. The Company's results of operations are dependent primarily
on net interest income, which is the difference, or "spread", between the
interest income earned on its loan, mortgage-backed securities and investment
portfolios and its cost of funds, consisting of interest paid on its deposits
and on borrowed funds. The Company's operating expenses principally consist of
employee compensation and benefits, occupancy, federal deposit insurance
premiums, marketing and other general and administrative expenses. The Company's
results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities.
The Company's mission is to provide, safely and profitably, financial services
to families and businesses in the communities served by its offices. In seeking
to accomplish this mission, management has adopted a business strategy designed
to: (i) maintain the level of the Bank's tangible capital well in excess of
regulatory requirements; (ii) maintain a high level of asset quality; (iii)
manage the Company's exposure to changes in market interest rates; (iv) increase
the Company's interest rate spread; and (v) take advantage of loan and deposit
growth opportunities in the Company's principal market areas, to the extent
available. The Company has attempted to achieve these goals by focusing on: (i)
the origination of adjustable-rate mortgage loans ("ARMs") on residential
properties for retention in its portfolio; (ii) the sale of most of the
long-term fixed-rate residential mortgage loans which it originates; (iii)
supplementing its residential lending with commercial real estate, consumer,
commercial business, multi-family and, to a lesser extent, construction lending;
(iv) providing high quality service to enhance customer loyalty; and (v)
offering a variety of financial products to serve as comprehensively as
practicable the financial needs of families and community businesses in its
market areas.
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
[PHOTO]
IN 1996 THE BANK MADE A SUBSTANTIAL INVESTMENT IN TRAINING
KEEPING THE SKILLS OF TELLERS AND FINANCIAL COUNSELORS IN STEP
WITH TECHNOLOGICAL ADVANCES.
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 same time
period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities. A gap is
considered 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 negative gap would tend to adversely
affect net interest income while a positive gap would
tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap
MANAGEMENT'S DISCUSSION AND ANALYSIS 9
<PAGE>
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, 1996, total
interest-earning assets maturing or repricing within one year exceeded total
interest-bearing liabilities maturing or repricing in the same period by $51.1
million, representing a positive cumulative one-year gap equal to 14.6% of total
assets.
In an attempt to manage its exposure to changes in interest rates, management
closely monitors the Company's interest rate risk. The Bank has an
asset/liability management committee consisting of the president, certain vice
presidents and the controller of the Bank which meets monthly and reviews the
Bank's interest rate risk position and makes quarterly recommendations for
adjusting such position to the Bank's Board of Directors. In addition, on a
quarterly basis the Board reviews the Bank's asset/liability position, including
simulations of the effect on the Bank's capital of various interest rate
scenarios.
In managing its asset/liability mix, the Company, at times, depending on the
relationship between long-term and short-term interest rates, market conditions
and consumer preferences, may place somewhat greater emphasis on maximizing its
net interest margin than on better matching the interest rate sensitivity of its
assets and liabilities in an effort to improve its net income. Management
believes that the increased net income resulting from a mismatch in the maturity
of its asset and liability portfolios can, during periods of declining or stable
interest rates, provide returns that justify the increased exposure to sudden
and unexpected increases in interest rates which can result from such a
mismatch.
To the extent consistent with its interest margin objectives, the Company has
attempted to reduce its interest rate risk and has taken a number of steps to
restructure its assets and liabilities. First, the Company has focused its
one-to-four family residential lending program on ARMs. ARM originations
exceeded fixed-rate originations during 1996. In excess of half of fixed-rate
one-to-four family loan originations during 1996 were in loans with an initial
term to maturity of 15 years or less. Such loans are retained in the Company's
portfolio. At December 31, 1996, approximately $98.8 million, or 66.3% of the
Company's one-to-four family residential loan portfolio consisted of ARMs.
Second, the Company has continued building its portfolio of consumer loans
having terms to maturity that are significantly shorter than residential loans.
Third, the Company has continued to build its portfolio of adjustable-rate
commercial real estate and multi-family loans. Fourth, the Company has increased
originations of commercial business and construction loans having adjustable or
floating interest rates, relatively short terms to maturity, or a combination
thereof. Fifth, the Company has adopted a policy of selling substantially all of
its newly originated conventional 30-year, fixed-rate residential mortgage
loans, with servicing retained.
At December 31, 1996, the Company held $50.1 million of fixed-rate one-to-four
family loans, of which $13.5 million had original terms of more than 15 years
(i.e., long-term loans). The Company's current policy is to sell substantially
all newly originated 30 year, fixed-rate loans, and $640,000 were classified as
held for sale at December 31, 1996. The remaining $12.8 million of these loans
are seasoned loans that have been carried in the Company's permanent loan
portfolio and are intended to be held until maturity.
The following table sets forth the interest rate sensitivity of the Bank's
assets and liabilities at December 31, 1996. Except as stated below, the amounts
of assets and liabilities shown which reprice or mature during a particular
period are determined in accordance with the earlier of the term to repricing or
maturity of the asset or liability. The Bank has assumed that its passbook
savings, checking and money market accounts, which totaled $101.0 million at
December 31, 1996, are withdrawn at the annual percentage rates of 15.0%, 37.5%
and 37.6%, respectively. Certificate accounts are assumed to reprice at the date
of contractual maturity. Finally, the Bank has assumed that its annual
percentage withdrawal rates and its annual loan prepayment rates are
MANAGEMENT'S DISCUSSION AND ANALYSIS 10
<PAGE>
consistent with the withdrawal and prepayment assumptions of the Office of
Thrift Supervision ("OTS").
<TABLE>
<CAPTION>
MATURING OR REPRICING
----------------------------------------------------------------
4 MONTHS
1-3 TO ONE OVER 1-3 OVER 3-5 OVER 5
MONTHS YEAR YEARS YEARS YEARS TOTAL
--------- --------- --------- --------- --------- ---------
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate one-to-four family
(including mortgage-backed
securities, (commercial real estate
and construction loans............... $ 4,908 $ 8,339 $ 15,823 $ 10,884 $ 31,504 $ 71,458
Adjustable rate one-to-four family
commercial real estate and
construction loans................... 57,959 102,088 -- -- -- 160,047
Commercial business loans.............. 7,516 980 1,447 -- -- 9,943
Consumer loans......................... 11,709 6,466 7,206 2,786 2,402 30,569
Investment securities and other........ 22,239 2,002 4,979 16,051 17,054 62,325
--------- --------- --------- --------- --------- ---------
Total interest-earning
assets....................... 104,331 119,875 29,455 29,721 50,960 334,342
--------- --------- --------- --------- --------- ---------
Savings deposits....................... 2,028 5,769 12,258 8,856 23,056 51,967
Checking and money market.............. 5,136 13,258 11,519 6,928 12,204 49,045
Certificates........................... 49,778 62,985 48,395 14,988 -- 176,146
FHLB advances.......................... 7,000 7,350 375 -- -- 14,725
Other borrowings....................... 19,820 -- -- -- -- 19,820
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities.................. 83,762 89,362 72,547 30,772 35,260 311,703
--------- --------- --------- --------- --------- ---------
Interest-earning assets less interest-
bearing liabilities.................. $ 20,569 $ 30,513 $ (43,092) $ (1,051) $ 15,700 $ 22,639
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Cumulative interest-rate sensitivity
gap.................................. $ 20,569 $ 51,082 $ 7,990 $ 6,939 $ 22,639
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cumulative interest-rate gap as a
percentage of assets................. 5.87% 14.57% 2.28% 1.98% 6.46%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</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 ARMs, have
features which restrict changes in interest rates
on a short-term basis and over the life of the
asset. Further, in the event of a change in
interest rates, prepayment and early withdrawal
levels could deviate significantly from those
assumed in calculating the table. Finally, the
ability of many borrowers to service their
adjustable-rate debt may decrease in the event of
an interest rate increase.
MANAGEMENT'S DISCUSSION AND ANALYSIS 11
<PAGE>
[PHOTO]
THE
BANK HAS RECEIVED
EXCELLENT RESPONSE TO
ITS NEW
RELATIONSHIP
BANKING PROGRAM, MERIT
PLUS GOLD.
MANAGEMENT'S DISCUSSION AND ANALYSIS 12
<PAGE>
Financial Condition
Total assets decreased by $4.5 million or 1.3% to $350.6 million at December 31,
1996, from $355.1 million at December 31, 1995. The decrease in total assets
during 1996 was primarily attributed to the sale of the Bank's branch office in
Carlyle, Illinois.
Cash and cash equivalents decreased by $8.5 million to $17.2 million at December
31, 1996, from $25.7 million at December 31, 1995. The decrease was primarily
attributed to the decrease in deposit account balances of $8.7 million, of which
$8.6 million was the result of the branch sale. The decrease was also attributed
to purchases of investment and mortgage-backed securities, and an increase in
loans. These decreases were partially offset by an increase in borrowings, and
the sale and maturity of investment and mortgage-backed securities.
Loans held for sale increased $59,000 or 10.1% to $640,000 at December 31, 1996.
This was the result of the origination of approximately $4.0 million of 30 year,
fixed-rate loans, offset by the sale with servicing retained of approximately
$4.0 million of such loans to the Federal Home Loan Mortgage Corporation.
The Company participates in government-sponsored, insured and guaranteed loan
programs, such as those offered by the Veterans' Administration ("VA") and the
Federal Housing Authority ("FHA"). During 1996, $872,000 of such loans were
originated and sold to investors with servicing released. Borrowers are notified
at the time of application that their loan will be sold to, and serviced by, a
party other than the Company.
During 1996, the Company, as per its agreement with the Student Loan Marketing
Association, sold $792,000 in student loans at the time the loans went into
repayment status.
During the year ended December 31, 1996, net loans increased by $3.4 million or
1.5% to $233.3 million from $229.9 million at December 31, 1995. The increase
was the result of the origination of $30.3 million of real estate loans, the
origination of $45.9 million of consumer and commercial business loans, the
purchase of $1.1 million of commercial business loans, and was offset by the
sale of $3.8 million in loans, as part of the sale of the Carlyle branch, and
loan repayments which totaled $70.0 million.
At December 31, 1996, investment securities available-for-sale totaled $51.3
million, an increase of $3.6 million or 7.5% from the amount classified as
available-for-sale at December 31, 1995. The increase was the result of the
purchase of $27.0 million of available-for-sale securities during the year. The
increase was partially offset by sales of $7.3 million, maturities of $15.5
million of available-for-sale securities and a negative adjustment of $815,000
in the market value of available-for-sale securities during the fiscal year
ended December 31, 1996.
At December 31, 1996, mortgage-backed securities available-for-sale totaled
$34.5 million, a decrease of $1.7 million from the amount classified as
available-for-sale at December 31, 1995. The decrease in mortgage-backed
securities available-for-sale was the result of principal repayments totaling
$9.3 million, sales of $4.9 million and an adjustment to market value of
$91,000, during the year ended December 31, 1996. These decreases were partially
offset by purchases of $13.0 million of mortgage-backed securities
available-for-sale during 1996.
Held-to-maturity investment securities and non-marketable equity securities
decreased by $52,000 to $573,000 at December 31, 1996, from $626,000 at December
31, 1995. This decrease was the result of a principal pay down of $2,000 of
held-to-maturity investment securities and the sale of $50,000 in non-marketable
equity securities due to a buy-out by that company's management.
Deposits decreased by $8.7 million (3.1%) to $277.3 million at December 31,
1996, from $286.1 million at December 31, 1995. The decrease resulted from a
$4.3 million decrease in certificates of deposit and a $4.4 million decrease in
passbook savings, checking and money market accounts. During the year, the Bank
sold its branch office in Carlyle, Illinois, which included $4.9 million in
certificates of deposit and $3.7 million in passbook savings, checking and money
market accounts.
Borrowed money increased by $4.9 million (16.5%) to $34.5 million at December
31, 1996, from $29.6 million at December 31, 1995. Borrowed money consisted of
$14.7 million in advances from
[PHOTO]
LAPTOP COMPUTERS HAVE INCREASED
LOAN APPLICATION EFFICIENCY FOR BOTH
CUSTOMERS AND THE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS 13
<PAGE>
the Federal Home Loan Bank of Chicago ("FHLB") and $19.8 million was derived
from securities sold under agreements to repurchase. Approximately $30.0 million
of the borrowed money was used to purchase and retain mortgage-backed securities
in order to generate additional net interest income and as a method of
increasing the leverage on the Company's capital. The remaining borrowed money
resulted from short-term cash management requirements.
Stockholders' equity on a per share basis increased from $25.08 at December 31,
1995, to $25.79 at December 31, 1996. Stockholders' equity increased by $43,000
(0.1%) and remained at $36.5 million at December 31, 1996. The increase in
stockholders' equity was attributed to net income of $1.8 million. The increase
was partially offset by the repurchase of 39,200 shares of Company common stock
at a total cost of $762,000, the market value adjustment on available-for-sale
securities required under SFAS No. 115, which, net of provision for income
taxes, amounted to $598,000 and the payment of dividends of $572,000, during the
year ended December 31, 1996.
Asset Quality
Asset quality is an important aspect of the financial condition of a savings
institution such as the Company. Measurements of asset quality are indicators of
both the current strength of a financial institution and of its ability to
generate the desired returns from its business activities.
Company management performs a quarterly analysis of the adequacy of the
allowance for losses on loans. Management classifies problem assets into one of
four categories: Substandard, Doubtful, Loss and Special Mention. During the
year ended December 31, 1996, total classified assets decreased by $1.0 million
to $6.6 million from $7.6 million at December 31, 1995. This decrease was due to
decreases of $619,000 in real estate owned, $109,000 in assets classified as
Substandard, and $310,000 in assets categorized as Special Mention.
Non-performing assets include foreclosed assets, loans that have been placed on
non-accrual status and loans 90 days or more past due that continue to accrue
interest. During the year ended December 31, 1996, total non-performing assets
increased by $1.8 million, or 78.1%, to $4.1 million from $2.3 million at
December 31, 1995. The increase was due to increases of $1.2 million in
non-accrual construction and development loans, $436,000 in accruing commercial
loans 90 days or more delinquent and $570,000 in accruing construction and
development loans 90 days or more delinquent, which were partially offset by a
decrease of $635,000 in foreclosed assets. The increase was due primarily to the
categorization of three loans totaling $2.2 million as non-performing. The loans
are secured by a retail commercial building, a residential subdivision and an
office building, with principal balances of $1.2 million, $499,000 and $436,000,
respectively. Based on its review of these loans, management does not anticipate
that the Company will incur a material loss.
Results of Operations
The Company's results of operations depend
primarily on the level of its net interest and
non-interest income and its control of operating
expenses. Net interest income depends upon the
volume of interest-earning assets and
interest-bearing liabilities
and the interest rate earned or paid on them.
MANAGEMENT'S DISCUSSION AND ANALYSIS 14
<PAGE>
Net Interest Income Analysis
The following table presents for the periods indicated the total dollar amount
of interest income from average interest-earning assets and resultant yields, as
well as the interest expense on average interest-bearing liabilities, expressed
both in dollars and rates. No tax equivalent adjustments were made. All average
balances are monthly average balances. Non-accruing loans have been included in
the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------
AVERAGE
OUTSTANDING INTEREST
BALANCE EARNED/PAID YIELD/RATE
----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)................ $ 233,064 $ 19,138 8.21%
Mortgage-backed securities (2)...... 33,696 2,147 6.37%
Investments securities (2).......... 55,396 3,645 6.58%
Other interest-earning assets....... 17,258 752 4.36%
FHLB stock.......................... 1,862 126 6.77%
----------- -----------
Total interest-earning assets... 341,276 25,808 7.56%
----------- -----------
Other assets............................ 15,251
-----------
Total assets............................ $ 356,527
-----------
-----------
Interest-bearing liabilities:
Certificate of deposit accounts..... $ 182,687 10,516 5.76%
Savings deposits.................... 53,987 1,453 2.69%
Demand and NOW deposits............. 51,626 1,531 2.97%
Borrowings.......................... 29,457 1,699 5.77%
----------- -----------
Total interest-bearing
liabilities................... 317,757 15,199 4.78%
----------- -----------
Other liabilities....................... 2,918
-----------
Total liabilities....................... 320,675
-----------
Stockholders' equity.................... 35,852
-----------
Total liabilities and stockholders'
equity................................ $ 356,527
-----------
-----------
Net interest income..................... $ 10,609
-----------
-----------
Net interest rate spread................ 2.78%
----------
----------
Net earning assets...................... $ 23,519
-----------
-----------
Net yield on average interest-earning
assets
(net interest margin)................. 3.11%
----------
----------
Average interest-earning assets to
average interest-bearing
liabilities........................... 107.40%
-----------
-----------
</TABLE>
- --------------------------
(1)Calculated including loans held for sale, and net of deferred loan fees, loan
discounts, loans in process and the allowance for losses on loans.
(2)Calculated including mortgage-backed or investment securities available for
sale.
