<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(MARK ONE)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the Quarterly Period Ended March 31, 1999.
or
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period From to .
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Commission File Number 1-13676
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KANKAKEE BANCORP, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-3846489
- --------------------------------------------- -------------------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification
or Organization) Number)
310 SOUTH SCHUYLER AVENUE, KANKAKEE, ILLINOIS 60901
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(815) 937-4440
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of May 7, 1999, there were 1,332,668 issued and outstanding shares of the
Issuer's Common Stock (exclusive of 417,332 shares of the Issuer's Common Stock
held as treasury stock).
<PAGE>
KANKAKEE BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial
Statements (Unaudited)
Statements of Financial Condition,
March 31, 1999 and December 31, 1998 1 - 2
Statements of Income and Comprehensive Income,
Three Months Ended March 31, 1999 and 1998 3
Statements of Cash Flows, Three Months
Ended March 31, 1999 and 1998 4 - 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 7 - 16
Item 3. Quantitative and Qualitative Disclosure
About Market Risk 8
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Cash and due from banks $ 11,583,358 $ 15,154,733
Federal funds sold 10,100,000 18,525,000
Money market funds 12,522,623 13,310,905
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Cash and cash equivalents 34,205,981 46,990,638
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Certificates of deposit 50,000 50,000
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Securities:
Investment securities:
Available-for-sale, at fair value 74,501,711 75,942,836
Held-to-maturity, at cost (fair value: March 31, 1999 -
$339,595; December 31, 1998 - $345,318) 341,234 341,647
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Total investment securities 74,842,945 76,284,483
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Mortgage-backed securities:
Available-for-sale, at fair value 21,647,228 18,577,927
Held-to-maturity, at cost (fair value: March 31, 1999 -
$150,625; December 31, 1998 - $172,340) 147,089 167,741
------------ ------------
Total mortgage-backed securities 21,794,317 18,745,668
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Non-marketable equity securities 501,100 501,100
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Loans 259,539,608 247,608,314
Less: Allowance for losses on loans 2,224,046 2,375,533
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Net loans 257,315,562 245,232,781
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Loans held for sale 1,891,470 1,910,966
Real estate held for sale 2,133,741 1,882,324
Federal Home Loan Bank stock, at cost 1,801,100 1,801,100
Office properties and equipment 8,603,425 8,729,971
Accrued interest receivable 2,927,008 2,772,872
Prepaid expenses and other assets 1,245,500 1,289,077
Intangible assets 5,481,157 5,587,678
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Total assets $412,793,306 $411,778,658
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</TABLE>
(Continued)
1
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) (continued)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Liabilities and stockholders' equity Liabilities:
Deposits
Noninterest bearing $ 20,334,210 $ 17,533,020
Interest bearing 326,450,583 329,269,826
Short term borrowings - -
Other borrowings 22,900,000 22,900,000
Advance payments by borrowers for taxes and insurance 2,618,498 1,532,482
Other liabilities 1,662,088 866,721
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Total liabilities 373,965,379 372,102,049
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Stockholders' equity
Preferred stock, $.01 par value; authorized, 500,000
shares; none outstanding - -
Common stock, $.01 par value; authorized, 3,500,000
shares; issued and outstanding: March 31, 1999 -
1,331,348; December 31, 1998 - 1,367,358 17,500 17,500
Additional paid-in capital 16,037,958 16,070,157
Retained income, substantially restricted 31,461,359 31,183,528
Less: Cost of treasury stock (418,652 shares at March 31,
1999; 382,642 shares at December 31, 1998) (8,479,870) (7,621,599)
Unrealized losses on securities available-for-sale, net of
related income taxes 93,402 329,445
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Total stockholders' equity before
Employee Stock Ownership Plan loan
and Bank Incentive Plan and Trust 39,130,349 39,979,031
------------ ------------
Employee Stock Ownership Plan loan (302,422) (302,422)
------------ ------------
Total stockholders' equity 38,827,927 39,676,609
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Total liabilities and stockholders' equity $412,793,306 $411,778,658
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements (unaudited)
2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1999 1998
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<S> <C> <C>
Interest income:
Loans $4,904,795 $5,099,853
Mortgage-backed securities 238,370 468,212
Investment securities 1,495,013 1,168,872
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Total interest income 6,638,178 6,736,937
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Interest expense:
Deposits 3,584,688 3,497,979
Borrowed funds 299,915 355,244
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Total interest expense 3,884,603 3,853,223
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Net interest income 2,753,575 2,883,714
Provision for losses on loans - -
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Net interest income after provision for losses on loans 2,753,575 2,883,714
Other income:
Net loss on sale of securities available-for-sale - -
Net gain on sales of real estate held for sale 19,979 203
Net gain on sales of loans held for sale 11,351 34,619
