<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1997
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 1-13676
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]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
As of March 2, 1998, the Registrant had issued and outstanding 1,377,988 of
the Registrant's Common Stock. The aggregate market value of the voting stock
held by non-affiliates of the Registrant as of March 2, 1998, was $40,833,243.*
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and IV of Form 10-K--Portions of the 1997 Annual Report to
Stockholders.
PART III of Form 10-K--Portions of the Proxy Statement for the 1998 Annual
Meeting of Stockholders.
- --------------------
* Based on the last reported price ($33.8125) of an actual transaction in the
Registrant's Common Stock on March 2, 1998, 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.
2
<PAGE>
KANKAKEE BANCORP, INC.
1997 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page Number
-----------
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 48
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . 48
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters. . . . . . . . . . . . . . . . . . . . 48
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . 48
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . 48
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . 48
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . . . 49
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . 49
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 49
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Item 13. Certain Relationships and Related Transactions . . . . . . . . . 50
Item 14. Exhibits, Financial Statement Schedules, and Reports on 8-K. . . 50
Form 10-K Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . 52
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 eleven branch offices located in the communities of
Ashkum, Bourbonnais, Braidwood, Champaign, Coal City, Diamond, Dwight, Herscher,
Hoopeston, Manteno, and Momence, Illinois. At December 31, 1997, the Company
had consolidated assets of $343.4 million, deposits of $280.0 million and
stockholders' equity of $37.8 million.
4
<PAGE>
The branch offices in Braidwood, Coal City and Diamond, Illinois were
acquired on January 29, 1998, when the Company completed the acquisition of Coal
City National Bank ("CCNB") from Coal City Corporation, a multi-bank holding
company headquartered in Chicago, Illinois. At the time of purchase, CCNB had
total assets of $56.0 million, deposits of $51.7 million and stockholders'
equity of $3.7 million. The transaction, which was accounted for as a purchase,
resulting in the recording of approximately $4.3 million in intangible assets.
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, debit card services
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.
In February 1998, the Bank received approval from the OTS to begin offering
trust services. While approval for full trust services was received, the Bank
will initially focus on personal trust services and limited employee benefit
plan services.
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 eleven branch offices located in the communities of
Ashkum, Bourbonnais, Braidwood, Champaign, Coal City, Diamond, Dwight, Herscher,
Hoopeston, Manteno and Momence. The Company's market areas include Kankakee,
Champaign, Iroquois and Livingston Counties and portions of Will, Grundy and
Vermilion Counties, Illinois.
5
<PAGE>
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, Provena St. Mary's Hospital, Shapiro Development Center,
the Baker and Taylor Company, CIGNA Companies, Armstrong World Industries,
CENTEON, Heinz Pet Products, Bunge Edibile Oil Corporation, Henkel Corporation,
KMART Corporation Distribution Center, Sears Logistics Services, Inc., and CBI
Services.
Champaign/Urbana 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/Urbana market area includes several major medical
centers and agricultural and industrial businesses. Major employers in the
Champaign/Urbana area include Carle Clinic, Provena 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., Hoopeston Food's, Inc., Food Machinery Corp. (FMC), Hoopeston Community
Memorial Hospital and Schumachers.
Coal City is located approximately 30 miles northwest of Kankakee in Grundy
County, Illinois. Braidwood is located approximately 25 miles northwest of
Kankakee in Will County, Illinois. Coal City, Braidwood and their surrounding
communities have a population of 9,000 residents. As bedroom communities of the
south Chicago suburbs, the economy in this region is a mix of agricultural,
industrial and service-based businesses. Large corporate employers such as
Commonwealth Edison, the Braidwood and Dresden nuclear power plants and Collins
Station, Amoco, Equistar Chemicals, Reichhold Chemicals, Mobil and Caterpillar
are within short driving distance.
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>
<CAPTION>
December 31,
---------------------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
REAL ESTATE LOANS (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to-four family . . . . . . . . . . $157,764 58.22% $149,544 54.74% $147,007 54.28%
Multi-family . . . . . . . . . . . . . 7,480 2.76 14,172 5.19 14,475 5.35
Commercial . . . . . . . . . . . . . . 20,881 7.71 28,721 10.51 28,273 10.44
Construction or development. . . . . . 9,004 3.32 5,525 2.02 8,248 3.05
Mortgage-backed securities and
participation certificates . . . . . 28,503 10.52 34,713 12.71 36,481 13.47
-------- ------ -------- ------ -------- ------
--------
Total real estate loans and
mortgage-backed securities . . . . . 223,632 82.53 232,675 85.17 234,484 86.59
-------- ------ -------- ------ -------- ------
--------
OTHER LOANS:
Consumer Loans:. . . . . . . . . . . .
Deposit account. . . . . . . . . . . 820 0.30 588 0.21 745 0.27
Student. . . . . . . . . . . . . . . 825 0.30 918 0.34 1,151 0.43
Automobile . . . . . . . . . . . . . 4,476 1.65 4,033 1.48 3,219 1.19
Home equity. . . . . . . . . . . . . 16,795 6.20 14,166 5.19 12,847 4.74
Home improvement . . . . . . . . . . 13 0.00 56 0.02 208 0.08
Mobile home. . . . . . . . . . . . . 3,293 1.22 3,161 1.16 3,122 1.15
Credit cards . . . . . . . . . . . . 1,534 0.57 1,705 0.62 1,870 0.69
Personal . . . . . . . . . . . . . . 7,407 2.73 5,942 2.17 3,919 1.45
-------- ------ -------- ------ -------- ------
--------
Total consumer loans . . . . . . . 35,163 12.97 30,569 11.19 27,081 10.00
Commercial business loans. . . . . . . 12,185 4.50 9,943 3.64 9,246 3.41
-------- ------ -------- ------ -------- ------
--------
Total other loans. . . . . . . . . . 47,348 17.47 40,512 14.83 36,327 13.41
-------- ------ -------- ------ -------- ------
--------
Total loans and mortgage-backed
securities receivable. . . . . . . . 270,980 100.00% 273,187 100.00% 270,811 100.00%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
LESS:
Loans in process . . . . . . . . . . . 1,121 1,726 957
Deferred fees and discounts. . . . . . 176 425 517
Allowance for losses on loans. . . . . 2,130 2,360 2,388
-------- -------- --------
Total loans and mortgage-backed
securities receivable, net . . . . . $267,553 $268,676 $266,949
-------- -------- --------
-------- -------- --------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
1994 1993
--------------------- ---------------------
Amount Percent Amount Percent
------ ------- ------ -------
REAL ESTATE LOANS
<S> <C> <C> <C> <C>
One-to-four family . . . . . . . . . . $136,735 61.13% $122,522 59.55%
Multi-family . . . . . . . . . . . . . 14,551 6.51 13,336 6.48
Commercial . . . . . . . . . . . . . . 25,300 11.31 25,404 12.35
Construction or development. . . . . . 11,730 5.24 11,177 5.43
Mortgage-backed securities
and participation certificates . . . 6,357 2.84 8,488 4.12
-------- ------ -------- ------
Total real estate loans and
mortgage-backed securities . . . . . 194,673 87.03 180,927 87.93
-------- ------ -------- ------
OTHER LOANS:
Consumer Loans:
Deposit account. . . . . . . . . . . 504 0.23 593 0.29
Student. . . . . . . . . . . . . . . 1,733 0.77 1,606 0.78
Automobile . . . . . . . . . . . . . 2,232 1.00 1,228 0.60
Home equity. . . . . . . . . . . . . 8,881 3.97 7,033 3.42
Home improvement . . . . . . . . . . 327 0.15 127 0.06
Mobile home. . . . . . . . . . . . . 3,207 1.43 3,099 1.50
Credit cards . . . . . . . . . . . . 1,804 0.81 1,988 0.97
Personal . . . . . . . . . . . . . . 2,246 1.00 1,506 0.73
-------- ------ -------- ------
Total consumer loans . . . . . . . 20,934 9.36 17,180 8.35
Commercial business loans. . . . . . . 8,074 3.61 7,649 3.72
-------- ------ -------- ------
Total other loans. . . . . . . . . . 29,008 12.97 24,829 12.07
Total loans and mortgage-backed
securities receivable. . . . . . . . 223,681 100.00% 205,756 100.00%
-------- ------ -------- ------
-------- ------ -------- ------
LESS:
Loans in process . . . . . . . . . . . 1,705 2,622
Deferred fees and discounts. . . . . . 555 627
Allowance for losses on loans. . . . . 2,151 2,166
-------- --------
Total loans and mortgage-backed
securities receivable, net . . . . . $200,341 $200,341
-------- --------
-------- --------
</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>
<CAPTION>
December 31,
---------------------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
FIXED-RATE LOANS AND
MORTGAGE-BACK SECURITIES (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
One-to-four family. . . . . . . . . $56,908 21.00% $50,758 18.58% $51,620 19.06%
Multi-family. . . . . . . . . . . . --- --- --- --- --- ---
Commercial. . . . . . . . . . . . . 1,392 0.51 3,520 1.29 6,128 2.26
Construction or
development. . . . . . . . . . . . 1,711 0.63 690 0.25 1,583 0.58
Mortgage-backed securities. . . . . . 12,502 4.61 17,489 6.40 18,341 6.77
-------- ------ -------- ------ -------- ------
--------
Total real estate loans and
mortgage-backed
securities . . . . . . . . . . . . 72,513 26.75 72,457 26.52 77,672 28.67
Consumer. . . . . . . . . . . . . . . . 19,918 7.35 17,065 6.25 14,876 5.49
Commercial business . . . . . . . . . . 3,005 1.11 2,867 1.05 2,665 0.98
-------- ------ -------- ------ -------- ------
--------
Total fixed-rate loans and
mortgage-backed securities . . . . 95,436 35.21 92,389 33.82 95,213 35.14
-------- ------ -------- ------ -------- ------
--------
ADJUSTABLE-RATE LOANS AND
MORTGAGE-BACKED SECURITIES
Real estate:
One-to-four family. . . . . . . . . 100,856 37.22 98,786 36.16 95,387 35.22
Multi-family. . . . . . . . . . . . 7,480 2.76 14,172 5.19 14,475 5.35
Commercial. . . . . . . . . . . . . 19,489 7.19 25,201 9.22 22,145 8.18
Construction or
development. . . . . . . . . . . . 7,293 2.69 4,835 1.77 6,665 2.47
Mortgage-backed securities. . . . . 16,001 5.91 17,224 6.31 18,140 6.70
-------- ------ -------- ------ -------- ------
--------
Total real estate loans
and mortgage-backed
securities . . . . . . . . . . . 151,119 55.77 160,218 58.65 156,812 57.92
Consumer. . . . . . . . . . . . . . . . 15,245 5.63 13,504 4.94 12,205 4.51
Commercial business . . . . . . . . . . 9,180 3.39 7,076 2.59 6,581 2.43
-------- ------ -------- ------ -------- ------
--------
Total adjustable-rate loans
and mortgage-backed securities . . 175,544 64.78 180,798 66.18 175,598 64.86
-------- ------ -------- ------ -------- ------
--------
Total loans and mortgage-
backed securities. . . . . . . . . . 270,980 100.00% 273,187 100.00% 270,811 100.00%
-------- ------ -------- ------ -------- ------
-------- ------ ------ ------
Less:
Loans in process. . . . . . . . . . . 1,121 1,726 957
Deferred fees and discounts . . . . . 176 425 517
Allowance for losses on loans . . . . 2,130 2,360 2,388
-------- -------- --------
Total loans and mortgage-
backed securities
receivable, net. . . . . . . . . . $267,553 $268,676 $266,949
-------- -------- --------
-------- -------- --------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
1994 1993
--------------------- ---------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Fixed-Rate Loans and
Mortgage-Back Securities
Real estate:
One-to-four family. . . . . . . . . $55,299 24.72% $61,499 29.89%
Multi-family. . . . . . . . . . . . 37 0.02 97 0.05
Commercial. . . . . . . . . . . . . 2,984 1.33 4,209 2.05
Construction or
development. . . . . . . . . . . . 8,844 3.96 7,817 3.80
Mortgage-backed securities. . . . . . 6,357 2.84 8,488 4.12
-------- -------- -------- --------
Total real estate loans and
mortgage-backed
securities . . . . . . . . . . . . 73,521 32.87 82,110 39.91
Consumer. . . . . . . . . . . . . . . . 12,789 5.72 9,425 4.58
Commercial business . . . . . . . . . . 2,359 1.05 1,870 0.91
-------- -------- -------- --------
Total fixed-rate loans and
mortgage-backed securities . . . . 88,669 39.64 93,405 45.40
Adjustable-Rate Loans and
Mortgage-Backed Securities
Real estate:
One-to-four family. . . . . . . . . 81,436 36.41 61,023 29.66
Multi-family. . . . . . . . . . . . 14,514 6.49 13,239 6.43
Commercial. . . . . . . . . . . . . 22,316 9.97 21,195 10.30
Construction or
development. . . . . . . . . . . . 2,886 1.29 3,360 1.63
Mortgage-backed securities. . . . . --- --- --- ---
-------- -------- -------- --------
Total real estate loans
and mortgage-backed
securities . . . . . . . . . . . 121,152 54.16 98,817 48.02
Consumer. . . . . . . . . . . . . . . . 8,145 3.64 7,755 3.77
Commercial business . . . . . . . . . . 5,715 2.56 5,779 2.81
-------- -------- -------- --------
Total adjustable-rate loans
and mortgage-backed
securities . . . . . . . . . . . . 135,012 60.36 112,351 54.60
-------- -------- -------- --------
Total loans and mortgage-
backed securities. . . . . . . . . . 223,681 100.00% 205,756 100.00%
-------- -------- -------- --------
-------- --------
Less:
Loans in process. . . . . . . . . . . 1,705 2,622
Deferred fees and discounts . . . . . 555 627
Allowance for losses on loans . . . . 2,251 2,166
-------- --------
Total loans and mortgage-
backed securities
receivable, net. . . . . . . . . . $219,170 $200,341
-------- --------
-------- --------
</TABLE>
10
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Company's loan and mortgage-backed securities portfolio at December 31, 1997.
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>
<CAPTION>
Real Estate
-------------------------------------------------------------------------
One-to-four family and
Mortgage-Backed Multi-family and Construction or
Securities Commercial Development
-------------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Due During Twelve (Dollars in thousands)
Month Periods
Ending
December 31,
1998(1). . . . . . $651 6.19% $4,349 8.80% $5,973 8.84%
1999 and 2000. . . 1,721 7.46 2,012 8.43 2,015 9.50
2001 and 2002. . . 2,743 8.37 2,570 7.30 59 9.50
2003 and 2007. . . 18,865 7.90 4,709 8.57 284 8.43
2008 and 2022. . . 47,451 7.26 13,022 8.89 183 10.02
2023 and following 114,836 7.04 1,699 8.96 490 7.19
-------- -------- --------
Total. . . . . . $186,267 $28,361 $9,004
-------- -------- --------
-------- -------- --------
<CAPTION>
Commercial
Consumer Business Total
-------------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Due During Twelve
Month Periods
Ending
December 31,
- ------------
1998(1) . . . . . . $5,624 10.33% $7,230 9.39% $23,827 9.28%
1999 and 2000. . . 6,200 9.58 2,279 9.40 14,227 9.12
2001 and 2002. . . 11,915 9.46 1,925 9.44 19,212 9.01
2003 and 2007. . . 9,402 9.50 564 9.57 33,824 8.47
2008 and 2022. . . 2,022 10.16 187 9.50 62,865 7.71
2023 and following --- --- --- --- 117,025 7.07
-------- -------- --------
Total. . . . . . $35,163 $12,185 $270,980
-------- -------- --------
-------- -------- --------
</TABLE>
_______________________
(1) Includes demand loans and loans having no stated maturity.
11
<PAGE>
As of December 31, 1997, the total amount of loans and mortgage-backed
securities due after December 31, 1998, which had predetermined interest rates
was $90.2 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 $157.0 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, 1997,
the Bank's regulatory loan-to-one borrower limit was $4.9 million. On the same
date, the Bank's largest total of loans to one borrower was $3.2 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, 1997, $157.8
million, or 58.2% 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 $46,100
and the largest outstanding residential loan had a book value of $604,000.
Substantially all of the residential loans originated by the Company are secured
by properties located in the Company's primary market areas.
In order to reduce its exposure to changes in interest rates, the Company
originates 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
its fixed-rate residential loans which have terms of 15 years or less, and have
a contractual interest rate of 7.00% or greater.
12
<PAGE>
Most of 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 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, and those which have terms of 15 years or less at a
contractual interest rate of less than 7.00%, that it originates, the Company
typically retains the servicing of loans that it sells. At December 31, 1997,
the Company had $44.6 million of 15 year fixed-rate residential loans and $12.3
million of 30 year fixed-rate residential loans in its portfolio.
The Company offers ARM loans at rates, terms and fees determined in
accordance with market and competitive factors. 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,
1997, the Company had $58.9 million, $13.3 million, and $28.7 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 $1.3 million of one-to-four
family loans delinquent 60 days or more at December 31, 1997, $1.1 million (or
0.7% of one-to-four family loans) consisted of ARMs and $165,000 (or 0.1% 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.
The Company, on occasion, originates loans in excess of $214,600 (the FHLMC
maximum during 1997). As of December 31, 1997, the Company had 38 residential
mortgage loans having an aggregate balance of $10.3 million with original
balances in excess of $214,600 ("Jumbo Loans"). The Company's delinquency
experience on its Jumbo Loans has been excellent.
The Company is an approved 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 1997, five such
13
<PAGE>
loans totaling $250,000 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, 1997, the Company had $28.4 million in multi-family and commercial
real estate loans, representing 10.5% of the Company's total loan and
mortgage-backed securities portfolio. Included in such loans were $3.5 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 other commercial buildings.
The Company has originated both adjustable and fixed-rate multi-family and
commercial real estate 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, 1997 and the amounts of such loans which were non-performing or "of
concern" at December 31, 1997. The amounts shown do not reflect allowances for
losses.
<TABLE>
<CAPTION>
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. . . 22 $8,339 $7,480 $1,701
Nursing homes . . . . . . . . 1 990 99 ---
Churches. . . . . . . . . . . 18 2,518 1,626 ---
Motels. . . . . . . . . . . . 2 1,325 829 ---
Agricultural related. . . . . 14 1,006 934 181
Industrial and warehouse. . . 39 16,245 12,417 74
Retail. . . . . . . . . . . . 18 2,624 1,922 181
Office. . . . . . . . . . . . 7 1,837 1,141 ---
Other . . . . . . . . . . . . 22 2,617 1,913 175
------- ------- ------- -------
Total . . . . . . . . . . . 143 $37,501 $28,361 $2,312
------- ------- ------- -------
------- ------- ------- -------
</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
14
<PAGE>
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 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, 1997. At
December 31, 1997, the Bank had $1.1 million of purchased loans and
participation interests in one-to-four family loans.