MANAGEMENT'S DISCUSSION AND ANALYSIS 14
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
------------------------------------ ------------------------------------
AVERAGE AVERAGE
OUTSTANDING INTEREST OUTSTANDING INTEREST
BALANCE EARNED/PAID YIELD/RATE BALANCE EARNED/PAID YIELD/RATE
----------- ----------- ---------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)................ $ 223,477 $ 17,717 7.93% $ 198,191 $ 15,146 7.64%
Mortgage-backed securities (2)...... 17,250 1,100 6.38% 7,231 486 6.72%
Investments securities (2).......... 49,716 3,225 6.49% 60,852 4,231 6.95%
Other interest-earning assets....... 12,720 688 5.41% 11,732 350 2.98%
FHLB stock.......................... 1,502 100 6.66% 1,407 84 5.97%
----------- ----------- ----------- -----------
Total interest-earning assets... 304,665 22,830 7.49% 279,413 20,297 7.26%
----------- ----------- ----------- -----------
Other assets............................ 13,616 12,037
----------- -----------
Total assets............................ $ 318,281 $ 291,450
----------- -----------
----------- -----------
Interest-bearing liabilities:
Certificate of deposit accounts..... $ 160,548 8,943 5.57% $ 135,768 6,055 4.46%
Savings deposits.................... 55,298 1,413 2.56% 65,392 1,663 2.54%
Demand and NOW deposits............. 51,628 1,576 3.05% 48,727 1,370 2.81%
Borrowings.......................... 11,182 630 5.63% 2,231 134 6.01%
----------- ----------- ----------- -----------
Total interest-bearing
liabilities................... 278,656 12,562 4.51% 252,118 9,222 3.66%
----------- ----------- ----------- -----------
Other liabilities....................... 3,416 3,353
----------- -----------
Total liabilities....................... 282,072 255,471
----------- -----------
Stockholders' equity.................... 36,209 35,979
----------- -----------
Total liabilities and stockholders'
equity................................ $ 318,281 $ 291,450
----------- -----------
----------- -----------
Net interest income..................... $ 10,268 $ 11,075
----------- -----------
----------- -----------
Net interest rate spread................ 2.98% 3.60%
---------- ----------
---------- ----------
Net earning assets...................... $ 26,009 $ 27,295
----------- -----------
----------- -----------
Net yield on average interest-earning
assets
(net interest margin)................. 3.37% 3.96%
---------- ----------
---------- ----------
Average interest-earning assets to
average interest-bearing
liabilities........................... 109.33% 110.83%
----------- -----------
----------- -----------
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS 15
<PAGE>
The following table sets forth the weighted average yields on the Company's
interest-earning assets, the weighted average interest rates on interest-bearing
liabilities and the interest rate spread between the Company's weighted average
yields and rates at the dates indicated. Non-accruing loans have been included
in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable (1).................................................. 8.05% 8.06% 7.37%
Mortgaged-backed securities (2)....................................... 6.89% 6.94% 6.67%
Investment securities (2)............................................. 6.34% 6.31% 6.86%
Other interest-earning assets......................................... 6.14% 5.41% 5.58%
Combined weighted average yield on interest-earning assets........ 7.68% 7.53% 7.19%
Weighted average rate paid on:
Saving deposits....................................................... 2.72% 2.66% 2.56%
Demand and NOW deposits............................................... 2.95% 3.03% 3.23%
Certificates.......................................................... 5.77% 5.93% 5.00%
Borrowings............................................................ 5.62% 5.86% 0.00%
Combined weighted average rate paid on interest-bearing
liabilities..................................................... 4.80% 4.89% 4.05%
Spread.................................................................... 2.88% 2.64% 3.14%
</TABLE>
- ----------
(1) Includes loans held for sale.
(2) Includes securities available for sale.
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase related to
higher outstanding balances and that due to the levels and volatility of
interest rates. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (i)
changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 VS. 1995 DECEMBER 31, 1995 VS. 1994
--------------------------------- ---------------------------------
INCREASE INCREASE
(DECREASE) DUE TO TOTAL (DECREASE) DUE TO TOTAL
-------------------- INCREASE -------------------- INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
--------- --------- ----------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans receivable.......................... $ 779 $ 642 $ 1,421 $ 1,981 $ 590 $ 2,571
Mortgage-backed securities................ 1,049 (2) 1,047 640 (26) 614
Investment securities..................... 374 46 420 (739) (267) (1,006)
Other interest-earning assets............. 141 (77) 64 31 307 338
FHLB stock................................ 24 2 26 13 3 16
--------- --------- ----------- --------- --------- -----------
Total interest-earning assets......... $ 2,367 $ 611 $ 2,978 $ 1,926 $ 607 $ 2,533
--------- --------- ----------- --------- --------- -----------
--------- --------- ----------- --------- --------- -----------
Interest bearing liabilities:
Certificate of deposit accounts........... $ 1,262 $ 312 $ 1,574 $ 1,221 $ 1,666 $ 2,887
Savings deposits.......................... (33) 73 40 (263) 13 (250)
Demand and NOW deposits................... 0 (45) (45) 85 121 206
Borrowings................................ 1,053 16 1,069 504 (8) 496
--------- --------- ----------- --------- --------- -----------
Total interest-bearing
liabilities......................... $ 2,282 $ 356 $ 2,638 $ 1,547 $ 1,792 $ 3,339
--------- --------- ----------- --------- --------- -----------
--------- --------- ----------- --------- --------- -----------
Net interest income........................... $ 340 $ (806)
----------- -----------
----------- -----------
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS 16
<PAGE>
Comparison of Operating Results for the Year Ended December 31, 1996,
to the Year Ended December 31, 1995
General
Consolidated net income was $1.8 million, or $1.18 per share, for both the year
ended December 31, 1996 and the year ended December 31, 1995. Net income for
1996 was impacted by two events which took place during the third quarter of the
year. The first event was a one-time assessment by the Federal Deposit Insurance
Corporation ("FDIC") on deposits insured by the Savings Association Insurance
Fund ("SAIF") for which the Company recorded an expense of $1.7 million. Net of
tax benefit of $578,000, this assessment reduced net income for the year by $1.1
million, or $.73 per share. The second event was the sale by the Bank of its
branch in Carlyle, Illinois. The sale of the branch resulted in a gain of
$708,000. Net of provision for income taxes of $241,000, this sale increased net
income for the year by $467,000, or $.31 per share. Absent these two events,
consolidated net income for 1996 would have been $2.4 million, or $1.60 per
share.
Net Interest Income
Net interest income was $10.6 million for the year ended December 31, 1996, an
increase of $340,000, or 3.3%, during the 1996 period as compared to the year
ended December 31, 1995. The increase was primarily attributable to the increase
in interest income resulting from the increase in volume of interest-earning
assets exceeding the increase in interest expense resulting from the increase in
volume of interest-bearing liabilities.
Interest Income
Interest income totaled $25.8 million for the year ended December 31, 1996, an
increase of $3.0 million as compared to $22.8 million for the year ended
December 31, 1995, a 13.0% increase. The increase during 1996 resulted from an
increase in the yield earned on assets from 7.49% during 1995 to 7.56% during
1996 and from a $36.6 million increase in average interest-earning assets from
$304.7 million during 1995 to $341.3 million during 1996.
Interest on loans was $19.1 million for the year ended December 31, 1996, an
increase of $1.4 million or 8.0%, as compared to the year ended December 31,
1995. The increase was primarily attributable to the effect of a $9.6 million
increase in the average loans outstanding and an increase in the yield on loans
from 7.93% during 1995 to 8.21% during 1996. The increase in the yield on loans
was primarily due to increases in outstanding balances of higher yielding
commercial and consumer loans during the year. The higher average balance of
loans during the year ended December 31, 1996, reflected an increase in the
origination of consumer and commercial business loans.
Interest earned on mortgage-backed securities was $2.1 million for the year
ended December 31, 1996, as compared to $1.1 million for the year ended December
31, 1995. This represented an increase of 95.2% between the periods and was
primarily due to an increase of $16.4 million in the average outstanding balance
of mortgage-backed securities during the 1996 period.
Interest earned on investment securities and other interest-earning assets and
dividends on FHLB stock totaled $4.5 million for the year ended December 31,
1996, as compared to $4.0 million for the year ended December 31, 1995. This
represented an increase of 12.7% during 1996. The increase was primarily due to
an increase in the average balance of these assets from $63.9 million in 1995 to
$74.5 million in 1996, which was partially offset by a decrease in the average
yield on these assets from 6.27% in 1995 to 6.07% in 1996.
Interest Expense
Interest expense was $15.2 million for the year ended December 31, 1996, an
increase of $2.6 million or 21.0%, as compared to the year ended December 31,
1995. The increase was due to
MANAGEMENT'S DISCUSSION AND ANALYSIS 17
<PAGE>
average yields on interest-bearing liabilities increasing to 4.78% for the year
ended December 31, 1996, from 4.51% for the year ended December 31, 1995, and an
increase in the average balance outstanding to $317.8 million for the year ended
December 31, 1996, from $278.7 million for the year ended December 31, 1995. The
increase in average yield during 1996 was attributable to a shift in the
composition of interest-bearing liabilities to certificates of deposit accounts
and borrowings, and away from lower cost non-certificate of deposit accounts.
During 1996, $1.7 million of the Company's interest expense, compared to
$630,000 during 1995, related to advances from the FHLB and from securities sold
under agreements to repurchase.
Provision for Losses on Loans
The provision for losses on loans totaled $42,000 for the year ended December
31, 1996, compared to $173,000 for the year ended December 31, 1995. The
provision for losses on loans decreased by 76.0% during 1996. Charge-offs during
1996 increased to $126,000, from $60,000 during 1995. The increase in
charge-offs during 1996 was partially offset by an increase in recoveries to
$56,000 in 1996 from $23,000 in 1995. While the percentage increase of
charge-offs during the year ended December 31, 1996 compared to the year ended
December 31, 1995 may appear to be substantial, the level of charge-offs
actually remained very low in terms of both total dollars and percentage of
outstanding loans. Based upon the Company's quarterly analysis of the adequacy
of the allowance for losses on loans, considering remaining collateral of loans
with more than a normal degree of risk, historical loan loss percentages and
economic conditions, it is management's belief that the $42,000 provision for
losses on loans and the $2.4 million allowance for losses on loans at December
31, 1996 are adequate to cover future possible losses.
The allowance for losses on loans is maintained at a level believed adequate by
management to absorb potential losses in the loan portfolio. Management's
methodology to determine the adequacy of the allowance considers specific credit
reviews, past loan loss experience, current economic conditions and trends, and
the volume, growth and composition of the loan portfolio.
Each credit on the Company's internal loan "watch list" is evaluated
periodically to estimate potential losses. In addition, minimum loss estimates
for each category of watch list credits also are provided for based on
management's judgment which considers past loan loss experience and other
factors. For installment and real estate mortgage loans, specific allocations
are based on past loss experience adjusted for recent portfolio growth and
economic trends. The total of the estimated loss exposure resulting from the
analysis is considered the "allocated" portion of the allowance for losses on
loans. The amounts specifically provided for individual loans and pools of loans
are supplemented by an unallocated portion of the allowance for losses on loans.
This unallocated amount is determined based on management's judgment which
considers, among other things, the risk of error in the specific allocations,
other potential exposure in the loan portfolio, economic conditions and trends,
and other factors.
The allowance for losses on loans is charged when management determines that the
prospects of recovery of the principal of a loan have significantly diminished.
Subsequent recoveries, if any, are credited to the allowance. Credit card loans
are charged off at the earlier of notice of bankruptcy, when at least 120 days
past due, or when otherwise deemed to be uncollectible. All other installment
loans that are 90 to 120 days past due are charged off monthly unless the loans
are insured for credit loss or where scheduled payments are being received. Real
estate mortgage loans are written down to fair value upon the earlier of receipt
of a deed of foreclosure or upon completion of foreclosure proceedings.
Commercial and other loan charge-offs are made based on management's on-going
evaluation of non-performing loans.
The Company will continue to monitor and adjust its allowance for losses on
loans based on management's analysis of its loan portfolio and general economic
conditions.
MANAGEMENT'S DISCUSSION AND ANALYSIS 18
<PAGE>
Other Income
Other income increased $956,000 for the year ended December 31, 1996 to $2.1
million, compared to $1.2 million for the year ended December 31, 1995. The
increase in other income is primarily related to a gain of $708,000 on the sale
by the Bank of its branch in Carlyle, Illinois, and to increases in fee income,
insurance commissions and net gain on the sale of real estate. These increases
were partially offset by small decreases in net gains on the sale of loans and
the sale of investment and mortgage-backed securities. During the year ended
December 31, 1996, the Company sold $4.0 million fixed-rate one-to-four family
loans from its held for sale portfolio, as compared to $1.9 million of similar
sales during the year ended December 31, 1995.
Other Expenses
Other expenses were $10.2 million for the year ended December 31, 1996, as
compared to $8.5 million for the year ended December 31, 1995. This represents
an increase of $1.7 million or 20.3% during 1996. The increase in other expenses
was primarily due to an increase of $1.7 million in deposit insurance premiums
which was the result of the special one-time assessment on SAIF-insured
deposits. As a direct result of the special one-time assessment on SAIF-insured
deposits, deposit insurance premiums will be substantially reduced in future
years. These future reductions should result in full recovery of the special
one-time assessment in less than four years. The amortization of intangible
assets was $232,000 for the year ended December 31, 1996, as compared to $97,000
for the year ended December 31, 1995. The increase of $135,000, or 137.6%, was
the result of amortization of intangible assets related to the December 8, 1995
acquisition of a branch office in Momence, Illinois. Absent changes in
intangible assets, amortization costs during the next several years should
remain at approximately the 1996 level.
Income Taxes
Federal income tax expense was $713,000 for the year ended December 31, 1996, as
compared to $934,000 for the year ended December 31, 1995. This decrease was
primarily the result of decreased pre-tax income and a reduction in the
effective tax rate. The Company's effective tax rate was 29% and 34% for the
years ended December 31, 1996 and 1995. A summary of the significant tax
components is provided in Note 9 of the Notes to the Consolidated Financial
Statements included later in this report.
Comparison of Operating Results for the Year Ended December 31, 1995, to the
Year Ended December 31, 1994
General
Net income for the year ended December 31, 1995, was $1.8 million, or $1.18 per
share as compared to $2.4 million, or $1.44 per share, for the year ended
December 31, 1994. This represented a decrease of 22.8% during 1995 from the
1994 earnings. The decrease in net income was primarily the result of a decrease
in net interest income brought about by changes during the year in market
interest rates.
Net Interest Income
Net interest income was $10.3 million for the year ended December 31, 1995, a
decrease of $806,000, or 7.3%, during the 1995 period as compared to the year
ended December 31, 1994. The decrease was primarily attributable to a decrease
in the interest rate spread to 2.98% during the year ended December 31, 1995,
from 3.60% during the year ended December 31, 1994.
Interest Income
Interest income totaled $22.8 million for the year ended December 31, 1995, an
increase of $2.5 million as compared to $20.3 million for the year ended
December 31, 1994, a 12.5% increase. The increase during 1995 resulted from an
increase in the yield earned on assets from 7.26%
MANAGEMENT'S DISCUSSION AND ANALYSIS 19
<PAGE>
during 1994 to 7.49% during 1995 and from a $25.3 million increase in average
interest-earning assets from $279.4 million during 1994 to $304.7 million during
1995.
Interest on loans was $17.7 million for the year ended December 31, 1995, an
increase of $2.6 million or 17.0%, as compared to the year ended December 31,
1994. The increase was primarily attributable to the effect of a $25.3 million
increase in the average loans outstanding and an increase in the yield on loans
from 7.64% during 1994 to 7.93% during 1995. The increase in the yield on loans
was primarily due to increases in outstanding balances of higher yielding
commercial and consumer loans during the year. The higher average balance of
loans during the year ended December 31, 1995, reflected an increase in the
origination of consumer and commercial business loans. Additionally,
approximately 80% of one-to-four family loan originations during 1995 were ARM
loans which were retained in the Company's portfolio.
Interest earned on mortgage-backed securities was $1.1 million for the year
ended December 31, 1995, as compared to $486,000 for the year ended December 31,
1994. This represents an increase of 126.4% between the periods and was
primarily due to an increase of $10.0 million in the average outstanding balance
of mortgage-backed securities during the 1995 period.
Interest earned on investment securities and other interest-earning assets and
dividends from FHLB stock totaled $4.0 million for the year ended December 31,
1995, as compared to $4.7 million for the year ended December 31, 1994. This
represented a decrease of 14.0% during 1995. The decrease was primarily due to a
decrease in the average balance of these assets from $74.0 million in 1994 to
$63.9 million in 1995 and a slight decrease in the average yield on these assets
from 6.30% in 1994 to 6.27% in 1995. The decrease in the average balance
reflected a continuing effort by management to shift the composition of the
Company's assets from investment securities to loans.
Interest Expense
Interest expense was $12.6 million for the year ended December 31, 1995, an
increase of $3.4 million or 36.2%, as compared to the year ended December 31,
1994. The increase was due to average yields on interest-bearing liabilities
increasing to 4.51% for the year ended December 31, 1995, from 3.66% for the
year ended December 31, 1994, and an increase in the average balance outstanding
to $278.7 million for the year ended December 31, 1995, from $252.1 million for
the year ended December 31, 1994. The increase in average yield during 1995 was
attributable to the general increase in market interest rates during 1994 and
early 1995. During 1995, $630,000 of
the Company's interest expense related to
borrowings from the FHLB and from securities sold
under agreements to repurchase.
Provision for Losses on Loans
The provision for losses on loans totaled $173,000
for the year ended December 31, 1995, compared to
$296,000 for the year ended December 31, 1994. The
provision for losses on loans
[PHOTO]
FURTHERING ITS MISSION TO PROVIDE CONVENIENT SERVICE,
THE BANK PLACED ADDITIONAL ATM MACHINES IN SERVICE
DURING 1996 MAKING FUNDS ACCESSIBLE TO CUSTOMERS
24 HOURS A DAY.
decreased by 41.5% during 1995. The amount of the
provision for each of 1995 and 1994 was intended to
maintain the allowance for losses on loans at the
higher levels established during the 1992 and 1993
fiscal years. Charge-offs during 1995 decreased to
$60,000, from $245,000 during 1994.
Other Income
Other income remained stable for the year ended
December 31, 1995, and totaled $1.2 million, as it
had for the year ended December 31, 1994. The
decreases in other income were primarily related to
decreases in net gain on sales of real estate, fee
income and insurance commissions. These decreases
MANAGEMENT'S DISCUSSION AND ANALYSIS 20
<PAGE>
were partially offset by increases in net gain on the sales of investment
securities and net gain on the sale of loans. During the year ended December 31,
1995, the Company sold $1.9 million fixed-rate one-to-four family loans from its
held for sale portfolio, as compared to $6.9 million of similar sales during the
year ended December 31, 1994.