Fee income 544,761 417,061
Insurance commissions 13,782 33,727
Other 195,812 113,858
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Total other income 785,685 599,468
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Other expenses:
Compensation and benefits 1,499,041 1,251,968
Occupancy 264,835 190,509
Furniture and equipment 175,687 123,643
Federal insurance premiums 42,985 42,236
Advertising 75,195 39,698
Provision for losses on foreclosed assets 17,750 2,538
Data processing services 117,586 87,004
Telephone and postage 85,701 81,842
Amortization of intangible assets 106,521 94,521
Other general and administrative 484,445 375,419
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Total other expenses 2,869,746 2,289,378
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Income before income taxes 669,514 1,193,804
Income taxes 227,642 401,128
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Net income $ 441,872 $ 792,676
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---------- ----------
Net income $ 441,872 $ 792,676
Other comprehensive income:
Unrealized losses on available-for-sale
securities, net of related income taxes (236,043) (29,596)
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Comprehensive income $ 205,829 $ 763,080
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Basic earnings per share $0.33 $0.58
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Diluted earnings per share $0.31 $0.54
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----- -----
</TABLE>
See notes to consolidated financial statements (unaudited)
3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1999 1998
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 441,872 $ 792,676
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on loans - -
Provisions for losses on real estate held for sale 17,750 -
Depreciation and amortization 326,470 226,843
Amortization of investment premiums and discounts, net 97,026 54,668
Accretion of loan fees and discounts, net 5,430 (19,807)
Deferred income tax provision (benefit) 100,107 -
Originations of loans held for sale (3,251,074) (15,357,397)
Proceeds from sales of loans 3,281,921 13,731,525
(Increase) decrease in interest receivable (154,136) 149,686
Increase (decrease) in interest payable on deposits 14,152 (28,120)
Net gain on sales of loans (11,351) (34,619)
Net gain on sales of real estate held for sale (19,979) (203)
Other, net 863,520 879,317
----------- ------------
Net cash from operating activities 1,711,708 394,569
----------- ------------
Cash flows from investing activities
Investment securities
Available-for sale:
Purchases (5,001,882) (8,574,630)
Proceeds from calls and maturities 6,000,000 8,000,000
Held-to-maturity:
Purchases - (1,025,000)
Mortgage-backed securities:
Available-for-sale:
Purchases (5,650,382) (1,997,500)
Proceeds from maturities and pay downs 2,569,833 1,770,385
Held-to-maturity:
Proceeds from maturities and pay downs 20,652 8,736
Purchases of certificates of deposit - (765,692)
Proceeds from maturities of certificates of deposit - 2,028,846
Proceeds from sales of real estate 243,324 -
Deferred loan fees and costs, net (2,686) 9,021
Loans originated (35,929,910) (19,200,771)
Loans purchased (1,366,276) (300,000)
Principal collected on loans 25,087,948 26,065,159
Purchases of office properties and equipment, net (120,179) (689,758)
Payment of acquisition costs - (8,054,109)
Payments of improvements on real estate (357,018) -
----------- ------------
Net cash from investing activities (14,506,576) (2,725,313)
</TABLE>
See notes to consolidated financial statements (unaudited).
4
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (continued)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1999 1998
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<S> <C> <C>
Cash flows from financing activities
Net increase in non-certificate
of deposit accounts $ 1,996,790 $ 2,289,593
Net decrease in certificate of deposit accounts (2,028,995) (947,619)
Net increase in advance payments by
borrowers for taxes and insurance 1,096,927 1,175,764
Repayments of short-term borrowings - (8,220,000)
Proceeds from other borrowings - 8,000,000
Proceeds from exercise of stock options 92,289 113,451
Dividends paid (164,041) (165,358)
Purchase of treasury stock (982,759) -
----------- -----------
Net cash from financing activities 10,211 2,245,831
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Decrease in cash and cash equivalents (12,784,657) (84,913)
Cash and cash equivalents:
Beginning of year 46,990,638 22,825,892
Cash acquired with Coal City National Bank - 21,745,008
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End of year $34,205,981 $44,485,987
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----------- -----------
Supplemental disclosures of cash flow information Cash paid
during the year for:
Interest on deposits $3,584,700 $3,469,900
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---------- ----------
Interest on borrowed funds $300,600 $372,800
-------- --------
-------- --------
Income taxes - -
-------- --------
-------- --------
Supplemental disclosures of non-cash investing activities:
Real estate acquired through foreclosure $122,713 $124,520
-------- --------
-------- --------
Increase (decrease) in unrealized gains (losses) on
securities available-for-sale ($357,642) ($44,843)
--------- --------
--------- --------
Increase (decrease) in deferred taxes attributable to the
unrealized gains (losses) on securities available-for-sale $121,598 $15,247
-------- -------
-------- -------
Acquisition of Coal City National Bank
Cash paid ($8,084,596)
Assets acquired:
Cash 21,745,008
Investments 15,538,921
Loans 17,560,127
Accrued interest receivable 307,474
Premises and equipment 696,288
Other assets 122,646
Liabilities assumed:
Non-certificates of deposit (28,996,351)
Certificates of deposit (22,691,676)
Accrued interest payable (176,247)
Other liabilities (459,339)
Equity (3,646,851)
------------
$ (8,084,596)
------------
------------
</TABLE>
See notes to consolidated financial statements (unaudited).