<TABLE>
<CAPTION>
Amount
Original Outstanding Unfunded Non-
Month of Original Loan Participation Balance at Commitment at Performing
Type of Security/Location Origination Amount Amount Dec. 31, 1997 Dec. 31, 1997 or of Concern
- ------------------------- ----------- ------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
APARTMENT BUILDINGS:
Pleasant Hills, California 09/10/86 $11,900 $726 $658 $--- $---
Santa Ana, California 08/26/86 13,750 839 753 --- ---
Everett, Washington 09/12/86 5,500 1,375 1,144 --- 1,144
MOTELS:
Gainesville, Florida 12/19/88 1,350 675 270 --- ---
Spring Lake, North Carolina 12/19/88 1,300 650 558 --- ---
NURSING HOME:
Arlington Heights, Illinois 03/01/73 1,980 990 99 --- ---
------- ------- -------
$3,482 $ --- $1,144
------- ------- -------
------- ------- -------
</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, most of the loan participations currently on
the Company's books are 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 20% of total
assets. However, any amount exceeding 10% of total assets must represent small
business loans as defined by the OTS.
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 originates 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
15
<PAGE>
receivable, inventory, equipment and agriculture. The Company does not have any
energy or foreign loans.
At December 31, 1997, the Company had $12.2 million in commercial business
loans outstanding (representing 4.5% of the Company's total loan and
mortgage-backed securities portfolio) with additional commercial business loan
commitments totaling $7.5 million, most of which were undrawn lines of credit.
In addition, at December 31, 1997, the Company had thirteen letters of credit
outstanding, in an aggregate amount of $1.2 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, 1997, the Company had
fourteen commercial business loans with balances of $200,000 or more, in an
aggregate amount of $6.2 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, 1997.
<TABLE>
<CAPTION>
Total Outstanding Amount
Number Loan Principal Non-Performing
of Loans Commitment Balance or of Concern
-------- ---------- ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
SECURED LOANS:
Accounts receivable. . . . . 6 $499 $336 $30
Inventory. . . . . . . . . . 17 907 583 82
Equipment. . . . . . . . . . 47 2,560 1,856 28
Other business assets. . . . 5 1,450 535 ---
Stocks and bonds . . . . . . 10 961 859 ---
Heavy duty vehicles. . . . . 55 2,465 1,716 43
Other motor vehicles . . . . 11 1,135 469 ---
Crops. . . . . . . . . . . . 4 1,071 555 ---
Life insurance . . . . . . . 3 86 51 ---
Stand-by letters of credit . 8 1,055 --- ---
Beneficial interest in
real estate trust. . . . . 30 5,968 4,037 111
UNSECURED LOANS . . . . . . . 52 1,731 1,188 72
UNSECURED STAND-BY
LETTERS OF CREDIT . . . . . 5 185 --- ---
------- ------- ------- -------
Total commercial
business loans . . . . . . 253 $20,073 $12,185 $ 366
------- ------- ------- -------
------- ------- ------- -------
</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
16
<PAGE>
asset/liability management tools. The Company currently originates
substantially all of its consumer loans in its market areas. At December 31,
1997, the Company's consumer loans totaled $35.2 million or 13.0% 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 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, the Company offers 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, 1997, mobile home loans totaled
$3.3 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, 1997, the Company held $825,000 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, 1997, $399,000, or
approximately 1.1% 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.
17
<PAGE>
At December 31, 1997, the Company had $2.1 million of residential construction
loans and $98,000 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 one year and may provide for the payment of interest and loan fees from loan
proceeds. At December 31, 1997, the Bank had approximately $2.1 million in
loans to builders of residences, and $1.4 million in loans on commercial
construction. In addition, on the same date, the Company had $3.3 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, 1997, only
three of the Company's construction loans had a principal balance in excess of
$500,000. The total principal balances of these loans was $2.5 million.
The table below sets forth by type of security property the number and
amount of the Company's construction loans at December 31, 1997.
<TABLE>
<CAPTION>
Total Outstanding Amount
Number Loan Principal Non-Performing
of Loans Commitment Balance or of Concern
-------- ---------- ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-four family
residential . . . . . . . . 17 $7,269 $4,633 $ 546
Land acquisition and
development . . . . . . . . 28 4,121 3,074 438
Church. . . . . . . . . . . . 3 727 725 ---
Retail and Industrial . . . . 3 583 572 ---
------- ------- ------- -------
Total. . . . . . . . . . 51 $12,700 $9,004 $ 984
------- ------- ------- -------
------- ------- ------- -------
</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.
18
<PAGE>
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, and its
15-year, fixed-rate loan production carrying an interest rate of less than
7.00%, in the secondary market. The Company's recent 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, 1997, excluding
mortgage-backed securities, approximately $4.6 million of the Company's loan
portfolio consisting of purchased loans and purchased participations was
serviced by others and the Company serviced $37.0 million of loans for others.
During the year ended December 31, 1997, the Company received fee income of
$83,000 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>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
-------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
ORIGINATIONS BY TYPE:
Adjustable-Rate:
Real estate - one-to-four family . . . $20,180 $21,433 $26,494
- multi-family . . . . . . --- --- 2,100
- commercial . . . . . . . 8,911 7,745 4,417
Non-real estate - consumer . . . . . . 16,521 13,536 10,137
- commercial business. 8,085 6,767 6,644
------- ------- -------
Total adjustable-rate. . . . . . 53,697 49,481 49,792
Fixed-Rate:
Real estate - one-to-four family . . . 20,354 13,728 6,657
- multi-family . . . . . . --- --- ---
- commercial . . . . . . . 3,757 1,829 1,126
Non-real estate - consumer . . . . . . . 13,470 14,525 13,395
- commercial business. . 2,870 2,336 2,717
------- ------- -------
Total fixed-rate. . . . . . . . . . 40,451 32,418 23,895
Total loans originated. . . . . . . 94,148 81,899 73,687
PURCHASES:
Real estate - one-to-four family. . . . --- --- 3
- commercial. . . . . . . 260 1,120 375
Non-real estate - consumer. . . . . . . --- --- ---
- commercial business 1,920 --- ---
------- ------- -------
Total loans. . . . . . . . . . 2,180 1,120 378
Mortgage-backed securities . . . . . . . --- 12,999 34,707
------- ------- -------
Total purchased. . . . . . . . 2,180 14,119 35,085
------- ------- -------
SALES AND REPAYMENTS:
Sales:
Real estate - one-to-four family. . . . 6,565 4,834 2,246
- commercial. . . . . . . --- --- ---
Non-real estate - consumer. . . . . . . 493 792 1,129
- commercial business . --- --- ---
Loans sold with branch. . . . . . . . . --- 3,845 ---
------- ------- -------
Total loans . . . . . . . . . . 7,058 9,471 3,375
Mortgage-backed securities. . . . . . . --- 4,913 ---
------- ------- -------
Total sales . . . . . . . . . . 7,058 14,384 3,375
Principal repayments. . . . . . . . . . 89,386 79,269 57,159
------- ------- -------
Total reductions. . . . . . . . 96,444 93,653 60,534
Increase (decrease) in other items, net (2,091) 11 (1,108)
------- ------- -------
Net increase (decrease) . . . . $(2,207) $ 2,376 $47,130
------- ------- -------
------- ------- -------
</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
15 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, 1997.
<TABLE>
<CAPTION>
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 3 $641 0.41% 13 $659 0.42% 16 $1,300 0.83%
Multi-family. . . --- --- --- 1 556 7.43 1 556 7.43
Commercial. . . . 2 322 1.54 5 280 1.34 7 602 2.88
Construction and
development . . --- --- --- 6 903 10.03 6 903 10.03
Consumer. . . . . . 24 198 0.56 51 399 1.14 75 597 1.70
Commercial business 1 111 0.91 2 19 0.16 3 130 1.07
------- ------- ------- ------- ------- -------
Total. . . . 30 $1,272 0.52 78 $2,816 1.16 108 $4,088 1.68
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
The following table sets forth the Company's loan delinquencies by type, by
amount and by percentage of type at December 31, 1996.
<TABLE>
<CAPTION>
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>
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, 1997, on a net basis, the Company had classified $1.7
million of its assets as Special Mention, $4.7 million as Substandard and
$35,000 as Loss. No assets were classified as Doubtful at December 31, 1997.
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, 1997, there were 59 loans with outstanding principal balances totaling $1.3
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. 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>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One-to-four family(1) . . . . . . . . . . . . . $659 $524 $516 $485 $298
Multi-family. . . . . . . . . . . . . . . . . . --- --- --- 557 ---
Commercial. . . . . . . . . . . . . . . . . . . 207 1,396 111 111 116
Construction and development. . . . . . . . . . 669 --- --- --- ---
Consumer. . . . . . . . . . . . . . . . . . . . --- --- --- --- ---
Commercial business . . . . . . . . . . . . . . --- --- --- --- ---
------ ------ ------ ------ ------
Total. . . . . . . . . . . . . . . . . . . . 1,535 1,920 627 1,153 414
------ ------ ------ ------ ------
Accruing loans delinquent more
than 90 days:
One-to-four family(1) . . . . . . . . . . . . . --- --- --- --- ---
Multi-family. . . . . . . . . . . . . . . . . . 556 557 557 296 ---
Commercial. . . . . . . . . . . . . . . . . . . 73 1,005 --- --- ---
Construction and development. . . . . . . . . . 234 170 169 --- ---
Consumer. . . . . . . . . . . . . . . . . . . . 399 177 108 133 113
Commercial business . . . . . . . . . . . . . . 19 45 --- --- ---
------ ------ ------ ------ ------
Total. . . . . . . . . . . . . . . . . . . . 1,281 1,954 834 429 113
------ ------ ------ ------ ------
Foreclosed assets:
One-to-four family. . . . . . . . . . . . . . . --- 96 84 27 132
Multi-family. . . . . . . . . . . . . . . . . . --- --- 675 579 448
Commercial. . . . . . . . . . . . . . . . . . . 1,317 69 69 73 251
Construction and development. . . . . . . . . . --- --- --- --- ---
Consumer. . . . . . . . . . . . . . . . . . . . 3 --- --- 16 15
Commercial business . . . . . . . . . . . . . . --- --- --- --- ---
------ ------ ------ ------ ------
Total foreclosed assets. . . . . . . . . . . 1,320 193 828 695 846
------ ------ ------ ------ ------
Troubled debt restructuring
Real estate:
One-to-four family. . . . . . . . . . . . . . . 209 --- --- --- ---
------ ------ ------ ------ ------
Total troubled debt restructuring. . . . . . 209 --- --- --- ---
------ ------ ------ ------ ------
Total non-performing assets . . . . . . . . . . . $4,345 $4,067 $2,289 $2,277 $1,373
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total as a percentage of total
assets. . . . . . . . . . . . . . . . . . . . . 1.27% 1.16% 0.64% 0.75% 0.49%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
- --------------------------------
(1) Includes loans held for sale.
For the year ended December 31, 1997 and the year ended December 31, 1996,
gross interest income which would have been recorded had the non-accruing loans
been current in accordance with their original terms amounted to $33,215 and
$37,648, respectively. The amount that was included in interest income on such
loans was $48,240 and $29,147 for the year ended December 31, 1997 and the year
ended December 31, 1996, respectively.
24
<PAGE>
The Company's non-performing assets at December 31, 1997 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.
25
<PAGE>
LOAN LOSS RESERVE ANALYSIS. The following table sets forth an analysis of
the Company's allowance for loan losses.
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period. . . . . . . . . . $2,360 $2,388 $2,251 $2,165 $2,391
Charge-offs:
One-to-four family. . . . . . . . . . . . . . . --- --- --- 31 20
Multi-family. . . . . . . . . . . . . . . . . . --- --- --- 108 176
Commercial real estate. . . . . . . . . . . . . --- --- --- 17 ---
Construction. . . . . . . . . . . . . . . . . . 160 --- --- --- ---
Consumer. . . . . . . . . . . . . . . . . . . . 136 125 59 74 106
Commercial business . . . . . . . . . . . . . . --- 1 --- 15 364
------ ------ ------ ------ ------
296 126 59 245 666
------ ------ ------ ------ ------
Recoveries:
One-to-four family. . . . . . . . . . . . . . . --- --- --- --- ---
Multi-family. . . . . . . . . . . . . . . . . . --- --- --- --- ---
Commercial real estate. . . . . . . . . . . . . --- --- --- --- ---
Construction. . . . . . . . . . . . . . . . . . --- --- --- --- ---
Consumer. . . . . . . . . . . . . . . . . . . . 33 56 20 33 20
Commercial business . . . . . . . . . . . . . . --- --- 3 2 ---
------ ------ ------ ------ ------
33 56 23 35 20
------ ------ ------ ------ ------
Net charge-offs . . . . . . . . . . . . . . . . . (263) (70) (36) (210) (646)
Additions charged to operations . . . . . . . . . 33 42 173 296 420
------ ------ ------ ------ ------
Balance at end of period. . . . . . . . . . . . . $2,130 $2,360 $2,388 $2,251 $ 2,165
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of net charge-offs during the
period to average loans
outstanding during the period . . . . . . . . . 0.11% 0.03% 0.02% 0.11% 0.36%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of net charge-offs during the
period to average non-
performing assets . . . . . . . . . . . . . . . 6.25% 2.20% 1.58% 11.51% 40.90%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
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.
26
<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>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to-four
family. . . . . . . . . $ 521 65.06% $ 408 62.71% $ 403 62.74%
Multi-family. . . . . . . 172 3.09 451 5.94 437 6.18
Commercial real
estate. . . . . . . . . 444 8.61 496 12.04 561 12.07
Construction. . . . . . . 150 3.71 294 2.32 272 3.52
Consumer. . . . . . . . . 215 14.50 185 12.82 170 11.56
Commercial
business. . . . . . . . 352 5.03 276 4.17 259 3.95
Unallocated. . . . . . . 276 --- 250 --- 286 ---
------ ------ ------ ------ ------ ------
Total . . . . . . . $2,130 100.00% $2,360 100.00% $2,388 100.00%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
<CAPTION>
1994 1993
----------------------- -----------------------
Percent of Percent of
Loans in Loans in
Each Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to-four
family. . . . . . . . . $506 62.92% $299 62.11%
Multi-family. . . . . . . 460 6.70 399 6.76
Commercial real
estate. . . . . . . . . 470 14.34 519 12.88
Construction. . . . . . . 424 2.70 264 5.66
Consumer. . . . . . . . . 150 9.63 135 8.71
Commercial
business. . . . . . . . 241 3.71 234 3.88
Unallocated . . . . . . . --- --- 315 ---
------ ------ ------ ------
Total . . . . . . . $2,251 100.00% $2,165 100.00%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
27
<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, 1997, 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, 1997, the Bank's liquidity ratio (liquid assets as
a percentage of net withdrawable savings and current borrowings) was 13.7% as
compared to the OTS requirement of 4%.
28
<PAGE>
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Investment Securities (1):
U.S. government securities . . . . . . . . $ 7,587 19.33% $ 9,628 17.87% $12,961 25.98%
Federal agency obligations . . . . . . . . 28,876 73.56 41,386 76.82 34,426 69.01
Municipal bonds. . . . . . . . . . . . . . 70 0.18 72 0.13 75 0.15
Non-marketable equity securities . . . . . 501 1.28 501 0.93 551 1.11
Mutual fund shares . . . . . . . . . . . . 360 0.92 331 0.62 324 0.65
------- ------ ------- ------ ------- ------
Subtotal . . . . . . . . . . . . . . . . 37,394 95.27 51,918 96.37 48,337 96.90
FHLB Stock . . . . . . . . . . . . . . . . . 1,856 4.73 1,956 3.63 1,546 3.10
------- ------ ------- ------ ------- ------
Total investment securities and FHLB
stock . . . . . . . . . . . . . . . . . $39,250 100.00% $53,874 100.00% $49,883 100.00%
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
Average remaining life or term to repricing of
investment securities excluding FHLB stock
and non-marketable securities . . . . . . 52 months 64 months 45 months
Other Interest-Earning Assets:
Federal funds sold. . . . . . . . . . . . $8,575 38.91% $ 7,985 55.59% $13,090 59.19%
Money market funds. . . . . . . . . . . . 5,067 22.99 4,883 33.99 3,755 16.98
FHLB overnight investments. . . . . . . . 6,793 30.83 1,446 10.07 4,982 22.53
Certificates of deposit . . . . . . . . . 1,602 7.27 50 0.35 288 1.30
------- ------ ------- ------ ------- ------
Total. . . . . . . . . . . . . . . . . $22,037 100.00% $14,364 100.00% $22,115 100.00%
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
</TABLE>
- ---------------------
(1) Includes securities available-for-sale.
29
<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, 1997, are indicated in the
following table.
<TABLE>
<CAPTION>
At December 31, 1997
----------------------------------------------------------------------------------------
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...... $2,023 $ 5,564 $ --- $ --- $ 7,587
Federal agency
obligations..... 5,966 10,852 7,102 4,956 28,876
Mutual fund
shares...... 360 --- --- --- 360
------ ------- ------- ------- -------
Total ...... $8,349 $16,416 $ 7,102 $ 4,956 $36,823
------ ------- ------- ------- -------
------ ------- ------- ------- -------
Weighted average
yield.......... 5.39% 5.82% 6.80% 7.12% 6.09%
------ ------- ------- ------- -------
------ ------- ------- ------- -------
SECURITIES HELD-TO-
MATURITY:
Municipal Bonds $ --- $ --- $ --- $ 70 $ 70
------ ------- ------- ------- -------
------ ------- ------- ------- -------
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
30
<PAGE>
the interest rate, among other factors. The Company has not actively sought
deposits outside of its primary market area.
The following table sets forth the savings flows at the Company during the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Opening balance. . . . . . . $277,348 $286,080 $265,570
Deposits . . . . . . . . . . 533,933 562,775 517,300
Withdrawals. . . . . . . . . 541,843 573,994 522,551
Purchased deposits . . . . . --- --- 16,071
Sold deposits. . . . . . . . --- (8,608) ---
Increase (decrease)
before interest
credited . . . . . . . . . (7,910) (19,827) 10,820
Interest credited. . . . . . 10,584 11,095 9,690
-------- -------- --------
Ending balance . . . . . . . $280,022 $277,348 $286,080
-------- -------- --------
-------- -------- --------
Net increase (decrease). . . $ 2,674 $ (8,732) $ 20,510
-------- -------- --------
-------- -------- --------
Percent increase (decrease). 0.96% (3.05)% 7.72%
-------- -------- --------
-------- -------- --------
</TABLE>
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.