Other Expenses
Other expenses were $8.5 million for the year ended December 31, 1995, as
compared to $8.3 million for the year ended December 31, 1994. This represents
an increase of $164,000 or 2.0% during 1995.
Income Taxes
Federal income tax expense was $934,000 for the year ended December 31, 1995, as
compared to $1.2 million for the year ended December 31, 1994. This decrease was
primarily a result of decreased pre-tax income with the effective tax rate of
approximately 34.0% remaining the same.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, proceeds from principal and
interest payments on loans and investment and mortgage-backed securities. While
maturities and scheduled amortization of loans and mortgage-backed securities
are a predictable source of funds, deposit flows and mortgage loan prepayments
are greatly influenced by general interest rates, economic conditions and
competition. In a period of declining interest rates, mortgage loan prepayments
generally increase. As a result, the proceeds from mortgage loan prepayments are
invested in lower yielding loans or other investments which have the effect of
reducing interest income. In a period of rising interest rates, mortgage loan
prepayments generally decrease and the proceeds from such prepayments are
invested in higher yielding loans or investments which would have the effect of
increasing interest income.
The Company's liquidity, represented by cash and cash equivalents, is a result
of its operating, investing and financing activities. These activities are
summarized below for the years ended December 31, 1996, 1995 and 1994,
respectively:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income............................................................ $ 1,776 $ 1,848 $ 2,395
Adjustments to reconcile net income to net cash provided (used) by
operating activities................................................ (393) 105 4,871
--------- --------- ---------
Net cash provided by operating activities............................. 1,383 1,953 7,266
Net cash used by investing activities................................. (13,327) (37,715) (24,918)
Net cash provided by financing activities............................. 3,409 47,410 20,368
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.................. (8,535) 11,648 (2,716)
Cash and cash equivalents at beginning of period...................... 25,695 14,047 11,331
--------- --------- ---------
Cash and cash equivalents at end of period............................ $17,160 $25,695 $14,047
--------- --------- ---------
--------- --------- ---------
</TABLE>
The primary investing activities of the Company are the origination of loans,
the purchase of investment and mortgage-backed securities, and, to a lesser
extent, the purchase of loans and loan participations. During the years ended
December 31, 1996, 1995 and 1994, respectively, the Company's loan originations
totaled $81.9 million, $73.7 million and $91.9 million, respectively, and
purchases of loans totaled $1.1 million, $378,000 and $150,000, respectively.
Purchases of mortgage-backed securities totaled $13.0 million and $34.7 million
for the years ended December 31, 1996, and 1995, respectively. There were no
purchases of mortgage-backed securities during the year ended December 31, 1994.
Other investment activities included the
MANAGEMENT'S DISCUSSION AND ANALYSIS 21
<PAGE>
purchase of investment securities which totaled $27.0 million, $11.1 million and
$8.8 million for the years ended December 31, 1996, 1995 and 1994, respectively.
During the years ended December 31, 1996, 1995 and 1994, these activities were
funded primarily by maturities of investment securities totaling $15.5 million,
$9.0 million and $6.0 million, respectively, by sales of investment securities
totaling $7.3 million, $13.8 million and $4.1 million, respectively, and by
principal repayments on loans and mortgage-backed securities and proceeds from
the sale of mortgaged-backed securities totaling $84.2 million, $57.2 million
and $65.6 million, respectively.
The major source of cash from financing activities during the year ended
December 31, 1996, was an increase of $4.9 million in borrowed money.
Additionally, financing activities for the year ended December 31, 1996,
included the repurchase of common stock totaling $762,000. The major sources of
cash from financing activities during the year ended December 31, 1995, were an
increase in deposits of $20.5 million and an increase in borrowed money of $29.6
million. Additionally, financing activities for the year ended December 31,
1995, included the repurchase of common stock totaling $1.5 million. The major
source of cash from financing activities during the year ended December 31,
1994, was an increase in deposits of $22.9 million. Additionally, financing
activities for the year ended December 31, 1994, included the repurchase of
common stock totaling $2.7 million. Net cash provided from financing activities
was used to offset the net cash used in investing activities for the years ended
December 31, 1996, 1995 and 1994.
The Bank is required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which may be waived at the discretion of the
OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The Bank's regulatory
liquidity ratio was 14.8% at December 31, 1996, which exceeded the then required
ratio of 5.0%.
The Company's most liquid assets are cash, cash in banks and highly liquid,
short-term investments. The levels of these assets are dependent on the
Company's operating, financing, lending and investing activities during any
given period. At December 31, 1996, 1995 and 1994, these liquid assets totaled
$17.2 million, $25.7 million, and $14.0 million, respectively. The high level of
liquid assets at December 31, 1995, was primarily due to the receipt of $13.9
million of cash in settlement of a branch purchase which closed on December 8,
1995. Additionally, securities available-for-sale under SFAS No. 115 may be
utilized to meet liquidity needs.
Liquidity management for the Company is both a daily and long-term function of
the Company's management strategy. Excess funds are generally invested in
short-term investments such as federal funds. In the event that the Company
should require funds beyond its ability to generate
them internally, additional sources of funds are
available, including
FHLB advances. At December 31, 1996, the Company had
outstanding borrowings totaling $34.5 million, of which
$14.7 million were advances from FHLB and $19.8 million
were funds borrowed on securities sold under agreements
to repurchase.
At December 31, 1996, the Company had outstanding
commitments to originate mortgage loans of $3.2 million,
of which 33.0% were at fixed
[PHOTO]
BANK CUSTOMERS REGISTER FOR A MYRIAD OF GROUP TRAVEL
OPPORTUNITIES THROUGH OUR POPULAR MERIT PLUS GOLD
PROGRAM
interest rates. These commitments provided that the
loans would be secured by properties located in the
Company's primary market areas. The Company anticipates
that it will have sufficient funds available to meet its
current loan commitments. Certificates of deposit which
were scheduled to mature in one year or less from
December 31, 1996, totaled $108.7 million. Based upon
the historically stable nature of the Company's deposit
base, management believes that a significant portion of
such deposits will remain with the Company. The Company
also had unused lines of credit provided to customers of
$17.1 million and $15.5 million at December 31, 1996,
and 1995, respectively.
<PAGE>
At December 31, 1996, the Bank exceeded all of its capital requirements on a
fully phased-in basis. See Note 10 of the Notes to Consolidated Financial
Statements and the discussion of the Company's financial condition above.
Dividends
A thrift institution is precluded under current regulations of the OTS from
declaring or paying a dividend or repurchasing any of its common stock if either
of such actions would reduce the institution's core, tangible or risk-based
capital levels below its liquidation account balance or any of the three current
minimum regulatory capital requirements. The institution is authorized to make
capital distributions, such as dividends, during a calendar year in an amount
equal to the greater of: (i) up to 100% of its net income to date during the
calendar year, plus the amount that would reduce by one-half its surplus capital
ratio at the beginning of the calendar year; or (ii) 75% of its net income over
the immediately preceding four calendar quarters. The Bank declared and paid
dividends totaling $3.8 million and $1.0 million to the Company, its sole
stockholder, during the years ended December 31, 1996 and December 31, 1995,
respectively. No dividends were either declared or paid by the Bank during the
year ended December 31, 1994.
At its January 10, 1995, meeting, the Board of Directors of the Company declared
its first cash dividend since becoming a public company. Cash dividends in the
total amount of $.40 per share per year were paid during 1996 and 1995. At its
January 14, 1997, meeting, the Board of Directors of the Company declared a
quarterly cash dividend of $.12 per share payable on February 28, 1997, to
stockholders of record as of February 14, 1997. This represented a twenty
percent (20%) increase from prior quarterly dividends. Although future dividends
will depend primarily upon the Company's earnings, financial condition and need
for funds, as well as restrictions imposed by regulatory authorities regarding
dividend payments and net worth requirements, it is expected that the quarterly
dividend will continue through 1997.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This report, including the Chairman's Letter to Stockholders, contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company intends such forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Reform Act of 1995, and is including this statement for
purposes of these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Company, are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project" or similar
expressions. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a
material adverse affect on the operations and future prospects of the Company
and the subsidiaries include, but are not limited to, changes in: interest
rates, general economic conditions, legislative/regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Federal Reserve Board, the quality of composition of the loan or
investment portfolios, demand for loan products, deposit flows, competition,
demand for financial services in the Company's market area and account
principles, policies and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
MANAGEMENT'S DISCUSSION AND ANALYSIS 23
<PAGE>
INDEPENDENT AUDITOR'S REPORT
- ------------------------------------
To the Stockholders and Board of Directors
Kankakee Bancorp, Inc.
Kankakee, Illinois
We have audited the accompanying consolidated statements of financial condition
of Kankakee Bancorp, Inc. and Subsidiary as of December 31, 1996 and 1995, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the years then ended. 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 audit. The consolidated
financial statements of Kankakee Bancorp, Inc. and Subsidiary, for the year
ended December 31, 1994, were audited by other auditors whose report dated
January 27, 1995, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial position of
Kankakee Bancorp, Inc. and Subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ McGladrey and Pullen, LLP
Champaign, Illinois
January 30, 1997
INDEPENDENT AUDITOR'S REPORT 24
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
-----------------------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Assets
Cash and due from banks................................................................... $ 4,291,857 $ 8,849,933
Federal funds sold........................................................................ 7,985,000 13,090,000
Money market funds........................................................................ 4,883,256 3,754,576
-------------- --------------
Cash and cash equivalents................................................................. 17,160,113 25,694,509
-------------- --------------
Certificate of deposit.................................................................... 50,000 287,500
-------------- --------------
Securities:
Investment securities:
Available-for-sale, at fair value....................................................... 51,345,158 47,710,703
Held-to-maturity, at cost (fair value: 1996 $72,223; 1995 $74,545)...................... 72,223 74,545
-------------- --------------
Total investment securities........................................................... 51,417,381 47,785,248
-------------- --------------
Mortgage-backed securities:
Available-for-sale, at fair value....................................................... 34,467,377 36,118,544
Held-to-maturity, at cost (fair value: 1996 $255,058; 1995 $378,182).................... 246,303 362,843
-------------- --------------
Total mortgage-backed securities...................................................... 34,713,680 36,481,387
-------------- --------------
Nonmarketable equity securities........................................................... 501,100 551,100
-------------- --------------
Loans..................................................................................... 235,682,573 232,274,230
Less: Allowance for losses on loans....................................................... 2,359,889 2,387,856
-------------- --------------
Net loans................................................................................. 233,322,684 229,886,374
-------------- --------------
Loans held for sale....................................................................... 639,861 581,054
Real estate held for sale................................................................. 215,027 834,136
Federal Home Loan Bank stock, at cost..................................................... 1,956,000 1,546,500
Office properties and equipment........................................................... 4,721,060 5,099,536
Accrued interest receivable............................................................... 2,638,066 2,483,548
Prepaid expenses and other assets......................................................... 914,693 1,269,868
Intangible assets......................................................................... 2,393,422 2,602,237
-------------- --------------
Total assets.................................................................................. $ 350,643,087 $ 355,102,997
-------------- --------------
-------------- --------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Liabilities and stockholders' equity
Liabilities:
Deposits
Noninterest bearing................................................................. $ 7,643,667 $ 7,849,790
Interest bearing.................................................................... 269,704,540 278,229,960
Short term borrowings................................................................. 26,820,000 20,370,000
Other borrowings...................................................................... 7,725,000 9,275,000
Advance payments by borrowers for taxes and insurance................................. 1,436,595 1,630,066
Other liabilities..................................................................... 819,064 1,297,494
-------------- --------------
Total liabilities......................................................................... 314,148,866 318,652,310
-------------- --------------
Stockholders' Equity
Preferred stock, $.01 par value; authorized, 500,000 shares; none outstanding......... -- --
Common stock, $.01 par value; authorized 3,500,000 shares; 1,750,000 shares issued.... 17,500 17,500
Additional paid-in capital............................................................ 16,181,726 16,186,914
Retained income, substantially restricted............................................. 27,219,741 26,015,559
Less: Cost of treasury stock (335,082 and 296,582 shares in 1996 and 1995,
respectively)......................................................................... (5,876,509) (5,126,646)
Unrealized gains (losses) on securities available-for-sale, net of related income
taxes................................................................................. (409,353) 188,849
-------------- --------------
Total stockholders' equity before Employee Stock Ownership Plan Loan and Bank
Incentive Plans and Trusts............................................................ 37,133,105 37,282,176
Employee Stock Ownership Plan Loan.................................................... (604,844) (756,055)
Bank Incentive Plans and Trusts....................................................... (34,040) (75,434)
-------------- --------------
Total stockholders' equity............................................................ 36,494,221 36,450,687
-------------- --------------
Total liabilities and stockholders' equity.................................................... $ 350,643,087 $ 355,102,997
-------------- --------------
-------------- --------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
26
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Loans....................................................................... $ 19,138,450 $ 17,716,834 $ 15,145,673
Mortgage-backed securities.................................................. 2,146,885 1,099,812 485,727
Investment securities....................................................... 4,522,142 4,013,456 4,665,605
------------- ------------- -------------
Total interest income................................................... 25,807,477 22,830,102 20,297,005
------------- ------------- -------------
Interest expense:
Deposits.................................................................... 13,499,576 11,931,312 9,088,413
Borrowed funds.............................................................. 1,698,996 630,329 133,736
------------- ------------- -------------
Total interest expense.................................................. 15,198,572 12,561,641 9,222,149
------------- ------------- -------------
Net interest income......................................................... 10,608,905 10,268,461 11,074,856
Provision for losses on loans................................................... 41,647 173,415 295,876
------------- ------------- -------------
Net interest income after provision for losses on loans................. 10,567,258 10,095,046 10,778,980
Other income:
Net gain (loss) on sales of securities available-for-sale................... 20,344 24,440 (35,094)
Net gain (loss) on sales of real estate held for sale....................... 44,555 (3,539) 79,612
Net gain (loss) on sales of loans held for sale............................. 44,451 47,664 (1,753)
Net gain on sale of branch.................................................. 707,675 -- --
Fee income.................................................................. 790,387 619,938 659,311
Insurance commissions....................................................... 111,643 63,984 84,488
Other....................................................................... 417,798 428,126 399,400
------------- ------------- -------------
Total other income...................................................... 2,136,853 1,180,613 1,185,964
------------- ------------- -------------
Other expenses:
Compensation and benefits................................................... 4,332,053 4,542,387 4,602,436
Occupancy................................................................... 697,073 698,334 663,723
Furniture and equipment..................................................... 381,036 289,797 410,071
Federal insurance premiums.................................................. 2,273,216 598,151 565,534
Advertising................................................................. 164,149 184,291 209,339
Provision for losses on real estate held for sale........................... -- 64,000 --
Data processing services.................................................... 318,609 245,420 189,341
Telephone and postage....................................................... 282,040 250,295 197,623
Amortization of intangible assets........................................... 231,683 97,493 8,034
Other general and administrative............................................ 1,535,042 1,523,486 1,483,335
------------- ------------- -------------
Total other expenses.................................................... 10,214,901 8,493,654 8,329,436
------------- ------------- -------------
Income before income taxes...................................................... 2,489,210 2,782,005 3,635,508
Income taxes.................................................................... 712,771 934,115 1,240,400
------------- ------------- -------------
Net income.................................................................. $ 1,776,439 $ 1,847,890 $ 2,395,108
------------- ------------- -------------
------------- ------------- -------------
Earnings Per Share.............................................................. $ 1.18 $ 1.18 $ 1.44
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
27
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES) ON EMPLOYEE BANK
ADDITIONAL SECURITIES STOCK INCENTIVE TOTAL
COMMON PAID-IN RETAINED TREASURY AVAILABLE- OWNERSHIP PLANS AND STOCKHOLDERS'
STOCK CAPITAL INCOME STOCK FOR-SALE PLAN LOAN TRUSTS EQUITY
----------- ---------- ---------- ---------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993.................. $ 17,500 $16,205,549 $22,372,794 $(1,107,450) $ -- $(1,058,477) $(354,588) $36,075,328
Implementation of change
in accounting for
securities
available-for-sale,
net of related income
taxes................. -- -- -- -- 992,213 -- -- 992,213
Change in unrealized
gains (losses) on
securities
available-for-sale,
net of related income
taxes................. -- -- -- -- (1,607,252) -- -- (1,607,252)
Purchase of 153,350
shares of treasury
stock................. -- -- -- (2,650,709) -- -- -- (2,650,709)
Principal payment of
ESOP loan............. -- -- -- -- -- 151,211 -- 151,211
Amortization of award of
Bank Incentive Plan
stock................. -- 29,131 -- -- -- -- 140,839 169,970
Net income.............. -- -- 2,395,108 -- -- -- -- 2,395,108
----------- ---------- ---------- ---------- ----------- ---------- ----------- ------------
Balance, December 31,
1994.................. 17,500 16,234,680 24,767,902 (3,758,159) (615,039) (907,266) (213,749) 35,525,869
Change in unrealized
gains (losses) on
securities
available-for-sale,
net of related income
taxes................. -- -- -- -- 803,888 -- -- 803,888
Purchase of 76,000
shares of treasury
stock................. -- -- -- (1,480,441) -- -- -- (1,480,441)
Exercise of stock
options............... -- -- -- 64,188 -- -- -- 64,188
Adjustment to paid-in
capital due to
exercise of stock
options............... -- (47,766) -- 47,766 -- -- -- --
Dividends paid on common
stock--$.40 per
