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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______
Commission File Number 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]
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As of March 1, 1999, the Registrant had issued and outstanding
1,357,508 shares of the Registrant's Common Stock. The aggregate market value of
the voting stock held by non-affiliates of the Registrant as of March 1, 1999,
was $27,364,215.*
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and IV of Form 10-K--Portions of the 1998 Annual Report to
Stockholders. PART III of Form 10-K--Portions of the Proxy Statement
for the 1999 Annual Meeting of Stockholders.
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* Based on the last reported price ($23.00) of an actual transaction in
the Registrant's Common Stock on March 1, 1999, 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.
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KANKAKEE BANCORP, INC.
1998 ANNUAL REPORT ON FORM 10-K
Table of Contents
PAGE NUMBER
PART I
Item 1. Business........................................................ 4
Item 2. Properties......................................................48
Item 3. Legal Proceedings...............................................49
Item 4. Submission of Matters to a Vote of Security Holders.............49
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters......................................49
Item 6. Selected Financial Data.........................................49
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................49
Item 7a. Quantitative and Qualitative Disclosures About Market Risk......49
Item 8. Financial Statements and Supplementary Data.....................50
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure..........................50
PART III
Item 10. Directors and Executive Officers of the Registrant..............50
Item 11. Executive Compensation..........................................50
Item 12. Security Ownership of Certain Beneficial Owners and
Management...................................................51
Item 13. Certain Relationships and Related Transactions..................51
Item 14. Exhibits, Financial Statement Schedules, and Reports on 8-K.....51
Form 10-K Signature Page.....................................................53
3
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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 Stock 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 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. At December 31, 1998, the Company had consolidated assets of $411.8
million, deposits of $346.8 million and stockholders' equity of $39.7 million.
4
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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,
resulted in the recording of approximately $3.8 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 has initially focused 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 and
borrowings.
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 fourteen branch offices located in the communities
of Ashkum, Bourbonnais, Bradley, Braidwood, Champaign, Coal City (2), Diamond,
Dwight, Herscher, Hoopeston, Manteno, Momence and Urbana. The Company's market
areas include Kankakee, Champaign, Iroquois and Livingston Counties and portions
of Will, Grundy and Vermilion Counties, Illinois.
5
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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, Bunge
Edible Oil Corporation, Henkel Corporation, KMART Corporation Distribution
Center and Sears Logistics Services, Inc.
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 12,000 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
ComEd, the Braidwood and Dresden nuclear power plants and Collins Station,
Amoco, Equistar Chemicals, Reichhold Chemicals, Mobil and Caterpillar are within
short driving distances.
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.
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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,
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1998 1997 1996 1995 1994
----------------- ------------------ ------------------- ---------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- ------- ------- -------- -------
REAL ESTATE LOANS (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family.........$159,956 59.23% $157,764 58.22% $149,544 54.74% $147,007 54.28% $136,735 61.13%
Multi-family............... 5,556 2.06 7,480 2.76 14,172 5.19 14,475 5.35 14,551 6.51
Commercial................. 21,291 7.88 20,881 7.71 28,721 10.51 28,273 10.44 25,300 11.31
Construction or
development.............. 13,938 5.16 9,004 3.32 5,525 2.02 8,248 3.05 11,730 5.24
Mortgage-backed
securities and parti-
cipation certificates.... 18,746 6.94 28,503 10.52 34,713 12.71 36,481 13.47 6,357 2.84
------ ---- ------ ----- ------ ----- ------ ----- ----- ----
Total real estate loans
and mortgage-backed
securities............. 219,487 81.27 223,632 82.53 232,675 85.17 234,484 86.59 194,673 87.03
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
OTHER LOANS:
Consumer Loans:
Deposit account.......... 827 0.31 820 0.30 588 0.21 745 0.27 504 0.23
Student.................. 231 0.09 825 0.30 918 0.34 1,151 0.43 1,733 0.77
</TABLE>
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<TABLE>
<CAPTION>
DECEMBER 31,
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1998 1997 1996 1995 1994
---------------- ----------------- ----------------- ---------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Automobile.............. 3,830 1.42 4,476 1.65 4,033 1.48 3,219 1.19 2,232 1.00
Home equity............. 17,215 6.37 16,795 6.20 14,166 5.19 12,847 4.74 8,881 3.97
Home improvement........ 7 0.00 13 0.00 56 0.02 208 0.08 327 0.15
Mobile home............. 2,826 1.05 3,293 1.22 3,161 1.16 3,122 1.15 3,207 1.43
Credit cards............ 1,376 0.51 1,534 0.57 1,705 0.62 1,870 0.69 1,804 0.81
Personal................ 6,900 2.55 7,407 2.73 5,942 2.17 3,919 1.45 2,246 1.00
----- ---- ----- ---- ------ ---- ----- ---- ----- ----
Total consumer loans.. 33,212 12.30 35,163 12.97 30,569 11.19 27,081 10.00 20,934 9.36
Commercial business loans... 17,365 6.43 12,185 4.50 9,943 3.64 9,246 3.41 8,074 3.61
------ ----- ------ ----- ------ ----- ------ ----- ----- ----
Total other loans....... 50,577 18.73 47,348 17.47 40,512 14.83 36,327 13.41 29,008 12.97
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total loans and mortgage-
backed securities
receivable................ 270,064 100.00% 270,980 100.00% 273,187 100.00% 270,811 100.00% 223,681 100.00%
------- ------- ------- -------- ------- ------- ------- ------- ------- -------
------- -------- ------- ------- -------
LESS:
Loans in process.......... 1,671 1,121 1,726 957 1,705
Deferred fees and
discounts............... 129 176 425 517 555
Allowance for losses
on loans................ 2,375 2,130 2,360 2,388 2,151
----- ----- ----- ----- -----
Total loans and mortgage-
backed securities
receivable, net.........$265,889 $267,553 $268,676 $266,949 $200,341
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
8
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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,
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1998 1997 1996 1995 1994
---------------- --------------- ----------------- ----------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------ ------- ------- ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED-RATE LOANS AND
MORTGAGE-BACK SECURITIES
Real estate:
One-to-four family...........$75,352 27.90% $56,908 21.00% $50,758 18.58% $51,620 19.06% $55,299 24.72%
Multi-family................. 390 0.14 --- --- --- --- --- --- 37 0.02
Commercial................... 2,076 0.77 1,392 0.51 3,520 1.29 6,128 2.26 2,984 1.33
Construction or
development................ 2,708 1.00 1,711 0.63 690 0.25 1,583 0.58 8,844 3.96
Mortgage-backed securities.... 9,296 3.44 12,502 4.61 17,489 6.40 18,341 6.77 6,357 2.84
------ ---- ------ ---- ------ ---- ------ ---- ----- ----
Total real estate loans and
mortgage-backed
securities ................ 89,822 33.25 72,513 26.75 72,457 26.52 77,672 28.67 73,521 32.87
Consumer......................... 19,087 7.07 19,918 7.35 17,065 6.25 14,876 5.49 12,789 5.72
Commercial business.............. 8,020 2.97 3,005 1.11 2,867 1.05 2,665 0.98 2,359 1.05
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total fixed-rate loans and
mortgage-backed securities.116,929 43.29 95,436 35.21 92,389 33.82 95,213 35.14 88,669 39.64
------- ----- ------ ----- ------ ----- ------ ----- ------ -----
ADJUSTABLE-RATE lOANS AND
MORTGAGE-BACKED SECURITIES
Real estate:
One-to-four family........... 84,604 31.33 100,856 37.22 98,786 36.16 95,387 35.22 81,436 36.41
</TABLE>
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<TABLE>
<CAPTION>
DECEMBER 31,
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1998 1997 1996 1995 1994
---------------- ------------------ ---------------- ---------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- -------- -------- ------ ------- ------ ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Multi-family................ 5,166 1.92 7,480 2.76 14,172 5.19 14,475 5.35 14,514 6.49
Commercial.................. 19,215 7.11 19,489 7.19 25,201 9.22 22,145 8.18 22,316 9.97
Construction or
development............... 11,230 4.16 7,293 2.69 4,835 1.77 6,665 2.47 2,886 1.29
Mortgage-backed securities.. 9,450 3.50 16,001 5.91 17,224 6.31 18,140 6.70 --- ---
------ ---- ------ ---- ------ ---- ------ ---- ------ -----
Total real estate loans
and mortgage-backed
securities.............. 129,665 48.02 151,119 55.77 160,218 58.65 156,812 57.92 121,152 54.16
Consumer........................ 14,125 5.23 15,245 5.63 13,504 4.94 12,205 4.51 8,145 3.64
Commercial business ............ 9,345 3.46 9,180 3.39 7,076 2.59 6,581 2.43 5,715 2.56
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total adjustable-rate loans
and mortgage-backed
securities................ 153,135 56.71 175,544 64.78 180,798 66.18 175,598 64.86 135,012 60.36
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans and mortgage-
backed securities........... 270,064 100.00% 270,980 100.00% 273,187 100.00% 270,811 100.00% 223,681 100.00%
------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- -------
Less:
Loans in process.............. 1,671 1,121 1,726 957 1,705
Deferred fees and discounts... 129 176 425 517 555
Allowance for losses on loans. 2,375 2,130 2,360 2,388 2,251
----- ----- ----- ----- -----
Total loans and mortgage-
backed securities
receivable, net...........$265,889 $267,553 $268,676 $266,949 $219,170
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
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The following schedule illustrates the interest rate sensitivity of the
Company's loan and mortgage-backed securities portfolio at December 31, 1998.
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
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ONE-TO-FOUR FAMILY AND
MORTGAGE-BACKED MULTI-FAMILY AND CONSTRUCTION OR COMMERCIAL
SECURITIES COMMERCIAL DEVELOPMENT CONSUMER BUSINESS TOTAL
------------------- ----------------- ---------------- ---------------- ----------------- ---------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
--------- -------- ------ -------- ------ ------ ------ -------- ------ -------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DUE DURING TWELVE
MONTH PERIODS ENDING
DECEMBER 31,
1999(1)............ $1,143 8.08% $4,481 8.44% $12,159 8.38% $4,930 11.26% $9,710 8.76% $32,423 8.93%
2000 and 2001...... 2,914 8.55 2,564 7.90 1,054 9.24 6,834 9.34 3,666 8.89 17,032 8.89
2002 and 2003...... 4,158 8.49 2,449 7.43 29 9.22 12,297 8.76 2,389 9.02 21,322 8.58
2004 and 2008...... 22,313 7.29 3,873 8.88 265 8.35 7,448 9.11 589 8.45 34,488 7.89
2009 and 2023...... 81,929 7.14 11,696 8.54 138 9.50 1,703 10.10 1,011 8.01 96,477 7.37
2024 and following. 66,245 7.22 1,784 8.80 293 6.50 --- --- --- --- 68,322 7.25
------- -------- ------- ------- ------- -------
Total............$178,702 $26,847 $13,938 $33,212 $17,365 $270,064
------- -------- ------- ------- ------- -------
------- -------- ------- ------- ------- -------
- -------------
(1) Includes demand loans and loans having no stated maturity.
</TABLE>
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As of December 31, 1998, the total amount of loans and mortgage-backed
securities due after December 31, 1999, which had predetermined interest rates
was $107.9 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 $129.8 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, 1998,
the Bank's regulatory loan-to-one borrower limit was $4.5 million. On the same
date, the Bank's largest total of loans to one borrower was $3.5 million.
All of the Company's lending activities are conducted in accordance
with policies adopted by its Board of Directors. The Company is an equal
opportunity lender. Decisions on loan applications are made on the basis of
detailed applications and property valuations (consistent with the Company's
written appraisal policy) prepared by qualified appraisers. The loan
applications are designed primarily to determine the borrower's ability to repay
and the more significant items on the application are verified through use of
credit reports, financial statements, tax returns and/or third-party
confirmations.