5
<PAGE>
KANKAKEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1999
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The statement of condition
at December 31, 1998 has been derived from the audited financial statements at
that date, but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
Operating results for the three-month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the annual report for Kankakee
Bancorp, Inc. (the "Company") on Form 10-K for the year ended December 31, 1998.
Note 2 - Earnings Per Share
Basic earnings per share of common stock have been determined by dividing
net income for the period by the average number of shares of common stock
outstanding. Diluted earnings per share of common stock have been determined by
dividing net income for the period by the average number of shares of common
stock and common stock equivalents outstanding. Common stock equivalents assume
exercise of stock options, and the calculation assumes purchase of treasury
stock with the option proceeds at the average market price for the period (when
dilutive). The Company has an incentive stock option plan for the benefit of
directors, officers and employees. Diluted earnings per share have been
determined considering the stock options granted, net of stock options which
have been exercised.
Note 3 - Accounting for Certain Investments in Debt and Equity Securities
At March 31, 1999, stockholders' equity includes $93,402, which represents
the amount by which the market value of the available-for-sale securities and
the available-for-sale mortgage-backed securities exceeded the book value, net
of an income tax provision of $51,525. An increase in market interest rates
during the three months ended March 31, 1999 resulted in a $236,043 decrease in
the market value, net of income tax effect, of the available-for-sale securities
and the available-for-sale mortgage-backed securities during the three months.
At the end of 1998, the market value of the available-for-sale securities
portfolio exceeded the book value by $329,445, net of income tax benefit.
6
<PAGE>
KANKAKEE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was formed in late 1992 under the laws of the State of Delaware
for the purpose of becoming the savings and loan holding company of Kankakee
Federal Savings Bank (the "Bank"), the Company's principal subsidiary. The Bank
was originally chartered in 1885 as an Illinois savings and loan association and
was converted to a federally chartered thrift institution in 1937.
The Company serves the financial needs of families and local businesses in
its primary market areas through its main office at 310 South Schuyler Avenue,
Kankakee, Illinois and fourteen branch offices located in the communities of
Ashkum, Bourbonnais, Bradley, Braidwood, Champaign, Coal City (2), Diamond,
Dwight, Herscher, Hoopeston, Manteno, Momence and Urbana, Illinois. The
Company's business involves attracting deposits from the general public and
using such deposits to originate residential mortgage loans and, to a lesser
extent, commercial real estate, consumer, commercial business, multi-family and
construction loans in its market areas. The Company also invests in investment
securities, mortgage-backed securities and various types of short term liquid
assets.
FINANCIAL CONDITION
Total assets of the Company increased by $1.0 million, or 0.2%, to $412.8
million at March 31, 1999 from $411.8 million at December 31, 1998.
Cash and cash equivalents decreased by $12.8 million, or 27.2%, from $47.0
million at December 31, 1998 to $34.2 million at March 31, 1999. The decrease
was primarily attributable to the use of cash equivalent assets in the funding
of loans and the purchase of mortgage-backed securities during the quarter.
During the three-month period ended March 31, 1999, net loans receivable
increased by $12.1 million, or 4.9%, from $245.2 million to $257.3 million. This
was primarily the result of the origination (or purchase) of $24.6 million of
real estate loans and the origination (or purchase) of $12.6 million of consumer
and commercial business loans, offset by loan repayments which totaled $25.1
million.
Loans held for sale were $1.9 million at March 31, 1999, which was
approximately the same as they had been at December 31, 1998. During the quarter
ended March 31, 1999, $3.3 million of loans were originated, which originations
were offset by the sale of $3.3 million of such loans.
Securities available-for-sale decreased by $1.4 million, or 1.9%, to $74.5
million at March 31, 1998 from $75.9 million at December 31, 1998 as the result
of the maturity of $6.0 million of securities, which was partially offset by the
purchase of $5.0 million of securities and by the net change in market value
adjustment.
Mortgage-backed securities available-for-sale increased by $3.1 million, or
16.5%, to $21.7 million at March 31, 1999 from $18.6 million at December 31,
1998. The increase resulted from purchases of $5.7 million of securities, which
was partially offset by the maturity of $2.6 million of securities and the
change in market value adjustment.
7
<PAGE>
Deposits remained at $346.8 million as of March 31, 1999. During the
quarter there was a $2.0 million increase in passbook, NOW and money market
accounts which was offset by a $2.0 million decrease in certificate of deposit
accounts.
Total borrowings remained at $22.9 million at March 31, 1999. Borrowings
consisted entirely of advances from the Federal Home Loan Bank of Chicago (the
"FHLB").
Real estate held for sale increased by $251,000, or 13.4%, to $2.1 million
at March 31, 1999, from $1.9 million at December 31, 1998. The increase was the
result of the transfer of one single family property from loans to real estate
held for sale during the three-month period and additional expenditures in the
commercial building in Champaign, Illinois, which is discussed below. These
increases were partially offset by the disposal of three single family
properties and an increase in loss reserves. Included in real estate held for
sale is a commercial building in Champaign, Illinois, which was deeded to the
Company in 1997. The property is fully rented to a retail operation and a local
community college on multi-year leases. Negotiations are continuing on the sale
of the commercial building. Management does not anticipate any material loss on
these transactions.