31
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1997 1996 1995
------------------- -------------------- --------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
Transaction and Savings (Dollars in thousands)
Deposits(1):
- ------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Demand
0%. . . . . . . . . . . $ 9,720 3.47% $ 7,644 2.76% $ 7,850 2.75%
Savings Accounts
2.66%. . . . . . . . . 50,727 18.12 51,966 18.74 53,760 18.79
NOW Accounts
3.47%. . . . . . . . . 32,759 11.70 34,756 12.53 34,842 12.18
Money Market Accounts
2.83%. . . . . . . . . 6,699 2.39 6,612 2.38 8,937 3.12
-------- ------ -------- ------ -------- ------
Total Non-Certificates
99,905 35.68 100,978 36.41 105,389 36.84
-------- ------ -------- ------ -------- ------
Certificates:
- -------------
0.00 - 3.99%. . . . . . --- --- 3 0.00 1,325 0.46
4.00 - 4.99%. . . . . . 2,561 0.91 6,560 2.37 15,528 5.43
5.00 - 5.49%. . . . . . 41,636 14.87 65,714 23.69 40,919 14.31
5.50 - 5.99%. . . . . . 103,602 37.00 64,930 23.41 45,292 15.83
6.00 - 7.99%. . . . . . 32,025 11.44 38,666 13.94 76,729 26.82
8.00 - 9.99%. . . . . . 97 0.03 273 0.10 572 0.20
10.00 and over . . . . . --- --- --- --- --- ---
-------- ------ -------- ------ -------- ------
Total Certificates . . . 179,921 64.25 176,146 63.51 180,365 63.05
-------- ------ -------- ------ -------- ------
Accrued Interest . . . . 196 0.07 224 0.08 326 0.11
-------- ------ -------- ------ -------- ------
Total Deposits . . . . . $280,022 100.00% $277,348 100.00% $286,080 100.00%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
</TABLE>
(1) RATES ON TRANSACTION AND SAVINGS DEPOSITS ARE THOSE IN EFFECT ON
DECEMBER 31, 1997.
32
<PAGE>
THE FOLLOWING TABLE SHOWS RATE AND MATURITY INFORMATION FOR THE COMPANY'S
CERTIFICATES OF DEPOSIT AS OF DECEMBER 31, 1997.
<TABLE>
<CAPTION>
0.00- 5.00- 5.50- 6.00- Percent
4.99% 5.49% 5.99% 7.99% 8% and Over Total of Total
----- ----- ----- ----- ----------- ----- --------
(Dollars in thousands)
Certificate Accounts
Maturing
In Quarter Ending:
- ------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1998 $2,410 $22,008 $ 7,828 $ 1,457 $ 49 $ 33,752 18.76%
June 30, 1998 54 11,976 15,697 564 14 28,305 15.73
September 30, 1998 45 4,612 19,131 712 12 24,512 13.62
December 31, 1998 38 901 27,950 614 --- 29,503 16.40
March 31, 1999 10 1,076 17,116 1,192 16 19,410 10.79
June 30, 1999 --- 779 6,110 2,675 --- 9,564 5.31
September 30, 1999 --- 112 2,459 6,392 --- 8,963 4.98
December 31, 1999 1 78 1,325 2,033 --- 3,437 1.91
March 31, 2000 --- --- 1,317 3,572 --- 4,889 2.72
June 30, 2000 --- 94 813 3,064 --- 3,971 2.21
September 30, 2000 --- --- 448 1,189 --- 1,637 0.91
December 31, 2000 --- --- 529 3,215 --- 3,744 2.08
Thereafter 3 --- 2,879 5,346 6 8,234 4.58
------ ------- -------- ------- ---- -------- ------
Total $2,561 $41,636 $103,602 $32,025 $97 $179,921 100.00%
------ ------- -------- ------- ---- -------- ------
------ ------- -------- ------- ---- -------- ------
Percent of total 1.42% 23.14% 57.58% 17.80% 0.06%
------ ------- -------- ------- ----
------ ------- -------- ------- ----
</TABLE>
33
<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,
1997.
<TABLE>
<CAPTION>
Maturity
-----------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------ ------ --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000 (1) . . . . . . . . $29,859 $26,178 $49,156 $58,377 $163,570
Certificates of deposit of
$100,000 or more (1) . . . . . . . 3,268 1,862 4,159 4,490 13,779
Public funds (2). . . . . . . . . . 625 265 700 982 2,572
------- ------- ------- ------- --------
Total certificates of
deposit . . . . . . . . . . . . . $33,752 $28,305 $54,015 $63,849 $179,921
------- ------- ------- ------- --------
------- ------- ------- ------- --------
</TABLE>
- -----------------------
(1) Excluding public funds.
(2) Deposits from governmental and other public entities.
BORROWINGS. The Company utilizes borrowings primarily for two purposes.
The first is to purchase mortgage-backed securities in order to generate
additional net interest income and as a method of increasing the leverage on its
capital. The second is as part of the management of short term cash
requirements. The decision to borrow money to purchase mortgage-backed
securities is based on several factors, including the current asset/liability
mix, the regulatory capital position of the Bank and the adequacy of available
interest rate spreads available in such transactions, subject to the limits on
such transactions established by the Board of Directors. Borrowings for such
purposes are derived from securities sold under agreements to repurchase and
advances from the FHLB of Chicago. Borrowings related to short term cash
management are in the form of advances from the FHLB of Chicago. 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, 1997,
borrowed money totaled $23.5 million, of which $3.2 million was related to
securities sold under agreements to repurchase, and $20.3 million was in
advances from the FHLB of Chicago. Interest expense on borrowed money totaled
$1.5 million during 1997 and $1.7 million during 1996 as the result of these
borrowings.
34
<PAGE>
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
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, 1997, the Company's equity
investment in KFS was approximately $963,000. During the year ended December
31, 1997, KFS recorded net consolidated income of $110,000. During the years
ended December 31, 1997 and December 31, 1996, gross revenues related to
securities and annuities brokerage, appraisal activities and insurance agency
activities totaled approximately $173,000, $215,000 and $82,000, and $205,000,
$201,000 and $47,000, 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 16.4% and less than 1.0%, 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.
35
<PAGE>
EMPLOYEES
As of December 31, 1997, the Company had 103 full-time employees and 28
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 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 FDIC, the
Board of Governors of the FRB, 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
PENDING LEGISLATION. Legislation is pending in the Congress that would
eliminate the federal thrift charter by requiring each federal thrift to convert
to a national bank or to a state bank or state thrift. Under the pending
legislation, any federal thrift that failed to convert to a national or state
bank within two years following enactment of the legislation would, by operation
of law,
36
<PAGE>
become a national bank as of the second anniversary of enactment of the
legislation. A converting federal thrift and its holding company would be
allowed to retain nonconforming investments and activities following conversion
(subject to certain conditions, including, in the case of a holding company,
certain restrictions on the ability of the holding company to acquire other
depository institutions or to be acquired). The pending legislation would
combine the OTS with the Office of the Comptroller of the Currency by the second
anniversary of the enactment of the legislation, and would merge the Bank
Insurance Fund (the "BIF") and the Savings Association Insurance Fund (the
"SAIF") as of the earlier of January 1, 2000 or the second anniversary of
enactment of the legislation. The pending legislation would also allow bank
holding companies to engage in a wider range of nonbanking activities, including
greater authority to engage in securities and insurance activities. At this
time, the Company is unable to predict whether the pending legislation will be
enacted and, therefore, is unable to predict the impact the pending legislation
will have on the operations of the Company and the Bank.
THE COMPANY
GENERAL. The Company, as the sole shareholder 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 FDIC 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 and savings and loan holding companies 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.
37
<PAGE>
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 (SEE "--The
Bank--Qualified Thrift Lender Test"). 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 law also prohibits acquisition of "control" of a savings
association, such as the Bank, or savings and loan holding company, such as the
Company, without prior notice to certain federal bank 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 Delaware General Corporation Law (the "DGCL") allows the
Company to pay dividends only out of its surplus (as defined and computed in
accordance with the provisions of the DGCL), 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. Additionally, 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.
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 bank, the deposits of
which are insured by the SAIF of the FDIC. As a SAIF-insured, federally
chartered savings bank, 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
38
<PAGE>
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 results of 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 year ended December 31, 1997, SAIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 1998, SAIF assessment rates will continue to range from 0% of
deposits to 0.27% of deposits.
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. 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 Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. Pursuant to federal legislation enacted
September 30, 1996, commencing January 1, 1997, both SAIF members and BIF
members became subject to assessments to cover the interest payments on
outstanding FICO obligations. Such FICO assessments are 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. 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. During the year ended December 31, 1997, the FICO assessment rate for
SAIF members was approximately 0.063% of deposits while the FICO assessment rate
for BIF members was approximately 0.013% of deposits. During the year ended
December 31, 1997, the Bank paid FICO assessments totaling $170,000.
OTS ASSESSMENTS. All 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
39
<PAGE>
institution's total assets, including consolidated subsidiaries, as reported to
the OTS. During the year ended December 31, 1997, the Bank paid supervisory
fees to the OTS totaling $86,000.
CAPITAL REQUIREMENTS. Pursuant to the HOLA and OTS regulations, savings
associations, such as the Bank, are subject to the following minimum capital
requirements: 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 leases 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,
among other things, interest rate risk or the risks posed by concentrations of
credit or nontraditional activities.
During the year ended December 31, 1997, 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, 1997, 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 15.57%.
The OTS has proposed to amend its regulations to establish a minimum core
capital requirement of 3% of total assets for any savings association assigned a
composite rating of 1 under the Uniform Financial Institutions Rating System
("UFIRS") as of the association's most recent OTS examination, with a minimum
core capital requirement of 4% of total assets for all other savings
associations. It is not anticipated that the adoption of this proposal would
affect the Bank's ability to comply with the OTS capital requirements.
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
40
<PAGE>
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") can, after prior notice to, but without
the approval of, the OTS, make capital distributions during a calendar year in
an aggregate amount 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 OTS approval. As of December 31, 1997,
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, 1997. 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, 1997, approximately $10.5 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 by the
Bank if the OTS determines such payment would constitute an unsafe or unsound
practice.
The OTS has proposed to amend its regulations governing capital
distributions (including cash dividends) by savings associations. The proposed
amendment would require prior OTS approval for any capital distribution by a
savings association that is not eligible for expedited processing under the
OTS's application processing regulations. In order to qualify for expedited
processing, a savings association must: (i) have a composite UFIRS rating of 1
or 2; (ii) have a Community Reinvestment Act rating of satisfactory or better;
(iii) have a compliance rating of 1 or 2; (iv) meet all applicable regulatory
capital requirements; and (v) not have been notified by the OTS that it is a
problem association or an association in troubled condition. Savings
associations that qualify for expedited processing would be required to obtain
OTS approval prior to making a capital distribution only if the amount of the
proposed capital distribution, when aggregated with all other capital
distributions during the same calendar year, would exceed an amount equal to the
association's year-to-date net income plus its retained net income for the
preceding two years. The proposed amendment would continue to require that the
OTS be given
41
<PAGE>
prior notice of certain types of capital distributions, including any capital
distribution by a savings association that, like the Bank, is a subsidiary of a
savings and loan holding company.
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,
federal law 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 federal banking agencies have adopted
guidelines which establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. 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 institution's primary federal
regulator may require the institution to submit a plan for achieving and
maintaining compliance. The preamble to the guidelines states that the agencies
expect 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 appropriate
federal regulator, 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 qualified thrift lender 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, and fails to meet
the qualified thrift lender test, the association may branch only to the extent
permitted for national banks located in the savings association's home state.
As of December 31, 1997, 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. The HOLA requires every savings association
to satisfy a "qualified thrift lender" ("QTL") test. Under the HOLA, a savings
association will be deemed
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<PAGE>
to meet the QTL test if it either (i) maintains at least 65% of its "portfolio
assets" in "qualified thrift investments" on a monthly basis in nine out of
every 12 months or (ii) qualifies as a "domestic building and loan association,"
as defined in the Internal Revenue Code. For purposes of the QTL test,
"qualified thrift investments" consist of mortgage loans, mortgage-backed
securities, education loans, small business loans, credit card loans and certain
other housing- and consumer-related loans and investments. "Portfolio assets"
consist of a savings association's total assets less goodwill and other
intangible assets, the association's business properties and a limited amount of
the liquid assets maintained by the association pursuant to the liquidity
requirements of the HOLA and OTS regulations (SEE "--The Bank--Liquidity
Requirements"). A savings association that fails to meet the QTL test must
either convert to a bank charter or operate under certain restrictions on its
activities and, within one year following the loss of QTL status, the holding
company for the savings association will be required to register as, and will be
deemed to be, a bank holding company. A savings association that fails the QTL
test may requalify as a QTL but it may do so only once. As of December 31,
1997, the Bank satisfied the QTL test, with a ratio of qualified thrift
investments to portfolio assets of 89.6%, 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 quarter, 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 4% of either (i) its liquidity base (I.E., its net withdrawable
accounts plus borrowings repayable in 12 months or less) as of the end of the
preceding calendar quarter or (ii) the average daily balance of its liquidity
base during the preceding calendar quarter. This liquidity requirement may be
changed from time to time by the OTS to an amount within a range of 4% to 10% of
the liquidity base, depending upon economic conditions and the deposit flows of
savings associations. The OTS may also require a savings association to
maintain a higher level of liquidity than the minimum 4% requirement if the OTS
deems necessary to ensure the safe and sound operation of the association.
Penalties may be imposed for failure to meet liquidity ratio requirements. At
December 31, 1997, the Bank was in compliance with OTS liquidity requirements,
with a liquidity ratio of 13.7%.
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 $47.8 million or less, the reserve
requirement is 3% of total transaction accounts; and for transaction accounts
aggregating in excess of $47.8 million, the reserve requirement is $1.434
million plus 10% of the aggregate amount of total transaction accounts in excess
of $47.8 million. The first $4.7 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.
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<PAGE>
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.
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 ($108,000) has been recaptured into
taxable income during both 1996 and 1997. 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)
44
<PAGE>
over $2 million. During the years ended December 31, 1995, 1996 and 1997, 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.
EXECUTIVE OFFICERS OF THE COMPANY
The business experience during the past five years with respect to
executive officers of the Company and the Bank who do not serve on the Company's
Board of Directors is listed below. 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 48, 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 Chief Financial Officer, was named Treasurer in 1985, and promoted to Senior
Vice President in 1996. Mr. Walters is a certified public accountant.
David B. Cox, age 59, 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 61, 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
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<PAGE>
Bancshares located in Kankakee, Illinois. Mr. Chantome was an employee and
officer of City National since 1954.
Keith M. Roseland, age 48, is a Senior Vice President and Regional Branch
Manager of the Bank, a position he was appointed to in 1998. Mr. Roseland is
responsible for the operation of the Coal City, Diamond and Braidwood, Illinois
branches of the Bank. He had previously served as President, since 1986, of
CCNB, which was acquired by the Bank in January, 1998. Mr. Roseland had been
with CCNB since 1967.
Lois Swartz, age 55, 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 and the Company's Training
Department. She joined the Bank in 1960.
Monte S. Crowl, age 33, 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 59, 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.
Carol Hoekstra, age 42, 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
mortgage and consumer lending operations. 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.
Robert E. Edwards, age 44, is a Vice President and Senior Trust Officer of
the Bank, a position he was appointed to in 1998. Mr. Edwards is responsible
for the operations of the Bank's newly established trust department. He has in
excess of fifteen years experience in similar positions with financial
institutions in the Pontiac, Dixon and Kankakee, Illinois areas. Mr. Edwards is
an attorney.
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<PAGE>
ITEM 2. PROPERTIES
OFFICES
The following table sets forth information concerning the main office and
each branch office of the Bank at December 31, 1997. At December 31, 1997, the
Company's premises had an aggregate net book value of approximately $3.3
million.
<TABLE>
<CAPTION>
Year Owned Lease Net
Location Opened (1) or Leased Expiration Date Book Value
-------- ---------- --------- --------------- ----------
(In thousands)
<S> <C> <C> <C> <C>
MAIN OFFICE
310 S. Schuyler Avenue
Kankakee, Illinois 1958 Owned N/A $700
FULL SERVICE BRANCHES
Main Street and U.S. 45
Ashkum, Illinois 1977 Owned N/A 11
680 S. Main Street
Bourbonnais, Illinois 1974 Owned N/A 298
180 N. Front Street
Braidwood, Illinois (2) 1998 Leased July 24, 2000 (4) ---
1001 S. Neil Street
Champaign, Illinois 1992 Owned N/A 722
660 S. Broadway
Coal City, Illinois (2) 1998 Owned N/A ---
1275 E. Diamond Street
Diamond, Illinois (2) 1998 Owned N/A ---
302 W. Mazon Avenue
Dwight, Illinois 1987 Owned N/A 435
161 S. Main Street
Herscher, Illinois 1987 Owned N/A 245
323 E. Main Street
Hoopeston, Illinois 1994 Owned N/A 182
310 Section Line Road
Manteno, Illinois 1975 Owned N/A 242
200 W. Washington Street
Momence, Illinois 1995 Owned N/A 173
1708 S. Philo Road
Urbana, Illinois (3) 1998 Owned N/A 315
------
$3,323
------
------
</TABLE>
(1) Year opened refers to the year in which the current facility opened or
acquired.
(2) Offices acquired by the purchase of Coal City National Bank on January 29,
1998.
(3) Under construction at December 31, 1997.
(4) The Bank has an option to renew this lease for three consecutive five year
terms.
47
<PAGE>
The Company believes that its current facilities are adequate to meet
present and immediately foreseeable needs.
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, 1997 was $249,000.
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,
1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 52 of the 1997 Annual Report to Stockholders is herein incorporated by
reference.
ITEM 6. SELECTED FINANCIAL DATA
Pages 7 and 8 of the 1997 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 25 of the 1997 Annual Report to Stockholders are herein
incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 27 through 52 of the 1997 Annual Report to Stockholders are herein
incorporated by reference.
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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 1998 (the "1998 Proxy Statement"), a copy of which
was filed on March 13, 1998.
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, 1997 through December 31, 1997.
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
1998 Proxy Statement entitled "Executive Compensation." The report of the
Company's Compensation Committee is not incorporated into this Form 10-K.
49
<PAGE>
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 1998 Proxy Statement entitled
"Voting Securities and Principal Holder Thereof."
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 1998 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 1997 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. . . 9-25
Report of Independent Auditors . . . . . . . . . . . 27
Consolidated Statements of Financial Condition . . . 28-29
Consolidated Statements of Income. . . . . . . . . . 30
Consolidated Statements of Stockholders' Equity. . . 31
Consolidated Statements of Cash Flows. . . . . . . . 32-33
Notes to Consolidated Financial Statements . . . . . 34-50
Quarterly Financial Information. . . . . . . . . . . 50
With the exception of those sections specifically incorporated by
reference, the Registrant's 1997 Annual Report to Stockholders is not deemed
filed as part of this Annual Report on Form 10-K.
(a)(2) FINANCIAL STATEMENT SCHEDULES:
50
<PAGE>
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.