The Company requires evidence of marketable title and lien position as
well as appropriate title and other insurance on all loans secured by real
property in amounts at least equal to the principal amount of the loan or the
value of improvements on the property, depending on the type of loan.
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LENDING. The cornerstone of
the Company's lending program is the origination of loans secured by mortgages
on owner-occupied one-to-four family residences. At December 31, 1998, $160.0
million, or 59.2% 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 $49,200
and the largest outstanding residential loan had a book value of $582,000.
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 20 years or
less, and which meet periodically determined minimum interest rates.
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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 20 years, and those which have terms of 20 years or less at a
contractual interest rate of less than a periodically determined interest rate,
that it originates, the Company typically retains the servicing of loans that it
sells. Secondary mortgage market rates are reviewed in conjunction with other
market rates and economic forecasts on a regular basis to determine a rate below
which loans with terms of 20 years or less will be sold. All loans made on
applications taken after the rate is established which are below that rate are
sold. At December 31, 1998, the Company had $59.5 million of 15 year fixed-rate
residential loans and $15.8 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, 1998, the Company had $45.4
million, $5.8 million, and $33.4 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 $1.1 million of
one-to-four family loans delinquent 60 days or more at December 31, 1998,
$792,000 (or 0.5% of one-to-four family loans) consisted of ARMs and $319,000
(or 0.2% 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 $227,150 (the
FHLMC maximum during 1998). As of December 31, 1998, the Company had 43
residential mortgage loans having an aggregate balance of $12.7 million with
original balances in excess of $227,150 ("Jumbo Loans"). The Company's
historical delinquency experience on its Jumbo Loans has been excellent.
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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 1998, one such loan totaling $89,000 was 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, 1998, the Company had $26.8 million in multi-family and commercial
real estate loans, representing 9.9% of the Company's total loan and
mortgage-backed securities portfolio. Included in such loans were $1.9 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, 1998 and the amounts of such loans which were non-performing or "of
concern" at December 31, 1998. 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................... 19 $6,135 $5,556 $1,126
Nursing homes.............................. 1 990 8 ---
Churches................................... 12 3,438 2,600 ---
Agricultural related....................... 11 498 401 ---
Industrial and warehouse................... 42 18,233 11,398 271
Retail..................................... 19 2,721 2,123 49
Office..................................... 6 1,760 982 ---
Other...................................... 30 4,528 3,779 69
--- -------- -------- --------
Total............................. 140 $38,303 $26,847 $1,515
--- -------- -------- --------
--- -------- -------- --------
</TABLE>
14
<PAGE>
Multi-family residential and commercial real estate loans generally
present a higher level of risk than loans secured by one-to-four family
residences. This greater risk is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
PURCHASED LOAN PARTICIPATIONS. In order to supplement lending
activities during periods of low loan volume, the Company has from time to time
purchased participation interests in multi-family 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,
1998. At December 31, 1998, the Bank had $673,000 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, 1998 DEC. 31, 1998 OR OF CONCERN
- -------------------------------- -------------- -------- ------------- ------------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
APARTMENT BUILDINGS:
Santa Ana, California 08/26/86 13,750 839 $753 --- ---
Everett, Washington 09/12/86 5,500 1,375 1,126 --- 1,126
NURSING HOME:
Arlington Heights, Illinois 03/01/73 1,980 990 8 --- ---
------ ----- -------
$1,887 $ --- $1,126
------ ----- -------
------ ----- -------
</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, 1998, the Company had $17.4 million in commercial
business loans outstanding (representing 6.4% of the Company's total loan and
mortgage-backed securities portfolio) with additional commercial business loan
commitments totaling $12.1 million, most of which were undrawn lines of credit.
In addition, at December 31, 1998, the Company had fourteen letters of credit
outstanding, in an aggregate amount of $2.2 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, 1998, the Company had
sixteen commercial business loans with balances of $200,000 or more, in an
aggregate amount of $7.1 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, 1998.
<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 $373 $227 $24
Inventory................................ 19 2,469 844 67
Equipment................................ 86 8,665 4,397 36
Other business assets.................... 19 4,032 2,444 ---
Stocks and bonds......................... 11 931 882 ---
Heavy duty vehicles...................... 64 2,885 1,837 31
Other motor vehicles..................... 14 1,095 339 28
Crops.................................... 4 2,087 555 ---
Life insurance........................... 1 25 20 ---
Stand-by letters of credit............... 7 1,902 --- ---
Beneficial interest in real estate trust. 27 7,520 4,386 68
UNSECURED LOANS............................ 66 2,034 1,434 ---
UNSECURED STAND-BY LETTERS OF CREDIT....... 7 310 --- ---
---- -------- -------- ------
Total commercial business loans.......... 331 $34,328 $17,365 $254
---- -------- -------- ------
---- -------- -------- ------
</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, 1998, the
Company's consumer loans totaled $33.2 million or 12.3% 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, 1998, mobile home loans totaled $2.8
million or approximately 1.1% 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,
1998, the Company held $231,000 of such loans, which represents 0.1% 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, 1998, $438,000, or
approximately 1.3% 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 areas, the Company expanded its construction
lending.
17
<PAGE>
At December 31, 1998, the Company had $4.1 million of residential construction
loans and $269,000 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, 1998, the Bank had approximately $2.1
million in loans to builders of residences, and $1.0 million in loans on
commercial construction. In addition, on the same date, the Company had $6.4
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, 1998,
only four of the Company's construction loans had a principal balance in excess
of $500,000. The total principal balances of these loans was $7.5 million.
The table below sets forth the number and amount of the Company's
construction loans at December 31, 1998, by type of security property.
<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............. 27 $4,187 $4,089 $ 114
Land acquisition and development........... 34 14,646 8,256 2,069
Church..................................... 1 65 58 ---
Retail and Industrial...................... 3 1,548 1,535 ---
--- ------- -------- ------
Total............................. 65 $20,446 $13,938 $2,183
--- ------- -------- ------
--- ------- -------- ------
</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 in the
secondary market. In addition, the Company sells a portion of its newly
originated conventional 15-year, fixed-rate residential mortgage loans and
conventional 20-year, fixed-rate residential mortgage loans which bear an
interest rate of less than a specified level, with servicing retained. The
specified rate level is reviewed on a monthly basis and changed based on market
conditions and interest rate forecasts. 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, 1998, excluding
mortgage-backed securities, approximately $2.6 million of the Company's loan
portfolio consisting of purchased loans and purchased participations was
serviced by others and the Company serviced $71.3 million of loans for others.
During the year ended December 31, 1998, the Company received fee income of
$149,000 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,
----------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ORIGINATIONS BY TYPE:
Adjustable-Rate:
Real estate - one-to-four family......... $ 17,315 $20,180 $21,433
- multi-family............... 99 --- ---
- commercial................. 17,434 8,911 7,745
Non-real estate - consumer............... 12,930 16,521 13,536
- commercial business 12,531 8,085 6,767
-------- -------- --------
Total adjustable-rate.............. 60,309 53,697 49,481
-------- -------- --------
Fixed-Rate:
Real estate - one-to-four family......... 62,295 20,354 13,728
- multi-family............ --- --- ---
- commercial.............. 3,204 3,757 1,829
Non-real estate - consumer............... 9,672 13,470 14,525
- commercial business 7,244 2,870 2,336
-------- -------- --------
Total fixed-rate................... 82,415 40,451 32,418
------- -------- --------
Total loans originated............. 142,724 94,148 81,899
------- -------- --------
PURCHASES:
Real estate - one-to-four family........... --- --- ---
- commercial................. --- 260 1,120
Non-real estate - consumer................. --- --- ---
- commercial business 300 1,920 ---
Loans acquired with CCNB................... 17,958 --- ---
------- ----------- -----------
Total loans....................... 18,258 2,180 1,120
Mortgage-backed securities................. 8,772 --- 12,999
Mortgage-backed securities
acquired with CCNB...... 286 --- ---
--------- ----------- -----------
Total purchased................... 27,316 2,180 14,119
-------- -------- --------
SALES AND REPAYMENTS:
Sales:
Real estate - one-to-four family........... 35,654 6,565 4,834
- commercial 191 --- ---
Non-real estate - consumer................. 1,089 493 792
- commercial business --- --- ---
Loans sold with branch --- --- 3,845
---------- ---------- --------
Total loans........................ 36,934 7,058 9,471
Mortgage-backed securities................. --- --- 4,913
---------- ---------- --------
Total sales........................ 36,934 7,058 14,384
Principal repayments....................... 133,538 89,386 79,269
------- ------- -------
Total reductions................... 170,472 96,444 93,653
------- ------- -------
Increase (decrease) in other items, net.... (484) (2,091) 11
--------- -------- ---------
Net increase (decrease) ........... $ (916) $(2,207) $ 2,376
--------- -------- ---------
--------- -------- ---------
</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 losses on loans. 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, 1998.
<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.... 10 $505 0.32% 16 $606 0.38% 26 $1,111 0.70%
Multi-family.......... --- --- - --- --- --- --- --- --- ---
Commercial............ 2 68 0.32 7 306 1.44 9 374 1.76
Construction and
development......... --- --- --- --- --- --- --- --- ---
Consumer................ 17 122 0.37 52 438 1.32 69 560 1.69
Commercial business..... --- --- --- 4 131 0.75 4 131 0.75
--- ------ --- ------- ----- -------
Total............ 29 $ 695 0.28 79 $1,481 0.59 108 $2,176 0.87
--- ------ --- ------- ----- -------
--- ------ --- ------- ----- -------
</TABLE>
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>
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 losses on loans. If an asset or portion
thereof is classified as Loss, the institution must either establish specific
allowances for losses on loans 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, 1998, on a net basis, the Company had classified $2.7
million of its assets as Special Mention, $4.1 million as Substandard and
$134,000 as Loss. No assets were classified as Doubtful at December 31, 1998.
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, 1998,
there were 56 loans with outstanding principal balances totaling $519,000 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 restruc turings 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,
-----------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One-to-four family(1)................... $606 $659 $524 $516 $485
Multi-family............................ --- --- --- --- 557
Commercial.............................. 265 207 1,396 111 111
Construction and development............ --- 669 --- --- ---
Consumer................................ --- --- --- --- ---
Commercial business..................... 90 --- --- --- ---
------ ------- ------- ------- -------
Total................................ 962 1,535 1,920 627 1,153
----- ----- ----- ----- -----
Accruing loans delinquent more than 90 days:
One-to-four family(1)................... --- --- --- --- ---
Multi-family............................ --- 556 557 557 296
Commercial.............................. 41 73 1,005 --- ---
Construction and development............ --- 234 170 169 ---
Consumer................................ 438 399 177 108 133
Commercial business..................... 40 19 45 --- ---
------- ------- ------- -------- --------
Total................................ 519 1,281 1,954 834 429
------ ------ ------ ------ ------
Foreclosed assets:
One-to-four family...................... 387 --- 96 84 27
Multi-family............................ --- --- --- 675 579
Commercial.............................. 1,489 1,317 69 69 73
Construction and development............ --- --- --- --- ---
Consumer................................ --- 3 --- --- 16
--- --- --- --- ---
Commercial business..................... --- --- --- --- ---
-------- -------- ------- ------- ---------
Total foreclosed assets.............. 1,876 1,320 193 828 695
------ ------ ------ ------ -------
Troubled debt restructuring Real estate:
One-to-four family...................... --- 209 --- --- ---
------- ------- ------- ------- -------
Total troubled debt restructuring.... --- 209 --- --- ---
------- ------- ------- ------- -------
Total non-performing assets............... $3,357 $4,345 $4,067 $2,289 $2,277
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total as a percentage of total
assets.................................. 0.82% 1.27% 1.16% 0.64% 0.75%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
- -------------------------
(1) Includes loans held for sale.