ASSET/LIABILITY MANAGEMENT
Management attempts to control fluctuations in net interest income which
result from an imbalance in the amounts of assets and liabilities that reprice
during a period of time. The Company attempts to mitigate its interest rate
exposure, to the extent consistent with the maintenance of an adequate interest
rate spread, by retaining adjustable rate loans and selling, in the secondary
market (with servicing typically retained), the majority of 30-year fixed-rate
mortgage loans, and the majority of 20-year fixed-rate mortgage loans bearing a
contractual interest rate of less than 6.75%, which it originates. In addition,
the Company has continued, as market circumstances permit, to build its
portfolio of adjustable rate commercial real estate loans. The Company has also
increased, as market circumstances permit, its origination of installment and
home equity consumer loans having adjustable or floating interest rates and/or
relatively short terms to maturity in an effort to control interest rate risk.
The Company has not entered into derivative financial instruments including
futures, forwards, interest rate risk swaps, option contracts, or other
financial instruments with similar characteristics. However, the Company is a
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.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOSSES ON LOANS
The Company's non-performing assets increased to 0.87% of total assets at
March 31, 1999 from 0.82% of total assets at December 31, 1998. Non-performing
assets increased to $3.6 million at March 31, 1999 compared to $3.4 million at
December 31, 1998. During the three-month period ended March 31, 1999,
non-performing one-to-four family loans, non-performing construction and
development loans and non-performing consumer loans increased by $126,000,
$42,000 and $52,000, respectively. These increases were partially offset by
decreases of $85,000 and $131,000 in non-performing commercial real estate loans
and non-performing commercial business loans, respectively. In addition,
foreclosed assets increased by $244,000. The ratio of the allowance for losses
on loans to non-performing loans decreased to 149.8% as of March 31, 1999 as
compared
8
<PAGE>
to 160.4% as of December 31, 1998. The decrease in this ratio, which excludes
foreclosed assets and restructured troubled debt, was primarily the result of a
decrease of $152,000 in the allowance for losses on loans, which resulted from
net charge-offs.
The Company classified $2.7 million of its assets as Special Mention, $4.3
million as Substandard and $63,000 as Loss as of March 31, 1999. No assets were
classified as Doubtful at March 31, 1999. This represents a decrease of $10,000
in the Special Mention category and a net increase of $128,000 in the other
categories from the December 31, 1998 totals for classified assets. The ratio of
classified assets to total assets (including items classified as Special
Mention) was 1.72% as of March 31, 1999 as compared to 1.70% as of December 31,
1998. The ratio of the allowance for losses on loans to classified assets
decreased to 31.3% as of March 31, 1999 as compared to 34.0% as of December 31,
1998.
The allowance for losses on loans is established through a provision for
losses on loans based on management's evaluation of the risk inherent in the
loan portfolio and changes in the nature and volume of its loan activity. Such
evaluation, which includes a review of all loans with respect to which full
collectibility may not be reasonably assured, considers the fair value of the
underlying collateral, economic conditions, historical loan loss experience,
level of classified loans and other factors that warrant recognition in
providing for an adequate allowance for losses on loans.
While management believes that it uses the best information available to
determine the allowance for losses on loans, unforeseen market conditions could
result in adjustments to the allowance for losses on loans and net earnings
could be significantly affected if circumstances differ substantially from the
assumptions used in establishing the allowance for losses on loans.
BANK ACQUISITION AND OTHER 1998 DEVELOPMENTS
The operating impact of a number of activities and events undertaken during
calendar 1998 is fully reflected in the results for the three-month period ended
March 31, 1999. However, due to their timing, they may have had a lesser impact
or no impact on the results for the comparable 1998 period.
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, and their operating results have been included with
those of the Bank since January 29, 1998. The transaction was accounted for as a
purchase and intangible assets of approximately $3.8 million were recorded as a
result of this purchase.
In addition to the purchase of CCNB, three new branch offices of the Bank
were opened during 1998. A branch in a grocery store in Coal City, Illinois, and
a stand-alone branch in Urbana, Illinois, opened for business in June. A branch
in a superstore in Bradley, Illinois, opened for business in November. The
Company also completed construction of a new building to replace its Herscher,
Illinois, branch. The new building was occupied and opened for business in
August.
During the second quarter of 1998, the Company's item processing was
converted to an in-house operation. Additionally, during the second quarter the
Company completed the data processing conversion of the deposit and loan
accounts acquired with the acquisition of CCNB.
9
<PAGE>
In February 1998, the Bank received regulatory approval to begin offering
trust services. Although granted full trust powers, the Bank has initially
focused on personal trust services and limited employee plan services. It is
anticipated that the trust operations will generate operating losses during the
year ending December 31, 1999, and are not projected to break even or produce a
small profit until the year 2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Net income for the three-month period ended March 31, 1999 was $442,000
compared to $793,000 for the same period in 1998. This represented a $351,000
decrease in net income for the 1999 period. The decrease in net income resulted
from a decrease of $130,000 in net interest income and from a $580,000 increase
in general and administrative expenses, due primarily to expenses relating to
the expansion of the organization. These items were partially offset by an
increase of $186,000 in other income.