(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
security holders, including debentures (1) N/A
10 Executive Compensation Plans and Arrangements
a. Stock Option Plan (2) N/A
b. Management Recognition Plan and Trusts (2) N/A
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
Incentive Plan and Trust (3) N/A
13 1997 Annual Report to Stockholders N/A
22 Subsidiaries of Registrant N/A
23 Consent of Independent Auditor N/A
27.1 Financial Data Schedule N/A
27.2 Financial Data Schedule N/A
27.3 Financial Data Schedule N/A
99.1 1998 Proxy Statement 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.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K have been filed during the three-month period ended
December 31, 1997.
51
<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 20, 1998 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.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ James G. Schneider 3-20-98 Chief Executive Officer and Chairman
- ------------------------- ------- of the Board (Principal Executive and
James G. Schneider Date Operating Officer)
/s/ Ronald J. Walters 3-20-98 Vice President and Treasurer (Principal
- ------------------------- ------- Financial and Accounting Officer)
Ronald J. Walters Date
/s/ William Cheffer 3-20-98 Director
- ------------------------- -------
William Cheffer Date
/s/ Charles C. Huber 3-20-98 Director
- ------------------------- -------
Charles C. Huber Date
/s/ Wesley E. Walker 3-20-98 Director
- ------------------------- -------
Wesley E. Walker Date
/s/ Larry D. Huffman 3-20-98 Director
- ------------------------- -------
Larry D. Huffman Date
/s/ Thomas M. Schneider 3-20-98 Director
- ------------------------- -------
Thomas M. Schneider Date
/s/ Michael A. Stanfa 3-20-98 Director
- ------------------------- -------
Michael A. Stanfa Date
</TABLE>
The foregoing constitute all of the Board of Directors of the Company.
52
<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
security holders, including debentures (1) N/A
10 Executive Compensation Plans and Arrangements
a. Stock Option Plan (2) N/A
b. Management Recognition Plan and Trusts (2) N/A
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
Incentive Plan and Trust (3) N/A
13 1997 Annual Report to Stockholders N/A
22 Subsidiaries of Registrant N/A
23 Consent of Independent Auditor N/A
27.1 Financial Data Schedule N/A
27.2 Financial Data Schedule N/A
27.3 Financial Data Schedule N/A
99.1 1998 Proxy Statement 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.
53
<PAGE>
Exhibit 13
SELECTED CONSOLIDATED FINANCIAL INFORMATION
-------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets.............................. $ 343,409 $ 350,643 $ 355,103 $ 304,425 $ 281,895
Loans, net, including loans held for
sale.................................... 239,050 233,963 230,467 212,813 191,854
Mortgage-backed securities held-to-
maturity................................ 204 246 363 6,357 8,488
Mortgage-backed securities available-
for-sale................................ 28,300 34,467 36,119 -- --
Investment securities held-to-maturity
(1)..................................... 2,173 623 913 43,031 61,027
Investment securities
available-for-sale...................... 36,823 51,345 47,711 17,318 --
Deposits.................................. 280,022 277,348 286,080 265,570 242,703
Total borrowings.......................... 23,495 34,545 29,645 -- --
Stockholders' equity...................... 37,821 36,494 36,451 35,526 36,075
Shares outstanding........................ 1,371,638 1,414,918 1,453,418 1,522,918 1,676,268
Stockholders' equity per share............ $ 27.57 $ 25.79 $ 25.08 $ 23.32 $ 21.52
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income..................... $ 24,895 $ 25,808 $ 22,830 $ 20,297 $ 20,374
Total interest expense.................... 14,273 15,199 12,562 9,222 9,248
---------------------------------------------------------------
Net interest income..................... 10,622 10,609 10,268 11,075 11,126
Provision for losses on loans............. 33 42 173 296 420
---------------------------------------------------------------
Net interest income after provision for
losses on loans......................... 10,589 10,567 10,095 10,779 10,706
---------------------------------------------------------------
Fee income................................ 1,023 791 620 659 747
Gain on sales of loans, mortgage-backed
securities and investment securities.... 112 109 69 43 2,013
Other non-interest income................. 554 1,237 492 484 546
---------------------------------------------------------------
Total non-interest income............. 1,689 2,137 1,181 1,186 3,306
---------------------------------------------------------------
Other expenses............................ 8,185 10,215 8,494 8,330 8,415
Income tax expense........................ 1,081 713 934 1,240 1,904
---------------------------------------------------------------
Total non-interest expense............ 9,266 10,928 9,428 9,570 10,319
---------------------------------------------------------------
Net income before cumulative effect of
accounting change....................... 3,012 1,776 1,848 2,395 3,693
Cumulative effect of changing method of
accounting for post-retirement health
benefits, net of income taxes........... -- -- -- -- (156)
---------------------------------------------------------------
Net income after cumulative effect
adjustment.............................. $ 3,012 $ 1,776 $ 1,848 $ 2,395 $ 3,537
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
- ----------
(1) Includes certificates of deposit and non-marketable equity securities.
7
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION (continued)
-------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (rations of net income to average total
assets)................................................... 0.87% 0.50%(4) 0.58% 0.82% 1.31%(3)
Interest rate spread information:
Average during the year................................... 2.86% 2.78% 2.98% 3.60% 3.73%
End of year............................................... 2.73% 2.88% 2.64% 3.14% 3.68%
Net interest margin (1)................................... 3.22% 3.11% 3.37% 3.96% 4.11%
Ratio of operating expense to average total assets........ 2.36% 2.87%(5) 2.67% 2.86% 2.98%
Return on equity (ratio of net income to average
equity)................................................. 8.04% 4.95%(6) 5.10% 6.66% 10.59%(3)
Ratio of average interest-earning assets to average
interest-earning liabilities............................ 108.25% 107.40% 109.33% 110.83% 110.97%
Quality Ratios:
Non-performing assets to total assets at end of period.... 1.27% 1.16% 0.64% 0.75% 0.49%
Allowance for loan losses to non-performing loans......... 75.64% 60.92% 163.45% 114.85% 410.82%
Classified assets to total assets at end of period (2).... 1.89% 1.88% 2.15% 3.14% 3.37%
Allowance for loan losses to classified assets............ 32.86% 35.80% 31.30% 23.52% 22.77%
Capital ratios:
Equity to total assets at end of period................... 11.01% 10.41% 10.26% 11.67% 12.80%
Average equity to average assets.......................... 10.71% 10.06% 11.38% 12.34% 12.37%
Dividend payout ratio..................................... 24.00% 33.90% 33.90% -- --
Other Data:
Number of full service branch offices..................... 9 9 10 10 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) Without the effect of the special assessment on SAIF-insured deposits and
the gain on the sale of a branch, the Return on Average Assets would have
been 0.67%.
(5) Without the effect of the special assessment on SAIF-insured deposits, the
ratio of Operating Expenses to Average Assets would have been 2.40%.
(6) Without the effect of the special 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, and, to a lesser extent, multi-family and 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 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
CUSTOMERS RECEIVE IMMEDIATE ANSWERS ABOUT THE STATUS OF THEIR ACCOUNTS USING
ACCOUNTLINE, THE NEW BANK-BY-PHONE ACCOUNT INFORMATION AND TRANSACTION
INQUIRY SERVICE.
[PHOTO]
MANAGEMENT'S DISCUSSION AND ANALYSIS
9
<PAGE>
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
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, 1997, total
interest-earning assets maturing or repricing within one year exceeded total
interest-bearing liabilities maturing or repricing in the same period by $45.8
million, representing a positive cumulative one-year gap equal to 13.3% 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, to the extent
requested in its lending areas, has focused its one-to-four family residential
lending program on ARMs. Approximately 49.8% of one-to-four family residential
loans originated in 1997 were ARMs. In excess of half of the fixed-rate
one-to-four family loan originations during 1997 were in loans with an initial
term to maturity of 15 years or less. Such loans are originated at market rates,
and, provided they bear an interest rate of 7.00% or greater, they are retained
in the Company's portfolio. At December 31, 1997, approximately $100.9 million,
or 64.0% 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 increased originations of commercial
business and construction loans having adjustable or floating interest rates,
relatively short terms to maturity, or a combination thereof. Fourth, the
Company has adopted a policy of selling substantially all of its newly
originated conventional 30-year, fixed-rate residential mortgage loans and all
of its newly originated conventional 15-year, fixed rate residential mortgage
loans with an interest rate of less than 7.00%, with servicing retained.
At December 31, 1997, the Company held $56.9 million of fixed-rate one-to-four
family loans, of which $12.3 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 $254,000 were classified as
held for sale at December 31, 1997. Most of the remaining $12.1 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 Company currently does not enter into derivative financial instruments
including futures, forwards, interest rate risk swaps, option contracts, or
other financial instruments with similar characteristics. However, the Company
is party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers such as
commitments to extend credit and letters of credit.
Commitments to extend credit and letters of credit are not recorded as an asset
by the Company until the instrument is exercised.
The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee. Interest rate risk is the potential of economic
losses due to future interest rate changes. These economic losses can be
reflected as a loss of future net interest income and/or a loss of current fair
market values. Tools used by management include the standard GAP report and the
quarterly Office of Thrift Supervision (the "OTS") report measuring interest
rate
MANAGEMENT'S DISCUSSION AND ANALYSIS
10
<PAGE>
sensitivity. The OTS report provides the Company the economic value of each type
of asset, liability, and off-balance sheet contract under the assumption that
the Treasury yield curve shifts instantaneous and parallel up and down by 100 to
400 basis points in 100 basis point increments. The Company has no market risk
sensitive instruments held for trading purposes. It appears that the Company's
market risk is reasonable at this time. The following condensed GAP report
summarizing the Company's interest rate sensitivity sets forth the interest rate
sensitivity of the Bank's assets and liabilities at December 31, 1997. 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 and statement savings, checking and money market
accounts, which totaled $99.9 million at December 31, 1997, are withdrawn at the
annual percentage rates of 15.0%, 37.4% and 37.6%, respectively. Certificate
accounts are assumed to reprice at the date of contractual maturity.
<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
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate one-to-four family
(including mortgage-backed
securities, commercial real
estate and construction
loans)........................ $ 4,592 $ 7,918 $ 16,727 $ 11,861 $ 31,415 $ 72,513
Adjustable rate one-to-four
family (including mortgage-
backed securities, commercial
real estate and construction
loans)........................ 50,627 74,847 13,506 12,139 -- 151,119
Commercial business loans....... 9,990 841 1,143 204 7 12,185
Consumer loans.................. 16,256 6,230 8,032 2,828 1,817 35,163
Investment securities and
other......................... 27,800 3,000 7,543 4,937 13,908 57,188
--------- --------- --------- --------- --------- ---------
Total interest-earning
assets.............. 109,265 92,836 46,951 31,969 47,147 328,168
Savings deposits................ 1,550 5,748 12,052 8,707 22,670 50,727
Checking and money market....... 4,509 13,849 18,773 7,344 4,718 49,193
Certificates.................... 38,670 79,211 53,806 8,234 -- 179,921
FHLB advances................... 9,200 375 -- 10,700 -- 20,275
Other borrowings................ 3,220 -- -- -- -- 3,220
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities........... 57,149 99,183 84,631 34,985 27,388 303,336
Interest-earning assets less
interest-bearing
liabilities................... $ 52,116 ($ 6,347) ($ 37,680) ($ 3,016) $ 19,759 $ 24,832
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Cumulative interest-rate
sensitivity gap............... $ 52,116 $45,769 $ 8,089 $ 5,073 $24,832
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cumulative interest-rate gap as
a percentage of assets........ 15.18% 13.33% 2.36% 1.48% 7.23%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</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
[PHOTO]
THE BANK INTRODUCED ITS CHECK FREE VISA-REGISTERED TRADEMARK- DEBIT CARD
PROGRAM IN SPRING OF 1997. BEFORE YEAR-END, CARD USAGE SURGED PAST
INTRODUCTORY GOALS.
MANAGEMENT'S DISCUSSION AND ANALYSIS
11
<PAGE>
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.
FINANCIAL CONDITION
Total assets decreased by $7.2 million or 2.1% to $343.4 million at December 31,
1997, from $350.6 million at December 31, 1996. The decrease in total assets
during 1997 was primarily attributed to the use of principal receipts from
maturities and prepayments of investment and mortgage-backed securities
available-for-sale, to repay short-term borrowings.
Cash and cash equivalents increased by $5.6 million to $22.8 million at December
31, 1997, from $17.2 million at December 31, 1996. The increase was primarily
attributed to the decrease in investment and mortgage-backed securities, and the
increase in deposit balances and other borrowings. These increases were
partially offset by an increase in loans and a decrease in short-term
borrowings.
Loans held for sale decreased $385,000 or 60.2% to $254,000 at December 31,
1997. This was the result of the origination of approximately $5.9 million of 30
year, fixed-rate loans, offset by the sale with servicing retained of
approximately $6.3 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 and the Federal
Housing Authority. During 1997, $250,000 of such loans were originated and sold
to investors with servicing released. Borrowers under these programs are
notified at the time of application that their loan will be sold to, and
serviced by, a party other than the Company.
Pursuant to its agreement with the Student Loan Marketing Association, during
1997 the Company sold $502,000 in student loans at the time the loans went into
repayment status.
During the year ended December 31, 1997, net loans increased by $5.5 million or
2.3% to $238.8 million from $233.3 million at December 31, 1996. The increase
was the result of the origination of $47.0 million of real estate loans, the
purchase of $260,000 of real estate loans, the origination of $40.4 million of
consumer and commercial business loans, the purchase of $1.9 million of
commercial business loans, and loan repayments which totaled $83.0 million.
At December 31, 1997, investment securities available-for-sale totaled $36.8
million, a decrease of $14.5 million or 28.3% from the amount classified as
available-for-sale at December 31, 1996. The decrease was the result of sales of
$8.0 million and maturities of $10.2 million of available-for-sale securities,
which were partially offset by the purchases of $3.2 million of
available-for-sale securities and a positive adjustment of $462,000 in the
market value of available-for-sale securities during the fiscal year ended
December 31, 1997.
At December 31, 1997, mortgage-backed securities available-for-sale totaled
$28.3 million, a decrease of $6.2 million from the amount classified as
available-for-sale at December 31, 1996. The decrease in mortgage-backed
securities available-for-sale was the result of principal repayments totaling
$6.3 million, which was partially offset by an adjustment to market value of
$267,000 during the year.
Held-to-maturity investment securities and non-marketable equity securities
decreased by $2,000 to $571,000 at December 31, 1997, from $573,000 at December
31, 1996. This decrease was the result of a principal pay down of $2,000 of
held-to-maturity investment securities.
Deposits increased by $2.7 million (1.0%) to $280.0 million at December 31,
1997, from $277.3 million at December 31, 1996. The increase resulted from a
$3.8 million increase in certificates of deposit, partially offset by a $1.1
million decrease in passbook savings, checking and money market accounts.
MANAGEMENT'S DISCUSSION AND ANALYSIS
12
<PAGE>
Borrowed money decreased by $11.0 million (32.0%) to $23.5 million at December
31, 1997, from $34.5 million at December 31, 1996. Borrowed money consisted of
$20.3 million in advances from the Federal Home Loan Bank of Chicago (the
"FHLB") and $13.2 million from securities sold under agreements to repurchase.
Borrowed money was primarily 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. Periodically borrowed money
is used for both short-term and long-term cash management requirements.
Stockholders' equity on a per share basis increased from $25.79 at December 31,
1996, to $27.57 at December 31, 1997. Stockholders' equity increased by $1.3
million (3.6%) to $37.8 million at December 31, 1997. The increase in
stockholders' equity was attributed to net income of $3.0 million and the market
value adjustment on available-for-sale securities required under SFAS No. 115,
which, net of provision for income taxes, amounted to $481,000. The increase was
partially offset by the repurchase of 55,000 shares of Company common stock at a
total cost of $1.8 million and the payment of dividends of $676,000, during the
year ended December 31, 1997.
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. See also "Comparison
of Operating Results for the Year Ended December 31, 1997, to the Year Ended
December 31, 1996 -- Provision for Losses on Loans".
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, 1997, total classified assets decreased by $109,000 to
$6.5 million from $6.6 million at December 31, 1996. This decrease was due to
decreases of $212,000 in assets classified as Loss, and $566,000 in assets
categorized as Special Mention, which were partially offset by an increase of
$669,000 in assets classified as Substandard. The decrease in the loss category
was due primarily to the write-off of $160,000, which had been fully reserved.
Non-performing assets include foreclosed assets, loans that have been placed
on non-accrual status, loans 90 days or more past due that continue to accrue
interest and restructured troubled debt. During the year ended December 31,
1997, total non-performing assets increased by $278,000, or 6.8%, to $4.3
million from $4.1 million at December 31, 1996. The increase was due to
increases of $1.1 million in foreclosed assets, $209,000 in restructured
troubled debt, $669,000 in non-accruing construction and development loans
and $222,000 in accruing consumer loans 90 days or more delinquent. These
increases were partially offset by decreases of $1.2 million, $505,000 and
$363,000 in non-accruing commercial real estate loans, accruing construction
and development loans 90 days or more delinquent and accruing commercial real
estate loans 90 days or more delinquent, 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.
[PHOTO]
THE MERIT PLUS GOLD PROGRAM RECEIVED NATIONAL EXPOSURE AND WAS THE FIRST
FEATURED CASE STUDY IN BANK MARKETING'S 1997 JANUARY-FEBRUARY ISSUE. IT ALSO
RECEIVED A NATIONAL AWARD IN BANK MARKETING'S ANNUAL GOLDEN COIN COMPETITION.