For the years ended December 31, 1998 and 1997, gross interest income
which would have been recorded had the non-accruing loans been current in
accordance with their original terms amounted to $44,493 and $33,215,
respectively. The amount that was included in interest income on such loans was
$28,524 and $48,240 for 1998 and 1997, respectively.
</TABLE>
24
<PAGE>
The Company's non-performing assets at December 31, 1998 included the
following: (i) an automobile dealership in Kankakee, Illinois; (ii) a
residential subdivision in Bourbonnais, Illinois; and (iii) a commercial retail
building in Champaign, Illinois.
25
<PAGE>
ANALYSIS OF ALLOWANCE FOR LOSSES ON LOANS. The following table sets
forth an analysis of the Company's allowance for losses on loans.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(DOLLAR IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period. $2,130 $2,360 $2,388 $2,251 $2,165
Charge-offs:
One-to-four family........................ 20 --- --- --- 31
Multi-family.............................. --- --- --- --- 108
Commercial real estate.................... --- --- --- --- 17
Construction.............................. --- 160 --- --- ---
Consumer.................................. 160 136 125 59 74
Commercial business....................... 44 --- 1 --- 15
------- ------- ------- ------- -----
224 296 126 59 245
------ ------ ------ ------ -----
Recoveries:
One-to-four family........................ --- --- --- --- ---
Multi-family.............................. --- --- --- --- ---
Commercial real estate.................... --- --- --- --- ---
Construction.............................. --- --- --- --- ---
Consumer.................................. 71 33 56 20 33
Commercial business....................... --- --- --- 3 2
------- ------- -------- ------- ------
71 33 56 23 35
------ ------ ------- ------ -----
Net charge-offs............................. (153) (263) (70) (36) (210)
Additions charged to operations............. --- 33 42 173 296
Additions through acquisitions.............. 398 --- --- --- ---
-------- ---------- --------- --------- ---------
Balance at end of period.................... $2,375 $2,130 $2,360 $2,388 $2,251
-------- ---------- --------- --------- ---------
-------- ---------- --------- --------- ---------
Ratio of net charge-offs during the
period to average loans
outstanding during the period............. 0.06% 0.11% 0.03% 0.02% 0.11%
-------- ---------- --------- --------- ---------
-------- ---------- --------- --------- ---------
Ratio of net charge-offs during the
period to average non-
performing assets......................... 3.97% 6.25% 2.20% 1.58% 11.51%
-------- ---------- --------- --------- ---------
-------- ---------- --------- --------- ---------
</TABLE>
The balance in the allowance for losses on loans 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 losses on loans, unforeseen market
conditions could result in adjustments to the allowance for estimated losses on
loans and net earnings could be significantly affected if circumstances differ
substantially from the assumptions used in making the final determination.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- -------------------- ------------------- ---------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----------- ------ ----- ------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four
family.......... $ 415 63.65% $ 521 65.06% $ 408 62.71% $ 403 62.74% $506 62.92%
Multi-family...... 83 2.21 172 3.09 451 5.94 437 6.18 460 6.70
Commercial real
estate.......... 469 8.47 444 8.61 496 12.04 561 12.07 470 14.34
Construction or
development..... 301 5.55 150 3.71 294 2.32 272 3.52 424 2.70
Consumer.......... 208 13.21 215 14.50 185 12.82 170 11.56 150 9.63
Commercial
business........ 556 6.91 352 5.03 276 4.17 259 3.95 241 3.71
Unallocated....... 343 --- 276 --- 250 --- 286 --- --- ---
------ -------- ------- -------- ------ --------- ------- -------- ------- ---------
Total........ $2,375 100.00% $2,130 100.00% $2,360 100.00% $2,388 100.00% $2,251 100.00%
------ -------- ------- -------- ------ --------- ------- -------- ------- ---------
------ -------- ------- -------- ------ --------- ------- -------- ------- ---------
</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, 1998, 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, 1998, the Bank's liquidity ratio (liquid assets as
a percentage of net withdrawable savings and current borrowings) was 27.3% as
compared to the OTS requirement of 4%. The Company believes its liquidity
position is such that it will have no difficulty in meeting any additional
requirements for cash availability which could result from the Year 2000 issue.
28
<PAGE>
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ------------------------
BOOK % OF BOOK % OF BOOK % OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
--------- --------- --------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities (1):
U.S. government securities...................... $21,690 27.60% $7,587 19.33% $ 9,628 17.87%
Federal agency obligations...................... 53,865 68.54 28,876 73.56 41,386 76.82
Municipal bonds................................. 342 0.44 70 0.18 72 0.13
Non-marketable equity securities................ 501 0.64 501 1.28 501 0.93
Mutual fund shares.............................. 388 0.49 360 0.92 331 0.62
-------- -------- --------- -------- --------- --------
Subtotal.................................. 76,786 97.71 37,394 95.27 51,918 96.37
FHLB Stock......................................... 1,801 2.29 1,856 4.73 1,956 3.63
-------- ------- -------- ------- -------- --------
Total investment securities and FHLB
stock.................................. $78,587 100.00% $39,250 100.00% $53,874 100.00%
-------- ------- -------- ------- -------- --------
-------- ------- -------- ------- -------- --------
Average remaining life or term to repricing of
investment securities excluding FHLB stock
and non-marketable securities................... 43 months 52 months 64 months
Other Interest-Earning Assets:
Federal funds sold.............................. $18,525 58.10% $8,575 38.91% $ 7,985 55.59%
Money market funds.............................. 13,311 41.74 5,067 22.99 4,883 33.99
FHLB overnight investments...................... --- --- 6,793 30.83 1,446 10.07
Certificates of deposit......................... 50 0.16 1,602 7.27 50 0.35
------- -------- --------- --------- ---------- --------
Total........................................ $31,886 100.00% $22,037 100.00% $14,364 100.00%
------- -------- --------- --------- ---------- --------
------- -------- --------- --------- ---------- --------
- ---------------------
(1) Includes securities available-for-sale.
</TABLE>
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, 1998, are indicated in the
following table.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-------------------------------------------------------------------------------
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...... $12,081 $ 9,609 $ --- $ --- $21,690
Federal agency
obligations..... 2,960 39,907 9,003 1,995 53,865
Mutual fund
shares...... 388 --- --- --- 388
--------- ----------- --------- --------- ---------
Total ...... $15,429 $49,516 $9,003 $1,995 $75,943
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
Weighted average
yield.......... 5.54% 5.89% 6.35% 7.00% 5.91%
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
SECURITIES
HELD-TO-MATURITY:
Municipal Bonds $ 31 $ 56 $ 177 $ 78 $ 342
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
Weighted average
yield........... 5.77% 5.49% 4.65% 6.25% 5.25%
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
</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 deposit 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,
--------------------------------------------------------------------
1998 1997 1996
----------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Opening balance................. $280,022 $277,348 $286,080
Deposits........................ 872,751 533,933 562,775
Withdrawals..................... 869,404 541,843 573,994
Purchased deposits.............. 51,688 --- ---
Sold deposits. . . . . . . . --- --- (8,608)
Increase (decrease)
before interest
credited...................... 55,035 (7,910) (19,827)
Interest credited............... 11,746 10,584 11,095
---------- ---------- ---------
Ending balance.................. $346,803 $280,022 $277,348
---------- ---------- ---------
---------- ---------- ---------
Net increase (decrease)......... $ 66,781 $ 2,674 $ (8,732)
---------- ---------- ---------
---------- ---------- ---------
Percent increase
(decrease)...................... 23.85% 0.96% (3.05)%
---------- ---------- ---------
---------- ---------- ---------
</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,
---------------------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- ------------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------- ------- ------ ------ ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
TRANSACTION AND
SAVINGS DEPOSITS(1):
Commercial Demand
0% ..................... $15,327 4.42% $9,720 3.47% $7,644 2.76%
Savings Accounts
2.39%................... 60,583 17.47 50,727 18.12 51,966 18.74
NOW Accounts
2.73%................... 46,553 13.42 32,759 11.70 34,756 12.53
Money Market
Accounts
2.96%................... 13,655 3.94 6,699 2.39 6,612 2.38
-------- ------- --------- ------- --------- ---------
Total Non-Certificates.... 136,118 39.25 99,905 35.68 100,978 36.41
-------- ------ -------- ------ -------- --------
CERTIFICATES:
0.00 - 3.99%............. --- --- --- --- 3 0.00
4.00 - 4.99%............. 29,665 8.55 2,561 0.91 6,560 2.37
5.00 - 5.49%............. 36,662 10.57 41,636 14.87 65,714 23.69
5.50 - 5.99% . . . . . 114,663 33.06 103,602 37.00 64,930 23.41
6.00 - 7.99%............. 29,390 8.48 32,025 11.44 38,666 13.94
8.00 - over.............. 23 0.01 97 0.03 273 0.10
----------- ------- ----------- ------- ----------- --------
Total Certificates........ 210,403 60.67 179,921 64.25 176,146 63.51
-------- ------ -------- ------ --------- --------
Accrued Interest.......... 282 0.08 196 0.07 224 0.08
---------- ------- ---------- ------- ----------- --------
Total Deposits............ $346,803 100.00% $280,022 100.00% $277,348 100.00%
---------- ------- ---------- ------- ----------- --------
---------- ------- ---------- ------- ----------- --------
- -----------------
(1) Rates on transaction and savings deposits are those in effect on December
31, 1998.
</TABLE>
32
<PAGE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of December 31, 1998.
<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)
<S> <C> <C> <C> <C> <C> <C> <C>
CERTIFICATE ACCOUNTS
MATURING IN QUARTER
ENDING:
March 31, 1999............ $3,646 $11,768 $32,281 $1,220 $17 $48,932 23.26%
June 30, 1999............. 11,814 1,881 21,892 2,721 --- 38,308 18.21
September 30, 1999........ 1,223 2,694 20,243 6,545 --- 30,705 14.59
December 31, 1999......... 11,004 6,752 12,916 2,128 --- 32,800 15.59
March 31, 2000............ 946 3,224 10,780 3,684 --- 18,634 8.86
June 30, 2000............. 777 5,192 3,942 3,181 --- 13,092 6.22
September 30, 2000........ --- 235 2,213 1,216 --- 3,664 1.74
December 31, 2000......... 206 3,914 1,030 3,302 --- 8,452 4.02
March 31, 2001............ --- 77 2,887 1,221 6 4,191 1.99
June 30, 2001............. --- 222 1,132 24 --- 1,378 0.65
September 30, 2001........ --- --- 1,347 383 --- 1,730 0.82
December 31, 2001......... 49 485 371 1,309 --- 2,214 1.05
Thereafter................ --- 218 3,629 2,456 --- 6,303 3.00
------- ---------- ---------- --------- -------- ---------- -----------
Total..................$29,665 $36,662 $114,663 $29,390 $23 $210,403 100.00%
------- ---------- ---------- --------- -------- ---------- -----------
------- ---------- ---------- --------- -------- ---------- -----------
Percent of total....... 14.10% 17.42% 54.50% 13.97% 0.01%
------- ---------- ---------- --------- --------
------- ---------- ---------- --------- --------
</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, 1998.
<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)..........................$42,726 $33,253 $55,755 $52,649 $184,383
Certificates of deposit of
$100,000 or more (1)....................... 4,928 1,779 5,047 4,697 16,451
Public funds (2)............................ 1,278 3,276 2,703 2,312 9,569
------- -------- ------- -------- --------
Total certificates of
deposit....................................$48,932 $38,308 $63,505 $59,658 $210,403
------- -------- ------- -------- --------
------- -------- ------- -------- --------
</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, 1998, borrowed
money totaled $22.9 million, all of which was in advances from the FHLB of
Chicago. Interest expense on borrowed money totaled $1.3 million during 1998 and
$1.5 million during 1997.