Net interest income decreased $130,000, or 4.5%, during the three-month
period ended March 31, 1999, compared to the three-month period ended March 31,
1998.
The table presented on page 16 ("Table I"), sets forth an analysis of the
Company's net interest income for the three-month periods ended March 31, 1999
and 1998.
As Table I indicates, interest income decreased $99,000, or 1.5%, to $6.6
million for the three-month period ended March 31, 1999 from $6.7 million for
the same period in 1998. The decrease in interest income was the result of a
decrease in the yield earned on interest-earning assets to 7.09% during the 1999
period from 7.50% during the 1998 period. This was partially offset by an
increase in the average balance of interest-earning assets to $379.8 million
during the 1999 period from $364.5 million during the 1998 period. The increase
in the average balance of interest-earning assets was primarily due to increases
in balances of loans and investment securities during the period, which were
partially offset by decreases in balances of mortgage-backed securities and
other interest-earning assets. The decrease in the yield earned on
interest-earning assets was the result of declining market interest rates during
1998, which resulted in a high level of loan refinancing.
Interest expense increased $31,000, or 0.8%, but remained at approximately
$3.9 million for the three-month period ended March 31, 1999 compared to the
same period in 1998. The increase in interest expense was the result of an
increase in the average outstanding balance of interest-bearing liabilities to
$369.6 million during the 1999 period from $344.6 million during the 1998
period. This increase was partially offset by a decrease in the average yield on
interest-bearing liabilities to 4.26% during the 1999 period from 4.53% during
the 1998 period. The increase in average interest-bearing liabilities resulted
primarily from deposit growth. The decrease in the average yield on
interest-bearing liabilities resulted from lower market interest rates.
No provision for losses on loans was deemed necessary during either the
first quarter of 1999, or the first quarter of 1998, based on management's
review of the adequacy of the allowance for losses on loans. This was primarily
the result of the acquisition of $398,000 in allowance for losses on loans as
part of the purchase of CCNB in January, 1998.
Other income for the three-month period ended March 31, 1999 increased
$186,000, or 31.1%, to $786,000 compared to $600,000 for the same period in
1998. The increase was attributable to increases of $128,000 in fee income,
$81,000 in other income and $20,000 in gain on sale of real estate held for
sale. These increases were partially offset by decreases of $23,000 in gain on
the
10
<PAGE>
sale of loans held for sale and $20,000 in insurance commissions. The increase
in fee income was the result of an ongoing review of the Company's fee structure
and growth in transaction accounts. The decrease in gain on the sale of loans
held for sale was the result of a smaller volume of origination and sales of
such loans compared to the year earlier period, during which there was a high
volume of refinancings.
Other expenses for the three-month period ended March 31, 1999 increased
$580,000 or 25.4%, to $2.4 million from $2.3 million during the 1998 period. The
increase was primarily attributable to expenses associated with the ongoing
operation of fifteen (15) offices during the 1989 period compared to twelve (12)
during the same period in 1998. The three additional offices were start-ups and
will contribute more to expense than to income until a sufficient customer base
is developed at each of the locations. There were increases in all categories of
other expenses, including increases of $247,000 (19.7%) in compensation and
benefits, $109,000 (29.0%) in amortization of intangible assets. $74,000 (39.0%)
in occupancy costs, $52,000 (42.1%) in furniture and equipment expense, $35,000
(89.4%) in advertising expense and $31,000 (35.2%) in data processing expenses.
Federal income taxes decreased $173,000 to $278,000 for the three-month
period ended March 31, 1999, compared to $401,000 for the same period in 1998.
The primary reason for this decrease was the decrease in pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a certain level of cash and other liquid assets to
fund normal volumes of loan commitments, deposit withdrawals and other
obligations. The Office of Thrift Supervision (the "OTS") regulations currently
require each savings association to maintain, for each calendar quarter, an
average daily balance of liquid assets (including cash and cash equivalent
investments) equal to at least 4% of its liquidity base as of the end of the
preceding calendar quarter or the average daily balance of its liquidity base
during the preceding calendar quarter. The liquidity base consists of net
withdrawable accounts plus borrowings repayable in 12 months or less. At March
31, 1999, the Company's liquidity ratio was 25.4%, which was well in excess of
the minimum regulatory requirement.
The Company's primary sources of funds are deposits and proceeds from
payments of principal and interest on loans and the sale or maturity of
investment securities and mortgage-backed securities. Management considers
current liquidity and additional sources of funds adequate to meet outstanding
liquidity needs.