share................. -- -- (600,233) -- -- -- -- (600,233)
Principal payment on
ESOP loan............. -- -- -- -- -- 151,211 -- 151,211
Amortization of award of
Bank Incentive Plan
stock................. -- -- -- -- -- -- 138,315 138,315
Net income.............. -- -- 1,847,890 -- -- -- -- 1,847,890
----------- ---------- ---------- ---------- ----------- ---------- ----------- ------------
Balance, December 31,
1995.................. 17,500 16,186,914 26,015,559 (5,126,646) 188,849 (756,055) (75,434) 36,450,687
Change in unrealized
gains (losses) on
securities
available-for-sale,
net of related income
taxes................. -- -- -- -- (598,202) -- -- (598,202)
Purchase of 39,200
shares of treasury
stock................. -- -- -- (761,963) -- -- -- (761,963)
Exercise of stock
options............... -- -- -- 6,192 -- -- -- 6,192
Adjustment to paid-in
capital due to
exercise of stock
options............... -- (5,188) -- 5,188 -- -- -- --
Dividends paid on common
stock--$.40 per
share................. -- -- (572,257) -- -- -- -- (572,257)
Principal payment on
ESOP loan............. -- -- -- -- -- 151,211 -- 151,211
Amortization of award of
Bank Incentive Plan
stock................. -- -- -- -- -- -- 41,394 41,394
Net income.............. -- -- 1,776,439 -- -- -- -- 1,776,439
----------- ---------- ---------- ---------- ----------- ---------- ----------- ------------
Balance, December 31,
1996.................. $ 17,500 $16,181,726 $27,219,741 $(5,877,229) $(409,353) $ (604,844) $ (34,040) $36,493,501
----------- ---------- ---------- ---------- ----------- ---------- ----------- ------------
----------- ---------- ---------- ---------- ----------- ---------- ----------- ------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
28
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income................................................................... $ 1,776,439 $ 1,847,890 $ 2,395,108
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for losses on loans............................................ 41,647 173,415 295,876
Provision for losses on real estate held for sale........................ -- 64,000 --
Depreciation and amortization............................................ 692,304 488,418 463,520
Amortization of investment premiums and discounts, net................... 335,089 80,310 29,477
Accretion of loan fees and discounts..................................... (94,362) (129,316) (220,584)
Deferred income tax provision (benefit).................................. 17,894 73,656 (72,800)
Origination of loans held for sale....................................... (5,684,990) (3,844,863) (2,596,168)
Proceeds from sales of loans............................................. 5,670,634 3,422,416 7,510,890
Increase in interest receivable.......................................... (172,918) (343,840) (90,157)
Increase (decrease) in interest payable on deposits...................... (86,326) 128,874 71,897
Proceeds from sales of trading securities................................ 21,412,500 -- 1,717,813
Purchase of trading securities........................................... (21,644,844) -- (1,737,188)
Net (gain) loss on sales of loans........................................ (44,451) (47,664) 1,753
Net (gain) loss on sales of securities available-for-sale................ (20,344) (24,440) 35,094
Net (gain) loss on sales of real estate held for sale.................... (44,555) 3,539 (79,612)
Net gain on sale of branch............................................... (707,675) -- --
Other, net............................................................... (62,941) 60,446 (459,094)
------------- ------------- -------------
Net cash from operating activities........................................... 1,383,101 1,952,841 7,265,825
------------- ------------- -------------
Cash Flow from Investing Activities
Investment securities:
Available-for-sale:
Purchases............................................................ (26,967,466) (9,073,854) (2,055,312)
Proceeds from sales.................................................. 7,301,376 13,789,429 4,093,907
Proceeds from calls and maturities................................... 15,500,000 1,000,000 --
Held-to-maturity:
Purchases............................................................ -- (2,000,000) (6,790,730)
Proceeds from maturities............................................. 2,322 8,002,182 6,002,051
Mortgage-backed securities:
Available-for-sale:
Purchases............................................................ (12,998,838) (34,707,109) --
Proceeds from sales.................................................. 4,912,617 -- --
Proceeds from maturities and paydowns................................ 9,330,390 3,632,743 --
Held-to-maturity:
Proceeds from maturities and paydowns................................ 116,540 859,148 2,129,545
Purchases of certificates of deposit......................................... (826,640) (875,000) (1,807,826)
Proceeds from maturities of certificates of deposit.......................... 1,064,140 2,135,326 260,000
Proceeds from sales of real estate........................................... 945,481 21,018 414,772
Net loan fees deferred....................................................... 1,910 98,482 141,955
Loans originated............................................................. (76,214,411) (69,841,600) (89,301,761)
Loans purchased.............................................................. (1,120,000) (378,136) (150,378)
Principal collected on loans................................................. 69,821,907 52,667,335 63,461,568
Purchases of office properties and equipment, net............................ (320,326) (1,129,905) (523,171)
Cash transferred to buyer on sale of branch.................................. (3,852,993) -- --
Payment of acquisition costs................................................. (22,868) (1,915,219) (792,545)
------------- ------------- -------------
Net cash from investing activities........................................... (13,326,859) (37,715,160) (24,917,925)
------------- ------------- -------------
</TABLE>
29
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
-------------------------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Net (decrease) increase in non-certificate of deposit accounts............... $ (725,722) $ (13,585,310) $ 15,424,172
Net increase in certificate of deposit accounts.............................. 704,198 33,966,657 7,370,676
Increase (decrease) in advance payments by borrowers for taxes and
insurance.................................................................. (141,806) (600,138) 224,386
Proceeds from short-term borrowings.......................................... 59,280,000 48,230,000 8,000,000
Repayments of short-term borrowings.......................................... (52,830,000) (27,860,000) (8,000,000)
Proceeds from other borrowings............................................... 3,650,000 9,275,000 --
Repayments of other borrowings............................................... (5,200,000) -- --
Proceeds from exercise of stock options...................................... 6,912 64,188 --
Dividends paid............................................................... (572,257) (600,233) --
Purchase of treasury stock................................................... (761,963) (1,480,441) (2,650,709)
------------- ------------- -------------
Net cash from financing activities....................................... 3,409,362 47,409,723 20,368,525
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents................................. $ (8,534,396) $ 11,647,404 $ 2,716,425
Cash and cash equivalents:
Beginning of year............................................................ 25,694,509 14,047,105 11,330,680
------------- ------------- -------------
End of year.................................................................. $ 17,160,113 $ 25,694,509 $ 14,047,105
------------- ------------- -------------
------------- ------------- -------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest on deposits..................................................... $ 13,413,300 $ 11,802,400 $ 9,016,500
------------- ------------- -------------
------------- ------------- -------------
Interest on borrowed funds............................................... $ 1,709,200 $ 424,500 $ 119,700
------------- ------------- -------------
------------- ------------- -------------
Income taxes............................................................. $ 789,436 $ 678,000 $ 1,335,000
------------- ------------- -------------
------------- ------------- -------------
Supplemental Disclosures of Noncash Investing Activities:
Real estate acquired through foreclosure..................................... $ 281,817 $ 225,823 $ 129,726
------------- ------------- -------------
------------- ------------- -------------
Securities held for investment purposes transferred to available-for-sale
portfolio.................................................................. $ -- $ -- $ 20,329,530
------------- ------------- -------------
------------- ------------- -------------
Change in unrealized gains (losses) on securities available-for-sale......... $ 906,232 $ (1,218,013) $ 2,435,230
------------- ------------- -------------
------------- ------------- -------------
Change in deferred taxes attributable to the unrealized gains (losses) on
securities available-for-sale.............................................. $ (308,030) $ 414,125 $ (827,978)
------------- ------------- -------------
------------- ------------- -------------
Amortized cost of securities transferred from held-to-maturity to available-
for-sale:
Investment securities.................................................... $ -- $ 34,924,732 $ --
------------- ------------- -------------
------------- ------------- -------------
Mortgage-backed securities............................................... $ -- $ 5,133,070 $ --
------------- ------------- -------------
------------- ------------- -------------
Reduction of Employee Stock Ownership Plan loan.............................. $ 151,211 $ 151,211 $ 151,211
------------- ------------- -------------
------------- ------------- -------------
Sale of Branch:
Assets disposed:
Loans.................................................................... $ (3,845,182) $ -- $ --
Accrued interest receivable.............................................. (18,400) -- --
Premises and equipment................................................... (238,181) -- --
Other assets............................................................. (15,468) -- --
Liabilities assumed by buyer:
Non-certificates of deposit.............................................. 3,684,830 -- --
Certificates of deposit.................................................. 4,922,897 -- --
Accrued interest payable................................................. 15,966 -- --
Escrows on loans......................................................... 51,664 -- --
Other liabilities........................................................ 2,542 -- --
Gain on sale of branch....................................................... (707,675) -- --
------------- ------------- -------------
Cash paid.................................................................... $ 3,852,993 $ -- $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
1. Significant Accounting Policies
Through Kankakee Federal Savings Bank (the "Bank"), Kankakee Bancorp, Inc. (the
"Company") provides a full range of banking services to individual and corporate
customers through its nine locations throughout central Illinois. The Bank is
subject to competition from other financial institutions and nonfinancial
institutions providing financial products. Additionally, the Company and the
Bank are subject to the regulations of certain regulatory agencies and undergo
periodic examinations by those regulatory agencies.
The significant accounting and reporting policies of the Company and its
subsidiary follow:
Basis of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, the Bank. Significant intercompany accounts and
transactions have been eliminated in consolidation.
The consolidated financial statements of the Company and the Bank have been
prepared in conformity with generally accepted accounting principles and conform
to predominate practice within the banking industry.
In preparing the consolidated financial statements, Company management is
required to make estimates and assumptions which significantly affect the
amounts reported in the consolidated financial statements. Significant estimates
which are particularly susceptible to change in a short period of time include
the determination of the allowance for losses on loans and valuation of real
estate and other properties acquired in connection with foreclosures or in
satisfaction of amounts due from borrowers on loans. Actual results could differ
from those estimates.
Securities
The Company adopted Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments
in Debt and Equity Securities," effective January 1, 1994. Application of SFAS
No. 115 resulted in an increase of $992,213 in stockholders' equity as of
January 1, 1994, representing the recognition of unrealized appreciation, net of
deferred income taxes of $511,140, for the Company's investment in debt and
equity securities determined to be available-for-sale, previously carried at
amortized cost or lower of cost of market.
Securities classified as held-to-maturity are those securities the Company has
both the positive intent and ability to hold to maturity regardless of changes
in market conditions, liquidity needs or changes in general economic conditions.
These securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed by the interest method over their contractual
lives.
Securities classified as available-for-sale are those securities that the
Company intends to hold for an indefinite period of time, but not necessarily to
maturity and marketable equity securities. Any decision to sell a security
classified as available-for-sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Company's assets and liabilities, liquidity needs, regulatory capital
considerations and other similar factors. Securities available-for-sale are
carried at fair value. The difference between fair value and cost, adjusted for
amortization of premium and accretion of discounts, results in an unrealized
gain or loss. Unrealized gains or losses are reported as increases or decreases
in stockholders' equity, net of the related deferred tax effect. Gains or losses
on the sale of securities are determined on the basis of the specific security
sold and are included in earnings. Premiums and discounts are recognized in
interest income using the interest method over their contractual lives.
NOTES TO CONSOLIDATED STATEMENTS 31
<PAGE>
Government bonds held principally for resale in the near term, and
mortgage-backed securities held for sale in conjunction with the Bank's mortgage
banking activities, are classified as trading account securities and recorded at
their fair values. Unrealized gains and losses on trading account securities are
included immediately in other income.
Loans
Loans originated or purchased are identified as either held for sale or
portfolio at origination or purchase. Loans held for portfolio are originated or
purchased with the intent to hold them to maturity for the purpose of earning
interest income. Since the Bank has the ability to hold such loans as intended,
they are recorded at cost. Loans held for sale are recorded at the lower of
aggregate cost or market until they are sold. Any transfers between portfolios,
which are rare, are recorded at the lower of cost or market.
Unearned interest on installment loans is credited to income over the term of
the loan using the interest method. For all other loans, interest is credited to
income as earned using the simple interest method applied to the daily balances
of the principal outstanding.
A loan is considered to be impaired when, based on current information and
events, it is probable the Bank will not be able to collect all amounts due. The
portion of the allowance for losses on loans applicable to impaired loans has
been computed based on the present value of the estimated future cash flows of
interest and principal discounted at the loan's effective interest rate or on
the fair value of the collateral for collateral dependent loans. The entire
change in present value of expected cash flows of impaired loans or of
collateral value is reported as bad debt expense in the same manner in which
impairment initially was recognized or as a reduction in the amount of bad debt
expense that otherwise would be reported.
The accrual of interest income on loans is discontinued when, in the opinion of
management, there is reasonable doubt as to the borrower's ability to meet
payments of interest or principal when they become due. Interest income on these
loans is recognized to the extent interest payments are received and the
principal is considered fully collectible.
Loan origination fees and certain direct origination costs are being amortized
as an adjustment of the yield over the contractual life of the related loan,
adjusted for prepayments, using the interest method.
Allowance for losses on loans
The allowance for losses on loans is established through a provision for losses
on loans charged to operating expenses. Loans are charged against the allowance
for losses on loans when management believes that the collectibility of the
principal is unlikely. The allowance is an amount that management believes will
be adequate to absorb losses on existing loans that may become uncollectible,
based on evaluations of the collectibility of loans and prior loan loss
experience. The evaluations take into consideration such factors as changes in
the nature and volume of the loan portfolio, overall portfolio quality, review
of specific problem loans and current economic conditions that may affect the
borrowers' ability to pay. While management uses the best information available
to make its evaluation, future adjustments to the allowance may be necessary if
there are significant changes in economic conditions. In addition, various
regulatory agencies periodically review the allowance for losses on loans. These
agencies may require the Bank to make additions to the allowance for losses on
loans based on their judgments of collectibility based on information available
to them at the time of their examination.
Intangible assets
The excess of cost over the fair value of assets acquired for transactions
accounted for as purchases is recorded as an asset by the Company. This amount
is amortized into other expense on a straight-line basis using periods of eight
to fifteen years.
NOTES TO CONSOLIDATED STATEMENTS 32
<PAGE>
Real estate held for sale
Real estate acquired through foreclosure or deed in lieu of foreclosure
represents specific assets to which the Company has acquired legal title in
satisfaction of indebtedness. Such real estate is recorded at the property's
fair value at the date of foreclosure (cost). Initial valuation adjustments, if
any, are charged against the allowance for losses on loans. Property is
evaluated regularly to ensure the recorded amount is supported by its current
fair value, valuation allowances to reduce the carrying amount to fair value
less estimated cost to dispose are recorded as necessary. Revenues and expenses
related to holding and operating these properties are included in operations.
Office properties and equipment
Office properties and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets.
Deferred income taxes
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Deferred tax assets are also recognized for operating
loss and tax credit carryforwards. Valuation allowances are established when
necessary to reduce deferred tax assets to an amount expected to be realized.
Income tax expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
Earnings per share
Earnings per share are determined by dividing net income for the year by the
weighted average number of shares of common stock and common stock equivalents
outstanding. Common stock equivalents assume exercise of stock options and use
of proceeds to purchase treasury stock at the average market price for the
period. The weighted average shares outstanding were 1,507,827, 1,570,592 and
1,662,528 for 1996, 1995 and 1994, respectively.
Cash and cash equivalents
For reporting cash flows, cash and cash equivalents represent highly liquid
investments with maturities of 90 days or less at the time of purchase and
includes cash on hand, due from bank accounts (including cash items in process
of clearing), and federal funds sold.
Accounting for transfers and servicing of financial assets and extinguishment of
liabilities
In June 1996, the Financial Accounting Standards Board issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" (SFAS No. 125). SFAS No. 125 distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings. A
transfer of financial assets in which the transferor surrenders control over
those assets is accounted for as a sale to the extent that consideration other
than beneficial interest in the transferred assets is received in exchange. SFAS
No. 125 also establishes standards on the initial recognition and measurement of
servicing assets and other retained interests and servicing liabilities, and
their subsequent measurement.
SFAS No. 125 requires that debtors reclassify financial assets pledged as
collateral and that secured parties recognize those assets and their obligation
in return them in certain circumstances in which the secured party has taken
control of those assets. In addition, SFAS No. 125 requires that a liability be
derecognized only if the debtor is relieved of its obligation through payment to
the creditor or by being legally released from being the primary obligor under
the liability either judicially or by the creditor.
SFAS No. 125 is effective for transactions occurring after December 31, 1996,
except for secured borrowings and collateral for which the effective date is
December 15, 1997. The Company
NOTES TO CONSOLIDATED STATEMENTS 33
<PAGE>
believes the adoption of SFAS No. 125 will not have a material impact on its
consolidated financial statements.
Reclassifications
Certain amounts in the 1994 and 1995 consolidated financial statements have been
reclassified to conform with the 1996 presentation. Such reclassifications have
no effect on previously reported net income.
2. Securities
During 1995, the Financial Accounting Standards Board decided to allow all
enterprises to make a one-time reassessment of the classification of securities
made under No. SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company transferred debt securities with an amortized cost of
$40,057,802 from the Held-to-Maturity classification to the Available-for-Sale
classification and recorded, as a component of equity, an unrealized gain of
$133,597, net of $68,824 of deferred taxes to allow for more flexibility in
managing the Company's asset mix.