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, 1998, the Company's equity
investment in KFS was approximately $1.1 million. During 1998, KFS recorded net
consolidated income of $156,000. During 1998 and 1997, gross revenues related to
securities and annuities brokerage, appraisal activities and insurance agency
activities totaled approximately $202,000, $235,000 and $62,000, and $173,000,
$215,000 and $82,000, 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
areas. 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, Coal
City, Hoopeston and Champaign/Urbana market areas to be 15.6%, 48.4%, 17.6% 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, 1998, the Company had 146 full-time employees and 23
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 the OTS, the FDIC, the Board of Governors of
the Federal Reserve System (the "Federal Reserve"), the Internal Revenue Service
and state taxing authorities and the Securities and Exchange Commission (the
"SEC"). The effect of applicable statutes, regulations and regulatory 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 is a summary of the material elements of the regulatory
framework that applies to the Company and its subsidiaries. It does not describe
all of the statutes, regulations and regulatory policies that apply to the
Company and its subsidiaries, nor does it restate all of the requirements of the
statutes, regulations and regulatory policies that are described. As such, the
following is qualified in its entirety by reference to the applicable statutes,
regulations and regulatory policies. Any change in applicable law, regulations
or regulatory policies may have a material effect on the business of the Company
and its subsidiaries.
36
<PAGE>
RECENT REGULATORY DEVELOPMENTS
PENDING LEGISLATION. Legislation has been introduced in the Congress
that would allow bank holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities and insurance
activities. The expanded powers generally would be available to a bank holding
company only if the bank holding company and its bank subsidiaries remain
well-capitalized and well-managed. Unlike prior financial modernization bills
considered by the Congress, the pending legislation does not include provisions
eliminating the federal savings association charter and requiring all federal
savings associations to convert to banks. The pending legislation does, however,
restrict the types of non-banking activities that may be conducted by any
company which becomes a unitary savings and loan holding company (I.E., a
savings and loan holding company that controls only one savings association
subsidiary) after October 7, 1998. Under current law, unitary savings and loan
holding companies are generally not subject to restrictions on the types of
non-banking activities in which they may engage. At this time, the Company is
unable to predict whether the proposed legislation will be enacted and,
therefore, is unable to predict the impact such legislation may have on 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 Home Owners'
Loan Act, as amended (the "HOLA"). Under the HOLA, the Company is subject to
periodic examination by the OTS. The Company is also required to file with the
OTS periodic reports of the Company's operations and such additional information
regarding the Company and its subsidiaries 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 is not FDIC-insured.
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. Interstate acquisitions of healthy savings associations, however,
are permitted only if the law of the state in which the savings association to
be acquired is located specifically authorizes 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
37
<PAGE>
loan holding companies located in any state of the United States to acquire
savings associations or savings and loan holding companies located in Illinois,
subject to certain conditions, including the requirement that the laws of the
state in which the acquiror is located permit savings and loan holding companies
located in Illinois to acquire savings associations or savings and loan holding
companies in the acquiror's state.
A savings and loan holding company that controls only one savings
association subsidiary is generally not subject to any restrictions on the types
of 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. The restrictions the OTS may impose include
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 any person or company from acquiring
"control" of a savings association or a savings and loan holding company without
prior notice to the OTS. "Control" is defined in certain cases as the
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, OTS policies provide
that a savings and loan holding company should not pay dividends that are not
supportable by the company's core earnings or that may be funded only by
borrowings or by sales of assets. The OTS also 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.
38
<PAGE>
THE BANK
GENERAL. The Bank is a federally chartered savings association, the
deposits of which are insured by the FDIC's Savings Association Insurance Fund
("SAIF"). As a SAIF-insured, federally chartered savings association, the Bank
is subject to the examination, supervision, reporting and enforcement
requirements of the OTS, as the chartering authority for federal savings
associations, and the FDIC as administrator of the SAIF. The Bank is also a
member of the Federal Home Loan Bank 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, 1998, SAIF assessments ranged from
0% of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 1999, 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 (i)
has engaged or is engaging in unsafe or unsound practices, (ii) is in an unsafe
or unsound condition to continue operations or (iii) 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 Financing Corporation ("FICO"). FICO was
created in 1987 to finance the recapitalization of the Federal Savings and Loan
Insurance Corporation, the SAIF's predecessor insurance fund. As a result of
federal legislation enacted in 1996, beginning as of January 1, 1997, both SAIF
members and members of the FDIC's Bank Insurance Fund ("BIF") became subject to
assessments to cover the interest payments on outstanding FICO obligations.
These 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 final maturity of the outstanding
FICO
39
<PAGE>
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, 1998, the FICO assessment rate for SAIF members ranged between approximately
0.061% of deposits and approximately 0.063% of deposits, while the FICO
assessment rate for BIF members ranged between approximately 0.012% of deposits
and approximately 0.013% of deposits. During the year ended December 31, 1998,
the Bank paid FICO assessments totaling $168,000.
SUPERVISORY ASSESSMENTS. All Federal savings associations are required
to pay supervisory assessments to the OTS to fund the operations of the OTS. The
amount of the assessment is calculated using a formula which takes into account
the institution's size, its supervisory condition (as determined by the
composite rating assigned to the institution as a result of its most recent OTS
examination) and the complexity of its operations. During the year ended
December 31, 1998, the Bank paid supervisory assessments to the OTS totaling
$90,000.
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. Core capital consists primarily of permanent stockholders' equity less
(i) intangible assets other than certain supervisory goodwill, certain mortgage
servicing rights and certain purchased credit card relationships and (ii)
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. Total capital consists primarily of 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, 1998, the Bank was not required by
the OTS to increase its capital to an amount in excess of the minimum regulatory
requirement. As of December 31, 1998, the Bank exceeded its minimum regulatory
capital requirements with a core capital ratio of 6.95%, a tangible capital
ratio of 6.95% and a risk-based capital ratio of 13.62%.
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 as of the association's most recent OTS
examination, with a minimum core capital requirement of
40
<PAGE>
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," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators' corrective
powers include: requiring the institution to submit a capital restoration plan;
limiting the institution's asset growth and restricting its activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions between the
institution and its 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. As of December 31, 1998, the Bank was "well-capitalized," as
defined by OTS regulations.
DIVIDENDS. OTS regulations impose limitations upon all capital
distributions by savings associations, including cash dividends. Under the OTS
rule that is presently in effect, an institution that exceeds all applicable
capital requirements both before and after the proposed capital distribution (a
"Tier 1 Institution") may, 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 amounts of its capital in excess of its 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, 1998, the Bank was a Tier 1
Institution.
The OTS has amended its regulations governing capital distributions
(including cash dividends) by savings associations. The amended rule, which
takes effect April 1, 1999, will 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 examination 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
will be required to obtain OTS approval prior to making a capital distribution
only if: (a) the amount of the proposed capital distribution, when aggregated
with all other capital distributions during the same calendar year, will exceed
an amount equal to the association's year-to-date net income plus its retained
net income for the preceding two years; (b) after giving effect to the
distribution, the association will
41
<PAGE>
not be at least "adequately capitalized" (as defined by OTS regulation); or (c)
the distribution would violate a prohibition contained in an applicable statute,
regulation or agreement with the OTS or the FDIC or violate a condition imposed
in connection with an OTS-approved application or notice. The amended regulation
will continue to require that the OTS be given 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, or by a savings association that, after giving effect to the
distribution, would not be "well-capitalized" (as defined by OTS regulation).
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, 1998. 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, 1998, approximately $5.9 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.
INSIDER TRANSACTIONS. The Bank is subject to certain restrictions
imposed by federal law 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 addition, in October 1998, the federal banking regulators issued
safety and soundness standards for achieving Year 2000 compliance, including
standards for developing and managing Year 2000 project plans, testing
remediation efforts and planning for contingencies.
42
<PAGE>
In general, the safety and soundness 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. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
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 or acquire branch offices anywhere in the United States.
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, 1998, the Bank qualified as a "domestic building and loan
association," as defined in the Internal Revenue Code and met the qualified
thrift lender 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 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 operations and activities. Additionally,
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, 1998, the Bank
satisfied the QTL test, with a ratio of qualified thrift investments to
portfolio assets of 78.0%,
43
<PAGE>
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,
1998, the Bank was in compliance with OTS liquidity requirements, with a
liquidity ratio of 27.3%.
FEDERAL RESERVE SYSTEM. Federal Reserve 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 $46.5 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $46.5 million, the reserve
requirement is $1.395 million plus 10% of the aggregate amount of total
transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve.
The Bank is in compliance with the foregoing requirements. The balances used to
meet the reserve requirements imposed by the Federal Reserve may be used to
satisfy liquidity requirements imposed by the OTS.
FEDERAL AND STATE TAXATION
GENERAL. Prior to 1996, savings associations such as the Bank that met
certain definitional tests relating to the composition of assets and income as
defined in the Internal Revenue Code of 1986 were allowed to establish reserves
for bad debts on "qualifying real property loans" based either upon a percentage
of taxable income or the experience method, whichever resulted in a larger
deduction. Reserves for bad debts on nonqualifying loans were based solely upon
the experience method. The experience method reserve amount is calculated as a
function of the actual bad debt experience sustained by the institution over a
period of years, whereas the percentage of taxable income method is a strict
numeric calculation not dependent on actual loss experience.
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
44
<PAGE>
savings associations 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 1996,
1997 and 1998. 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 losses on loans 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 imposed to the extent it exceed the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million. During the years ended December 31, 1996, 1997 and 1998, 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.
45
<PAGE>
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 49, 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 60, 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 62, is a Senior Vice President and Chief
Lending Officer of the Bank, a position he was appointed to in 1995. Previously
he was Vice President of Commercial and Consumer Lending for the Bank, a
position he held since 1988. Mr. Chantome is responsible for oversight of the
Bank's lending departments. Prior to joining the Bank, from 1981 to 1988, Mr.
Chantome served as Senior Vice President and director of City National Bank and
Keystone Bancshares located in Kankakee, Illinois. Mr. Chantome was an employee
and officer of City National since 1954.
Keith M. Roseland, age 49, 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 56, 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.
46
<PAGE>
Monte S. Crowl, age 34, 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 60, 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 43, 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 45, 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.
Terry L. Ralston, age 49, was elected a Vice President of the Bank in
1998. He is also the Data Processing Manager of the Bank, a position he has held
since joining the Bank in February, 1996. He is responsible for the day-to-day
operation of the Bank's data processing. He has over twenty-five years of
experience in similar positions with financial institutions in northern Illinois
and southern Wisconsin.
47
<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, 1998. At December 31, 1998,
the Company's premises had an aggregate net book value of approximately $5.8
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 1958 Owned N/A $861
Kankakee, Illinois
FULL SERVICE BRANCHES
- ---------------------
Main Street and U.S. 45 1977 Owned N/A 27
Ashkum, Illinois
680 S. Main Street 1974 Owned N/A 280
Bourbonnais, Illinois
990 N. Kinzie Avenue 1998 Leased October 22, 2013 (2) --- (4)
Bradley, Illinois
180 N. Front Street 1998 Leased July 24, 2000 (3) ---
Braidwood, Illinois
1001 S. Neil Street 1992 Owned N/A 806
Champaign, Illinois
100 S. Broadway 1998 Leased July 24, 2000 (3) 198
Coal City, Illinois
660 S. Broadway 1998 Owned N/A 820
Coal City, Illinois
1275 E. Division Street 1998 Owned N/A 385
Diamond, Illinois
302 W. Mazon Avenue 1987 Owned N/A 419
Dwight, Illinois
654 N. Park Road 1998 Owned N/A 634
Herscher, Illinois
323 E. Main Street 1994 Owned N/A 176
Hoopeston, Illinois
310 Section Line Road 1975 Owned N/A 231
Manteno, Illinois
200 W. Washington Street 1995 Owned N/A 165
Momence, Illinois
1708 S. Philo Road 1998 Owned N/A 756
Urbana, Illinois
$5,758
------
------
</TABLE>
- ----------------
(1) Year opened refers to the year in which the current facility opened or
was acquired.