Federally insured savings banks, such as the Bank, are required by federal
law and OTS regulations to maintain minimum levels of regulatory capital. The
OTS has established the following minimum capital requirements: a risk-based
capital ratio, a core capital ratio and a tangible capital ratio. In addition to
these minimum regulatory capital requirements, another provision of federal law
grants the OTS broad power to take prompt corrective action to resolve the
problems of undercapitalized institutions. The OTS regulations implementing this
statutory authority (the "prompt corrective action regulations") establish other
capital thresholds which determine whether an institution will be deemed to be
"well capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" or "critically undercapitalized". The capital category to
which an institution is assigned in turn determines the actions the OTS may take
to address the institution's undercapitalization. The capital regulations of the
OTS exclude the effect of SFAS 115 for the purpose of calculating regulatory
capital.
11
<PAGE>
The capital regulations currently require tangible capital of at least 1.5%
of adjusted total assets (as defined by regulation). Under the prompt corrective
action regulations, however, an institution with a ratio of tangible capital to
total assets below 2.0% is deemed to be "critically undercapitalized" and, as
such, will be subject to a variety of sanctions under the prompt corrective
action regulations, including, without limitation, limits on asset growth,
restrictions on activities and, ultimately, the appointment of a receiver.
Tangible capital generally includes common stockholders' equity and retained
income and certain non-cumulative perpetual preferred stock and related income
less intangible assets (other than specified amounts of mortgage servicing
rights) and certain non- includable investments in subsidiaries.
The capital regulations also currently require core capital equal to at
least 3.0% of adjusted total assets (as defined by regulation). Under the prompt
corrective action regulations, however, an institution with a ratio of core
capital to adjusted total assets of 3.0% will be deemed to be "adequately
capitalized" only if the institution also has a composite rating of "1" under
the Uniform Financial Institutions Rating System ("UFIRS"). All other
institutions must maintain a minimum ratio of core capital to adjusted total
assets of 4.0% in order to be deemed to be "adequately capitalized", and an
institution, regardless of its UFIRS rating, will be deemed to be "well
capitalized" only if it maintains a ratio of core capital to adjusted total
assets of at least 5.0%. If an institution fails to remain at least "adequately
capitalized", the OTS may impose one or more of a variety of sanctions on the
institution to address its undercapitalized condition, including, without
limitation, requiring the submission of a capital plan, restricting growth and
restricting the payment of capital distributions (such as dividends). Core
capital generally consists of tangible capital plus specified amounts of certain
intangible assets.
The OTS risk-based requirement currently requires associations to have
total capital of at least 8.0% of risk-weighted assets. In order to be
considered "well capitalized" under the prompt corrective action regulations,
however, an institution must maintain a ratio of total capital to total risk-
weighted assets of at least 10.0% and a ratio of core capital to total
risk-weighted assets of at least 6.0%. Total capital consists of core capital
plus supplementary capital, which consists of, among other things, maturing
capital instruments, such as subordinated debt and mandatorily redeemable
preferred stock, and a portion of the Bank's general allowance for losses on
loans.
As of March 31, 1999, the Bank exceeded all current minimum regulatory
capital standards and was deemed to be "well capitalized" for purposes of the
OTS's prompt corrective action regulations. At March 31, 1999, the Bank's
tangible capital was $28.6 million, or 7.1%, of adjusted total assets, which
exceeded the 1.5% requirement by $22.6 million and exceeded the 2.0% "critically
undercapitalized" threshold by $20.5 million. In addition, at March 31, 1999,
the Bank had core capital of $28.6 million, or 7.1%, of adjusted total assets,
which exceeded the 4.0% requirement by $12.5 million and exceeded the 5.0% "well
capitalized" threshold by $8.4 million. The Bank had risk- based capital of
$30.7 million at March 31, 1999, or 13.4%, of risk-adjusted assets, which
exceeded the minimum risk-based capital requirement by $12.3 million and
exceeded the 10.0% "well capitalized" threshold by $7.7 million. Additionally,
the Bank's $28.6 million of core capital equaled 12.4% of total risk-weighted
assets, which exceeded the 6.0% "well capitalized" threshold by $14.8 million.
STOCK REPURCHASE
On January 12, 1999, the Company's Board of Directors authorized the
repurchase through January 31, 2000, of up to 136,000 shares of its common
stock. During the three-month period
12
<PAGE>
ending March 31, 1999, 42,260 shares of common stock were repurchased at a cost
of $983,000. Through March 31, 1999, a total of 465,267 shares of common stock
of the Company had been purchased under the current and previous repurchase
programs at a total cost of $9.3 million. As of March 31, 1999, the Company held
418,652 shares of its common stock as treasury stock. During the period from
March 31, 1999 through May 7, 1999, the Company repurchased 280 shares of common
stock at a cost of $7,000.
EXERCISE OF STOCK OPTIONS
During the first quarter of 1999, options on 6,250 shares of common stock
were exercised. Between March 31, 1999 and May 7, 1999, options on 1,600 shares
of common stock were exercised. No other notice was received from holders of
options of their intent to exercise options during that period.
DIVIDENDS
In January, 1995, the Company began a regular quarterly dividend program
and declared the first cash dividend since becoming a public company. During
1995 and 1996, cash dividends of $.10 per share were paid each quarter. During
1997, 1998 and for the first quarter of 1999, cash dividends of $.12 per share
were paid each quarter. On April 13, 1999, a cash dividend of $.12 per share was
declared payable on May 28, 1999 to stockholders of record as of May 13, 1999.