MANAGEMENT'S DISCUSSION AND ANALYSIS
13
<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, 1997
------------------------------------
AVERAGE
OUTSTANDING INTEREST
BALANCE EARNED/PAID YIELD/RATE
----------- ----------- ----------
<S> <C> <C> <C>
Interest-earning assets:
Loans (1)........................... $ 233,745 $ 18,894 8.08%
Mortgage-backed securities (2)...... 32,309 2,198 6.80%
Investments securities (2).......... 46,817 2,941 6.28%
Other interest-earning assets....... 14,775 734 4.97%
FHLB stock.......................... 1,887 128 6.78%
----------- -----------
Total interest-earning assets... 329,533 24,895 7.55%
----------- -----------
Other assets............................ 14,750
-----------
Total assets............................ $ 344,283
-----------
-----------
Interest-bearing liabilities:
Time deposits....................... $ 177,357 9,968 5.62%
Savings deposits.................... 51,777 1,409 2.72%
Demand and NOW deposits............. 49,021 1,387 2.83%
Borrowings.......................... 26,273 1,509 5.74%
----------- -----------
Total interest-bearing
liabilities................... 304,428 14,273 4.69%
----------- -----------
Other liabilities....................... 2,394
-----------
Total liabilities....................... 306,822
-----------
Stockholders' equity.................... 37,461
-----------
Total liabilities and stockholders'
equity................................ $ 344,283
-----------
-----------
Net interest income..................... $ 10,622
-----------
-----------
Net interest rate spread................ 2.86%
----------
----------
Net earning assets...................... $ 25,105
-----------
-----------
Net yield on average interest-earning
assets (net interest margin).......... 3.22%
----------
----------
Average interest-earning assets to
average interest-bearing
liabilities........................... 108.25%
-----------
-----------
</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, 1996 YEAR ENDED DECEMBER 31, 1995
------------------------------------ ------------------------------------
AVERAGE AVERAGE
OUTSTANDING INTEREST OUTSTANDING INTEREST
BALANCE EARNED/PAID YIELD/RATE BALANCE EARNED/PAID YIELD/RATE
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1)........................... $ 233,064 $ 19,138 8.21% $ 223,477 $ 17,717 7.93%
Mortgage-backed securities (2)...... 33,696 2,147 6.37% 17,250 1,100 6.38%
Investments securities (2).......... 55,396 3,645 6.58% 49,716 3,225 6.49%
Other interest-earning assets....... 17,258 752 4.36% 12,720 688 5.41%
FHLB stock.......................... 1,862 126 6.77% 1,502 100 6.66%
----------- ----------- ----------- -----------
Total interest-earning assets... 341,276 25,808 7.56% 304,665 22,830 7.49%
----------- ----------- ----------- -----------
Other assets............................ 15,251 13,616
----------- -----------
Total assets............................ $ 356,527 $ 318,281
----------- -----------
----------- -----------
Interest-bearing liabilities:
Time deposits....................... $ 182,687 10,516 5.76% $ 160,548 8,943 5.57%
Savings deposits.................... 53,987 1,453 2.69% 55,298 1,413 2.56%
Demand and NOW deposits............. 51,626 1,531 2.97% 51,628 1,576 3.05%
Borrowings.......................... 29,457 1,699 5.77% 11,182 630 5.63%
----------- ----------- ----------- -----------
Total interest-bearing
liabilities................... 317,757 15,199 4.78% 278,656 12,562 4.51%
----------- ----------- ----------- -----------
Other liabilities....................... 2,918 3,416
----------- -----------
Total liabilities....................... 320,675 282,072
----------- -----------
Stockholders' equity.................... 35,852 36,209
----------- -----------
Total liabilities and stockholders'
equity................................ $ 356,527 $ 318,281
----------- -----------
----------- -----------
Net interest income..................... $ 10,609 $ 10,268
----------- -----------
----------- -----------
Net interest rate spread................ 2.78% 2.98%
---------- ----------
---------- ----------
Net earning assets...................... $ 23,519 $ 26,009
----------- -----------
----------- -----------
Net yield on average interest-earning
assets (net interest margin).......... 3.11% 3.37%
---------- ----------
---------- ----------
Average interest-earning assets to
average interest-bearing
liabilities........................... 107.40% 109.33%
----------- -----------
----------- -----------
</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,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable (1).................................................. 8.02% 8.05% 8.06%
Mortgaged-backed securities (2)....................................... 6.89% 6.89% 6.94%
Investment securities (2)............................................. 6.08% 6.34% 6.31%
Other interest-earning assets......................................... 5.37% 6.14% 5.41%
Combined weighted average yield on interest-earning assets............ 7.53% 7.68% 7.53%
Weighted average rate paid on:
Saving deposits 2.77% 2.72% 2.66%
Demand and NOW deposits............................................... 2.79% 2.95% 3.03%
Certificates.......................................................... 5.80% 5.77% 5.93%
Borrowings............................................................ 5.67% 5.62% 5.86%
Combined weighted average rate paid on interest-bearing
liabilities..................................................... 4.80% 4.80% 4.89%
Spread.................................................................... 2.73% 2.88% 2.64%
</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, 1997 VS. 1996 DECEMBER 31, 1996 VS. 1995
------------------------------------- ---------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO TOTAL 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............................. $ 55 $ (299) $ (244) $ 779 $ 642 $ 1,421
Mortgage-backed securities................... (80) 131 51 1,049 (2) 1,047
Investment securities........................ (544) (160) (704) 374 46 420
Other interest-earning assets................ (116) 98 (18) 141 (77) 64
Federal Home Loan Bank stock................. 2 -- 2 24 2 26
----------- --------- ------ --------- --------- -----------
Total interest-earning assets............ $ (683) $ (230) $ (913) $ 2,367 $ 611 $ 2,978
----------- --------- ------ --------- --------- -----------
----------- --------- ------ --------- --------- -----------
Interest bearing liabilities:
Certificate accounts......................... $ (299) $ (249) $ (548) $ 1,262 $ 312 $ 1,574
Savings deposits............................. (60) 16 (44) (33) 73 40
Demand and NOW deposits...................... (74) (70) (144) -- (45) (45)
Borrowings................................... (181) (9) (190) 1,053 16 1,069
----------- --------- ------ --------- --------- -----------
Total interest-bearing liabilities....... $ (614) $ (312) $ (926) $ 2,282 $ 356 $ 2,638
----------- --------- ------ --------- --------- -----------
----------- --------- ------ --------- --------- -----------
Net interest income.......................... $ 13 $ 340
------ -----------
------ -----------
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
16
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997,
TO THE YEAR ENDED DECEMBER 31, 1996
GENERAL
Consolidated net income was $3.0 million, or $2.00 per share (diluted), for the
year ended December 31, 1997 compared to $1.8 million, or $1.18 per share
(diluted), for the year ended December 31, 1996. Absent two non-recurring
events, which occurred in the third quarter of 1996, consolidated net income for
1996 would have been $2.4 million, or $1.60 per share (diluted). These events
are discussed in the "Comparison of Operating Results for the Year Ended
December 31, 1996, to the Year Ended December 31, 1995--General".
NET INTEREST INCOME
Net interest income was $10.6 million for the year ended December 31, 1997, an
increase of $13,000, or 0.1%, during the 1997 period as compared to the year
ended December 31, 1996. Net interest income remained at the same level
primarily because the decrease in interest expense resulting from the decrease
in volume of interest-bearing liabilities was offset by the decrease in interest
income resulting from the decrease in volume of interest-earning assets.
INTEREST INCOME
Interest income totaled $24.9 million for the year ended December 31, 1997, a
decrease of $913,000, or 3.5%, as compared to $25.8 million for the year ended
December 31, 1996. This resulted from a decrease in the yield earned on assets
from 7.56% during 1996 to 7.55% during 1997 and from an $11.8 million decrease
in average interest-earning assets from $341.3 million during 1996 to $329.5
million during 1997.
Interest on loans was $18.9 million for the year ended December 31, 1997, a
decrease of $244,000 or 1.3%, as compared to the year ended December 31, 1996.
This was primarily attributable to the effect of a decrease in the yield on
loans from 8.21% during 1996 to 8.08% during 1997, which was partially offset by
an increase of $681,000 in average outstanding loans. The lower yield on loans
was primarily due to decreases in market interest rates during the year.
Interest earned on mortgage-backed securities was $2.2 million for the year
ended December 31, 1997, as compared to $2.1 million for the year ended December
31, 1996. This represented an increase of 2.4% between the periods and was
primarily due to an increase in the yield on mortgage-backed securities to 6.80%
during the 1997 period from 6.37% during the 1996 period.
Interest earned on investment securities and other interest-earning assets and
dividends on FHLB stock totaled $3.8 million for the year ended December 31,
1997, as compared to $4.5 million for the year ended December 31, 1996. This
represented a decrease of 15.9% during 1997. This was primarily due to a
decrease in the average balance of these assets from $74.5 million in 1996 to
$63.5 million in 1997, and a lower average yield on these assets from 6.07% in
1996 to 5.99% in 1997.
INTEREST EXPENSE
Interest expense was $14.3 million for the year ended December 31, 1997, or
$926,000 (6.1%), lower than in 1996. This was due to average yields on
interest-bearing liabilities decreasing to 4.69% for the year ended December 31,
1997, from 4.78% for the year ended December 31, 1996, and a decrease in the
average balance outstanding to $304.4 million for the year ended December 31,
1997, from $317.8 million for the year ended December 31, 1996. The lower
average yield during 1997 was attributable to decreases in the average cost of
certificates of deposit accounts and borrowings, which resulted from a reduction
in market rates.
MANAGEMENT'S DISCUSSION AND ANALYSIS
17
<PAGE>
During 1997, $1.5 million of the Company's interest expense, compared to $1.7
million during 1996, 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 $33,000 for the year ended December
31, 1997, or 19.8% less than the $42,000 provision for the year ended December
31, 1996. Charge-offs during 1997 increased to $296,000, from $126,000 during
1996. In addition to the increase in charge-offs, recoveries during 1997
decreased to $33,000 from $56,000 in 1996. The increase of charge-offs during
1997 compared to the year earlier was primarily due to the charge-off of
$160,000 against a specific reserve which had been established in prior years.
The level of charge-offs actually remained very low in terms of both total
dollars and percentage of outstanding loans.
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. 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 $2.1 million allowance for losses on loans at
December 31, 1997 was adequate. There can be no assurance that the allowance for
loan losses will be adequate to cover all losses.
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.
OTHER INCOME
Other income decreased $448,000 for the year ended December 31, 1997 to $1.7
million, compared to $2.1 million for the year ended December 31, 1996. The
decrease in other income was primarily related to a non-recurring gain of
$708,000 recorded during the year ended December 31, 1996, on the sale by the
Bank of its branch in Carlyle, Illinois, and to a decrease in net gain on the
sale of real estate held for sale. These decreases were partially offset by
increases in fee income, insurance commissions and net gain on the sale of loans
held for sale. During
MANAGEMENT'S DISCUSSION AND ANALYSIS
18
<PAGE>
1997, the Company sold $6.3 million fixed-rate one-to-four family loans from its
held for sale portfolio, as compared to $4.0 million of similar sales during
1996.
OTHER EXPENSES
Other expenses were $8.2 million for the year ended December 31, 1997, as
compared to $10.2 million for the year ended December 31, 1996. This represented
a decrease of $2.0 million or 19.9% during 1997, which was primarily due to a
decrease of $2.1 million in deposit insurance premiums. During 1996 the Company
paid a special one-time assessment of $1.7 million on its insured deposits as a
result of federal legislation intended to recapitalize the Savings Association
Insurance Fund (the "SAIF") of the Federal Deposit Insurance Corporation (the
"FDIC"). As a direct result of this special one-time assessment, deposit
insurance premiums were substantially reduced beginning in 1997. The premium
reductions of 1997 and those anticipated in future years should result in a full
recovery of the special assessment no later than the end of the year 2000. In
addition to reduced deposit insurance premiums, the decrease in other expenses
was due to decreases in data processing costs, telephone and postage expense,
and other expense. These decreases were partially offset by increases in
occupancy costs, furniture and equipment expense and advertising.
INCOME TAXES
Federal income tax expense was $1.1 million for the year ended December 31,
1997, as compared to $713,000 for the year ended December 31, 1996. This
increase was primarily the result of increased pre-tax income and a reduction in
the effective tax rate. The Company's effective tax rate was 26% and 29% for the
years ended December 31, 1997 and 1996. A summary of the significant tax
components is provided in Note 9 of the Notes to Consolidated Financial
Statements included later in this report.
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 on a diluted basis,
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 FDIC on
deposits insured by the 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 on a diluted basis.
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
MANAGEMENT'S DISCUSSION AND ANALYSIS
19
<PAGE>
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 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 have appeared to be substantial, the level of charge-offs
actually remained low in terms of both total dollars and percentage of
outstanding loans.
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,
MANAGEMENT'S DISCUSSION AND ANALYSIS
20
<PAGE>
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 represented
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, as compared to 1996 levels. 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.
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, 1997, 1996 and 1995,
respectively:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income.............................................................. $ 3,012 $ 1,776 $ 1,848
Adjustments to reconcile net income to net cash provided (used) by
operating activities.................................................. (1,319) (393) 105
--------- --------- ---------
Net cash provided by operating activities............................... 4,331 1,383 1,953
Net cash provided (used) by investing activities........................ 12,078 (13,327) (37,715)
Net cash provided (used) by financing activities........................ (10,743) 3,409 47,410
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.................... 5,666 (8,535) 11,648
Cash and cash equivalents at beginning of period........................ 17,160 25,695 14,047
--------- --------- ---------
Cash and cash equivalents at end of period.............................. $ 22,826 $ 17,160 $ 25,695
--------- --------- ---------
--------- --------- ---------
</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
MANAGEMENT'S DISCUSSION AND ANALYSIS
21
<PAGE>
loan participations. During the years ended December 31, 1997, 1996 and 1995,
respectively, the Company's loan originations totaled $94.1 million, $81.9
million and $73.7 million, respectively, and purchases of loans totaled $2.2
million, $1.1 million and $378,000, 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, 1997. Other investment activities
included the purchase of investment securities which totaled $3.2 million, $27.0
million and $11.1 million for the years ended December 31, 1997, 1996 and 1995,
respectively. During the years ended December 31, 1997, 1996 and 1995, these
activities were funded primarily by maturities of investment securities totaling
$10.2 million, $15.5 million and $9.0 million, respectively, by sales of
investment securities totaling $8.0 million, $7.3 million and $13.8 million,
respectively, and by principal repayments on loans and mortgage-backed
securities and proceeds from the sale of mortgaged-backed securities totaling
$93.8 million, $84.2 million and $57.2 million, respectively.
The major use of cash from financing activities during the year ended December
31, 1997 was a decrease of $11.1 million in borrowed money. Additionally,
financing activities for the year ended December 31, 1997 included the
repurchase of common stock totaling $1.8 million and the payment of dividends to
stockholders totaling $676,000. 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. Net cash provided from financing activities was used to offset the
net cash used in investing activities for the years ended December 31, 1996 and
1995. Net cash used in financing activities was offset by the net cash provided
by investing activities for the year ended December 31, 1997.
The Bank is required to maintain minimum levels of liquid assets as defined by
the 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 13.7% at December 31, 1997, which exceeded the then required
ratio of 4.0%.
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, 1997, 1996 and 1995, these liquid assets totaled
$22.8 million, $17.2 million, and $25.7 million, respectively. The high level of
liquid assets at December 31, 1997 was due to loan principal repayments and to
investment maturities. 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, 1997,
the Company had outstanding borrowings totaling $23.5 million, of which $20.3
million were advances from FHLB and $3.2 million were funds borrowed on
securities sold under agreements to repurchase.
At December 31, 1997, the Company had outstanding commitments to originate
mortgage loans of $4.0 million, of which 66.2% were at fixed 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
MANAGEMENT'S DISCUSSION AND ANALYSIS
22
<PAGE>
commitments. Certificates of deposit which were scheduled to mature in one year
or less from December 31, 1997, totaled $116.1 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 $19.2 million
and $17.1 million at December 31, 1997, and 1996, respectively.
At December 31, 1997, 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 federal 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 $1.8 million, $3.8 and $1.0 million to the
Company, its sole stockholder, during the years ended December 31, 1997, 1996
and 1995, respectively.
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 $.48 per share were paid during 1997, and cash dividends in the
total amount of $.40 per share per year were paid during 1996 and 1995. At its
January 13, 1998, meeting, the Board of Directors of the Company declared a
quarterly cash dividend of $.12 per share payable on February 27, 1998, to
stockholders of record as of February 13, 1998. 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 1998.
BANK ACQUISITION
On January 29, 1998, the Company completed the acquisition of Coal City National
Bank ("CCNB") from Coal City Corporation, a multi-bank holding company
headquartered in Chicago, Illinois. CCNB was based in Coal City, Illinois, which
is 30 miles northwest of Kankakee, and also had offices in nearby Braidwood and
Diamond, Illinois. All three offices of CCNB became offices of the Bank upon
completion of the merger.
At the time of purchase, CCNB had total assets of approximately $56.0 million,
deposits of approximately $51.7 million and stockholders' equity of
approximately $3.7 million. The cash purchase price was $7.8 million, and the
transaction will be accounted for as a purchase. Intangible assets of about $4.3
million will be recorded as a result of this purchase.
BUSINESS DEVELOPMENTS
The Company continues to seek new opportunities and to examine existing programs
in an effort to enhance its long-term profitability. The Company is currently
involved in a number of new projects and in improving and expanding several
areas of its business.
In addition to the three new offices acquired with the purchase of CCNB, the
Bank also plans to open a new office in Urbana, Illinois, and, subject to
regulatory approval, to open a new grocery store office in Coal City, Illinois.
The total capital expenditure for these offices is estimated to be $800,000 and
$200,000, respectively. Regulatory approval has been received for the office in
MANAGEMENT'S DISCUSSION AND ANALYSIS
23
<PAGE>
Urbana, Illinois, and construction is proceeding on schedule. It is anticipated
that both offices will open for business during the second quarter of 1998.
The Bank is in the process of constructing a new office building to replace its
existing office in Herscher, Illinois. The total capital expenditure for this
new office is estimated to be $575,000. The new office will be more convenient,
and provide greater accessibility to services, for the Bank's customers.
Regulatory approval for an office relocation has been received, construction is
proceeding on schedule, and it is expected to open during the second quarter of
1998.
In February 1998, the Bank received regulatory approval to begin offering trust
services. Although granted full trust powers, it is the Bank's intention to
initially focus on personal trust services and limited employee plan services.
It is anticipated that the trust operations will generate operating losses of
approximately $80,000 and $40,000 during 1998 and 1999, respectively, and will
break-even or produce a small profit in the year 2000.
During the second quarter of 1998, the Bank's check processing operation will be
brought in-house following three years with an outside vendor. The primary
reason for returning to in-house check processing is to improve customer
service. The capital expenditure for the check processing operation will be
approximately $500,000. Operating costs associated with the new operation are
expected to be no more than the operating costs associated with the current
outside vendor.
YEAR 2000 PLANNING AND CONCERNS
The "Year 2000" issue is the result of computer programs having been written
using a two-digit field, as opposed to a four-digit field, to define the
applicable year. Programs that are time sensitive may recognize a date using
"00" as the year 1900 rather than the year 2000. Computer system failure or
significant miscalculations could result from this problem.
The Company licenses all software used in conducting its business from third
party software vendors. None of the Company's software has been internally
developed. The Company has developed a comprehensive list of all software and
all hardware in use within the organization. Every vendor has been contacted
regarding the Year 2000 issue, and the Company is closely tracking the
progress each is making in resolving the problems associated with the issue.
Software is upgraded as the vendors resolve Year 2000 problems. The vendor of
the primary software inuse at the Bank is scheduled to release its Year 2000
compliant software in May 1998. Testing standards are being formulated for
comprehensive testing of this software during the last half of 1998.
Additionally, the Company has begun the process of contacting its borrowers
to determine the level of progress they have made in addressing the impact
that the Year 2000 issue will have on their respective businesses. At the
present time, no situations that will require material cost expenditures to
become fully compliant have been identified.
[PHOTO]
A NEW FULL-SERVICE BANKING FACILITY WILL BE COMPLETED IN HERSCHER
BY MID-1998.