(2) The Bank has an option to cancel this lease at the end of the fifth and
tenth year by providing notice consistent with the terms of the lease.
(3) The Bank has an option to renew this lease for three consecutive five
year terms.
(4) The office opened on November 2, 1998. However, all related bills had not
been submitted for payment by December 31, 1998, and costs had not been
transferred to the appropriate fixed assets accounts.
48
<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, 1998 was $197,000.
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,
1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 55 of the 1998 Annual Report to Stockholders is herein
incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Pages 7 and 8 of the 1998 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 27 of the 1998 Annual Report to Stockholders are herein
incorporated by reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pages 9 through 27 of the 1998 Annual Report to Stockholders are herein
incorporated by reference.
49
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 29 through 53 of the 1998 Annual Report to Stockholders are
herein incorporated by reference.
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 1999 (the "1999 Proxy Statement"), a copy
of which was filed on March 12, 1999.
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 1998, 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, 1998 through December 31, 1998.
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 1999 Proxy Statement entitled "Executive Compensation." The report of
the Company's Compensation Committee is not incorporated into this Form 10-K.
50
<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 1999 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 1999 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 1998 Annual
Report to Stockholders is incorporated by reference in this Annual Report on
Form 10-K as Exhibit 13.
<TABLE>
<CAPTION>
PAGES IN
ANNUAL REPORT SECTION ANNUAL REPORT
--------------------- -------------
<S> <C>
Selected Financial Data.................................................................... 7-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................ 9-27
Report of Independent Auditors............................................................. 29
Consolidated Statements of Financial Condition............................................. 30-31
Consolidated Statements of Income.......................................................... 32
Consolidated Statements of Stockholders' Equity............................................ 33
Consolidated Statements of Cash Flows...................................................... 34-35
Notes to Consolidated Financial Statements................................................. 36-53
Quarterly Financial Information ........................................................... 53
</TABLE>
With the exception of those sections specifically incorporated by
reference, the Registrant's 1998 Annual Report to Stockholders is not deemed
filed as part of this Annual Report on Form 10-K.
(a)(2) FINANCIAL STATEMENT SCHEDULES:
51
<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 (1) N/A
security holders, including debentures
10 Executive Compensation Plans and
Arrangements
a. Stock Option Plan (2) N/A
b. Management Recognition Plan (2) N/A
and Trusts
c. Employee Stock Ownership Plan (1) N/A
d. Money Purchase Pension Plan (1) N/A
e. 401(k) Plan (1) N/A
f. Kankakee Bancorp, Inc. Bank
Incentive Plan and Trust (3) N/A
13 1998 Annual Report to Stockholders N/A
22 Subsidiaries of Registrant N/A
23 Consent of Independent Auditor N/A
27 Financial Data Schedule N/A
99.1 1999 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, 1998.
52
<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 18, 1999 By: /S/ JAMES G. SCHNEIDER
-------------- -----------------------------------
James G. Schneider
Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/S/ JAMES G. SCHNEIDER 3-18-99 Chief Executive Officer and Chairman
---------------------- -------
James G. Schneider Date of the Board (Principal Executive and
Operating Officer)
/S/ RONALD J. WALTERS 3-18-99 Vice President and Treasurer (Principal
---------------------- -------
Ronald J. Walters Date Financial and Accounting Officer)
/S/ WILLIAM CHEFFER 3-18-99 Director
---------------------- -------
William Cheffer Date
/S/ CHARLES C. HUBER 3-18-99 Director
---------------------- -------
Charles C. Huber Date
/S/ WESLEY E. WALKER 3-18-99 Director
---------------------- -------
Wesley E. Walker Date
/S/ LARRY D. HUFFMAN 3-18-99 Director
---------------------- -------
Larry D. Huffman Date
/S/ THOMAS M. SCHNEIDER 3-18-99 Director
---------------------- -------
Thomas M. Schneider Date
/S/ MICHAEL A. STANFA 3-18-99 Director
---------------------- -------
Michael A. Stanfa Date
The foregoing constitute all of the Board of Directors of the Company.
53
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
REGULATION REFERENCE TO PRIOR SEQUENTIAL PAGE NUMBER WHERE
S-K EXHIBIT FILING OR EXHIBIT ATTACHED EXHIBITS ARE LOCATED IN
NUMBER DOCUMENT NUMBER ATTACHED HERETO FORM 10-K
- ------------ --------------------------------- --------------------------- -----------------------------------
<S> <C> <C> <C>
3 Articles of Incorporation (1) N/A
3 Bylaws (1) N/A
4 Instruments defining the rights of (1) N/A
security holders, including debentures
10 Executive Compensation Plans and
Arrangements
a. Stock Option Plan (2) N/A
b. Management Recognition Plan (2) N/A
and Trusts
c. Employee Stock Ownership Plan (1) N/A
d. Money Purchase Pension Plan (1) N/A
e. 401(k) Plan (1) N/A
f. Kankakee Bancorp, Inc. Bank (3) N/A
Incentive Plan and Trust
13 1998 Annual Report to Stockholders N/A
22 Subsidiaries of Registrant N/A
23 Consent of Independent Auditor N/A
27 Financial Data Schedule N/A
99.1 1999 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.
54
<PAGE>
EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL INFORMATION
-------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets.............................. $ 411,779 $ 343,409 $ 350,643 $ 355,103 $ 304,425
Loans, net, including loans held for
sale.................................... 247,144 239,050 233,963 230,467 212,813
Mortgage-backed securities held-to-
maturity................................ 168 204 246 363 6,357
Mortgage-backed securities available-
for-sale................................ 18,578 28,300 34,467 36,119 --
Investment securities held-to-
maturity (1)............................ 893 2,173 623 913 43,031
Investment securities
available-for-sale...................... 75,943 36,823 51,345 47,711 17,318
Deposits.................................. 346,803 280,022 277,348 286,080 265,570
Total borrowings.......................... 22,900 23,495 34,545 29,645 --
Stockholders' equity...................... 39,677 37,821 36,494 36,451 35,526
Shares outstanding........................ 1,367,358 1,371,638 1,414,918 1,453,418 1,522,918
Stockholders' equity per share............ $ 29.02 $ 27.57 $ 25.79 $ 25.08 $ 23.32
Stockholders' tangible equity
per share (2)........................... 24.93 26.00 24.10 23.29 22.81
<CAPTION>
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income..................... $ 27,522 $ 24,895 $ 25,808 $ 22,830 $ 20,297
Total interest expense.................... 16,126 14,273 15,199 12,562 9,222
----------- ----------- ----------- ----------- -----------
Net interest income..................... 11,396 10,622 10,609 10,268 11,075
Provision for losses on loans............. -- 33 42 173 296
----------- ----------- ----------- ----------- -----------
Net interest income after provision for
losses on loans......................... 11,396 10,589 10,567 10,095 10,779
Fee income................................ 1,532 1,023 791 620 659
Gain on sales of loans, mortgage-backed
securities and investment securities.... 179 112 109 69 43
Other non-interest income................. 765 554 1,237 492 484
----------- ----------- ----------- ----------- -----------
Total non-interest income............. 2,476 1,689 2,137 1,181 1,186
Other expenses............................ 10,432 8,185 10,215 8,494 8,330
Income tax expense........................ 1,151 1,081 713 934 1,240
----------- ----------- ----------- ----------- -----------
Total non-interest expense............ 11,583 9,266 10,928 9,428 9,570
----------- ----------- ----------- ----------- -----------
Net income................................ $ 2,289 $ 3,012 $ 1,776 $ 1,848 $ 2,395
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
- ----------
(1) Includes certificates of deposit and non-marketable equity securities.
(2) Calculated by subtracting intangible assets from stockholders' equity and
dividing by shares outstanding.
7
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION (continued)
-------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total
assets)................................................... 0.57% 0.87% 0.50%(3) 0.58% 0.82%
Interest rate spread information:
Average during the year................................... 2.92% 2.86% 2.78% 2.98% 3.60%
End of year............................................... 2.68% 2.73% 2.88% 2.64% 3.14%
Net interest margin (1)................................... 3.07% 3.22% 3.11% 3.37% 3.96%
Ratio of operating expense to average total assets........ 2.60% 2.36% 2.87%(4) 2.67% 2.86%
Return on equity (ratio of net income to average
equity)................................................. 5.86% 8.04% 4.95%(5) 5.10% 6.66%
Ratio of average interest-earning assets to average
interest-bearing liabilities............................ 103.47% 108.25 % 107.40 % 109.33 % 110.83 %
Quality Ratios:
Non-performing assets to total assets at
end of period........................................... 0.82 % 1.27 % 1.16 % 0.64 % 0.75 %
Allowance for loan losses to non-performing loans......... 160.43 % 75.64 % 60.92 % 163.45 % 114.85 %
Classified assets to total assets at end of period (2).... 1.70 % 1.89 % 1.88 % 2.15 % 3.14 %
Allowance for loan losses to classified assets............ 33.95 % 32.86 % 35.80 % 31.30 % 23.52 %
Capital Ratios:
Equity to total assets at end of period................... 9.64 % 11.01 % 10.41 % 10.26 % 11.67 %
Average equity to average assets.......................... 9.75 % 10.71 % 10.06 % 11.38 % 12.34 %
Dividend payout ratio..................................... 30.77 % 24.00 % 33.90 % 33.90 % --
Other data:
Number of full service branch offices..................... 15 9 9 10 10
</TABLE>
- ----------
(1) Net interest income divided by average interest earning assets.
(2) Includes items classified as special mention.
(3) 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%.
(4) Without the effect of the special assessment on SAIF-insured deposits, the
ratio of Operating Expenses to Average Assets would have been 2.40%.
(5) 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 Bank's tangible capital at a level that exceeds 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 30-year,
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 and services 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 [GRAPHIC]
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 THE BANK BEGAN OFFERING A
negative when the amount of interest FULL LINE OF TRUST SERVICES
rate sensitive liabilities exceeds the IN MARCH 1998.
amount of interest rate
MANAGEMENT'S DISCUSSION AND ANALYSIS 9
<PAGE>
sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income while a positive gap would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income while a positive gap would tend to adversely affect net interest
income. At December 31, 1998, total interest-earning assets maturing or
repricing within one year exceeded total interest-bearing liabilities maturing
or repricing in the same period by $16.0 million, representing a positive
cumulative one-year gap equal to 3.9% 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 22.6% of one-to-four family residential
loans originated in 1998 were ARMs. In excess of half of the fixed-rate
one-to-four family loan originations, including loans originated for sale,
during 1998 were in loans with an initial term to maturity of 20 years or less.
Such loans are originated at market rates, and, based on the policy in effect at
the time the application is taken, they are designated for sale or for retention
in the Company's portfolio. At December 31, 1998, approximately $84.6 million,
or 53.5% of the Company's one-to-four family residential loan portfolio
consisted of ARMs. Second, the Company has continued its origination 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 with servicing
retained. The Company also sells a portion of its newly originated conventional
15-year, fixed-rate residential mortgage loans and conventional 20-year,
fixed-rate residential mortgage loans which bear an interest rate of less than a
specified level, with servicing retained. The specified rate level is reviewed
on a monthly basis and changed based on market conditions and interest rate
forecasts.