Future dividends will depend primarily upon earnings, financial condition and
need for funds, as well as restrictions imposed by regulatory authorities
regarding dividend payments and capital requirements.
YEAR 2000 PLANNING AND CONCERNS
The Year 2000 has posed a unique set of challenges to those industries
reliant on information technology. As a result of methods employed by early
programmers, many software applications and operational programs may be unable
to distinguish the Year 2000 from the Year 1900. If not effectively addressed,
this problem could result in the production of inaccurate data, or, in the worst
cases, the inability of the systems to continue to function altogether.
Financial institutions are particularly vulnerable due to the industry's
dependence on electronic data processing systems. In 1997, the Company started
the process of identifying the hardware and software issues required to be
addressed to assure Year 2000 compliance. The Company began by assessing the
issues related to the Year 2000 and the potential for those issues to adversely
affect the Company's operations and those of its subsidiaries.
Since that time, the Company has established a Year 2000 management
committee to deal with this issue. The management committee meets with and
utilizes various representatives from key areas throughout the organization to
aid in analysis and testing. It is the mission of this committee to identify
areas subject to complications related to the Year 2000 and to initiate remedial
measures designed to eliminate any adverse effects on the Company's operations.
The committee has identified all mission-critical software and hardware that may
be adversely affected by the Year 2000 and has required vendors to represent
that the systems and products provided are or will be Year 2000 compliant.
The Company licenses all software used in conducting its business from
third party vendors.
13
<PAGE>
None of the Company's software has been internally developed. The Company has
developed a comprehensive list of all software, all hardware and all service
providers used by the Company. Every vendor has been contacted regarding the
Year 2000 issue, and the Company continues to closely track the progress each
vendor is making in resolving the problems associated with the issue. The vendor
of the primary software in use at the Company released its Year 2000 compliant
software in July 1998. Testing standards were formulated and comprehensive
testing was begun. At March 1999, the testing was complete, with no defects
reported to the software vendors. The Company is in the process of testing a
second time as part of the Company's comprehensive testing strategy. In
addition, the Company plans a third complete test of software in the third
quarter of 1999. The Company actively takes part in a peer users group to aid
the testing process. Users of the primary software talk monthly discussing Year
2000 issues and results. In addition, the Company continues to monitor all other
major vendors of services to the Company for Year 2000 issues in order to avoid
shortages of supplies and services in the coming months. The company has not had
any material delay regarding its information systems projects as a result of the
Year 2000 project.
The Company has two material third party relationships, and thus potential
exposure to Year 2000 issues. The Company's main commercial banking relationship
is with the LaSalle National Bank in Chicago. LaSalle newsletters and
correspondence indicate substantial progress with Year 2000 readiness. The
Company also has a material relationship with the Federal Home Loan Bank of
Chicago, whose newsletters also indicate substantial progress with Year 2000
readiness.
There are four third party utilities with which the Company has a critical,
though not material relationship, i.e. Ameritech and MCI (phone service), ComEd
(electricity) and NICOR (natural gas for heating). The Company has not
identified any practical, long-term alternatives to relying on these companies
for basic utility services. The Company's main office disaster plan has included
a generator for short term power outages and will be used to keep the main
office running in case of power outages caused by Year 2000 issues.
The Company also has tested such things as vault doors, alarm systems,
networks, etc., and is not aware of any significant problems with such systems.
The Company's cumulative costs of the Year 2000 project through the first
quarter of 1999 have been $78,000. After capitalization of purchased software
and hardware, this represents 3.0% of the annual information systems budget. The
estimated total cost of the Year 2000 project is $100,000. This includes costs
to upgrade equipment specifically for the purpose of Year 2000 compliance and
certain administrative expenditures. After capitalization of purchased software
and hardware, this represents 5.5% of the annual information systems budget. At
the present time, no situations have been identified that will require material
cost expenditures to become compliant or that will cause the Company to be
non-compliant. However, the Year 2000 problem is pervasive and complex and can
potentially affect any computer process. Accordingly, no assurance can be given
that Year 2000 compliance can be achieved without additional unanticipated
expenditures and uncertainties that might affect future financial results.
It is not possible at this time to quantify the estimated future costs due
to possible business disruption caused by vendors, suppliers, customers, or even
the possible loss of electric power or phone service; however, such costs could
be substantial.
The Company is committed to a plan for achieving compliance, focusing not
only on its own data processing systems, but also on its loan customers. The
management committee has taken steps to educate and assist its customers with
identifying their Year 2000 compliance problems. In
14
<PAGE>
addition, the management committee has proposed policy and procedure changes to
help identify potential risks to the Company and to gain an understanding of how
customers are managing the risks associated with the Year 2000. The Company is
assessing the impact, if any, the Year 2000 will have on its credit risk, loan
underwriting and cash needs. In connection with potential credit risk related to
the Year 2000 issue, the Company has contacted its large commercial loan
customers regarding their level of preparedness for the Year 2000. The Company
has also contacted large commercial depositors to determine their potential cash
needs over year end 1999.