The Company has incurred costs totaling approximately $20,000 related to
hardware and software upgrades because of the Year 2000 issue and anticipates
incurring additional costs of approximately $40,000 during 1998, primarily
related to additional planning and testing.
MANAGEMENT'S DISCUSSION AND ANALYSIS
24
<PAGE>
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 accounting
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
25
<PAGE>
(This page has been left blank intentionally.)
26
<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, 1997 and 1996, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. 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.
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ McGladrey & Pullen, LLP
------------------
Champaign, Illinois
January 22, 1998
INDEPENDENT AUDITOR'S REPORT
27
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
-----------------------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Assets
Cash and due from banks................................................................... $ 9,184,362 $ 4,291,857
Federal funds sold........................................................................ 8,575,000 7,985,000
Money market funds........................................................................ 5,066,530 4,883,256
-------------- --------------
Cash and cash equivalents................................................................. 22,825,892 17,160,113
-------------- --------------
Certificates of deposit................................................................... 1,602,000 50,000
-------------- --------------
Securities:
Investment securities:
Available-for-sale, at fair value..................................................... 36,823,019 51,345,158
Held-to-maturity, at cost (fair value: 1997 $69,752; 1996 $72,223).................... 69,752 72,223
-------------- --------------
Total investment securities............................................................... 36,892,771 51,417,381
-------------- --------------
Mortgage-backed securities:
Available-for-sale, at fair value..................................................... 28,299,596 34,467,377
Held-to-maturity, at cost (fair value: 1997 $207,815; 1996 $255,058).................. 203,662 246,303
-------------- --------------
Total mortgage-backed securities.......................................................... 28,503,258 34,713,680
-------------- --------------
Nonmarketable equity securities........................................................... 501,100 501,100
-------------- --------------
Loans..................................................................................... 240,925,455 235,682,573
Less: Allowance for losses on loans....................................................... 2,130,146 2,359,889
-------------- --------------
Net loans................................................................................. 238,795,309 233,322,684
-------------- --------------
Loans held for sale....................................................................... 254,406 639,861
Real estate held for sale................................................................. 1,326,302 215,027
Federal Home Loan Bank stock, at cost..................................................... 1,856,000 1,956,000
Office properties and equipment........................................................... 5,340,406 4,721,060
Accrued interest receivable............................................................... 2,465,594 2,638,066
Prepaid expenses and other assets......................................................... 884,458 914,693
Intangible assets......................................................................... 2,161,740 2,393,422
-------------- --------------
Total assets.................................................................................. $ 343,409,236 $ 350,643,087
-------------- --------------
-------------- --------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Liabilities and stockholders' equity
Liabilities:
Deposits
Noninterest bearing............................................................... $ 9,720,181 $ 7,643,667
Interest bearing.................................................................. 270,301,558 269,704,540
Short term borrowings................................................................. 8,220,000 26,820,000
Other borrowings...................................................................... 15,275,000 7,725,000
Advance payments by borrowers for taxes and insurance................................. 1,428,880 1,436,595
Other liabilities..................................................................... 642,250 819,064
-------------- --------------
Total liabilities......................................................................... 305,587,869 314,148,866
-------------- --------------
Stockholders' Equity
Preferred stock, $.01 par value; authorized, 500,000 shares; none outstanding......... -- --
Common stock, $.01 par value; authorized 3,500,000 shares; shares issued 1,750,000.... 17,500 17,500
Additional paid-in capital............................................................ 16,090,239 16,181,726
Retained income, substantially restricted............................................. 29,554,920 27,219,741
Less: Cost of treasury stock (378,362 and 335,082 shares in 1997 and 1996,
respectively)..................................................................... (7,459,540) (5,876,509)
Unrealized gains (losses) on securities available-for-sale, net of related income
taxes................................................................................. 71,881 (409,353)
-------------- --------------
Total stockholders' equity before Employee Stock Ownership Plan loan and Bank
Incentive Plans and Trusts........................................................ 38,275,000 37,133,105
Employee Stock Ownership Plan loan.................................................... (453,633) (604,844)
Bank Incentive Plans and Trusts....................................................... -- (34,040)
-------------- --------------
Total stockholders' equity............................................................ 37,821,367 36,494,221
-------------- --------------
Total liabilities and stockholders' equity.................................................... $ 343,409,236 $ 350,643,087
-------------- --------------
-------------- --------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
29
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans......................................................................... $ 18,893,603 $ 19,138,450 $ 17,716,834
Mortgage-backed securities.................................................... 2,198,282 2,146,885 1,099,812
Investment securities......................................................... 3,802,714 4,522,142 4,013,456
------------ ------------ ------------
Total interest income..................................................... 24,894,599 25,807,477 22,830,102
------------ ------------ ------------
Interest expense:
Deposits...................................................................... 12,763,541 13,499,576 11,931,312
Borrowed funds................................................................ 1,509,196 1,698,996 630,329
------------ ------------ ------------
Total interest expense.................................................... 14,272,737 15,198,572 12,561,641
------------ ------------ ------------
Net interest income........................................................... 10,621,862 10,608,905 10,268,461
Provision for losses on loans..................................................... 33,395 41,647 173,415
------------ ------------ ------------
Net interest income after provision for losses on loans....................... 10,588,467 10,567,258 10,095,046
------------ ------------ ------------
Other income:
Net gain on sales of securities available-for-sale............................ 34,146 20,344 24,440
Net gain (loss) on sales of real estate held for sale......................... 19,008 44,555 (3,539)
Net gain on sales of loans held for sale...................................... 58,512 44,451 47,664
Net gain on sale of branch.................................................... -- 707,675 --
Fee income.................................................................... 1,023,243 790,387 619,938
Insurance commissions......................................................... 128,184 111,643 63,984
Other......................................................................... 426,170 417,798 428,126
------------ ------------ ------------
Total other income........................................................ 1,689,263 2,136,853 1,180,613
------------ ------------ ------------
Other expenses:
Compensation and benefits..................................................... 4,411,759 4,332,053 4,542,387
Occupancy..................................................................... 748,084 697,073 698,334
Furniture and equipment....................................................... 480,930 381,036 289,797
Federal insurance premiums.................................................... 170,107 2,273,216 598,151
Advertising................................................................... 238,775 164,149 184,291
Provision for losses on real estate held for sale............................. 7,534 -- 64,000
Data processing services...................................................... 280,054 318,609 245,420
Telephone and postage......................................................... 246,857 282,040 250,295
Amortization of intangible assets............................................. 231,682 231,683 97,493
Other general and administrative.............................................. 1,368,812 1,535,042 1,523,486
------------ ------------ ------------
Total other expenses...................................................... 8,184,594 10,214,901 8,493,654
------------ ------------ ------------
Income before income taxes.................................................... 4,093,136 2,489,210 2,782,005
Income taxes...................................................................... 1,081,500 712,771 934,115
------------ ------------ ------------
Net income.................................................................... $ 3,011,636 $ 1,776,439 $ 1,847,890
------------ ------------ ------------
------------ ------------ ------------
Basic Earnings Per Share.......................................................... $ 2.13 $ 1.24 $ 1.23
------------ ------------ ------------
------------ ------------ ------------
Diluted Earnings Per Share........................................................ $ 2.00 $ 1.18 $ 1.18
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
30
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
--------------------------------------------------------------
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, 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.... -- -- -- 6,912 -- -- -- 6,912
Adjustment to paid-in capital
due to exercise of stock
options..................... -- (5,188) -- 5,188 -- -- -- --
Dividends paid on common
stock--$.40 per share....... -- -- (572,257) -- -- -- -- (572,257)
Principal payment on ESOP
loan........................ -- -- -- -- -- 151,211 -- 151,211
Amortization of award of Bank
Incentive Plan stock........ -- -- -- -- -- -- 41,394 41,394
Net income................... -- -- 1,776,439 -- -- -- -- 1,776,439
----------- ---------- ---------- ---------- ----------- ----------- ----------- ------------
Balance, December 31, 1996... 17,500 16,181,726 27,219,741 (5,876,509) (409,353) (604,844) (34,040) 36,494,221
Change in unrealized gains
(losses) on securities
available-for-sale, net of
related income taxes........ -- -- -- -- 481,234 -- -- 481,234
Purchase of 55,000 shares of
treasury stock.............. -- -- -- (1,790,253) -- -- -- (1,790,253)
Exercise of stock options.... -- -- -- 115,735 -- -- -- 115,735
Adjustment to paid-in capital
due to exercise of stock
options..................... -- (91,487) -- 91,487 -- -- -- --
Dividends paid on common
stock--$.48 per share....... -- -- (676,457) -- -- -- -- (676,457)
Principal payment on ESOP
loan........................ -- -- -- -- -- 151,211 -- 151,211
Amortization of award of Bank
Incentive Plan stock........ -- -- -- -- -- -- 34,040 34,040
Net income................... -- -- 3,011,636 -- -- -- -- 3,011,636
----------- ---------- ---------- ---------- ----------- ----------- ----------- ------------
Balance, December 31, 1997... $ 17,500 $16,090,239 $29,554,920 $(7,459,540) $ 71,881 $(453,633) $ -- $37,821,367
----------- ---------- ---------- ---------- ----------- ----------- ----------- ------------
----------- ---------- ---------- ---------- ----------- ----------- ----------- ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
31
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income................................................................... $ 3,011,636 $ 1,776,439 $ 1,847,890
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for losses on loans............................................ 33,395 41,647 173,415
Provision for losses on real estate held for sale........................ 7,534 -- 64,000
Depreciation and amortization............................................ 763,483 692,304 488,418
Amortization of investment premiums and discounts, net................... 139,640 335,089 80,310
Accretion of loan fees and discounts..................................... (33,971) (94,362) (129,316)
Deferred income tax provision (benefit).................................. (28,728) 17,894 73,656
Origination of loans held for sale....................................... (6,673,198) (5,684,990) (3,844,863)
Proceeds from sales of loans............................................. 7,117,165 5,670,634 3,422,416
(Increase) decrease in interest receivable............................... 172,472 (172,918) (343,840)
Increase (decrease) in interest payable on deposits...................... (28,120) (86,326) 128,874
Proceeds from sales of trading securities................................ -- 21,412,500 --
Purchase of trading securities........................................... -- (21,644,844) --
Net gain on sales of loans............................................... (58,512) (44,451) (47,664)
Net gain on sales of securities available-for-sale....................... (34,146) (20,344) (24,440)
Net (gain) loss on sales of real estate held for sale.................... (19,008) (44,555) 3,539
Net gain on sale of branch............................................... -- (707,675) --
Other, net............................................................... (38,494) (62,941) 60,446
------------- ------------- -------------
Net cash from operating activities............................................... 4,331,148 1,383,101 1,952,841
------------- ------------- -------------
Cash Flow from Investing Activities
Investment securities:
Available-for-sale:
Purchases............................................................ (3,194,888) (26,967,466) (9,073,854)
Proceeds from sales.................................................. 8,024,060 7,301,376 13,789,429
Proceeds from calls and maturities................................... 10,189,000 15,500,000 1,000,000
Held-to-maturity:
Purchases............................................................ -- -- (2,000,000)
Proceeds from maturities............................................. 2,471 2,322 8,002,182
Mortgage-backed securities:
Available-for-sale:
Purchases............................................................ -- (12,998,838) (34,707,109)
Proceeds from sales.................................................. -- 4,912,617 --
Proceeds from maturities and paydowns................................ 6,295,394 9,330,390 3,632,743
Held-to-maturity:
Proceeds from maturities and paydowns................................ 42,641 116,540 859,148
Purchases of certificates of deposit......................................... (2,357,500) (826,640) (875,000)
Proceeds from maturities of certificates of deposit.......................... 805,500 1,064,140 2,135,326
Proceeds from sales of real estate........................................... 209,351 945,481 21,018
Deferred loan fees and costs, net............................................ (179,669) 1,910 98,482
Loans originated............................................................. (87,475,090) (76,214,411) (69,841,600)
Loans purchased.............................................................. (2,180,000) (1,120,000) (378,136)
Principal collected on loans................................................. 83,047,771 69,821,907 52,667,335
Purchases of office properties and equipment, net............................ (1,151,147) (320,326) (1,129,905)
Cash transferred to buyer on sale of branch.................................. -- (3,852,993) --
Payment of acquisition costs................................................. -- (22,868) (1,915,219)
------------- ------------- -------------
Net cash from investing activities............................................... 12,077,894 (13,326,859) (37,715,160)
------------- ------------- -------------
</TABLE>
32
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
-------------------------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Net decrease in non-certificate of deposit accounts.......................... $ (1,072,434) $ (725,722) $ (13,585,310)
Net increase in certificate of deposit accounts.............................. 3,774,086 704,198 33,966,657
Decrease in advance payments by borrowers for taxes and insurance............ (43,940) (141,806) (600,138)
Proceeds from short-term borrowings.......................................... 66,430,000 59,280,000 48,230,000
Repayments of short-term borrowings.......................................... (85,030,000) (52,830,000) (27,860,000)
Proceeds from other borrowings............................................... 34,550,000 3,650,000 9,275,000
Repayments of other borrowings............................................... (27,000,000) (5,200,000) --
Proceeds from exercise of stock options...................................... 115,735 6,912 64,188
Dividends paid............................................................... (676,457) (572,257) (600,233)
Purchase of treasury stock................................................... (1,790,253) (761,963) (1,480,441)
------------- ------------- -------------
Net cash from financing activities............................................... (10,743,263) 3,409,362 47,409,723
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents................................. 5,665,779 (8,534,396) 11,647,404
Cash and cash equivalents:
Beginning of year............................................................ 17,160,113 25,694,509 14,047,105
------------- ------------- -------------
End of year.................................................................. $ 22,825,892 $ 17,160,113 $ 25,694,509
------------- ------------- -------------
------------- ------------- -------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest on deposits..................................................... $ 12,735,400 $ 13,413,300 $ 11,802,400
------------- ------------- -------------
------------- ------------- -------------
Interest on borrowed funds............................................... $ 1,580,700 $ 1,709,200 $ 424,500
------------- ------------- -------------
------------- ------------- -------------
Income taxes............................................................. $ 1,386,969 $ 789,436 $ 678,000
------------- ------------- -------------
------------- ------------- -------------
Supplemental Disclosures of Noncash Investing Activities:
Real estate acquired through foreclosure..................................... $ 1,314,939 $ 281,817 $ 225,823
------------- ------------- -------------
------------- ------------- -------------
(Increase) decrease in unrealized gains (losses) on securities available-for-
sale....................................................................... $ 729,140 $ (906,232) $ 1,218,013
------------- ------------- -------------
------------- ------------- -------------
Increase (decrease) in deferred taxes attributable to the unrealized gains
(losses) on securities available-for-sale.................................. $ (247,906) $ 308,030 $ (414,125)
------------- ------------- -------------
------------- ------------- -------------
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.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
NOTE 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
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.
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 in other income.
NONMARKETABLE EQUITY SECURITIES
Nonmarketable equity securities are carried at cost as fair values are not
readily determinable.
NOTES TO CONSOLIDATED STATEMENTS
34
<PAGE>
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.
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. Subsequent declines in estimated fair value are charged to expense
when incurred. Revenues and expenses related to holding and operating these
properties are included in operations.
NOTES TO CONSOLIDATED STATEMENTS
35
<PAGE>
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.
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.
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
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" (SFAS No. 128). SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the SFAS No. 128
requirements.
Basic earnings per share is computed by dividing net income for the year by the
weighted average number of shares outstanding of 1,412,136, 1,431,011 and
1,499,239 for 1997, 1996 and 1995, respectively.
Diluted earnings per share is 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 1,502,639,
1,507,827 and 1,570,592 for 1997, 1996 and 1995, 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), money market funds and federal funds sold.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1996 consolidated financial statements have been
reclassified to conform with the 1997 presentation. Such reclassifications have
no effect on previously reported net income.
IMPACT OF NEW FINANCIAL ACCOUNTING STANDARDS
REPORTING COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" (SFAS No. 130). Comprehensive income, as
defined by SFAS No. 130, is the change in equity of a business enterprise during
a period from transactions and other events and circumstances from nonowner
sources. In addition to an enterprise's net income, change in
NOTES TO CONSOLIDATED STATEMENTS
36
<PAGE>
equity components under comprehensive income reporting would also include such
items as the net change in unrealized gain or loss on available-for-sale
securities and foreign currency translation adjustments. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of financial statements.
SFAS No. 130 is effective for financial statement periods beginning after
December 15, 1997. The Company believes the adoption of SFAS No. 130 will not
have a material impact on its consolidated financial statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS No.
131). SFAS No. 131 establishes standards for the manner in which a publicly-held
enterprise reports certain information about operating segments of their
business in both their annual and interim financial reports provided to
shareholders. The information required to be disclosed for an entity's operating
segments not only consists of financial information, but also certain related
disclosures of the segment's products and services, geographic areas, and major
customers. The requirements of the new standard may result in identification of
different segments than those now used by the Company.
SFAS No. 131 is effective for financial statement periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated, unless impracticable. In addition, the
provisions of SFAS No. 131 need not be applied to interim financial statements
issued in the initial year of application. The Company believes the adoption of
SFAS No. 131 will not have a material impact on its consolidated financial
statements.
NOTE 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 SFAS No. 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
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
December 31, 1997
U. S. government and agency securities........... $ 36,526,165 $ 170,871 $ 233,557 $ 36,463,479
Mutual fund shares............................... 363,922 -- 4,382 359,540
------------ ----------- ----------- ------------
Total investment securities.................. 36,890,087 170,871 237,939 36,823,019
Mortgage-backed securities....................... 28,123,484 189,953 13,841 28,299,596
------------ ----------- ----------- ------------
Total........................................ $ 65,013,571 $ 360,824 $ 251,780 $ 65,122,615
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
December 31, 1996
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
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
NOTES TO CONSOLIDATED STATEMENTS
37
<PAGE>
<TABLE>
<CAPTION>
HELD-TO-MATURITY
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
December 31, 1997
Municipal bonds.................................. $ 69,752 $ -- $ -- $ 69,752
Mortgage-backed securities....................... 203,662 4,153 -- 207,815
------------ ----------- ----------- ------------
Total........................................ $ 273,414 $ 4,153 $ -- $ 277,567
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
December 31, 1996
Municipal bonds.................................. $ 72,223 $ -- $ -- $ 72,223
Mortgage-backed securities....................... 246,303 8,755 -- 255,058
------------ ----------- ----------- ------------
Total........................................ $ 318,526 $ 8,755 $ -- $ 327,281
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The amortized cost and fair value of securities classified as held-to-maturity
and available-for-sale at December 31, 1997, 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.