Amortized costs and fair values of securities are summarized as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
U. S. government and agency securities........... $ 51,533,323 $ 184,336 $ 703,491 $ 51,014,168
Mutual fund shares............................... 340,858 -- 9,868 330,990
------------ ----------- ----------- ------------
Total investment securities.................. 51,874,181 184,336 713,359 51,345,158
Mortgage-backed securities....................... 34,558,450 55,045 146,118 34,467,377
------------ ----------- ----------- ------------
Total........................................ $ 86,432,631 $ 239,381 $ 859,477 $ 85,812,535
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
<S> <C> <C> <C> <C>
U. S. government and agency securities........... $ 47,106,028 $ 794,513 $ 514,291 $ 47,386,250
Mutual fund shares............................... 319,017 5,436 -- 324,453
------------ ----------- ----------- ------------
Total investment securities.................. 47,425,045 799,949 514,291 47,710,703
Mortgage-backed securities....................... 36,118,066 120,967 120,489 36,118,544
------------ ----------- ----------- ------------
Total........................................ $ 83,543,111 $ 920,916 $ 634,780 $ 83,829,247
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
HELD-TO-MATURITY
DECEMBER 31, 1996
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Municipal bonds....................................... $ 72,223 $ -- $ -- $ 72,223
Mortgage-backed securities............................ 246,303 8,755 -- 255,058
----------- ----------- ----- ---------
Total............................................. $ 318,526 $ 8,755 $ -- $ 327,281
----------- ----------- ----- ---------
----------- ----------- ----- ---------
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------
<S> <C> <C> <C> <C>
Municipal bonds....................................... $ 74,545 $ -- $ -- $ 74,545
Mortgage-backed securities............................ 362,843 15,339 -- 378,182
----------- ----------- ----- ---------
Total............................................. $ 437,388 $ 15,339 $ -- $ 452,727
----------- ----------- ----- ---------
----------- ----------- ----- ---------
</TABLE>
The amortized cost and fair value of securities classified as held-to-maturity
and available-for-sale at December 31, 1996, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because
borrowers may have the right to prepay obligations without prepayment penalties,
and certain securities require principal repayments prior to maturity.
NOTES TO CONSOLIDATED STATEMENTS 34
<PAGE>
Therefore, these securities and mutual fund shares are not included in the
maturity categories in the following maturity summary.
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
---------------------- --------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Due within 1 year............................... $ -- $ -- $ 4,001,500 $ 4,009,375
Due after 1 year through 5 years................ -- -- 31,546,621 31,262,813
Due after 5 through 10 years.................... -- -- 9,008,813 8,976,355
Due after 10 years.............................. 72,223 72,223 6,976,389 6,765,625
Mortgage-backed securities...................... 246,303 255,058 34,558,450 34,467,677
Mutual fund shares.............................. -- -- 340,858 330,990
----------- --------- ------------ ------------
Total....................................... $ 318,526 $ 327,281 $ 86,432,631 $ 85,812,835
----------- --------- ------------ ------------
----------- --------- ------------ ------------
</TABLE>
The Bank, as a member of the Federal Home Loan Bank of Chicago (the "FHLB"), is
required to maintain an investment in capital stock of the FHLB in an amount
equal to 1% of its outstanding home loans. No ready market exists for the FHLB
stock, and it has no quoted market value. For disclosure purposes, such stock is
assumed to have a market value which is equal to cost.
U. S. government and agency securities with a carrying value of approximately
$8,118,000 and $7,306,000 at December 31, 1996 and 1995, respectively, were
pledged to collateralize certain deposit accounts with balances in excess of
$100,000, securities sold under agreement to repurchase and for other purposes
as required or permitted by law.
Realized gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Realized gains.................................................... $ 280,039 $ 220,490 $ 92,248
Realized losses................................................... (259,695) (196,050) (127,342)
---------- ---------- ----------
Net gain (loss)............................................... $ 20,344 $ 24,440 $ (35,094)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
NOTES TO CONSOLIDATED STATEMENTS 35
<PAGE>
3. Loans
Loans consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Real estate mortgage loans:
One-to-four family.................................................. $ 148,903,767 $ 146,426,087
Multifamily......................................................... 14,172,327 14,475,092
Commercial.......................................................... 28,720,502 28,273,080
Construction and development........................................ 5,525,096 8,247,871
Consumer loans:
Mobile home loans................................................... 3,161,164 3,122,199
Student loans....................................................... 918,177 1,150,984
Home improvement loans.............................................. 56,047 208,203
Home equity loans................................................... 14,165,844 12,846,582
Credit card loans................................................... 1,705,381 1,870,064
Motor vehicle loans................................................. 4,032,898 3,219,237
Personal loans...................................................... 5,941,680 3,918,477
Loans secured by savings accounts................................... 587,844 744,975
Commercial loans........................................................ 9,942,838 9,245,424
------------- -------------
Gross loans............................................................. 237,833,565 233,748,275
Less:
Unearned discounts.................................................. 13,215 11,785
Deferred loan fees, net............................................. 411,809 505,692
Undisbursed portion of loan proceeds................................ 1,725,968 956,568
------------- -------------
$ 235,682,573 $ 232,274,230
------------- -------------
------------- -------------
</TABLE>
The Company's lending activities have been concentrated primarily in the market
areas immediately surrounding the branch locations. The largest portion of the
Company's loans are originated for the purpose of enabling borrowers to purchase
residential real estate property secured by first liens on such property and
generally maintain loan-to-value ratios of no greater than 80%. At December 31,
1996, approximately 62% of the Company's loans were secured by owner-occupied,
one-to-four family residential property. Borrowers of commercial loans are
engaged in a wide variety of commercial enterprises.
The Company's opinion as to the ultimate collectibility of these loans is
subject to estimates regarding the future cash flows from operations and the
value of property, real and personal, pledged as collateral. These estimates are
affected by changing economic conditions and the economic prospects of the
borrowers.
Loans serviced by the Company for others approximated $35,377,000, $36,111,000
and $38,767,000 at December 31, 1996, 1995 and 1994.
4. Allowance for Losses on Loans
Changes in the allowance for losses on loans were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year................................... $ 2,387,856 $ 2,251,166 $ 2,165,179
Provision for losses on loans.................................. 41,647 173,415 295,876
Charge-offs.................................................... (125,666) (59,726) (244,685)
Recoveries..................................................... 56,052 23,001 34,796
----------- ----------- -----------
Balance at end of year......................................... $ 2,359,889 $ 2,387,856 $ 2,251,166
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTES TO CONSOLIDATED STATEMENTS 36
<PAGE>
5. Office Properties and Equipment
Office properties and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Office properties:
Land.................................................................. $ 522,262 $ 631,762
Building.............................................................. 4,217,253 4,434,292
Parking facilities:
Land.................................................................. 340,862 340,862
Improvements.......................................................... 133,418 133,418
Land acquired for future use.............................................. 1,278,534 1,278,534
Furniture and equipment................................................... 3,648,197 4,647,082
------------ ------------
10,140,526 11,465,950
Less: Accumulated depreciation............................................ 5,419,466 6,366,414
------------ ------------
$ 4,721,060 $ 5,099,536
------------ ------------
------------ ------------
</TABLE>
Depreciation expense amounted to $460,621, $386,400 and $462,381 for the years
ended December 31, 1996, 1995, and 1994, respectively.
6. Deposits
As of December 31, 1996, certificates of deposit have scheduled maturity dates
as follows:
<TABLE>
<CAPTION>
YEAR OF MATURITY AMOUNT PERCENT
- ------------------------------------------------------------------------------ ------------- -----------
<S> <C> <C>
1997.......................................................................... $ 108,744,211 61.7%
1998.......................................................................... 32,790,895 18.6
1999.......................................................................... 18,828,188 10.7
2000.......................................................................... 11,090,743 6.3
2001 and thereafter........................................................... 4,692,420 2.7
------------- -----
$ 176,146,457 100.0%
------------- -----
------------- -----
</TABLE>
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $14,065,040 and $14,225,822 at December 31, 1996 and 1995,
respectively.
A maturity distribution of time certificates of deposit in denominations of
$100,000 or more as of December 31, 1996, were as follows:
<TABLE>
<S> <C>
3 months or less.............................................................. $3,750,181
Over 3 months through 6 months................................................ 1,906,664
Over 6 months through 12 months............................................... 2,747,946
Over 12 months................................................................ 5,660,249
----------
Total......................................................................... $14,065,040
----------
----------
</TABLE>
NOTES TO CONSOLIDATED STATEMENTS 37
<PAGE>
7. Short-Term Borrowings
Short-term borrowings consist of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Securities sold under agreements to repurchase............................ $ 19,820,000 $ 19,720,000
Federal Home Loan Bank short-term advances................................ 7,000,000 650,000
------------ ------------
Total..................................................................... $ 26,820,000 $ 20,370,000
------------ ------------
------------ ------------
</TABLE>
All repurchase agreements as of December 31, 1996, were due within three months
or less. Mortgage-backed securities available-for-sale with a carrying value of
approximately $20,451,000 and $20,504,000 were pledged to collateralize the
repurchase agreements as of December 31,
1996 and 1995, respectively.
Advances from the FHLB which were due within three months or less are considered
short term. The advances from the FHLB are collateralized by one-to-four family
residential mortgages.
Average and maximum balances and rates on aggregate short-term borrowings
outstanding were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Maximum month-end balance................................................. $ 26,820,000 $ 21,195,000
Average month-end balance................................................. 22,151,000 7,518,000
Weighted average interest rate for the year............................... 5.73% 5.53%
Weighted average interest rate at year-end................................ 5.53% 5.79%
</TABLE>
8. Other Borrowings
Other borrowings at December 31, 1996 and 1995 consisted of advances from the
FHLB of $7,725,000 and $9,275,000, respectively. The weighted average maturity
date was approximately 8 months and 12 months, respectively, and the weighted
average interest rates were approximately 5.92% and 6.02%, respectively.
The advances from the FHLB are collateralized by one-to-four family residential
mortgages.
Future payments at December 31, 1996, for all other borrowings were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT
- ----------------------------------------------------------------------------------------- -----------
<S> <C>
1997..................................................................................... $ 7,350,000
1998..................................................................................... 375,000
-----------
Total.................................................................................... $ 7,725,000
-----------
-----------
</TABLE>
9. Income Taxes
Under provisions of the Internal Revenue Code and similar sections of the
Illinois income tax law that applies to tax years beginning before December 31,
1995, qualifying thrifts were allowed to claim bad debt deductions based on the
greater of (1) a specified percentage of taxable income, as defined, or (2)
actual loss experience. If, in the future, any of the accumulated bad debt
deductions are used for any purpose other than to absorb bad debt losses, gross
taxable income may result and income taxes may be payable.
The Small Business Job Protection Act became law on August 20, 1996. One of the
provisions in this law repealed the reserve method of accounting for bad debts
with thrift institutions so that the bad debt deduction described in the
preceding paragraph will no longer be effective for tax years beginning after
December 31, 1995. The change in the law requires that the tax bad debt
NOTES TO CONSOLIDATED STATEMENTS 38
<PAGE>
reserves accumulated after December 31, 1988 be recaptured into taxable income
over a six-year period. The start of the six-year period can be delayed for up
to two tax years if the Company meets certain residential lending thresholds.
Deferred taxes have been provided on the portion of the tax reserve for loan
loss that must be recaptured.
Retained earnings at December 31, 1996 and 1995, includes approximately
$8,998,000 of the tax reserve which accumulated prior to 1988, for which no
deferred income tax liability has been recognized. This amount represents an
allocation of income to bad debt deductions for tax purposes only. Reduction of
amounts so allocated for purposes other than tax bad debt losses or adjustments
arising from carryback of net operating losses would create income for tax
purposes only, which would be subject to the then-current corporate income tax
rate. The unrecorded deferred income tax liability on the above amounts was
approximately $3,059,000 as of December 31, 1996 and 1995.
As of December 31, 1996, the Bank had State net operating loss carryforwards of
approximately $10,220,000 for income tax purposes. The difference between book
and tax net operating income results from interest income from certain
investments which is exempt from income tax for state income tax purposes. For
financial reporting purposes, a valuation allowance of $490,297 based on the
effective state tax rate of 4.8% has been recognized to offset the deferred tax
assets related to those carryforwards. The net operating loss carryforwards
expire through 2007.
The income taxes consist of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- -----------
<S> <C> <C> <C>
Current............................................................ $ 694,877 $ 860,459 $ 1,313,200
Deferred........................................................... 17,894 73,656 (72,800)
--------- --------- -----------
$ 712,771 $ 934,115 $ 1,240,400
--------- --------- -----------
--------- --------- -----------
</TABLE>
A reconciliation from expected federal income taxes to consolidated effective
income taxes follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal income tax rate........................................ 35.0% 35.0% 35.0%
Effect of:
State income tax, net of federal benefit............................. -- 1.1% 1.9%
Utilization of state net operating loss carryforwards................ -- (1.1)% (1.9)%
Other................................................................ (6.4)% (1.4)% (0.9)%
--- --- ---
28.6% 33.6% 34.1%
--- --- ---
--- --- ---
</TABLE>
Deferred income taxes result from temporary differences in the recognition of
income and expense for tax and financial statement purposes. The sources of
these temporary differences and their resulting effect on income tax expense are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- -----------
<S> <C> <C> <C>
General valuation allowance........................................ $ (4,717) $ (10,078) $ (52,200)
Excess of tax accumulated provision for losses over base year...... 28,264 48,782 8,300
Loan fees deferred for income tax purposes......................... 24,356 (6,657) (7,500)
Loan costs deferred for book purposes.............................. (38,154) -- --
Depreciation and amortization...................................... (36,672) (32,883) --
Stock dividend on FHLB stock....................................... -- 7,310 (800)
Accrued benefits................................................... 22,213 92,820 (12,400)
Other, net......................................................... 22,604 (25,638) (8,200)
--------- --------- -----------
$ 17,894 $ 73,656 $ (72,800)
--------- --------- -----------
--------- --------- -----------
</TABLE>
NOTES TO CONSOLIDATED STATEMENTS 39
<PAGE>
Significant components of the deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for losses on loans........................................... $ 803,552 $ 783,668
State net operating loss carryforwards.................................. 490,297 504,170
Accrued benefits........................................................ 22,213 --
Unrealized loss on assets available-for-sale............................ 210,743 --
Other................................................................... 70,598 161,935
----------- -----------
Total deferred tax assets........................................... 1,597,403 1,449,773
Valuation allowance for deferred tax assets............................. 490,297 504,170
----------- -----------
Total deferred tax assets........................................... 1,107,106 945,603
----------- -----------
Deferred tax liabilities:
Unrealized gain in assets available-for-sale............................ -- (97,286)
Loan fees deferred for income tax purposes.............................. (122,009) (146,365)
Excess of tax accumulated provision for losses over base year........... (182,912) (274,177)
Stock dividend on FHLB stock............................................ (54,604) (54,604)
Loan costs deferred for book purposes................................... (38,154) --
Other................................................................... (33,848) (23,516)
----------- -----------
Total deferred tax liabilities...................................... (431,527) (595,948)
----------- -----------
Net deferred tax assets..................................................... $ 675,579 $ 349,655
----------- -----------
----------- -----------
</TABLE>
The Company believes that it is more likely than not that the deferred tax asset
will be realized based upon historical taxable income levels. The Company has
reported federal taxable income and pretax book income amounts totaling
approximately $8.6 million and $8.9 million over the past three years,
respectively.
10. Stockholders' Equity and Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Tangible and Tier I capital (as defined by the regulations) to
tangible assets (as defined), Total and Tier I capital (as defined) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
meet all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Office of Thrift
Supervision (the "OTS") categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table on the following page.
There are no conditions or events since that notification that management
believes have changed the Bank's category.
NOTES TO CONSOLIDATED STATEMENTS 40
<PAGE>
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------- ------------------------ -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
As of December 31, 1996
Tangible Capital to Tangible Assets
Kankakee Federal Savings Bank........ $ 28,907,448 8.41% $ 5,155,065 1.50% N/A
Core Capital to Tangible Assets
Kankakee Federal Savings Bank........ 28,907,448 8.41% 10,310,130 3.00% N/A
Tier I Capital to Risk Weighted Assets
Kankakee Federal Savings Bank........ 28,907,448 14.53% 7,957,720 4.00% $ 11,936,580 6.00%
Total Capital to Risk Weighted Assets
Kankakee Federal Savings Bank........ 30,982,337 15.57% 15,915,440 8.00% 19,894,300 10.00%
Tier I Capital to Average Adjusted
Assets
Kankakee Federal Savings Bank........ 28,907,448 8.34% 10,403,085 3.00% 17,338,475 5.00%
</TABLE>
A liquidation account in the amount of $17,720,139 has been established for the
benefit of eligible deposit account holders who continue to maintain their
deposit accounts in the Bank after the December 30, 1992 conversion from a
mutual savings and loan association to a stock savings bank. In the unlikely
event of a complete liquidation of the Bank, each eligible deposit account
holder will be entitled to receive a liquidation distribution from the
liquidation account, in the proportionate amount of the then-current adjusted
balance for deposit accounts held, before any distribution may be made with
respect to the Bank's capital stock. The Bank may not declare or pay a cash
dividend to the Company on, or repurchase any of, its capital stock if the
effect thereof would cause the net worth of the Bank to be reduced below the
amount required for the liquidation account.
The OTS capital distribution regulations restrict the Bank's cash dividend
payments or other capital distributions. The OTS regulations generally provide
that an institution can make capital distributions during a calendar year up to
100% of its net income to date during the calendar year plus the amount that
would reduce by one-half the excess capital over fully phased-in capital
requirements at the beginning of the calendar year. Any additional capital
distributions would also require prior notice to the OTS. The Company is not
subject to these regulatory restrictions on the payment of dividends to its
stockholders; however, the ability of the Company to pay future dividends will
depend on dividends from the Bank.
11. Officer, Director and Employee Plans
Money Purchase Pension Plan and Trust
The Bank sponsors a Money Purchase Pension Plan and Trust (the "Money Purchase
Plan") for the benefit of its employees meeting certain age and service
requirements. The Bank contributes to the Money Purchase Plan on behalf of each
Participant an amount equal to 7% of the Participant's compensation, as defined
by the Money Purchase Plan. Expense related to the Money Purchase Plan amounted
to approximately $204,000, $229,000 and $212,500, for the years ended December
31, 1996, 1995 and 1994, respectively.
401(k) Savings Plan
The Bank established a qualified, tax-exempt pension plan qualifying under
section 401(k) of the Internal Revenue Code (the "401(k) Plan"). Virtually all
employees are eligible to participate after meeting certain age and service
requirements. Eligible employees are permitted to contribute 1% to 10% of their
compensation to the 401(k) Plan. Expense related to the 401(k) Plan, including
plan administration, amounted to approximately $11,100, $22,400 and $23,200,
for the years ended December 31, 1996, 1995 and 1994, respectively.