At December 31, 1998, the Company held $75.4 million of fixed-rate one-to-four
family loans, of which $15.8 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 $1.9 million were classified
as held for sale at December 31, 1998. Most of the remaining $13.9 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
MANAGEMENT'S DISCUSSION AND ANALYSIS 10
<PAGE>
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 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 instantaneously 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. Management believes 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,
1998. 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 accounts, checking
accounts and money market accounts, which totaled $136.2 million at December 31,
1998, 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 TO OVER 1-3 OVER 3-5 OVER 5
1-3 MONTHS ONE YEAR YEARS YEARS YEARS TOTAL
----------- ----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
----------- ----------- ----------- ----------- --------- ---------
Fixed rate one-to-four family
(including mortgage-backed
securities, commercial real
estate and construction
loans)......................... $ 7,005 $ 14,296 $ 24,451 $ 15,896 $ 28,174 $ 89,822
Adjustable rate one-to-four
family (including
mortgage-backed securities,
commercial real estate and
construction loans)............ 41,414 63,541 15,247 9,426 37 129,665
Commercial business loans........ 12,351 2,481 2,036 420 77 17,365
Consumer loans................... 16,966 6,220 6,489 2,009 1,528 33,212
Investment securities and
other.......................... 32,113 13,016 13,098 36,442 11,141 105,810
----------- ----------- ----------- ----------- --------- ---------
Total interest-earning
assets....................... 109,849 99,554 61,321 64,193 40,957 375,874
----------- ----------- ----------- ----------- --------- ---------
Savings deposits................. 1,776 6,874 14,412 10,412 27,109 60,583
Checking and money market........ 6,976 21,264 28,823 11,275 7,245 75,583
Certificates..................... 53,300 99,020 51,780 6,303 -- 210,403
FHLB advances.................... 4,200 -- -- 10,700 8,000 22,900
Other borrowings................. -- -- -- -- -- --
----------- ----------- ----------- ----------- --------- ---------
Total interest-bearing
liabilities.................. 66,252 127,158 95,015 38,690 42,354 369,469
----------- ----------- ----------- ----------- --------- ---------
Interest-earning assets less
interest-bearing liabilities... $ 43,597 $ (27,604) $ (33,694) $ 25,503 $ (1,397) $ 6,405
----------- ----------- ----------- ----------- --------- ---------
----------- ----------- ----------- ----------- --------- ---------
Cumulative interest-rate
sensitivity gap................ $ 43,597 $ 15,993 $ (17,701) $ 7,802 $ 6,405
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
Cumulative interest-rate gap as a
percentage of assets........... 10.59% 3.88% (4.30%) 1.89% 1.56%
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
</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
MANAGEMENT'S DISCUSSION AND ANALYSIS 11
<PAGE>
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Additionally, certain assets, such as
ARMs, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels could deviate
significantly from those assumed in calculating the table. Finally, the ability
of many borrowers to service their adjustable-rate debt may decrease in the
event of an interest rate increase.
Bank Acquisition and Other Developments
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.
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, including acquisition
costs, was $8.2 million, and the transaction was accounted for as a purchase.
Intangible assets of about $3.8 million have been 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.
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.
Financial Condition
Total assets increased by $68.4 million or 19.9%
to $411.8 million at December 31, 1998, from
$343.4 million at December 31, 1997. The increase
in total assets during 1998 was primarily
attributed to the acquisition of CCNB and to
additional net deposit growth during the year.
[PHOTO]
Cash and cash equivalents increased by $24.2
million to $47.0 million at December 31, 1998,
PICTURED IS THE NEWLY from $22.8 million at December 31, 1997. The
BUILT IN-STORE BANKING increase was primarily attributed to the
CENTER INSIDE THE acquisition of CCNB, the decrease in mortgage-
COAL CITY TESTA'S IGA. backed securities, an increase in other
borrowings, and the additional increase in
deposit balances. These increases were partially offset by increases in
investment securities and by a decrease in short-term borrowings.
MANAGEMENT'S DISCUSSION AND ANALYSIS 12
<PAGE>
Loans held for sale increased $1.7 million to $1.9 million at December 31, 1998.
This was the result of the origination for sale of approximately $35.1 million
of fixed-rate loans, offset by the sale with servicing retained of approximately
$33.4 million of such loans, primarily 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 1998, $89,000 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.
As a result of legislation which changed the pricing on education loans
purchased by Student Loan Marketing Association ("Sallie Mae"), the Company
elected to sell its education loan portfolio. During the second quarter of 1998,
education loans totaling $867,000 were sold, resulting in a gain of $22,000, as
the result of this decision. The Company continues to offer student loans.
Pursuant to its ongoing agreement with Sallie Mae, during 1998 the Company sold
an additional $222,000 in student loans at the time the loans were fully
disbursed.
During the year ended December 31, 1998, net loans increased by $6.4 million or
2.7% to $245.2 million from $238.8 million at December 31, 1997. The increase
was the result of the acquisition of $17.6 million in loans with CCNB, the
origination of $61.7 million of real estate loans, the origination of $42.4
million of consumer and commercial business loans, the purchase of $300,000 of
commercial business loans, and loan repayments which totaled $115.0 million. The
high level of interest loan repayments during 1998 was due to low market rates
which resulted in a high volume of refinancing in one-to-four family, commercial
and consumer loans.
At December 31, 1998, investment securities available-for-sale totaled $75.9
million, an increase of $39.1 million or 106.2% from the amount classified as
available-for-sale at December 31, 1997. The increase was the result of the
acquisition of $15.0 million of available-for-sale securities with CCNB, the
purchases of $55.9 million of available-for-sale securities and a positive
adjustment of $432,000 in the market value of available-for-sale securities,
which were partially offset by maturities and calls totaling $32.3 million of
available-for-sale securities, during the fiscal year ended December 31, 1998.
At December 31, 1998, mortgage-backed securities available-for-sale totaled
$18.6 million, a decrease of $9.7 million from the amount classified as
available-for-sale at December 31, 1997. The decrease in mortgage-backed
securities available-for-sale was the result of principal repayments totaling
$18.5 million, and a negative adjustment to market value of $75,000 during the
year, which were partially offset by the purchase of $8.8 million in
mortgage-backed securities available-for-sale.
Held-to-maturity investment securities and non-marketable equity securities
increased by $272,000 to $843,000 at December 31, 1998, from $571,000 at
December 31, 1997. This increase was the result of the acquisition of $179,000
of held-to-maturity investment securities with CCNB and the purchase of $1.2
million of such securities, which was partially offset by the maturity of $1.1
million of held-to-maturity securities.
Deposits increased by $66.8 million (23.8%) to $346.8 million at December 31,
1998, from $280.0 million at December 31, 1997. The increase resulted from the
acquisition of $51.9 million in deposits with the purchase of CCNB, a $7.8
million increase in certificates of deposit, and a $7.1 million increase in
passbook savings, checking and money market accounts.
Borrowed money decreased by $595,000 (2.5%) to $22.9 million at December 31,
1998, from $23.5 million at December 31, 1997. Borrowed money consisted entirely
of advances from the Federal Home Loan Bank of Chicago (the "FHLB"). There were
no borrowings using securities sold under agreements to repurchase at December
31, 1998. Borrowed money was primarily used to purchase and retain
mortgage-backed securities in order to generate additional net interest
MANAGEMENT'S DISCUSSION AND ANALYSIS 13
<PAGE>
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 $27.57 at December
31, 1997, to $29.02 at December 31, 1998. Stockholders' equity increased by
$1.9 million (4.9%) to $39.7 million at December 31, 1998. The increase in
stockholders' equity was attributed to net income of $2.3[nb]million and to
an increase in the market value adjustment on available-for-sale securities
required under Statement of Financial Accounting Standards (""SFAS No.
115''), which, net of provision for income taxes, amounted to $258,000. The
increase was partially offset by the repurchase of 13,650 shares of Company
common stock at a total cost of $347,000 and the payment of dividends of
$661,000, during the year ended December 31, 1998.
Asset Quality
Asset quality is an important aspect of the economic condition of a financial
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, 1998,
to the Year Ended December 31, 1997[cad 228]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, 1998, total classified assets increased by
$515,000 to $7.0 million from $6.5 million at December 31, 1997. This
increase was due to increases of $98,000 in assets classified as Loss, and
$1.0 million in assets categorized as Special Mention, which were partially
offset by a decrease of $584,000 in assets classified as Substandard. The
increase in assets classified as Special Mention was due primarily to the
inclusion of a $1.3 million loan on a townhouse development on which there
has been some downward movement in asset value. However, no loss is
anticipated at this time with respect to this loan.
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,
1998, total non-performing assets decreased by $988,000, or 22.7%, to $3.4
million from $4.3 million at December 31, 1997. The decrease was due to
decreases of $209,000 in restructured troubled debt, $669,000 in non-accruing
construction and development loans, $234,000 in accruing construction and
development loans 90 days or more past due, $556,000 in accruing multi-family
loans 90 days or more past due and $53,000 in non-accruing one-to-four family
loans. These decreases were partially offset by increases of $58,000,
$91,000, $39,000 and $21,000 in non-accruing commercial real estate loans,
non-accruing commercial business loans, accruing consumer loans 90 days or
more past due and accruing commercial business loans 90 days or more past
due, respectively. Based on its review of the non-performing 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.
<PAGE>
(This page has been left blank intentionally.) 15
<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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------
AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE
----------- --------- ---------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)........................................... $ 248,148 $ 20,291 8.18%
Mortgage-backed securities (2)................................. 24,409 1,486 6.09%
Investments securities (3)..................................... 61,739 3,813 6.18%
Other interest-earning assets.................................. 34,879 1,809 5.19%
FHLB stock..................................................... 1,848 123 6.66%
----------- ---------
Total interest-earning assets.............................. 371,023 27,522 7.42%
----------- ---------
Other assets....................................................... 29,486
-----------
Total assets............................................... $ 400,509
-----------
-----------
Interest-bearing liabilities:
Certificate accounts........................................... $ 204,622 11,465 5.60%
Savings deposits............................................... 59,242 1,598 2.70%
Demand and NOW deposits........................................ 71,010 1,775 2.50%
Borrowings..................................................... 23,722 1,288 5.43%
----------- ---------
Total interest-bearing liabilities......................... 358,596 16,126 4.50%
----------- ---------
Other liabilities.................................................. 2,876
-----------
Total liabilities.......................................... 361,472
-----------
Stockholders' equity............................................... 39,037
-----------
Total liabilities and stockholders' equity................. $ 400,509
-----------
-----------
Net interest income................................................ $ 11,396
---------
---------
Net interest rate spread........................................... 2.92%
---------
---------
Net earning assets................................................. $ 12,427
-----------
-----------
Net yield on average interest-earning assets (net interest
margin).......................................................... 3.07%
---------
---------
Average interest-earning assets to average interest-bearing
liabilities...................................................... 103.47%
---------
---------
</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 securities available-for-sale.
(3) Calculated including investment securities available-for-sale and
certificates of deposit.