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
COST VALUE COST FAIR VALUE
----------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Due within 1 year............................... $ -- $ -- $ 8,000,419 $ 7,988,967
Due after 1 year through 5 years................ -- -- 16,543,471 16,416,094
Due after 5 through 10 years.................... -- -- 7,004,219 7,102,600
Due after 10 years.............................. 69,752 69,752 4,978,056 4,955,818
Mortgage-backed securities...................... 203,662 207,815 28,123,484 28,299,596
Mutual fund shares.............................. -- -- 363,922 359,540
----------- --------- ------------ ------------
Total....................................... $ 273,414 $ 277,567 $ 65,013,571 $ 65,122,615
----------- --------- ------------ ------------
----------- --------- ------------ ------------
</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
$5,639,000 and $8,118,000 at December 31, 1997 and 1996, 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,
---------------------------------
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Realized gains...................................................... $ 34,146 $ 280,039 $ 220,490
Realized losses..................................................... -- (259,695) (196,050)
--------- ---------- ----------
Net gain (loss)................................................. $ 34,146 $ 20,344 $ 24,440
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
NOTES TO CONSOLIDATED STATEMENTS
38
<PAGE>
NOTE 3. LOANS
Loans consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Real estate mortgage loans:
One-to-four family.................................................. $ 157,510,095 $ 148,903,767
Multifamily......................................................... 7,480,075 14,172,327
Commercial.......................................................... 20,880,715 28,720,502
Construction and development........................................ 9,004,399 5,525,096
Consumer loans:
Mobile home loans................................................... 3,292,603 3,161,164
Student loans....................................................... 824,768 918,177
Home improvement loans.............................................. 13,393 56,047
Home equity loans................................................... 16,794,915 14,165,844
Credit card loans................................................... 1,533,987 1,705,381
Motor vehicle loans................................................. 4,475,984 4,032,898
Personal loans...................................................... 7,407,321 5,941,680
Loans secured by savings accounts................................... 819,537 587,844
Commercial loans........................................................ 12,184,593 9,942,838
------------- -------------
Gross loans............................................................. 242,222,385 237,833,565
Less:
Unearned discounts.................................................. 12,935 13,215
Deferred loan fees, net............................................. 162,973 411,809
Undisbursed portion of loan proceeds................................ 1,121,022 1,725,968
------------- -------------
$ 240,925,455 $ 235,682,573
------------- -------------
------------- -------------
</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%.
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 $36,999,000, $35,377,000
and $36,111,000 at December 31, 1997, 1996 and 1995.
NOTE 4. ALLOWANCE FOR LOSSES ON LOANS
Changes in the allowance for losses on loans were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year................................... $ 2,359,889 $ 2,387,856 $ 2,251,166
Provision for losses on loans.................................. 33,395 41,647 173,415
Charge-offs.................................................... (296,432) (125,666) (59,726)
Recoveries..................................................... 33,294 56,052 23,001
----------- ----------- -----------
Balance at end of year......................................... $ 2,130,146 $ 2,359,889 $ 2,387,856
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTES TO CONSOLIDATED STATEMENTS
39
<PAGE>
NOTE 5. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Office properties:
Land.................................................................. $ 1,050,278 $ 522,262
Building.............................................................. 4,357,469 4,217,253
Parking facilities:
Land.................................................................. 340,862 340,862
Improvements.......................................................... 133,418 133,418
Land acquired for future use.............................................. 1,303,484 1,278,534
Furniture and equipment................................................... 4,039,788 3,648,197
------------ ------------
11,225,299 10,140,526
Less: Accumulated depreciation............................................ 5,884,893 5,419,466
------------ ------------
$ 5,340,406 $ 4,721,060
------------ ------------
------------ ------------
</TABLE>
Depreciation expense amounted to $531,801, $460,621 and $386,400 for the years
ended December 31, 1997, 1996, and 1995, respectively.
NOTE 6. DEPOSITS
As of December 31, 1997, certificates of deposit have scheduled maturity dates
as follows:
<TABLE>
<CAPTION>
YEAR OF MATURITY AMOUNT
-------------
<S> <C>
1998................................................................................... $ 116,072,311
1999................................................................................... 41,374,050
2000................................................................................... 14,240,634
2001................................................................................... 4,839,392
2002 and thereafter.................................................................... 3,394,155
-------------
$ 179,920,542
-------------
-------------
</TABLE>
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $15,477,441 and $14,065,040 at December 31, 1997 and 1996,
respectively.
NOTE 7. SHORT-TERM BORROWINGS
Short-term borrowings consist of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996
----------- ------------
<S> <C> <C>
Securities sold under agreements to repurchase............................. $ 3,220,000 $ 19,820,000
Federal Home Loan Bank short-term advances................................. 5,000,000 7,000,000
----------- ------------
Total...................................................................... $ 8,220,000 $ 26,820,000
----------- ------------
----------- ------------
</TABLE>
All repurchase agreements as of December 31, 1997, were due within three months
or less. Mortgage-backed securities available-for-sale with a carrying value of
approximately $3,285,000 and $20,451,000 were pledged to collateralize the
repurchase agreements as of December 31, 1997 and 1996, 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.
NOTES TO CONSOLIDATED STATEMENTS
40
<PAGE>
Average and maximum balances and rates on aggregate short-term borrowings
outstanding were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Maximum month-end balance................................................. $ 24,990,000 $ 26,820,000
Average month-end balance................................................. 12,071,000 22,151,000
Weighted average interest rate for the year............................... 5.60% 5.73%
Weighted average interest rate at year-end................................ 5.78% 5.53%
</TABLE>
NOTE 8. OTHER BORROWINGS
Other borrowings at December 31, 1997 and 1996 consisted of advances from the
FHLB of $15,275,000 and $7,725,000, respectively. The weighted average maturity
date was approximately 44 months and 8 months, respectively, and the weighted
average interest rates were approximately 5.61% and 5.92%, respectively.
Advances from the FHLB are collateralized by one-to-four family residential
mortgages.
Future payments at December 31, 1997, for all other borrowings were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT
------------
<S> <C>
1998.................................................................................... $ 375,000
1999.................................................................................... 4,200,000
2000.................................................................................... --
2001.................................................................................... --
2002.................................................................................... 10,700,000
------------
Total................................................................................... $ 15,275,000
------------
------------
</TABLE>
NOTE 9. INCOME TAXES
Under provisions of the Internal Revenue Code and similar sections of the
Illinois income tax law that apply 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
for 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 reserves
accumulated after December 31, 1987 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, 1997 and 1996 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, 1997 and 1996.
NOTES TO CONSOLIDATED STATEMENTS
41
<PAGE>
As of December 31, 1997, the Bank had State net operating loss carryforwards of
approximately $9,447,000 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 $447,673 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.
Income taxes consist of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Current............................................................ $ 1,110,228 $ 694,877 $ 860,459
Deferred........................................................... (28,728) 17,894 73,656
----------- --------- ---------
$ 1,081,500 $ 712,771 $ 934,115
----------- --------- ---------
----------- --------- ---------
</TABLE>
The Company's income tax expense differed from the statutory federal rate of 34%
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
Expected income taxes.............................................. $ 1,391,666 $ 846,331 $ 945,882
Income tax effect of:
State income tax, net of federal benefit....................... 65,399 -- 31,632
Utilization of state net operating loss carryforwards.......... (65,399) -- (31,632)
Bank Incentive Plan............................................ (31,168) (38,495) (14,854)
Other.......................................................... (278,998) (95,065) 3,087
----------- --------- ---------
$ 1,081,500 $ 712,771 $ 934,115
----------- --------- ---------
----------- --------- ---------
</TABLE>
Significant components of the deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for losses on loans........................................... $ 724,590 $ 803,552
State net operating loss carryforwards.................................. 447,673 490,297
Accrued benefits........................................................ 67,614 22,213
Unrealized loss on assets available-for-sale............................ -- 210,743
Other................................................................... 183,477 70,598
----------- -----------
Total deferred tax assets........................................... 1,423,354 1,597,403
Valuation allowance for deferred tax assets............................. 447,673 490,297
----------- -----------
Total deferred tax assets, net of valuation allowance............... 975,681 1,107,106
----------- -----------
Deferred tax liabilities:
Unrealized gain in assets available-for-sale............................ (37,163) --
Loan fees deferred for income tax purposes.............................. (105,229) (122,009)
Excess of tax accumulated provision for losses over base year........... (146,330) (182,912)
Stock dividend on FHLB stock............................................ (51,812) (54,604)
Loan costs deferred for book purposes................................... (113,056) (38,154)
Other................................................................... (65,690) (33,848)
----------- -----------
Total deferred tax liabilities...................................... (519,280) (431,527)
----------- -----------
Net deferred tax assets..................................................... $ 456,401 $ 675,579
----------- -----------
----------- -----------
</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 $8.5 million and $9.4 million over the past three years,
respectively.
NOTES TO CONSOLIDATED STATEMENTS
42
<PAGE>
NOTE 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
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of 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 Core capital (as defined by the regulations) to tangible
assets (as defined) and Total and Tier I capital (as defined) to risk-weighted
assets (as defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, 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 below. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------------- ----------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ --------- ------------ --------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Tangible Capital to Tangible Assets
Kankakee Federal Savings Bank......... $ 30,258,952 9.00% $ 5,044,218 1.50% N/A
Core Capital to Tangible Assets
Kankakee Federal Savings Bank......... 30,258,952 9.00% 10,088,436 3.00% $ 16,814,060 5.00%
Tier I Capital to Risk Weighted Assets
Kankakee Federal Savings Bank......... 30,258,952 15.26% N/A 11,897,880 6.00%
Total Capital to Risk Weighted Assets
Kankakee Federal Savings Bank......... 32,314,088 16.30% 15,863,840 8.00% 19,829,800 10.00%
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% $ 17,183,550 5.00%
Tier I Capital to Risk Weighted Assets
Kankakee Federal Savings Bank......... 28,907,448 14.53% N/A 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%
</TABLE>
A liquidation account in the amount of $17,720,139 was 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 would 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. Due to various natural events, such
as death, relocation and general attrition
NOTES TO CONSOLIDATED STATEMENTS
43
<PAGE>
of accounts, the balance in the liquidation account has been reduced to
$6,119,108 as of December 31, 1997.
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.
NOTE 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 $210,000, $204,000 and $229,000, for the years ended December
31, 1997, 1996 and 1995, 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 $14,700, $11,100 and $22,400, for
the years ended December 31, 1997, 1996 and 1995, respectively.
BANK INCENTIVE PLANS AND TRUSTS
The 52,500 shares of Company common stock in the Bank Incentive Plans and Trusts
(the "BIPs") were available for issuance to officers, directors, and employees
of the Bank. The awards were earned over a three- or five-year period depending
on age and years of service. The aggregate purchase price of these shares was
amortized to expense as the persons became vested in their stock awards. The
unamortized cost was reflected as a reduction of stockholders' equity. Expense
relating to the BIPs was approximately $34,040, $41,394 and $138,315 for the
years ended December 31, 1997, 1996 and 1995, 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
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Shares allocated to participants.................................. 70,833.5 58,886.0 45,168.5
Unallocated shares (grandfathered under SOP 93-6)................. 45,937.5 61,250.0 76,562.5
--------- --------- ---------
Total............................................................. 116,771.0 120,136.0 121,731.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTES TO CONSOLIDATED STATEMENTS
44
<PAGE>
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 $39,693, $50,278 and $60,862 for the
years ended December 31, 1997, 1996 and 1995, respectively. The Bank contributed
$165,764, $174,409 and $175,662 to the ESOP to fund principal and interest
payments for the years ended December 31, 1997, 1996 and 1995, 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 of an incentive stock option 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
non-qualified stock options, restricted stock and stock appreciation rights and
limited stock appreciation rights. Activity in the Stock Option Plan was as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
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..... 148,725 $ 9.941 149,425 $ 9.940 154,175 $ 9.875
Granted.............................. -- -- -- -- 1,750 15.500
Exercised............................ (11,720) 9.875 (700) 9.875 (6,500) 9.875
Forfeited............................ -- -- -- -- -- --
--------- --------- ---------
Outstanding at end of year........... 137,005 9.947 148,725 9.941 149,425 9.940
--------- --------- ---------
--------- --------- ---------
Options exercisable at year-end...... 137,005 148,725 149,425
--------- --------- ---------
--------- --------- ---------
Weighted-average fair value of
options granted during the year.... -- -- 5.260
----------- ----------- -----------
----------- ----------- -----------
</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.
NOTE 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.
NOTES TO CONSOLIDATED STATEMENTS
45
<PAGE>
NOTE 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.
Financial instruments whose contract represent credit risk at December 31, 1996
and 1997 follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Commitments to originate new loans........................................ $ 6,511,000 $ 3,199,000
Commitments to extend credit.............................................. 19,246,000 17,140,000
Standby letters of credit................................................. 1,240,000 2,041,000
</TABLE>
Such commitments are recorded in the financial 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.
NOTES TO CONSOLIDATED STATEMENTS
46
<PAGE>
NOTE 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
----------------------------------------------------------
1997 1996
---------------------------- ----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents............ $ 22,825,892 $ 22,825,892 $ 17,160,113 $ 17,160,113
Certificates of deposit.............. 1,602,000 1,602,000 50,000 50,000
Investment and mortgage-backed
securities......................... 65,396,029 65,400,182 86,131,061 86,139,816
Nonmarketable equity securities...... 501,100 501,100 501,100 501,100
Loans................................ 240,925,455 241,212,400 235,682,573 234,647,800
Loans held for sale.................. 254,406 258,499 639,861 651,559
FHLB stock........................... 1,856,000 1,856,000 1,956,000 1,956,000
Liabilities:
Deposits............................. $ 280,021,739 $ 280,755,697 $ 277,348,207 $ 278,348,779
Borrowed funds....................... 23,495,000 23,321,613 34,545,000 34,540,979
Advance payments by borrowers for
taxes and insurance................ 1,428,880 1,428,880 1,436,595 1,436,595
</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.
NON-MARKETABLE EQUITY SECURITIES AND FHLB STOCK: These securities are carried at
cost, as fair values are not readily determinable.
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.
NOTES TO CONSOLIDATED STATEMENTS
47
<PAGE>
NOTE 15. 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.
NOTE 16. SUBSEQUENT EVENT--BANK ACQUISITION
On January 29, 1998, the Company, through its Bank subsidiary, completed the
acquisition of Coal City National Bank ("CCNB") for $7,800,000 in cash. At the
acquisition date, CCNB had three office locations, assets of approximately $56.0
million, deposits of approximately $51.7 million and equity of approximately
$3.7 million. The transaction will be accounted for using the purchase method.
NOTE 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.
NOTE 18. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
STATEMENT OF FINANCIAL CONDITION
Assets:
Cash and cash equivalents............................................. $ 3,702,223 $ 3,609,325
Certificate of deposit................................................ 50,000 50,000
Investment and mortgage-backed securities, available-for-sale......... 469,132 1,094,055
Equity in net assets of Kankakee Federal Savings Bank................. 33,458,707 31,757,185
Other assets.......................................................... 216,814 67,204
------------ ------------
$ 37,896,876 $ 36,577,769
------------ ------------
------------ ------------
Liabilities and stockholders' equity:
Other liabilities..................................................... $ 75,509 $ 83,548
Common stock.......................................................... 17,500 17,500
Additional paid-in capital............................................ 16,090,239 16,181,726
Retained income....................................................... 29,554,920 27,219,741
Unrealized gains (losses) on securities available-for-sale, net of
tax................................................................. 71,881 (409,353)
Treasury stock........................................................ (7,459,540) (5,876,509)
Employee Stock Ownership Plan loan.................................... (453,633) (604,844)
Bank Incentive Plans and Trusts....................................... -- (34,040)
------------ ------------
$ 37,896,876 $ 36,577,769
------------ ------------
------------ ------------
</TABLE>
NOTES TO CONSOLIDATED STATEMENTS
48
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
Dividends from subsidiary................................... $ 1,776,237 $ 3,824,600 $ 1,026,100
Interest income............................................. 308,308 258,639 234,776
------------ ------------ ------------
Operating income........................................ 2,084,545 4,083,239 1,260,876
------------ ------------ ------------
Equity in undistributed earnings of Kankakee Federal Savings
Bank...................................................... 1,195,689 (1,963,859) 965,449
Other noninterest income.................................... 2,641 4,839 2,848
------------ ------------ ------------
Total other income...................................... 1,198,330 (1,959,020) 968,297
Other expenses.............................................. 403,739 391,809 480,368
------------ ------------ ------------
Income before income tax benefit........................ 2,879,136 1,732,410 1,748,805
Income tax benefit.......................................... 132,500 44,029 99,085
------------ ------------ ------------
Net income.............................................. $ 3,011,636 $ 1,776,439 $ 1,847,890
------------ ------------ ------------
------------ ------------ ------------
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF CASH FLOWS
Operating activities:
Net income.............................................. $ 3,011,636 $ 1,776,439 $ 1,847,890
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of Kankakee Federal
Savings Bank........................................ (1,195,689) 1,963,859 (965,449)
Other................................................. (161,650) 59,581 (129,017)
------------ ------------ ------------
Net cash provided by operating activities........... 1,654,297 3,799,879 753,424
------------ ------------ ------------
Investing activities:
Held-to-maturity investment and mortgage-backed
securities:
Principal collected................................. -- -- 209,686
Available-for-sale investment and mortgage backed
securities:
Purchase............................................ (23,064) (21,841) (63,630)
Proceeds from sales................................. -- -- 811,176
Proceeds from maturities and paydowns............... 661,429 390,336 --
Purchase of certificate of deposit...................... -- (50,000) --
------------ ------------ ------------
Net cash provided by investing activities........... 638,365 318,495 957,232
------------ ------------ ------------
Financing activities:
Principal collected on ESOP loan........................ 151,211 151,211 151,211
Purchase of treasury stock.............................. (1,790,253) (761,963) (1,480,441)
Dividends paid to stockholders.......................... (676,457) (572,257) (600,233)
Proceeds from exercise of stock options................. 115,735 6,912 64,188
------------ ------------ ------------
Net cash used in financing activities............... (2,199,764) (1,176,097) (1,865,275)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents............ 92,898 2,942,277 (154,619)
Cash and cash equivalents:
Beginning of period..................................... 3,609,325 667,048 821,667
------------ ------------ ------------
End of period........................................... $ 3,702,223 $ 3,609,325 $ 667,048
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTES TO CONSOLIDATED STATEMENTS
49
<PAGE>
NOTE 19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------
THREE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Interest income................................ $6,159,060 $6,201,268 $ 6,246,804 $ 6,287,467
Interest expense............................... 3,584,453 3,580,617 3,540,647 3,567,020
------------ ------------ ----------- -----------
Net interest income............................ 2,574,607 2,620,651 2,706,157 2,720,447
Provision for losses on loans.................. 12,720 20,675 3,550 (3,550)
------------ ------------ ----------- -----------
Net interest income after provision for losses
on loans..................................... 2,561,887 2,599,976 2,702,607 2,723,997
Other income................................... 518,635 424,522 370,343 375,763
Other expense.................................. 2,133,534 2,003,060 2,033,970 2,014,030
------------ ------------ ----------- -----------
Income before income taxes..................... 946,988 1,021,438 1,038,980 1,085,730
Income taxes................................... 199,590 285,890 280,310 315,710
------------ ------------ ----------- -----------
Net income..................................... $ 747,398 $ 735,548 $ 758,670 $ 770,020
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Basic earnings per share....................... $ 0.54 $ 0.52 $ 0.53 $ 0.54
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Diluted earnings per share..................... $ 0.51 $ 0.48 $ 0.50 $ 0.51
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
<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
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Basic earnings per share....................... $ 0.57 $ (0.02) $ 0.42 $ 0.27
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Diluted earnings per share..................... $ 0.54 $ (0.02) $ 0.40 $ 0.26
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
The 1996 and first three quarters of 1997 earnings per share amounts have been
restated to comply with Statement of Financial Accounting Standards No. 128,
"Earnings per Share."