The Company has developed contingency plans for various Year 2000 problems
and continues to revise those plans based on testing results, vendor
notifications, and regulatory changes.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
This report 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 effect on the
operations and future prospects of the Company and its subsidiaries include, but
are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U. S.
Government, including policies of the U. S. Treasury and the Federal Reserve
Board, the quality of composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and account principles, policies and guidelines. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
15
<PAGE>
<TABLE>
<CAPTION>
TABLE I
NET INTEREST INCOME ANALYSIS (UNAUDITED)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
Three Months Ended March 31,
---------------------------------------------------------------------------
1999 1998
---------------------------------- -------------------------------------
Average Average
Outstanding Interest Yield/ Outstanding Interest Yield/
Balance Earned/Paid Rate Balance Earned/Paid Rate
---------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) $252,841 $4,905 7.87% $250,410 $5,100 8.26%
Mortgage-backed securities 18,754 238 5.15% 28,700 468 6.61%
Investments securities (2) 75,868 1,121 5.99% 50,042 839 6.80%
Other interest-earning assets 30,522 346 4.60% 33,469 300 3.64%
FHLB stock 1,801 28 6.31% 1,856 30 6.56%
---------- -------- --------- --------
Total interest-earning assets 379,786 6,638 7.09% 364,477 6,737 7.50%
--------- -------- --------- --------
Other assets 32,286 21,766
--------- ---------
Total assets $412,072 $386,243
--------- ---------
--------- ---------
Interest-bearing liabilities:
Certificate accounts $210,151 2,802 5.41% $196,457 2,714 5.60%
Savings deposits 61,137 365 2.42% 56,922 374 2.66%
Demand and NOW deposits 75,371 417 2.24% 65,823 410 2.53%
Borrowings 22,900 300 5.31% 25,385 355 5.67%
---------- -------- ---------- --------
Total interest-bearing liabilities 369,559 3,884 4.26% 344,587 3,853 4.53%
---------- -------- ---------- --------
Other liabilities 3,096 3,424
---------- ----------
Total liabilities 372,655 348,011
---------- ----------
Stockholders' equity 39,417 38,232
---------- ----------
Total liabilities and
stockholders' equity $412,072 $386,243
---------- ----------
---------- ----------
Net interest income $2,754 $2,884
-------- --------
-------- --------
Net interest rate spread 2.83% 2.97%
----- -----
----- -----
Net earning assets $10,227 $19,890
---------- ----------
---------- ----------
Net yield on average interest-
earning assets (net interest
margin) 2.94% 3.21%
----- -----
----- -----
Average interest-earning assets to
average interest-bearing liabilities 102.77% 105.77%
-------- --------
-------- --------
</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 investment securities available-for-sale.
(3) Calculated including investment securities available-for-sale and
certificates of deposit.
16
<PAGE>
KANKAKEE BANCORP, INC.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - There are no material pending
legal proceedings to which the Company or the Bank is
a party other than ordinary routine litigation
incidental to their respective businesses.
Item 2. CHANGES IN SECURITIES - None
Item 3. DEFAULTS UPON SENIOR SECURITIES - None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERs - None
Item 5. OTHER INFORMATION - None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits - Exhibit 27 - Financial Data Schedule
Reports on Form 8-K - On March 5, 1999, the Company filed a Report on
Form 8-K reporting that the Company had issued a press release on
March 4, 1999, which announced that its 1999 Annual Meeting of
Stockholders would be held on Friday, April 23, 1999.
17
<PAGE>
KANKAKEE BANCORP, INC.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KANKAKEE BANCORP, INC.
Registrant
Date: May 7, 1999 /s/ MICHAEL A. STANFA
--------------------- --------------------------------
Executive Vice President
Date: May 7, 1999 /s/ RONALD J. WALTERS
--------------------- --------------------------------
Vice President and Treasurer
(Principal Financial
and Accounting Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,583
<INT-BEARING-DEPOSITS> 12,603
<FED-FUNDS-SOLD> 10,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 96,149
<INVESTMENTS-CARRYING> 488
<INVESTMENTS-MARKET> 490
<LOANS> 259,540
<ALLOWANCE> 2,224
<TOTAL-ASSETS> 412,793
<DEPOSITS> 346,785
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,281
<LONG-TERM> 22,900
0
0
<COMMON> 16,055
<OTHER-SE> 22,773
<TOTAL-LIABILITIES-AND-EQUITY> 412,793
<INTEREST-LOAN> 4,905
<INTEREST-INVEST> 1,495
<INTEREST-OTHER> 238
<INTEREST-TOTAL> 6,638
<INTEREST-DEPOSIT> 3,585
<INTEREST-EXPENSE> 3,884
<INTEREST-INCOME-NET> 2,754
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,870
<INCOME-PRETAX> 670
<INCOME-PRE-EXTRAORDINARY> 442
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 442
<EPS-PRIMARY> .33
<EPS-DILUTED> .31
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