MANAGEMENT'S DISCUSSION AND ANALYSIS 16
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
- --------------------------------- ---------------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 233,745 $ 18,894 8.08% $ 233,064 $ 19,138 8.21%
32,309 2,198 6.80% 33,696 2,147 6.37%
46,817 2,941 6.28% 55,396 3,645 6.58%
14,775 734 4.97% 17,258 752 4.36%
1,887 128 6.78% 1,862 126 6.77%
- ----------- --------- ----------- ---------
329,533 24,895 7.55% 341,276 25,808 7.56%
- ----------- --------- ----------- ---------
14,750 15,251
- ----------- -----------
$ 344,283 $ 356,527
- ----------- -----------
- ----------- -----------
$ 177,357 9,968 5.62% $ 182,687 10,516 5.76%
51,777 1,409 2.72% 53,987 1,453 2.69%
49,021 1,387 2.83% 51,626 1,531 2.97%
26,273 1,509 5.74% 29,457 1,699 5.77%
- ----------- --------- ----------- ---------
304,428 14,273 4.69% 317,757 15,199 4.78%
- ----------- --------- ----------- ---------
2,394 2,918
- ----------- -----------
306,822 320,675
- ----------- -----------
37,461 35,852
- ----------- -----------
$ 344,283 $ 356,527
- ----------- -----------
- ----------- -----------
$ 10,622 $ 10,609
--------- ---------
--------- ---------
2.86% 2.78%
--------- ---------
--------- ---------
$ 25,105 $ 23,519
- ----------- -----------
- ----------- -----------
3.22% 3.11%
--------- ---------
--------- ---------
108.25% 107.40%
--------- ---------
--------- ---------
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS 17
<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,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable (1).................................................. 7.77% 8.02% 8.05%
Mortgaged-backed securities (2)....................................... 7.18% 6.89% 6.89%
Investment securities (3)............................................. 5.89% 6.08% 6.34%
Other interest-earning assets......................................... 4.60% 5.37% 6.14%
Combined weighted average yield on interest-earning assets............ 7.09% 7.53% 7.68%
Weighted average rate paid on:
Saving deposits....................................................... 2.44% 2.77% 2.72%
Demand and NOW deposits............................................... 2.27% 2.79% 2.95%
Certificates.......................................................... 5.63% 5.80% 5.77%
Borrowings............................................................ 5.34% 5.67% 5.62%
Combined weighted average rate paid on interest-bearing liabilities... 4.41% 4.80% 4.80%
Spread.................................................................... 2.68% 2.73% 2.88%
</TABLE>
- ----------
(1) Includes loans held for sale.
(2) Includes mortgage-backed securities available for sale.
(3) Includes investment securities available for sale and certificates of
deposit.
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, 1998 VS. 1997 DECEMBER 31, 1997 VS. 1996
------------------------------------- ---------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE DUE
TO TO
-------------------- TOTAL INCREASE ---------------------- TOTAL INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
--------- --------- --------------- ----------- --------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans receivable................. $ 1,152 $ 245 $ 1,397 $ 55 $ (299) $ (244)
Mortgage-backed securities....... (538) (174) (712) (80) 131 51
Investment securities............ 935 (63) 872 (544) (160) (704)
Other interest-earning assets.... 998 77 1,075 (116) 98 (18)
FHLB stock....................... (3) (2) (5) 2 0 2
--------- --------- ------ ----------- --------- ------
Total interest-earning
assets..................... $ 2,544 $ 83 $ 2,627 $ (683) $ (230) $ (913)
--------- --------- ------ ----------- --------- ------
--------- --------- ------ ----------- --------- ------
Interest bearing liabilities:
Certificate accounts............. $ 1,537 $ (40) $ 1,497 $ (299) $ (249) $ (548)
Savings deposits................. 202 (13) 189 (60) 16 (44)
Demand and NOW deposits.......... 622 (234) 388 (74) (70) (144)
Borrowings....................... (147) (74) (221) (181) (9) (190)
--------- --------- ------ ----------- --------- ------
Total interest-bearing
liabilities................ $ 2,214 $ (361) $ 1,853 $ (614) $ (312) $ (926)
--------- --------- ------ ----------- --------- ------
--------- --------- ------ ----------- --------- ------
Net interest income.................. $ 774 $ 13
------ ------
------ ------
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS 18
<PAGE>
Comparison of Operating Results for the Year Ended December 31, 1998,
to the Year Ended December 31, 1997
General
Consolidated net income was $2.3 million, or $1.56 per share (diluted), for the
year ended December 31, 1998 compared to $3.0 million, or $2.00 per share
(diluted), for the year ended December 31, 1997.
Net Interest Income
Net interest income was $11.4 million for the year ended December 31, 1998, an
increase of $774,000, or 7.3%, during 1998 as compared to 1997. Net interest
income increased due primarily to the increase in interest income resulting from
the increase in volume of interest-earning assets exceeding the increase in
interest expenses resulting from the increase in volume of interest-bearing
liabilities, and to the decrease in rate on interest bearing liabilities
exceeding the decrease in rate on interest-earning assets.
Interest Income
Interest income totaled $27.5 million for the year ended December 31, 1998, an
increase of $2.6 million or 10.6%, as compared to $24.9 million for 1997. This
resulted from a $41.5 million increase in average interest-earning assets from
$329.5 million during 1997 to $371.0 million during 1998, which was partially
offset by a decrease in the yield earned on assets from 7.55% during 1997 to
7.42% during 1998.
Interest on loans was $20.3 million for 1998, an increase of $1.4 million or
7.4%, as compared to 1997. This was primarily attributable to the effect of an
increase of $14.4 million in average outstanding loans and an increase in the
yield on loans from 8.08% during 1997 to 8.18% during 1998.
Interest earned on mortgage-backed securities was $1.5 million for 1998, as
compared to $2.2 million for 1997. This represented a decrease of 32.4% between
the periods and was primarily due to a decrease of $7.9 million in average
mortgage-backed securities and a decrease in the yield on mortgage-backed
securities to 6.09% during 1998 from 6.80% during 1997.
Interest earned on investment securities and other interest-earning assets and
dividends on FHLB stock totaled $5.7 million for 1998, as compared to $3.8
million for 1997. This represented an increase of 51.1% during 1998. This was
primarily due to an increase in the average balance of these assets from $63.5
million in 1997 to $98.5 million in 1998, which was partially offset by a lower
average yield on these assets from 5.99% in 1997 to 5.83% in 1998.
Interest Expense
Interest expense was $16.1 million for 1998, or $1.9 million (13.0%), higher
than in 1997. This was due to an increase in the average balance outstanding of
interest-bearing liabilities to $358.6 million for 1998, from $304.4 million for
1997, which was partially offset by a decrease in average yields to 4.50% for
1998 from 4.69% for 1997. The lower average yield during 1998 was attributable
to decreases in the average cost of deposit accounts and borrowings, which
resulted from a reduction in market rates.
During 1998, $1.3 million of the Company's interest expense, compared to $1.5
million during 1997, related to advances from the FHLB and from securities sold
under agreements to repurchase.
MANAGEMENT'S DISCUSSION AND ANALYSIS 19
<PAGE>
Provision for Losses on Loans
The provision for losses on loans totaled $33,000 for the year ended December
31, 1997. No provision for losses on loans was deemed necessary during 1998
based on management's review of the adequacy of the allowance for losses on
loans subsequent to the acquisition of $398,000 in allowance for losses on loans
as part of the purchase of CCNB in January, 1998. Charge-offs during 1998
decreased to $224,000, from $296,000 during 1997. In addition to the decrease in
charge-offs, recoveries during 1998 increased to $71,000 from $33,000 in 1997.
The ratio of net charge-offs to average outstanding loans decreased to 0.06% in
1998 from 0.11% in 1997.
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 $2.4 million allowance for losses on loans at
December 31, 1998 was adequate. There can be no assurance that the allowance for
losses on loans 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 for losses on
loans. 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 following is a summary of loan loss experience and nonperforming assets for
the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Total loans...................................................................... $ 249,519 $ 241,180
Total assets..................................................................... 411,779 343,409
Allowance for losses on loans.................................................... 2,376 2,130
Net loan charge-offs............................................................. 153 263
Net loan charge-offs as a percentage of average loans............................ 0.06% 0.11%
Nonperforming loans.............................................................. $ 1,481 $ 3,025
Nonperforming assets............................................................. 3,357 4,345
Nonperforming assets to total assets............................................. 0.82% 1.27%
Allowance for losses on loans to nonperforming loans............................. 160.4% 75.6%
</TABLE>
The Company will continue to monitor and adjust its allowance for losses on
loans based on management's analysis of its loan portfolio and general economic
conditions.
MANAGEMENT'S DISCUSSION AND ANALYSIS 20
<PAGE>
Other Income
Other income increased $787,000 for 1998 to $2.5 million, compared to $1.7
million for 1997. The 46.6% increase in other income was primarily related to
increases of $650,000 in fee income, $100,000 in gain on the sale of loans and
$67,000 in other income. These increases were partially offset by a decrease in
net gain on the sale of securities available-for-sale. The increase in fee
income was attributable to the increase in outstanding balances of transaction
accounts due to the acquisition of CCNB and normal growth, and attributable to
the Company's ongoing review of service charges. During 1998, the Company sold
$35.1 million fixed-rate one-to-four family loans from its held for sale
portfolio, as compared to $6.3 million of similar sales during 1997.
Other Expenses
Other expenses were $10.4 million for 1998, as compared to $8.2 million for
1997. This represented an increase of $2.2 million or 27.5% during 1998. The
increase in other expenses during 1998 was reflected in all but one category of
such expense. Federal insurance premiums decreased by $2,000 (1.0%) during 1998.
The increases were due to several factors, including: the operating of fifteen
offices by year end 1998 compared to nine offices throughout 1997; the start-up
and first year operations of a trust department; non-capital costs associated
with the data processing conversion of the former CCNB offices; non-capital
costs associated with the return of item processing to an in-house operation;
and, the increased level of training required to absorb employees of acquired
offices and new employees to staff additional offices. Compensation and benefits
increased by $1.1 million (25.9%), occupancy increased by $158,000 (21.1%), data
processing increased by $102,000 (36.5%), telephone and postage increased by
$107,000 (43.3%), amortization of intangible assets increased by $176,000
(75.8%) and other general and administrative expenses increased by $343,000
(25.0%).
Income Taxes
Federal income tax expense was $1.2 million for 1998, as compared to $1.1
million for 1997. This increase was primarily the result of an increase in the
effective tax rate which was partially offset by a decrease in pre-tax income.
The Company's effective tax rate was 33% and 26% for the years ended December
31, 1998 and 1997. A summary of the significant tax components is provided in
Note 10 of the Notes to Consolidated Financial Statements included later in this
report.
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 [GRAPHIC]
events were: (1) a one-time IN NOVEMBER 1998, THE BANK OPENED
assessment by the Federal Deposit ITS IN-STORE FACILITY INSIDE THE
Insurance Corporation ("FDIC") on BRADLEY SUPER KMART CENTER. OPEN 65
deposits insured by the Savings HOURS A WEEK, IT IS THE ONLY BANKING
Association Insurance Fund ("SAIF") CENTER IN THE AREA WITH SUNDAY HOURS.
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; and (2) 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS 21
<PAGE>
Net Interest Income
Net interest income was $10.6 million for 1997, an increase of $13,000, or 0.1%,
during 1997 as compared to 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 1997, a decrease of $913,000, or 3.5%,
as compared to $25.8 million for 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 1997, a decrease of $244,000 or 1.3%, as
compared to 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 1997, as
compared to $2.1 million for 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 1997 from 6.37% during 1996.
Interest earned on investment securities and other interest-earning assets and
dividends on FHLB stock totaled $3.8 million for 1997, as compared to $4.5
million for 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 1997, or $926,000 lower than in 1996.
This 6.1% decrease was due to average yields on interest-bearing liabilities
decreasing to 4.69% for the year ended December 31, 1997, from 4.78% for 1996,
and a decrease in the average balance outstanding to $304.4 million for 1997,
from $317.8 million for 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.