NOTES TO CONSOLIDATED STATEMENTS 41
<PAGE>
Bank Incentive Plans and Trusts
The 52,500 shares of Company common stock in the Bank Incentive Plans and Trusts
(the "BIPs") are available for issuance to officers, directors, and employees of
the Bank. The awards are earned over a three- or five-year period depending on
age and years of service. The aggregate purchase price of these shares is being
amortized to expense as the persons become vested in their stock awards. The
unamortized cost is reflected as a reduction of stockholders' equity. Expense
relating to the BIPs was approximately $41,394, $138,315 and $140,839 for the
years ended December 31, 1996, 1995 and 1994, respectively.
Employee Stock Ownership Plan
The Kankakee Bancorp, Inc. Employee Stock Ownership Plan (the "ESOP") covers all
full time employees who have completed twelve months of service and have
attained the minimum age of twenty-one. A participant is 100 percent vested
after seven years of credited service.
The ESOP operates as a leveraged employee stock ownership plan. These shares are
held in trust and allocated to participants' accounts in the ESOP as the related
loan obligation is repaid.
The following table reflects the shares held by the ESOP:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Shares allocated to participants............................... 58,886.0 45,168.5 30,622.0
Unallocated shares (grandfathered under SOP 93-6).............. 61,250.0 76,562.5 91,875.0
----------- ----------- -----------
Total.......................................................... 120,136.0 121,731.0 122,497.0
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The ESOP borrowed from the Company to purchase the shares of common stock. The
loan obligation is considered unearned employee compensation and is recorded as
a reduction of stockholders' equity.
The Bank makes discretionary cash contributions to the ESOP which, along with
dividend payments, will be sufficient to service the principal payments plus
interest at 7 percent over the eight year loan term.
Interest expense recognized by the ESOP was $50,278, $60,862 and $71,447 for the
years ended December 31, 1996, 1995 and 1994, respectively. The Bank contributed
$174,409, $175,662 and $222,658 to the ESOP to fund principal and interest
payments for the years ended December 31, 1996, 1995 and 1994, respectively.
The Board of Directors of the Company may direct payment of dividends with
respect to shares allocated to the participants to be paid in cash to the
participants. Dividends on unallocated shares are to be used to make payments on
the loan. All shares of stock owned by the ESOP are considered outstanding and
included in the weighted average shares outstanding for calculating earnings per
share.
Stock Option Plan
In 1992, the Company adopted an incentive stock option plan for the benefit of
directors, officers, and employees of the Company or the Bank (the "Stock Option
Plan"). The number of shares of common stock authorized under the Stock Option
Plan is 175,000. The option exercise price must be at least equal to the fair
market value per share of the common stock on the date of grant. The Stock
Option Plan also provides for the issuance of restricted stock and stock
NOTES TO CONSOLIDATED STATEMENTS 42
<PAGE>
appreciation rights and limited stock appreciation rights. Activity in the Stock
Option Plan
was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------------------------------------------ --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.......... 149,425 $ 9.940 154,175 $ 9.875 154,175 $ 9.875
Granted................................... -- -- 1,750 15.500 -- --
Exercised................................. (700) 9.875 (6,500) 9.875 -- --
Forfeited................................. -- -- -- -- -- --
--------- --------- ---------
Outstanding at end of year................ 148,725 9.941 149,425 9.940 154,175 9.875
--------- --------- ---------
--------- --------- ---------
Options exercisable at year-end........... 148,725 149,425 154,175
--------- --------- ---------
--------- --------- ---------
Weighted-average fair value of options
granted during the year................. -- 5.260 N/A
----------- -----------
----------- -----------
</TABLE>
Grants under the Stock Option Plan are accounted for following APB Opinion No.
25 and related interpretations. Accordingly, no compensation cost has been
recognized for grants under the Stock Option Plan.
12. Commitments and Contingencies
In the normal course of business, there are outstanding various contingent
liabilities such as claims and legal action, which are not reflected in the
consolidated financial statements. In the opinion of management, the ultimate
resolution of these matters is not expected to have a material effect on the
financial position or on the results of operations of the Company
and its subsidiary.
13. Financial Instruments
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of
credit, and financial guarantees. Those instruments involve, to varying degrees,
elements of credit and interest rate risk. The contract or notional amounts of
those instruments reflect the extent of involvement the Bank has in particular
classes of financial instruments.
The Bank's exposure to credit loss, in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit and standby
letters of credit, is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
The Bank has entered into an agreement to provide credit enhancement for a
rental apartment development project. The Bank guarantees the repayment of
principal and interest on Municipal Revenue Bonds, which are secured by first
mortgages. Investment securities with a carrying value of approximately
$2,002,000 at December 31, 1996, are pledged as collateral of the guarantees.
The bonds have a principal amount of $17,000,000 (of which the Bank has
guaranteed $1,000,000) and expire in 2009.
The Bank had outstanding commitments to originate new loans totaling
approximately $3,199,000 and $5,946,000 at December 31, 1996 and 1995,
respectively. In addition, the Bank committed to approximately $17,140,000 and
$15,463,000 of lines of credit, which were undrawn at December 31, 1996 and
1995, respectively. Such commitments are recorded in the financial
NOTES TO CONSOLIDATED STATEMENTS 43
<PAGE>
statements when they are funded or related fees are incurred or received. These
commitments are principally at variable interest rates.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit written are conditional commitments issued by the bank
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing, and similar transactions. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
The Company and the Bank do not engage in the use of interest rate swaps,
futures, forwards, or option contracts.
14. Fair Value of Financial Instruments
The following table reflects a comparison of carrying amounts and the fair
values of the financial instruments:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1996 1995
---------------------------- ----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents............ $ 17,160,113 $ 17,160,113 $ 25,694,509 $ 25,694,509
Certificates of deposit.............. 50,000 50,000 287,500 287,500
Investment and mortgage-backed
securities......................... 86,131,061 86,139,816 84,266,635 84,281,974
Nonmarketable equity securities...... 501,100 501,100 551,100 551,100
Loans................................ 235,682,573 234,647,800 232,274,230 232,796,300
Loans held for sale.................. 639,861 651,559 581,054 590,515
FHLB stock........................... 1,956,000 1,956,000 1,546,500 1,546,500
Liabilities:
Deposits............................. $ 277,348,207 $ 278,348,779 $ 286,079,750 $ 285,567,450
Borrowed funds....................... 34,545,000 34,540,979 29,645,000 29,645,569
Advance payments by borrowers for
taxes and insurance................ 1,436,595 1,436,595 1,630,066 1,630,066
</TABLE>
The fair values utilized in the table were derived using the information
described below for the group of instruments listed. It should be noted that the
fair values disclosed in this table do not represent market values of all assets
and liabilities of the Company and, thus, should not be interpreted to represent
a market or liquidation value for the Company,
The following methods and assumptions were used by the Bank in estimating the
fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS AND CERTIFICATES OF DEPOSIT: The carrying amounts
reported in the balance sheet for cash and short-term instruments approximate
those assets' fair values.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES: Fair values for securities
are based on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments.
NOTES TO CONSOLIDATED STATEMENTS 44
<PAGE>
LOANS: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for fixed-rate loans are estimated using discounted cash flow analyses using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
LOANS HELD FOR SALE: Fair values are based on quoted market price.
OFF-BALANCE-SHEET INSTRUMENTS: Fair values for the Bank's off-balance-sheet
instruments (guarantees and loan commitments) are based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standing. The fair value
for such commitments is nominal.
DEPOSITS: The fair values disclosed for demand deposits are, by definition,
equal to the amount payable on demand at the balance sheet date. The carrying
amounts for variable-rate, fixed-term money market accounts approximate their
fair values at the balance sheet date. Fair values for fixed-rate certificates
of deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
SHORT-TERM BORROWINGS AND OTHER BORROWINGS: Rates currently available to the
Company for debt with similar terms and remaining maturities are used to
estimate fair value of existing debt.
15. Branch Acquisition
On December 8, 1995, the Company acquired the Momence, Illinois, branch (the
"Acquisition") of First of America Bank--Illinois, National Association,
Bannockburn, Illinois. The branch had approximately $16 million in deposits at
the date of acquisition. In addition to assuming the deposit liabilities
attributable to the branch, the Company acquired certain assets associated with
the branch, including the building. The operations of the Momence branch are
included in the Company's Consolidated Statements of Income from the acquisition
date and reflect the application of the purchase method of accounting.
Under this method of accounting, the aggregate cost to the Company of the
Acquisition was allocated to the assets acquired and the liabilities assumed,
based on their estimated fair value as of December 9, 1995. Goodwill and the
estimated value of the customer deposit base acquired intangibles in the amount
of $1,811,219 and $104,000, respectively, were recorded by the Bank in
connection with the Acquisition. The goodwill is being amortized on a
straight-line basis
over 15 years.
16. Branch Disposition
On September 13, 1996, the Company completed the sale of the Bank's branch
office in Carlyle, Illinois. The sale of the branch's $8.6 million in deposits,
fixed assets and a portion of the outstanding loans resulted in a gain of
$707,675.
17. Savings Association Insurance Fund Special Assessment
Effective September 30, 1996, legislation was passed to recapitalize the Savings
Association Insurance Fund (the "SAIF") by imposing a one-time assessment on
deposits insured by SAIF. This assessment was equal to 65.7 basis points on
March 31, 1995 deposits and was payable November 29, 1996. The total assessment
paid by the Bank increased the 1996 FDIC premium expense by $1,659,549 and is
recorded in other expenses.
NOTES TO CONSOLIDATED STATEMENTS 45
<PAGE>
18. Condensed Parent Company Only Financial Statements
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
STATEMENT OF FINANCIAL CONDITION
Assets:
Cash and cash equivalents............................................. $ 3,609,325 $ 667,048
Certificate of deposit................................................ 50,000
Investment and mortgage-backed securities, available-for-sale......... 1,094,055 1,484,391
Equity in net assets of Kankakee Federal Savings Bank................. 31,757,185 34,260,121
Other assets.......................................................... 67,204 111,829
------------ ------------
$ 36,577,769 $ 36,523,389
------------ ------------
------------ ------------
Liabilities and stockholders' equity:
Other liabilities..................................................... $ 83,548 $ 72,702
Common stock.......................................................... 17,500 17,500
Additional paid-in capital............................................ 16,181,726 16,186,914
Retained income....................................................... 27,219,741 26,015,559
Unrealized gains (losses) on securities available-for-sale, net of
tax................................................................. (409,353) 188,849
Treasury stock........................................................ (5,876,509) (5,126,646)
Employee Stock Ownership Plan loan.................................... (604,844) (756,055)
Bank Incentive Plans and Trusts....................................... (34,040) (75,434)
------------ ------------
$ 36,577,769 $ 36,523,389
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
Dividends from subsidiary..................................... $ 3,824,600 $ 1,026,100 $ --
Interest income............................................... 258,639 234,776 297,998
----------- ----------- -----------
Net interest income........................................... 4,083,239 1,260,876 297,998
----------- ----------- -----------
Equity in undistributed earnings of
Kankakee Federal Savings Bank............................... (1,963,859) 965,449 2,440,616
Other noninterest income...................................... 4,839 2,848 --
----------- ----------- -----------
Total other income............................................ (1,959,020) 968,297 2,440,616
Other expenses................................................ 391,809 480,368 366,906
----------- ----------- -----------
Income before income tax benefit.............................. 1,732,410 1,748,805 2,371,708
Income tax benefit............................................ 44,029 99,085 23,400
----------- ----------- -----------
Net income.................................................... $ 1,776,439 $ 1,847,890 $ 2,395,108
----------- ----------- -----------
----------- ----------- -----------
STATEMENT OF CASH FLOWS
Operating activities:
Net income................................................ $ 1,776,439 $ 1,847,890 $ 2,395,108
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of Kankakee Federal
Savings Bank........................................ 1,963,859 (965,449) (2,440,616)
Other................................................. 37,740 (129,017) 127,207
----------- ----------- -----------
Net cash provided by operating activities..................... 3,778,038 753,424 81,699
----------- ----------- -----------
Investing activities:
Held-to-maturity investment and mortgage-backed
securities..............................................
Proceeds from maturities.................................. -- -- 1,000,000
Principal collected....................................... -- 209,686 380,105
Available-for-sale investment securities
Purchase.............................................. -- (63,630) (1,066,562)
Proceeds from sales................................... 390,336 811,176 --
Purchase of certificate of deposit........................ (50,000) -- --
Purchase of office equipment.............................. -- -- (956)
----------- ----------- -----------
Net cash provided by investing activities..................... 340,336 957,232 312,587
----------- ----------- -----------
</TABLE>
NOTES TO CONSOLIDATED STATEMENTS 46
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
Financing activities:
<S> <C> <C> <C>
Principal collected on ESOP loan.......................... 151,211 151,211 151,211
Purchase of treasury stock................................ (761,963) (1,480,441) (2,650,709)
Dividends paid to stockholders............................ (572,257) (600,233) --
Proceeds from exercise of stock options................... 6,912 64,188 --
----------- ----------- -----------
Net cash used in financing activities......................... (1,176,097) (1,865,275) (2,499,498)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents.............. 2,942,277 (154,619) (2,105,212)
Cash and cash equivalents:
Beginning of period....................................... 667,048 821,667 2,926,879
----------- ----------- -----------
End of period............................................. $ 3,609,325 $ 667,048 $ 821,667
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
19. Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------
THREE MONTHS ENDED
----------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Interest income................................ $6,454,327 $6,471,478 $ 6,481,551 $ 6,400,121
Interest expense............................... 3,733,916 3,804,719 3,831,807 3,828,130
------------ ------------ ----------- -----------
Net interest income............................ 2,720,411 2,666,759 2,649,744 2,571,991
Provision for losses on loans.................. (19,750) 23,300 28,650 9,447
------------ ------------ ----------- -----------
Net interest income after provision for losses
on loans..................................... 2,740,161 2,643,459 2,621,094 2,562,544
Other income................................... 404,310 1,127,942 340,406 264,195
Other expense.................................. 1,927,738 3,811,916 2,167,172 2,308,075
------------ ------------ ----------- -----------
Income before income taxes..................... 1,216,733 (40,515) 794,328 518,664
Income taxes................................... 414,010 (13,760) 190,430 122,091
------------ ------------ ----------- -----------
Net income..................................... $ 802,723 $ (26,755) $ 603,898 $ 396,573
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Earnings per share............................. $ 0.54 $ (0.02) $ 0.40 $ 0.26
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------
THREE MONTHS ENDED
----------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Interest income................................ $6,188,985 $5,838,488 $ 5,485,187 $ 5,317,442
Interest expense............................... 3,628,914 3,289,914 2,928,675 2,714,138
------------ ------------ ----------- -----------
Net interest income............................ 2,560,071 2,548,574 2,556,512 2,603,304
Provision for losses on loans.................. 16,190 22,835 73,820 60,570
------------ ------------ ----------- -----------
Net interest income after provision for losses
on loans..................................... 2,543,881 2,525,739 2,482,692 2,542,734
Other income................................... 374,363 264,024 266,717 275,509
Other expense.................................. 2,156,918 2,151,183 2,269,985 1,915,568
------------ ------------ ----------- -----------
Income before income taxes..................... 761,326 638,580 479,424 902,675
Income taxes................................... 247,065 217,100 162,950 307,000
------------ ------------ ----------- -----------
Net income..................................... $ 514,261 $ 421,480 $ 316,474 $ 595,675
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Earnings per share............................. $ 0.34 $ 0.27 $ 0.20 $ 0.38
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
NOTES TO CONSOLIDATED STATEMENTS 47
<PAGE>
Exhibit 22
SUBSIDIARIES OF THE REGISTRANT
Kankakee Federal Savings Bank, a federally chartered savings bank
KFS Service Corporation, an Illinois corporation
KFS Insurance Agency, Inc., an Illinois corporation
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-66164) pertaining to the 1992 Stock Option and Incentive Plan of
Kankakee Bancorp, Inc. of our report dated January 27, 1995, with respect to the
consolidated financial statements of Kankakee Bancorp, Inc. incorporated by
reference in the Annual Report (Form 10-K) for the year ended December 31, 1994.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-61004) pertaining to the Kankakee Federal Amended and Restated
401(K) Savings Plan of our report dated January 27, 1995, with respect to the
consolidated financial statements of Kankakee Bancorp, Inc. incorporated by
reference in the Annual Report (Form 10-K) for the year ended December 31, 1994.
/s/ Ernst & Young LLP
Chicago, Illinois
March 21, 1997
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
pertaining to the 1992 Stock Option and Incentive Plan of Kankakee Bancorp,
Inc., of our report dated January 30, 1997, with respect to the consolidated
financial statements of Kankakee Bancorp, Inc. incorporated by reference in
the Annual Report (Form 10-K) for the year ended December 31, 1996.
We also consent to the incorporation by reference in the Registration
Statement pertaining to the Kankakee Federal Amended and Restated 401 (K)
Savings Plan of our report dated January 30, 1997, with respect to the
consolidated financial statements of Kankakee Bancorp, Inc. incorporated by
reference in the Annual Report (Form 10-K) for the year ended December 31,
1996.