NOTES TO CONSOLIDATED STATEMENTS
50
<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>
[LETTERHEAD]
CONSENT OF INDEPENDENT AUDITOR'S
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 22, 1998, 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, 1997.
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 22, 1998, 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, 1997.
/s/ McGladrey & Pullen, LLP
Champaign, Illinois
March 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,184
<INT-BEARING-DEPOSITS> 6,669
<FED-FUNDS-SOLD> 8,575
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 65,123
<INVESTMENTS-CARRYING> 273
<INVESTMENTS-MARKET> 278
<LOANS> 240,925
<ALLOWANCE> 2,130
<TOTAL-ASSETS> 343,409
<DEPOSITS> 280,022
<SHORT-TERM> 8,220
<LIABILITIES-OTHER> 2,071
<LONG-TERM> 15,275
0
0
<COMMON> 16,108
<OTHER-SE> 21,713
<TOTAL-LIABILITIES-AND-EQUITY> 343,409
<INTEREST-LOAN> 18,894
<INTEREST-INVEST> 3,803
<INTEREST-OTHER> 2,198
<INTEREST-TOTAL> 24,895
<INTEREST-DEPOSIT> 12,764
<INTEREST-EXPENSE> 14,273
<INTEREST-INCOME-NET> 10,622
<LOAN-LOSSES> 33
<SECURITIES-GAINS> 34
<EXPENSE-OTHER> 8,185
<INCOME-PRETAX> 4,093
<INCOME-PRE-EXTRAORDINARY> 3,012
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,012
<EPS-PRIMARY> 2.13
<EPS-DILUTED> 2.00
<YIELD-ACTUAL> 3.22
<LOANS-NON> 1,535
<LOANS-PAST> 1,281
<LOANS-TROUBLED> 209
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,360
<CHARGE-OFFS> 296
<RECOVERIES> 33
<ALLOWANCE-CLOSE> 2,130
<ALLOWANCE-DOMESTIC> 1,854
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 276
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 4,292 9,397 6,699 10,446
<INT-BEARING-DEPOSITS> 4,933 4,007 7,409 4,914
<FED-FUNDS-SOLD> 7,985 13,310 1,135 2,300
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 85,813 90,713 94,790 85,644
<INVESTMENTS-CARRYING> 319 409 354 327
<INVESTMENTS-MARKET> 327 421 361 327
<LOANS> 235,683 232,434 235,629 236,711
<ALLOWANCE> 2,360 2,374 2,379 2,357
<TOTAL-ASSETS> 350,643 363,182 359,171 352,926
<DEPOSITS> 277,348 294,080 294,622 286,899
<SHORT-TERM> 26,820 19,610 16,730 23,090
<LIABILITIES-OTHER> 2,256 3,986 2,396 2,656
<LONG-TERM> 7,725 9,925 9,925 7,925
0 0 0 0
0 0 0 0
<COMMON> 16,199 16,199 16,199 16,199
<OTHER-SE> 20,295 19,382 19,299 19,157
<TOTAL-LIABILITIES-AND-EQUITY> 350,643 363,182 359,171 352,926
<INTEREST-LOAN> 19,139 4,685 9,471 14,316
<INTEREST-INVEST> 4,522 1,142 2,295 3,434
<INTEREST-OTHER> 2,147 573 1,116 1,603
<INTEREST-TOTAL> 25,808 6,400 12,882 19,353
<INTEREST-DEPOSIT> 13,500 3,393 6,817 10,230
<INTEREST-EXPENSE> 15,199 3,828 7,660 11,465
<INTEREST-INCOME-NET> 10,609 2,572 5,222 7,888
<LOAN-LOSSES> 42 9 38 61
<SECURITIES-GAINS> 20 (19) (29) 13
<EXPENSE-OTHER> 10,215 2,308 4,475 8,287
<INCOME-PRETAX> 2,489 519 1,313 1,272
<INCOME-PRE-EXTRAORDINARY> 1,776 397 1,000 974
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 1,776 397 1,000 974
<EPS-PRIMARY> 1.24 0.27 0.69 0.67
<EPS-DILUTED> 1.18 0.26 0.66 0.64
<YIELD-ACTUAL> 3.11 0 0 0
<LOANS-NON> 1,920 0 0 0
<LOANS-PAST> 1,954 0 0 0
<LOANS-TROUBLED> 0 0 0 0
<LOANS-PROBLEM> 0 0 0 0
<ALLOWANCE-OPEN> 2,388 0 0 0
<CHARGE-OFFS> 126 0 0 0
<RECOVERIES> 56 0 0 0
<ALLOWANCE-CLOSE> 2,360 0 0 0
<ALLOWANCE-DOMESTIC> 2,110 0 0 0
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 250 0 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JAN-30-1997 SEP-30-1997
<CASH> 8,660 6,232 4,507
<INT-BEARING-DEPOSITS> 5,640 6,064 6,478
<FED-FUNDS-SOLD> 2,765 1,650 1,725
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 82,839 80,657 75,914
<INVESTMENTS-CARRYING> 311 291 282
<INVESTMENTS-MARKET> 314 294 285
<LOANS> 230,867 233,935 238,209
<ALLOWANCE> 2,341 2,158 2,144
<TOTAL-ASSETS> 342,379 341,678 339,937
<DEPOSITS> 278,282 277,940 276,215
<SHORT-TERM> 16,530 12,700 9,940
<LIABILITIES-OTHER> 3,289 1,920 1,155
<LONG-TERM> 7,725 11,225 13,775
0 0 0
0 0 0
<COMMON> 16,159 16,121 16,118
<OTHER-SE> 20,395 21,772 22,734
<TOTAL-LIABILITIES-AND-EQUITY> 342,379 341,678 339,937
<INTEREST-LOAN> 4,679 9,360 14,098
<INTEREST-INVEST> 1,207 2,204 2,941
<INTEREST-OTHER> 581 1,150 1,696
<INTEREST-TOTAL> 6,287 12,534 18,735
<INTEREST-DEPOSIT> 3,107 6,297 9,527
<INTEREST-EXPENSE> 3,567 7,108 10,688
<INTEREST-INCOME-NET> 2,720 5,426 8,047
<LOAN-LOSSES> (4) 0 21
<SECURITIES-GAINS> 0 0 2
<EXPENSE-OTHER> 2,014 4,048 6,051
<INCOME-PRETAX> 1,086 2,125 3,146
<INCOME-PRE-EXTRAORDINARY> 770 1,529 2,264
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 770 1,529 2,264
<EPS-PRIMARY> 0.54 1.07 1.59
<EPS-DILUTED> 0.51 1.01 1.49
<YIELD-ACTUAL> 0 0 0
<LOANS-NON> 0 0 0
<LOANS-PAST> 0 0 0
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 0 0 0
<CHARGE-OFFS> 0 0 0
<RECOVERIES> 0 0 0
<ALLOWANCE-CLOSE> 0 0 0
<ALLOWANCE-DOMESTIC> 0 0 0
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
<PAGE>
Exhibit 99.1
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):
/X/ 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 13, 1998
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 sixth Annual Meeting
of Stockholders of the Company. The meeting will be held at 10:00 a.m., on
Friday, April 24, 1998, at Sully's-Sullivan's Warehouse, a restaurant located at
555 South West Avenue, Kankakee, Illinois 60901.
The two individuals whom your Board of Directors has nominated to serve as
directors are each incumbent directors. In addition to the election of the two
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 1997 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 24, 1998
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 24, 1998 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 two 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, 1998;
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 2, 1998 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 13, 1998
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 24, 1998
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 24, 1998 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 13, 1998. 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 two 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, 1998. On March 2, 1998, the Company had
1,377,988 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 2, 1998 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 2, 1998, 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 2, 1998, 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.
<TABLE>
<CAPTION>
SHARES
BENEFICIAL OWNER BENEFICIALLY PERCENT OF
OWNED CLASS
---------------- ------------ ----------
<S> <C> <C>
5% STOCKHOLDERS
First Securities America, Inc. . . . . . 165,000 12.0%
135 North Meramec
Clayton, Missouri 63141(1)
Jeffrey L. Gendell . . . . . . . . . . . 119,800 8.7%
200 Park Avenue, Suite 3900
New York, New York 10166(2)
EXECUTIVE OFFICERS
James G. Schneider . . . . . . . . . . . 69,023 4.8%
Chairman, President and
Chief Executive Officer(3)
David B. Cox . . . . . . . . . . . . . . 19,706 1.4%
Vice President(4)
Ronald J. Walters . . . . . . . . . . . 11,573 0.8%
Vice President and
Chief Financial Officer(5)
Directors and executive officers . . . . 255,248 16.9%
of the Company as a group (15 persons)(6)
</TABLE>
- -----------
(1) This information is as reported to the Securities and Exchange Commission
("SEC") in a Form 3 dated June 18, 1996.
(2) This information is as reported to the SEC on a Schedule 13D/A dated
November 26, 1997. Mr. Gendell reported holding such shares individually
and as the managing member of Tontine Management, LLC and Tontine Overseas
Associates, LLC, and as the general partner of Tontine Financial Partners,
L.P.
2
<PAGE>
(3) The amount reported includes 9,976 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 2,924 shares allocated to Mr. Schneider under the
Company's Employee Stock Ownership Plan (the "ESOP"), with respect to which
shares Mr. Schneider has sole voting and no investment power.
(4) The amount reported includes 5,174 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 includes
3,222 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.
(5) The amount reported includes 2,438 shares held in the 401(k) Plan for the
benefit of Mr. Walters, over which shares Mr. Walters has shared voting and
sole investment power, and 5,950 shares subject to options granted under
the Stock Option Plan and which are exercisable, over which shares Mr.
Walters has no voting and sole investment power. The amount reported also
includes 2,693 shares allocated to Mr. Walters under the ESOP, with respect
to which shares Mr. Walters has sole voting and no investment power, and
192 shares held by Mr. Walters' spouse, with respect to which shares Mr.
Walters shares voting and investment power.
(6) This amount includes shares held directly, including 130,655 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.
ELECTION OF DIRECTORS
GENERAL
The Company's Board of Directors currently consists of seven members.
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 2, 1998,
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.
3
<PAGE>
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>
James G. Schneider(3) . . . . . . . 72 Chairman of the Board, 1955 2001 69,023 4.8%
President and Chief
Executive Officer
Larry D. Huffman(4) . . . . . . . . 51 Director 1992 2001 13,400 1.0%
DIRECTORS CONTINUING IN OFFICE
William Cheffer(5) . . . . . . . . 67 Vice Chairman of the 1988 1999 30,500 2.2%
Board
Michael A. Stanfa(6) . . . . . . . 48 Executive Vice President 1995 1999 12,413 0.9%
and Secretary
Charles C. Huber(7) . . . . . . . . 75 Director 1979 2000 22,170 1.6%
Thomas M. Schneider(8) . . . . . . 37 Director 1992 2000 10,290 0.7%
Wesley E. Walker(9) . . . . . . . . 62 Director 1986 2000 13,674 1.0%
</TABLE>
- --------------
(1) Includes service as a director of the Bank. 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.
(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 9,976 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 2,924 shares allocated
to Mr. Schneider under the ESOP, with respect to which shares Mr. Schneider
has sole voting and no 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. Huffman has no voting and sole investment power, and 2,024
shares held jointly with his spouse, with respect to which Mr. Huffman
shares voting and investment power.
(5) The amount reported includes 17,000 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 4,500
shares held by Mr. Cheffer's spouse, with respect to which shares Mr.
Cheffer has no voting or investment power.
(6) The amount reported includes 2,672 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
4
<PAGE>
reported also includes 2,398 shares allocated to Mr. Stanfa under the ESOP,
with respect to which shares Mr. Stanfa has sole voting and no investment
power.
(7) The amount reported includes 300 shares held by Mr. Huber's spouse, with
respect to which shares Mr. Huber has no voting or 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.
(8) 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
1,364 shares held jointly with his spouse, with respect to which Mr.
Schneider shares voting and investment power.
(9) The amount reported includes 8,155 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 2,025
shares held jointly with his spouse, with respect to which Mr. Walker
shares voting and investment power.
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 1997, 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, 1997 through December 31, 1997.
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.
5
<PAGE>
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 Automobile Insurance Company, Regulatory
Law Department, Bloomington, Illinois. Mr. Schneider has been employed by State
Farm Mutual Automobile Insurance Company in various capacities since 1995. 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.
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.
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 1997. During 1997 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.
During 1997 this committee met two times.
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 1997 the Company's and the Bank's Audit Committee each met
five 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 1997 this
committee met one time.
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 1997 this committee met two times.
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
6
<PAGE>
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.
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 $100,000 for 1997.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
- ----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
- ----------------------------------------------------------------------------------------------------------------------------------
FISCAL
YEAR SECURITIES
ENDED OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND DECEMBER COMPENSATION ($) 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 1997 $103,962 $ --- $ --- $ --- --- $12,828(2)
Chief Executive Officer 1996 100,038 --- --- --- --- 17,736(3)
of the Company 1995 121,250 --- --- --- --- 14,349(4)
- ----------------------------------------------------------------------------------------------------------------------------------
David B. Cox
Vice President of the
Company and President 1997 $144,818 $ --- $ --- $ --- --- $19,306(2)
and Chief Executive 1996 115,701 --- --- --- --- 15,258(3)
Officer of the Bank 1995 115,877 --- --- --- --- 15,124(4)
- ----------------------------------------------------------------------------------------------------------------------------------
Ronald J. Walters
Vice President and 1997 $100,229 $ --- $ --- $ --- --- $13,352(2)
Chief Financial Officer 1996 95,227 --- --- --- --- 13,239(3)
of the Company 1995 95,125 --- --- --- --- 12,073(4)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------
</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 cost to the Company of share allocations made
under the ESOP in 1997. The dollar amounts of these contributions and
allocations were $7,277 and $5,601 for Mr. Schneider, $11,505 and $7,801
for Mr. Cox, and $7,952 and $5,400 for Mr. Walters, respectively.
<PAGE>
(3) Represents contributions made under the Retirement Plan and the cost to the
Company of share allocations made under the ESOP in 1996. The dollar
amounts of these contributions and allocations were $10,500 and $7,236 for
Mr. Schneider, $9,001 and $6,257 for Mr. Cox, and $7,283 and $5,956 for Mr.
Walters, respectively.
(4) Represents contributions made under the Retirement Plan and the cost to the
Company of share allocations made under the ESOP in 1995. The dollar
amounts of these contributions and allocations were $8,487 and $5,862 for
Mr. Schneider, $8,990 and $6,134 for Mr. Cox, and $7,260 and $4,813 for Mr.
Walters, respectively.
The following table sets forth certain information concerning the number
and value of stock options at December 31, 1997 held by the named executive
officers. No stock options were exercised during 1997 by such persons.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
- ----------------------------------------------------------------------------------------------------------------------------------
SHARES NUMBER OF SECURITIES
ACQUIRED UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
ON VALUE OPTIONS/SARs AT FY-END THE-MONEY OPTIONS/SARs
NAME EXERCISE REALIZED (#)(d) AT FY-END ($)(e)
(#)(a) (#)(b) ($)(c) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------------------
James G. Schneider --- $--- 49,850 --- $ 1,389,569 $ ---
----------------------------------------------------------------------------------------------------------------------------------
David B. Cox --- $--- 5,400 --- $ 150,525 $ ---
----------------------------------------------------------------------------------------------------------------------------------
Ronald J. Walters --- $--- 5,950 --- $ 165,856 $ ---
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
</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.
8
<PAGE>
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 participate in an incentive program based upon achievement of
certain target performance levels.
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 1997 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.
9
<PAGE>
PERFORMANCE GRAPH
The following graph shows a five year comparison of cumulative total
returns on an investment of $100 in the Company's Common Stock, the Standard &
Poor's 500 Stock Index and the SNL American Stock Exchange Thrift Index. The
graph was prepared by SNL Securities, Charlottesville, Virginia, at the request
of the Company.
COMPARISON OF CUMULATIVE TOTAL RETURNS*
- -------------------------------------------------------------------------------
TOTAL RETURN PERFORMANCE
INDEX
VALUE
350 | ------------------------------------------------------------------|
| ----Kankankee Bancorp, Inc. |
| ----S & P 500 |
300 | ------------------------------------------------------------------|
| ----SNL AMEX Thrift Index |
V | |
A 250 | ------------------------------------------------------------------|
L | |
U | |
E 200 | ------------------------------------------------------------------|
| |
I | [GRAPH] |
N | |
D 150 | ------------------------------------------------------------------|
E | |
X | |
100 | ------------------------------------------------------------------|
| |
| |
50 | ------------------------------------------------------------------|
|
1/6/93 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- --------------------------------------------------------------------------------
*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 12/31/97
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Kankakee Bancorp-IL $100.00 $125.45 $116.36 $140.34 $187.70 $291.15
Standard & Poor's Stock 500 Index $100.00 $110.31 $111.77 $153.77 $188.93 $251.98
SNL AMEX Thrift Index $100.00 $122.14 $115.23 $163.45 $196.18 $333.43
- -----------------------------------------------------------------------------------------------------
</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
1997. 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, Mr. Michael A. Stanfa, Executive Vice
President of the Company, and Ms. Carol S. Hoekstra, a Vice President of the
Bank, each have a first mortgage loan at a rate which is one half percent lower
than that offered to the general public at the date of each loan origination.
The outstanding balance on each loan at December 31, 1997 was $43,324 and
$90,243, respectively. 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. Initially, the Bank sold a $250,000
participation interest in this loan to another financial institution and
retained a $750,000 interest in such loan. In 1997, the Bank sold an additional
25% of this loan to the other financial institution. 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, 1997, the loan was performing and the
balance of the Bank's interest in such loan was approximately $205,874.
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, 1998. A proposal will be presented at
the annual meeting to ratify the appointment of McGladrey & Pullen, LLP. If the
appointment of McGladrey & Pullen, LLP, 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, 1998.
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 13, 1998.
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 13, 1998
12