/s/ McGladrey & Pullen, LLP
Champaign, Illinois
March 21, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,292
<INT-BEARING-DEPOSITS> 4,933
<FED-FUNDS-SOLD> 7,985
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 85,813
<INVESTMENTS-CARRYING> 319
<INVESTMENTS-MARKET> 327
<LOANS> 235,683
<ALLOWANCE> 2,360
<TOTAL-ASSETS> 350,643
<DEPOSITS> 277,348
<SHORT-TERM> 26,820
<LIABILITIES-OTHER> 2,256
<LONG-TERM> 7,725
0
0
<COMMON> 16,199
<OTHER-SE> 20,295
<TOTAL-LIABILITIES-AND-EQUITY> 350,643
<INTEREST-LOAN> 19,139
<INTEREST-INVEST> 4,522
<INTEREST-OTHER> 2,147
<INTEREST-TOTAL> 25,808
<INTEREST-DEPOSIT> 13,500
<INTEREST-EXPENSE> 15,199
<INTEREST-INCOME-NET> 10,609
<LOAN-LOSSES> 42
<SECURITIES-GAINS> 20
<EXPENSE-OTHER> 10,215
<INCOME-PRETAX> 2,489
<INCOME-PRE-EXTRAORDINARY> 1,776
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,776
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.18
<YIELD-ACTUAL> 3.11
<LOANS-NON> 1,920
<LOANS-PAST> 1,954
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,388
<CHARGE-OFFS> 126
<RECOVERIES> 56
<ALLOWANCE-CLOSE> 2,360
<ALLOWANCE-DOMESTIC> 2,110
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 250
</TABLE>
<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
KANKAKEE BANCORP INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
-------------------------------------------------------
KANKAKEE BANCORP, INC.
-------------------------------------------------------
310 South Schuyler Avenue
P.O. Box 3 (815) 937-4440
Kankakee, IL 60901-0003 Fax (815) 937-3674
March 14, 1997
Dear Fellow Stockholder:
On behalf of the Board of Directors and management of Kankakee Bancorp,
Inc. (the "Company"), we cordially invite you to attend the fifth Annual Meeting
of Stockholders of the Company. The meeting will be held at 10:00 a.m., on
Friday, April 25, 1997, at Sully's-Sullivan's Warehouse, a restaurant located at
555 South West Avenue, Kankakee, Illinois 60901.
The three individuals whom your Board of Directors has nominated to serve
as directors are each incumbent directors. In addition to the election of the
three directors, stockholders are being asked to ratify the appointment of
McGladrey & Pullen, LLP, as auditors for the Company. Accordingly, your Board
of Directors unanimously recommends that you vote your shares for each of the
director nominees and in favor of the ratification of our accountants.
We encourage you to attend the meeting in person. WHETHER OR NOT YOU PLAN
TO ATTEND, HOWEVER, PLEASE READ THE ENCLOSED PROXY STATEMENT AND THEN COMPLETE,
SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE ACCOMPANYING POSTPAID
RETURN ENVELOPE AS PROMPTLY AS POSSIBLE. This will save the Company additional
expense in soliciting proxies and will ensure that your shares are represented
at the meeting.
A copy of the Company's Annual Report to Stockholders for the year 1996 is
also enclosed. Thank you for your attention to this important matter.
Very truly yours,
JAMES G. SCHNEIDER
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
-------------------------------------------------------
KANKAKEE BANCORP, INC.
-------------------------------------------------------
310 South Schuyler Avenue
P.O. Box 3 (815) 937-4440
Kankakee, IL 60901-0003 Fax (815) 937-3674
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 25, 1997
Notice is hereby given that the Annual Meeting of Stockholders (the
"Meeting") of Kankakee Bancorp, Inc. (the "Company") will be held at 10:00 a.m.,
Kankakee, Illinois time, on Friday, April 25, 1997 at Sully's-Sullivan's
Warehouse, a restaurant located at 555 South West Avenue, Kankakee, Illinois
60901. The Meeting is for the purpose of considering and acting upon:
1. The election of three directors of the Company;
2. The ratification of the appointment of McGladrey & Pullen, LLP, as
auditors of the Company for the fiscal year ending December 31, 1997;
and
3. To act upon such other business as may properly come before the
Meeting or any adjournments or postponements thereof.
The Board of Directors is not aware of any other business to come before
the Meeting. Any action may be taken on any one of the foregoing proposals at
the Meeting on the date specified above, or on any date or dates to which the
Meeting may be adjourned or postponed. Stockholders of record at the close of
business on March 3, 1997 are the stockholders entitled to vote at the Meeting
and any adjournments or postponements thereof.
You are requested to complete, sign and date the enclosed proxy, which is
solicited on behalf of the Board of Directors, and to mail it promptly in the
enclosed postpaid return envelope. The proxy will not be used if you attend and
vote at the Meeting in person.
By Order of the Board of Directors
Michael A. Stanfa
SECRETARY
Kankakee, Illinois
March 14, 1997
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE
OF FURTHER REQUESTS FOR PROXIES TO ENSURE A QUORUM AT THE MEETING. A PRE-
ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED
IF MAILED WITHIN THE UNITED STATES.
<PAGE>
PROXY STATEMENT
-------------------------------------------------------
KANKAKEE BANCORP, INC.
-------------------------------------------------------
310 SOUTH SCHUYLER AVENUE
KANKAKEE, IL 60901-0003
ANNUAL MEETING OF STOCKHOLDERS
APRIL 25, 1997
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of Kankakee Bancorp, Inc. (the
"Company") to be used at the Annual Meeting of Stockholders of the Company (the
"Meeting"), to be held at Sully's-Sullivan's Warehouse, a restaurant located at
555 South West Avenue, Kankakee, Illinois, on Friday, April 25, 1997 at 10:00
a.m., and at all adjournments or postponements of the Meeting. The accompanying
Notice of Meeting, proxy card and this Proxy Statement are first being mailed to
stockholders on or about March 14, 1997. Certain of the information provided in
this Proxy Statement relates to Kankakee Federal Savings Bank (the "Bank"), the
wholly owned subsidiary of the Company.
At the Meeting, the stockholders of the Company are being asked to consider
and vote upon the election of three directors of the Company and to ratify the
appointment of McGladrey & Pullen, LLP, as the Company's independent auditors
for the fiscal year ending December 31, 1997. On March 3, 1997, the Company had
1,420,168 shares of Common Stock outstanding, par value $.01 per share (the
"Common Stock"). Only holders of record of the Common Stock at the close of
business on March 3, 1997 will be entitled to vote at the Meeting and at all
adjournments or postponements of the Meeting.
VOTING RIGHTS AND PROXY INFORMATION
All shares of Common Stock represented at the Meeting by properly executed
proxies received prior to or at the Meeting, and not revoked, will be voted at
the Meeting in accordance with the instructions thereon. If no instructions are
indicated, properly executed proxies will be voted for the nominees for director
and for the ratification of the appointment of McGladrey & Pullen, LLP. The
Company does not know of any matters, other than as described in the Notice of
Meeting, that are to come before the Meeting. If any other matters are properly
presented at the Meeting for action, the persons named in the enclosed form of
proxy will have the discretion to vote on such matters in accordance with their
best judgment.
A proxy given pursuant to this solicitation may be revoked at any time
before it is voted. Proxies may be revoked by: (i) filing with the Secretary of
the Company at or before the Meeting a written notice of revocation bearing a
later date than the proxy; (ii) duly executing a subsequent proxy relating to
the same shares and delivering it to the Secretary of the Company at or before
the Meeting; or (iii) attending the Meeting and voting in person (although
attendance at the Meeting will not in and of itself constitute revocation of a
proxy). Any written notice revoking a proxy should be delivered to Michael A.
Stanfa, Secretary, Kankakee Bancorp, Inc., 310 S. Schuyler Avenue, P.O. Box 3,
Kankakee, Illinois 60901.
<PAGE>
VOTING REQUIRED FOR APPROVAL OF PROPOSALS
A majority of the shares of the Common Stock present in person or
represented by proxy and entitled to vote at the Meeting will constitute a
quorum for purposes of the Meeting. In all matters other than the election of
directors, the affirmative vote of a majority of the votes cast in person or by
proxy with a quorum present shall constitute stockholder approval. Directors are
elected by a plurality of the votes cast in person or by proxy with a quorum
present. Abstentions and broker "non-votes" will be considered in determining
the presence of a quorum but will not affect the vote required for approval of
the proposals or the election of directors. Stockholders of record as of the
close of business on March 3, 1997, will be entitled to one vote for each share
then held.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth information as of March 3, 1997, regarding
share ownership of: (i) those persons or entities known by management to
beneficially own more than five percent of the Company's Common Stock, (ii) each
executive officer named in the Summary Compensation Table, and (iii) all
directors and officers as a group. The nature of beneficial ownership for
shares listed in this table is sole voting and investment power, except as set
forth in the footnotes to the table. Inclusion of shares shall not constitute
an admission of beneficial ownership or voting or investment power over such
shares.
BENEFICIAL OWNER SHARES BENEFICIALLY
---------------- OWNED PERCENT OF CLASS
5% STOCKHOLDERS ----- ----------------
First Securities America, Inc.. . . 165,000 11.6%
135 North Meramec
Clayton, Missouri 63141(1)
EXECUTIVE OFFICERS
James G. Schneider. . . . . . . . . 69,187 4.7%
Chairman, President and
Chief Executive Officer(2)
David B. Cox. . . . . . . . . . . . 18,424 1.3%
Vice President(3)
Directors and executive officers. . 259,550 16.6%
of the Company as a group
(14 persons)(4)
- -------------------
(1) This information is as reported to the Securities and Exchange Commission
in a Form 3 dated June 18, 1996.
(2) The amount reported includes 9,807 shares held in the Bank's 401(k) Plan
(the "401(k) Plan") for the benefit of Mr. Schneider, over which shares Mr.
Schneider has shared voting and sole investment power, and 49,875 shares
subject to options granted under the Company's Stock Option Plan (the
"Stock Option Plan") and which are deemed to be exercisable, over which
shares Mr. Schneider has no voting and sole investment power. The amount
reported also includes 2,357 shares allocated to Mr. Schneider under the
Company's Employee Stock Ownership Plan ("ESOP"), with respect to which
shares Mr. Schneider has sole voting and no investment power.
(3) The amount reported includes 5,087 shares held in the 401(k) Plan for the
benefit of Mr. Cox, over which shares Mr. Cox has shared voting and sole
investment power, and 5,400 shares subject to options granted under the
Stock Option Plan and which are exercisable, over which shares Mr. Cox has
no voting and sole investment power. The amount reported also
2
<PAGE>
includes 2,430 shares allocated to Mr. Cox under the ESOP, with respect to
which shares Mr. Cox has sole voting and no investment power, and 1,012
shares held by Mr. Cox's spouse, with respect to which shares Mr. Cox
shares voting and investment power. The amount reported excludes 665
shares awarded under the Company's Bank Incentive Plan ("BIP") but not yet
vested, with respect to which shares Mr. Cox has no voting or investment
power.
(4) This amount includes shares held directly, including 142,075 shares subject
to options granted under the Stock Option Plan which are deemed to be
exercisable, as well as shares allocated to participant accounts under the
ESOP, shares held in retirement accounts and shares held by certain members
of the named individuals' families or held by trusts of which the named
individual is a trustee or substantial beneficiary, with respect to which
shares the respective directors and officers may be deemed to have sole or
shared voting and investment power. The amount reported excludes 4,028
shares awarded pursuant to the BIP over which such directors and officers
have no voting or dispositive power until such shares vest.
ELECTION OF DIRECTORS
GENERAL
The Company's Board of Directors currently consists of seven members. Each
of the directors of the Company has served in such capacity since its
incorporation in August 1992, except for Michael A. Stanfa, who was appointed to
the Board in 1995 and elected to a three-year term in 1996. The Board is
divided into three classes, each of which contains approximately one-third of
the Board. Approximately one-third of the directors is elected annually.
Directors of the Company are generally elected to serve for a three-year period
or until their respective successors are elected and qualified.
The table below sets forth certain information, as of March 3, 1997,
regarding the members of and nominees to the Company's Board of Directors,
including each director's term of office. The Board of Directors acting as the
nominating committee has recommended and approved the nominees identified in the
following table. It is intended that the proxies solicited on behalf of the
Board of Directors (other than proxies in which the vote is withheld as to a
nominee) will be voted at the Meeting FOR the election of the nominees
identified below. If a nominee is unable to serve, the shares represented by
all valid proxies will be voted for the election of such substitute nominee as
the Board of Directors may recommend. At this time, the Board of Directors
knows of no reason why any nominee may refuse or be unable to serve. Except as
disclosed herein, there are no arrangements or understandings between the
nominees and any other person pursuant to which a nominee was selected. THE
BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR EACH OF THE NOMINEES
FOR DIRECTOR.
NOMINEES
<TABLE>
<CAPTION>
SHARES OF
COMMON
POSITION(S) HELD TERM STOCK PERCENT
IN THE COMPANY DIRECTOR TO BENEFICIALLY OF
NAME AGE AND THE BANK SINCE(1) EXPIRE OWNED(2) CLASS
- ---- --- ---------------- -------- ------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Charles C. Huber(3). . . . . . 74 Director 1979 2000 22,170 1.6%
Thomas M. Schneider(4) . . . . 36 Director 1992 2000 10,190 0.7%
Wesley E. Walker(5). . . . . . 61 Director 1986 2000 13,210 0.9%
3
<PAGE>
<CAPTION>
DIRECTORS CONTINUING IN OFFICE
James G. Schneider(6). . . . . 71 Chairman of the 1955 1998 69,187 4.7%
Board, President
and Chief
Executive Officer
Larry D. Huffman(7). . . . . . 50 Director 1992 1998 12,910 0.9%
William Cheffer(8) . . . . . . 66 Vice Chairman of 1988 1999 40,000 2.8%
the Board
Michael A. Stanfa(9) . . . . . 47 Executive Vice 1995 1999 11,599 0.8%
President and Secretary
</TABLE>
- -------------------
(1) Includes service as a director of the Bank.
(2) Amounts reported include shares held directly, including shares subject to
options granted under the Stock Option Plan which are presently
exercisable, as well as shares which are held in retirement accounts and
shares held by certain members of the named individuals' families or held
by trusts of which the named individual is a trustee or substantial
beneficiary, with respect to which shares the respective director may be
deemed to have sole or shared voting and/or investment power. Inclusion of
shares shall not constitute an admission of beneficial ownership or voting
or investment power over included shares. The nature of beneficial
ownership for shares listed in this table is sole voting and investment
power, except as set forth in the following footnotes.
(3) The amount reported includes 300 shares held by Mr. Huber's spouse, with
respect to which shares Mr. Huber shares voting and investment power, and
8,925 shares subject to options granted under the Stock Option Plan which
are presently exercisable, with respect to which shares Mr. Huber has no
voting and sole investment power.
(4) The amount reported includes 8,925 shares subject to options granted under
the Stock Option Plan which are presently exercisable, with respect to
which shares Mr. Schneider has no voting and sole investment power, and
excludes 490 shares awarded under the BIP but not yet vested, with respect
to which shares Mr. Schneider has no voting or investment power.
(5) The amount reported includes 8,925 shares subject to options granted under
the Stock Option Plan which are presently exercisable, with respect to
which shares Mr. Walker has no voting and sole investment power, and
excludes 665 shares awarded under the BIP but not yet vested, with respect
to which shares Mr. Walker has no voting or investment power.
(6) The amount reported includes 9,807 shares held in the 401(k) Plan for the
benefit of Mr. Schneider, over which shares Mr. Schneider has shared voting
and sole investment power, and 49,875 shares subject to options granted
under the Company's Stock Option Plan and which are deemed to be
exercisable, over which shares Mr. Schneider has no voting and sole
investment power. The amount reported also includes 2,357 shares allocated
to Mr. Schneider under the ESOP, with respect to which shares Mr. Schneider
has sole voting and no investment power.
(7) The amount reported includes 8,925 shares subject to options granted under
the Stock Option Plan which are presently exercisable, with respect to
which shares Mr. Huffman has no voting and sole investment power, and
excludes 490 shares awarded under the BIP but not yet vested, with respect
to which shares Mr. Huffman has no voting or investment power.
(8) The amount reported includes 28,000 shares subject to options granted under
the Stock Option Plan which are presently exercisable, with respect to
which shares Mr. Cheffer has no voting and sole investment power, and 3,000
shares held by Mr. Cheffer's spouse, with respect to which shares Mr.
Cheffer has no voting or investment power.
(9) The amount reported includes 2,626 shares held in the 401(k) Plan for the
benefit of Mr. Stanfa, over which shares Mr. Stanfa has shared voting and
sole investment power, and 5,950 shares subject to options granted under
the Stock Option Plan which are presently exercisable, with respect to
which Mr. Stanfa has no voting and sole investment power. The amount
reported also includes 1,890 shares allocated to Mr. Stanfa under the ESOP,
with respect to which shares Mr. Stanfa has sole voting and no investment
power. The amount reported excludes 455 shares awarded under the BIP but
not yet vested, with respect to which shares Mr. Stanfa has no voting or
investment power.
4
<PAGE>
No member of the Board of Directors is related to any other member of the
Board of Directors, except that James G. Schneider is the father of Thomas M.
Schneider. No member of the Board of Directors is a member of a group which
includes any other member of the Board of Directors for purposes of the Savings
and Loan Holding Company Act and the Securities Act of 1933, as amended.
Section 16(a) of the Securities Exchange Act of 1934 requires that the
Company's directors, executive officers and persons who own more than 10% of the
Company Common Stock file reports of ownership and changes in ownership with the
Securities and Exchange Commission and with the exchange on which the shares of
Common Stock are traded. Such persons are also required to furnish the Company
with copies of all Section 16(a) forms they file. Based solely on the Company's
review of the copies of such forms furnished to the Company and, if appropriate,
representations made to the Company by any such reporting person concerning
whether a Form 5 was required to be filed for 1996, the Company is not aware
that any of its directors, executive officers or 10% stockholders failed to
comply with the filing requirements of Section 16(a) during the period
commencing January 1, 1996 through December 31, 1996.
The business experience of each director and nominee of the Company is set
forth below. All directors have held their present positions for at least five
years unless otherwise indicated.
JAMES G. SCHNEIDER. Mr. Schneider is the Chairman of the Board of the
Bank, a position he has held since 1988. Mr. Schneider was appointed Chairman
of the Board of the Company in August 1992. On August 1, 1993, he assumed the
additional positions of President and Chief Executive Officer of the Company.
Mr. Schneider had previously served as President of the Bank from 1961 to 1988
and as Chief Executive Officer from 1961 to 1990. Mr. Schneider joined the Bank
in 1954 and was elected a director in 1955.
WILLIAM CHEFFER. Mr. Cheffer, who had been President and Chief Executive
Officer of the Bank since June 1990 and President and Chief Executive Officer of
the Company since August 1992, retired from those positions effective July 31,
1993. Since that time he has served as Vice Chairman of both the Bank and the
Company. Mr. Cheffer served as President and Chief Operating Officer of the
Bank from 1988 to 1990, and as Senior Vice President and Secretary of the Bank
from 1974 to 1988. Mr. Cheffer joined the Bank in 1952.
CHARLES C. HUBER. Mr. Huber is a past Chairman of the Kankakee County
Economic Development Council. From 1987 to 1989, Mr. Huber served as President
of the Kankakee Area Chamber of Commerce. From 1973 to 1987, Mr. Huber was
employed as a plant manager by Armstrong World Industries, a manufacturer of
floor tile.
WESLEY E. WALKER. Until his retirement in 1995, Mr. Walker had been
Executive Director of the YMCA located in Kankakee since 1970. He was
responsible for oversight of the YMCA's facility and 90 employees. In 1991, Mr.
Walker received the National YMCA's "Award of Excellence" in recognition of his
leadership abilities. Currently he is serving on a part-time basis as the
interim Director of the YMCA, Danville, Illinois.
LARRY D. HUFFMAN, PH.D. Dr. Huffman has served as President of Kankakee
Community College located in Kankakee, Illinois since 1987. As President and
Chief Executive Officer, Dr. Huffman is responsible for management of the fiscal
and educational functions of the college.
THOMAS M. SCHNEIDER. Mr. Schneider is an attorney currently serving as
Assistant Counsel for State Farm Mutual Insurance Company, Corporate Law
Department, Bloomington, Illinois. In 1993 Mr. Schneider was the Executive
Director for Alpha Tau Omega, Inc., a national fraternal/leadership organization
located in Champaign, Illinois. Between 1989 and 1993, he served as the
Assistant Executive Director, and during his entire employment with the
fraternity he was its Staff Attorney. During 1989, Mr. Schneider served as
Chief District Aide to a U.S. Congressman from the Fourth Congressional District
of Florida with responsibility for supervision of the Congressman's district
offices and employees. From 1987 to 1989, Mr. Schneider was an associate with
the law firm of Marks, Gray, Conroy & Gibbs which is located in Jacksonville,
Florida.
5
<PAGE>
MICHAEL A. STANFA. Mr. Stanfa, an attorney, became a director of the
Company in 1995 and has been employed by the Company since 1986 as Staff
Attorney. Since 1992 he has been Secretary of the Company and since 1994 has
been Secretary and Executive Vice President of the Company. In addition to his
positions at the Company, Mr. Stanfa is also Senior Vice President and Secretary
of the Bank. Mr. Stanfa is also a part-time instructor at Kankakee Community
College, a position he has held since 1992.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Meetings of the Company's Board of Directors are generally held on a
monthly basis. The Board of Directors met 13 times during 1996. During 1996 no
incumbent director of the Company attended fewer than 75% of the aggregate of
the total number of Board meetings and the total number of meetings held by the
committees of the Board of Directors on which he served. Directors of the
Company who are salaried officers of the Bank are not paid for committee
meetings attended.
The Board of Directors of the Company has standing Executive, Audit, Long
Range Planning, and Stock Option and Compensation Committees.
The Executive Committee is comprised of Messrs. J. Schneider (Chairman),
Cheffer, Huber and Walker. The Executive Committee meets on an as needed basis
and exercises the power of the Board of Directors between Board meetings. This
committee did not meet in 1996.
The Audit Committee recommends independent auditors to the Board, reviews
the results of the auditors' services, reviews with management and the internal
auditor the systems of internal control and internal audit reports and assures
that the books and records of the Company are kept in accordance with applicable
accounting principles and standards. The members of the Audit Committee are
Messrs. Huffman (Chairman), Walker and Huber. The Audit Committee of the Bank
has an identical membership to that of the Company and addresses many of the
same issues. During 1996, the Company's and the Bank's Audit Committee each met
four times.
The Long Range Planning Committee monitors economic trends, long-range
economic forecasts and makes recommendations for the Company's and the Bank's
long-range business plans. The members of this Committee are Messrs. J.
Schneider (Chairman), Huber, Huffman, T. Schneider and Stanfa. During 1996,
this committee met twice.
The Stock Option and Compensation Committee is composed of Messrs. Huber
(Chairman), Walker and Huffman. This committee is responsible for administering
the Company's Stock Option Plan and reviews compensation and benefit matters.
During 1996 this committee met twice.
The entire Board of Directors acts as a nominating committee for selecting
nominees for election as directors. While the Board of Directors of the Company
will consider nominees recommended by stockholders, the Board has not actively
solicited such nominations. Pursuant to the Company's bylaws, nominations by
stockholders must be delivered in writing to the Secretary of the Company at
least 30 days before the date of the Meeting and must otherwise comply with the
provisions of the bylaws.
6
<PAGE>
EXECUTIVE COMPENSATION
The Company's executive officers do not receive any separate compensation
from the Company for services performed in their capacities as officers of the
Company. However, for services performed for the Company by certain officers, a
percentage of the salary paid by the Bank for those officers is reimbursed by
the Company.
The following table sets forth information regarding compensation paid or
accrued by the Company to its Chief Executive Officer and to each of the other
most highly compensated executive officers of the Company and Bank whose
aggregate salary and bonus exceeded $100,000 for 1996.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
Long Term
Compensation
ANNUAL COMPENSATION Awards
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
FISCAL
YEAR SECURITIES
ENDED OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND DECEMBER COMPENSATION ($) STOCK OPTIONS/ COMPENSATION
PRINCIPAL POSITION 31ST SALARY($)(1) BONUS ($) AWARDS ($) SARS(#) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
James G. Schneider
Chairman, President and 1996 $100,038 $ --- $ --- $ --- --- $ 26,998(2)
Chief Executive Officer 1995 121,250 --- --- --- --- 15,784(3)
of the Company 1994 98,180 --- --- --- --- 23,409(4)
David B. Cox
Vice President of the 1996 $115,701 $ --- $ --- $ --- --- $ 27,136(2)
Company and President 1995 115,877 --- --- --- --- 15,008(3)
and Chief Executive 1994 105,333 --- --- --- --- 18,414(4)
Officer of the Bank
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
(1) Includes amounts deferred under the 401(k) Plan.
(2) Represents contributions made under the Bank's Retirement Plan (the
"Retirement Plan") and the ESOP in 1996. These contributions were in the
amounts of the $11,319 and $15,679 for Mr. Schneider and $9,001 and $18,135
for Mr. Cox, respectively.
(3) Represents contributions made under the Retirement Plan and the ESOP in
1995. These contributions were in the amounts of $8,487 and $6,297 for Mr.
Schneider and $8,990 and $6,018 for Mr. Cox, respectively.
(4) Represents contributions made under the Retirement Plan and the ESOP in
1994. These contributions were in the amounts of $10,431 and $12,978 for
Mr. Schneider and $8,205 and $10,209 for Mr. Cox, respectively.
7
<PAGE>
The following table sets forth certain information concerning the number
and value of stock options at December 31, 1996 held by the named executive
officers. No stock options were exercised during 1996 by such persons.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES NUMBER OF SECURITIES
ACQUIRED UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
ON VALUE OPTIONS/SARS AT FY-END THE-MONEY OPTIONS/SARS
NAME EXERCISE REALIZED (#)(d) AT FY-END ($)(e)
(#)(a) (#)(b) ($)(c) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James G. Schneider --- $--- 49,850 --- $741,519 $ ---
David B. Cox --- $--- 5,400 --- $ 80,325 $ ---
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE INCORPORATION BY REFERENCE OF THIS PROXY STATEMENT INTO ANY DOCUMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE COMPANY SHALL NOT BE
DEEMED TO INCLUDE THE FOLLOWING REPORT UNLESS THE REPORT IS SPECIFICALLY STATED
TO BE INCORPORATED BY REFERENCE INTO SUCH DOCUMENT.
THE STOCK OPTION AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Stock Option and Compensation Committee of the Board of Directors is
composed of three outside directors who are not employees or former employees of
the Company, the Bank or its predecessors, and is responsible for
recommendations to the Board for compensation of executive officers of the Bank
and the Company. At this time no separate salary is paid to the Company's
executive officers. However, a portion of the officers' Bank salary is
allocated to Company expense for work performed by the officers for the Company.
In determining compensation, the following factors are generally taken into
consideration:
1. The Bank maintains a Base Salary Administration and Performance
Program. The purpose of the program is to provide equitable,
competitive and performance-based salaries for all Bank employees.
The executive officers are reviewed on an annual basis by the
president of the Bank, who makes compensation recommendations to the
committee based upon salary level, performance and adjustments for
items such as inflation. Information regarding industry comparisons
and adjustments is provided by an independent consulting firm.
2. The performance of the executive officers in achieving the short and
long term goals of the Company. The Long Range Planning Committee of
the Company is responsible for establishing these short and long term
goals.
3. Payment of compensation commensurate with the ability and expertise of
the executive officers.
4. Attempt to structure compensation packages so that they are
competitive with similar companies.
The Stock Option and Compensation Committee considers the foregoing factors, as
well as others, in determining compensation. There is no assigned weight given
to any of these factors. In addition to salary and other benefits granted,
officers may also particpate in an incentive program based upon achievement of
certain target performance levels.
8
<PAGE>
The committee also considers various benefits which have already been
awarded, including those pursuant to the Bank Incentive Plan, Employee Stock
Ownership Plan and Stock Option Plan, together with other perquisites in
determining compensation. The committee believes that the benefits provided
through the stock based plans more closely tie the compensation of the officers
to the interests of the stockholders and provide significant additional
performance incentives for the officers which directly benefit the stockholders
through an increase in the stock value.
The 1996 compensation of Mr. James Schneider, the Chief Executive Officer
of the Company, and Mr. David B. Cox, a Vice President of the Company and the
President and Chief Executive Officer of the Bank, was based upon the salary and
performance program, their performance, substantial experience, expertise and
length of service with the organization, the performance objectives and the
goals of the Bank and the compensation of officers with similar duties and
responsibilities at comparable organizations.
Members of the Stock Option and Compensation Committee are:
Charles C. Huber, Chairman
Wesley E. Walker
Larry D. Huffman
THE INCORPORATION BY REFERENCE OF THIS PROXY STATEMENT INTO ANY DOCUMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE COMPANY SHALL NOT BE
DEEMED TO INCLUDE THE FOLLOWING PERFORMANCE GRAPH AND RELATED INFORMATION UNLESS
SUCH GRAPH AND RELATED INFORMATION ARE SPECIFICALLY STATED TO BE INCORPORATED
BY REFERENCE INTO SUCH DOCUMENT.
PERFORMANCE GRAPH
The following graph shows a four year comparison of cumulative total
returns on an investment of $100 in the Company's Common Stock, the Nasdaq Stock
Market (U.S. Companies), the American Stock Exchange ("AMEX") Thrift Index and
an index of 25 Midwest thrift holding companies with total assets of between
$250 million and $500 million. The Common Stock of the Company was first listed
for quotation on the Nasdaq Stock Market on January 6, 1993. In early 1995,
management of the Company decided that it would be beneficial to its
stockholders to change its stock listing to the AMEX. On March 24, 1995, the
Common Stock began trading on the AMEX and was delisted from trading on the
Nasdaq Stock Market. The graph was prepared by SNL Securities, Charlottesville,
Virginia, at the request of the Company, and includes information pertaining to
both the Nasdaq Stock Market and the AMEX.
9
<PAGE>
COMPARISON OF CUMULATIVE TOTAL RETURNS*
[GRAPH]
*Assumes $100 invested on January 6, 1993, and that all dividends were
reinvested.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
01/06/93 12/31/93 12/31/94 12/31/95 12/31/96
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kankakee Bancorp-IL $100 $125.45 $116.36 $140.34 $187.70
25 Midwest Thrifts Index $100 $133.73 $140.12 $194.34 $231.05
AMEX Thrift Index $100 $130.21 $129.64 $179.93 $215.96
All Nasdaq US Stocks $100 $113.95 $111.38 $157.51 $193.75
- -----------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors and officers of the Company and the Bank, and their associates,
were customers of and had transactions with the Company and the Bank during
1996. Additional transactions may be expected to take place in the future. All
outstanding loans, commitments to loan, transactions in repurchase agreements
and certificates of deposit and depository relationships, in the opinion of
management, were made in the ordinary course of business, on substantially the
same terms, including interest rates and collateral as those prevailing at the
time for comparable transactions with other persons and did not involve more
than the normal risk of collectibility or present other unfavorable features,
except as follows. Pursuant to a program offered to senior officers and certain
employees of the Bank at the time, Ms. Carol S. Hoekstra, now a Vice President
of the Bank but a mid-level employee at the time originated, has a first
mortgage loan at a rate which is one half percent lower than that offered to the
general public at the date of origination. The outstanding balance on the loan
at December 31, 1996 was $93,371. As of 1990 this program was discontinued for
senior officers.
All loans by the Bank to its senior officers and directors are subject to
Office of Thrift Supervision regulations. A savings association is generally
prohibited from making loans to its senior officers and directors at favorable
rates or on terms not comparable to those prevailing to the general public. The
Bank presently does not offer any preferential loans to its senior officers or
directors.
On January 20, 1987, the Bank made a $1.0 million loan to the Grace Baptist
Church which is located in Kankakee. The Bank sold a $250,000 participation
interest in this loan to another financial institution and retained a $750,000
interest in such loan. Mr. Cox, the President and Chief Executive Officer of
the Bank, serves on the governing body of this church. This loan was made on
terms no more favorable than those available to the general public. At December
31, 1996, the loan was performing and the balance of the Bank's interest in such
loan was approximately $369,000.
RATIFICATION OF THE APPOINTMENT OF AUDITORS
Stockholders will be asked to approve the appointment of McGladrey &
Pullen, LLP, as the Company's independent public accountants to conduct the
audit for the year ending December 31, 1997. A proposal will be presented at
the annual meeting to ratify the appointment of McGladrey & Pullen. If the
appointment of McGladrey & Pullen is not ratified, the matter of the appointment
of independent public accountants will be considered by the Board of Directors.
A representative of McGladrey & Pullen, LLP is expected to attend the annual
meeting and will be available to respond to appropriate questions and to make a
statement if he or she so desires.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF MCGLADREY & PULLEN, LLP, AS THE COMPANY'S
AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1997.
STOCKHOLDER PROPOSALS
In order to be eligible for inclusion in the Company's proxy materials for
next year's Annual Meeting of Stockholders, any stockholder proposal to take
action at such meeting must be received at the Company's executive offices, 310
S. Schuyler Avenue, P.O. Box 3, Kankakee, Illinois 60901-0003, no later than
November 14, 1997.
11
<PAGE>
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
Meeting other than the matters described above in this Proxy Statement.
However, if any other matters should properly come before the Meeting, it is
intended that holders of the proxies will act in accordance with their best
judgment.
The cost of solicitation of proxies will be borne by the Company. The
Company will reimburse brokerage firms and other custodians, nominees and
fiduciaries for reasonable expenses incurred by them in sending proxy materials
to the beneficial owners of Company Common Stock. In addition to solicitation
by mail, directors and officers of the Company and regular employees of the Bank
may solicit proxies personally, by fax or by telegraph or telephone, without
additional compensation. The Company has retained Morrow & Company to assist,
as necessary, in the solicitation of proxies, for a fee estimated to be
approximately $3,500 plus reasonable out-of-pocket expenses.
By Order of the Board of Directors
Michael A. Stanfa
SECRETARY
Kankakee, Illinois
March 14, 1997
12
<PAGE>
PROXY KANKAKEE BANCORP, INC. PROXY
PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS -- APRIL 25, 1997
The undersigned hereby appoints William Cheffer, James G. Schneider and
Michael A. Stanfa, or any of them acting in the absence of the others, with
power of substitution, attorneys and proxies, for and in the name and place of
the undersigned, to vote the number of shares of Common Stock that the
undersigned would be entitled to vote if then personally present at the Annual
Meeting of the Stockholders of Kankakee Bancorp, Inc., to be held at Sully's-
Sullivan's Warehouse, a restaurant located at 555 South West Avenue, Kankakee,
Illinois 60901, on Friday, April 25, 1997, at 10:00 a.m., local time, or any
adjournments or postponements thereof, upon the matters set forth in the Notice
of Annual Meeting and Proxy Statement (receipt of which is hereby acknowledged)
as designated on the reverse side, and in their discretion, the proxies are
authorized to vote upon such other business as may come before the meeting:
/ / Check here for address change. / / Check here if you plan to attend
the meeting.
New Address:_________________________
_____________________________________
_____________________________________
(Continued and to be signed on reverse side.)
<PAGE>
KANKAKEE BANCORP, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY
1. Election of Directors
Charles C. Huber, Thomas M. Schneider and Wesley E. Walker
For Withheld For All
All All Except
/ / / / / /
_______________________
Nominee Exception
2. To ratify the selection of McGladrey & Pullen, LLP as auditors for the
Company for 1997.
For Against Abstain
/ / / / / /
The Board of Directors recommends a vote FOR all proposals.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH SPECIFICATION MADE. IF NO CHOICES
ARE INDICATED, THIS PROXY WILL BE VOTED FOR ALL PROPOSALS.
Dated: ___________________________________________________________________, 1997
Signature(s) ___________________________________________________________________
___________________________________________________________________
NOTE: Please sign exactly as your name(s) appears. For joint accounts, each
owner should sign. When signing as executor, administrator, attorney, trustee or
guardian, etc., please give your full title.