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 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS 22
<PAGE>
Other Income
Other income decreased $448,000 for 1997 to $1.7 million, compared to $2.1
million for 1996. The 20.9% decrease in other income was primarily related to a
non-recurring gain of $708,000 recorded during 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 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 1997, as compared to $10.2 million for
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 SAIF of 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 1997, as compared to $713,000
for 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.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS 23
<PAGE>
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, 1998, 1997 and 1996,
respectively:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income.............................................................. $ 2,289 $ 3,012 $ 1,776
Adjustments to reconcile net income to net cash provided by operating
activities............................................................ (774) (1,319) (393)
--------- --------- ---------
Net cash provided by operating activities............................... 1,515 4,331 1,383
Net cash provided (used) by investing activities........................ (12,591) 12,078 (13,327)
Net cash provided (used) by financing activities........................ 13,496 (10,743) 3,409
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.................... 2,420 5,666 (8,535)
Cash and cash equivalents at beginning of period........................ 22,826 17,160 25,695
Cash acquired with Coal City National Bank.............................. 21,745 -- --
--------- --------- ---------
Cash and cash equivalents at end of period.............................. $ 46,991 $ 22,826 $ 17,160
--------- --------- ---------
--------- --------- ---------
</TABLE>
The primary investing activities of the Company are the origination of loans,
the purchase of investment and mortgage-backed securities, and, to a lesser
extent, the purchase of loans and loan participations. During the years ended
December 31, 1998, 1997 and 1996, respectively, the Company's loan originations
totaled $142.7 million, $94.1 million and $81.9 million, respectively, and
purchases of loans totaled $300,000, $2.2 million and $1.1 million,
respectively. Purchases of mortgage-backed securities totaled $8.8 million and
$13.0 million for 1998 and 1996, respectively. There were no purchases of
mortgage-backed securities during 1997. Other investment activities included the
purchase of investment securities which totaled $57.1 million, $3.2 million and
$27.0 million for 1998, 1997 and 1996, respectively. During 1998, 1997 and 1996,
these activities were funded primarily by maturities of investment securities
totaling $33.4 million, $10.2 million and $15.5 million, respectively, by
principal repayments on loans and mortgage-backed securities and proceeds from
the sale of mortgage-backed securities totaling $133.5 million, $89.4 million
and $84.2 million, respectively, and, by sales of investment securities totaling
$8.0 million in 1997 and $7.3 million in 1996. There were no sales of investment
securities during 1998.
The major source of cash from financing activities during 1998 was an increase
of $14.8 million in deposit accounts. Additionally, financing activities for
1998 included the purchase of common stock totaling $347,000, the payment of
dividends to stockholders totaling $661,000 and the net repayment of borrowings
totaling $595,000. The major use of cash from financing activities during 1997
was a decrease of $11.1 million in borrowed money. Additionally, financing
activities for 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 1996 was an increase of
$4.9 million in borrowed money. Additionally, financing activities for the 1996
included the repurchase of common stock totaling $762,000. Net cash provided
from financing activities was used to offset the net cash used in investing
activities for 1998 and 1996. Net cash used in financing activities was offset
by the net cash provided by investing activities for 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 27.3% at December 31, 1998, 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, 1998, 1997 and 1996, these liquid assets totaled
$47.0 million, $22.8 million, and $17.2 million, respectively. The very high
level of liquid assets at December 31, 1998 was due to the net acquisition of
cash with the
MANAGEMENT'S DISCUSSION AND ANALYSIS 24
<PAGE>
CCNB transaction, loan principal repayments and loan sales. The high level of
liquid assets at December 31, 1997 was due to loan principal repayments and to
investment maturities. 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, 1998,
the Company had outstanding borrowings totaling $22.9 million, all of which were
advances from the FHLB.
At December 31, 1998, the Company had outstanding commitments to originate
mortgage loans of $9.1 million, of which 87.8% 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 commitments. Certificates of
deposit which were scheduled to mature in one year or less from December 31,
1998, totaled $150.7 million. Based upon the historically stable nature of the
Company's deposit base, management believes that a significant portion of such
deposits will remain with the Company. The Company also had unused lines of
credit provided to customers of $23.1 million and $19.2 million at December 31,
1998, and 1997, respectively.
At December 31, 1998, the Bank exceeded all of its capital requirements on a
fully phased-in basis. See Note 11 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. Under presently effective
OTS regulations, the institution is authorized, without OTS approval, 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 OTS has amended its
regulations governing dividends by thrift institutions effective April 1, 1999.
Under the amended regulations, the maximum amount of dividends that a thrift
institution will be permitted to pay in any calendar year without prior OTS
approval will be limited to the institution's year-to-date net income plus its
retained net income for the preceding two years. The Bank declared and paid
dividends totaling $1.2 million, $1.8 million and $3.8 million to the Company,
its sole stockholder, during 1998, 1997 and 1996, respectively.
The Company paid its first cash dividend since becoming a public company during
the first quarter of 1995. Cash dividends in the total amount of $.48 per share
per year were paid during 1998 and 1997, and cash dividends in the total amount
of $.40 per share per year were paid during 1996 and 1995. The Board of
Directors of the Company has declared a quarterly cash dividend of $.12 per
share payable on February 26, 1999, to stockholders of record as of February 12,
1999. 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
1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS 25
<PAGE>
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 late 1996, 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. 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 is now substantially complete. By the end of January,
1999, the testing was 95% complete, with no defects reported to the software
vendors. The Company actively takes part in a peer users group to aid the
testing process. Users of the primary software have monthly discussions
concerning Year 2000 testing 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 delays 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 parties with whom 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 fourth
quarter of 1998 have been $65,000. After capitalization of purchased software
and hardware, this represents 2.9% of the annual information systems budget. The
estimated total cost of the Year 2000 project is approximately $100,000. This
includes costs to upgrade equipment specifically for the purpose of
MANAGEMENT'S DISCUSSION AND ANALYSIS 26
<PAGE>
Year 2000 compliance and certain administrative expenditures. After
capitalization of purchased software and hardware, this represents approximately
5.5% of the annual information systems budget. At the present time, no
situations that will require material cost expenditures to become fully
compliant have been identified. 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 and deposit customers.
The management committee has taken steps to educate and assist its customers
with identifying their Year 2000 compliance problems. In 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 Year 2000. Based on its review of the
preparedness of commercial loan customers for dealing with the Year 2000 issue,
management, at this time, does not anticipate additional loss exposure as the
result of the issue. 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 and vendor
notifications.
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 [PHOTO]
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 THE URBANA OFFICE IS THE BANK'S
and the Federal Reserve Board, the quality SECOND FULL-SERVICE BANKING
of composition of the loan or investment FACILITY IN THE GROWING
portfolios, demand for CHAMPAIGN/URBANA COMMUNITY.
MANAGEMENT'S DISCUSSION AND ANALYSIS 27
<PAGE>
products, deposit flows, competition, demand for financial services in the
Company's market area and account principles, policies and guidelines. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
Further information concerning the Company and its business, including
additional factors that could materially affect the Company's financial
results, is included in the Company's filings with the Securities and
Exchange Commission.
MANAGEMENT'S DISCUSSION AND ANALYSIS 28
<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, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
[SIG]
Champaign, Illinois
January 22, 1999
INDEPENDENT AUDITOR'S REPORT 29
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
-----------------------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Assets
Cash and due from banks................................................................... $ 15,154,733 $ 9,184,362
Federal funds sold........................................................................ 18,525,000 8,575,000
Money market funds........................................................................ 13,310,905 5,066,530
-------------- --------------
Cash and cash equivalents................................................................. 46,990,638 22,825,892
-------------- --------------
Certificates of deposit................................................................... 50,000 1,602,000
-------------- --------------
Securities:
Investment securities:
Available-for-sale, at fair value..................................................... 75,942,836 36,823,019
Held-to-maturity, at cost (fair value: 1998 $345,318; 1997 $69,752)................... 341,647 69,752
-------------- --------------
Total investment securities............................................................... 76,284,483 36,892,771
-------------- --------------
Mortgage-backed securities:
Available-for-sale, at fair value..................................................... 18,577,927 28,299,596
Held-to-maturity, at cost (fair value: 1998 $172,340; 1997 $207,815).................. 167,741 203,662
-------------- --------------
Total mortgage-backed securities.......................................................... 18,745,668 28,503,258
-------------- --------------
Nonmarketable equity securities, at cost.................................................. 501,100 501,100
-------------- --------------
Loans..................................................................................... 247,608,314 240,925,455
Less: Allowance for losses on loans....................................................... 2,375,533 2,130,146
-------------- --------------
Net loans................................................................................. 245,232,781 238,795,309
-------------- --------------
Loans held for sale....................................................................... 1,910,966 254,406
Real estate held for sale................................................................. 1,882,324 1,326,302
Federal Home Loan Bank stock, at cost..................................................... 1,801,100 1,856,000
Office properties and equipment........................................................... 8,729,971 5,340,406
Accrued interest receivable............................................................... 2,772,872 2,465,594
Prepaid expenses and other assets......................................................... 1,289,077 884,458
Intangible assets......................................................................... 5,587,678 2,161,740
-------------- --------------
Total assets.................................................................................. $ 411,778,658 $ 343,409,236
-------------- --------------
-------------- --------------
</TABLE>
INDEPENDENT AUDITOR'S REPORT 30
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Liabilities
Deposits
Noninterest bearing............................................................... $ 17,533,020 $ 9,720,181
Interest bearing.................................................................. 329,269,826 270,301,558
Short term borrowings................................................................. -- 8,220,000
Other borrowings...................................................................... 22,900,000 15,275,000
Advance payments by borrowers for taxes and insurance................................. 1,532,482 1,428,880
Other liabilities..................................................................... 866,721 642,250
-------------- --------------
Total liabilities......................................................................... 372,102,049 305,587,869
-------------- --------------
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............................................................ 16,070,157 16,090,239
Retained income, substantially restricted............................................. 31,183,528 29,554,920
Treasury stock (382,642 and 378,362 shares in 1998 and 1997, respectively), at cost... (7,621,599) (7,459,540)
Accumulated comprehensive income...................................................... 329,445 71,881
-------------- --------------
Total stockholders' equity before Employee Stock Ownership Plan Loan...................... 39,979,031 38,275,000
Employee Stock Ownership Plan Loan.................................................... (302,422) (453,633)
-------------- --------------
Total stockholders' equity................................................................ 39,676,609 37,821,367
-------------- --------------
Total liabilities and stockholders' equity.................................................... $ 411,778,658 $ 343,409,236
-------------- --------------
-------------- --------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
INDEPENDENT AUDITOR'S REPORT 31
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans......................................................................... $ 20,291,307 $ 18,893,603 $ 19,138,450
Mortgage-backed securities.................................................... 1,485,642 2,198,282 2,146,885
Investment securities and other............................................... 5,745,120 3,802,714 4,522,142
------------ ------------ ------------
Total interest income..................................................... 27,522,069 24,894,599 25,807,477
------------ ------------ ------------
Interest expense:
Deposits...................................................................... 14,838,161 12,763,541 13,499,576
Borrowed funds................................................................ 1,288,296 1,509,196 1,698,996
------------ ------------ ------------
Total interest expense.................................................... 16,126,457 14,272,737 15,198,572
------------ ------------ ------------
Net interest income........................................................... 11,395,612 10,621,862 10,608,905
Provision for losses on loans..................................................... -- 33,395 41,647
------------ ------------ ------------
Net interest income after provision for losses on loans................... 11,395,612 10,588,467 10,567,258
------------ ------------ ------------
Other income:
Net gain on sales of securities available-for-sale............................ -- 34,146 20,344
Net gain on sales of real estate held for sale................................ 20,367 19,008 44,555
Net gain on sales of loans held for sale...................................... 158,551 58,512 44,451
Net gain on sale of branch.................................................... -- -- 707,675
Fee income.................................................................... 1,673,609 1,023,243 790,387
Insurance commissions......................................................... 130,470 128,184 111,643
Other......................................................................... 493,151 426,170 417,798
------------ ------------ ------------
Total other income........................................................ 2,476,148 1,689,263 2,136,853
------------ ------------ ------------
Other expenses:
Compensation and benefits..................................................... 5,553,788 4,411,759 4,332,053
Occupancy..................................................................... 906,201 748,084 697,073
Furniture and equipment....................................................... 593,600 480,930 381,036
Federal insurance premiums.................................................... 168,322 170,107 2,273,216
Advertising................................................................... 334,659 238,775 164,149
Provision for losses on real estate held for sale............................. 20,442 7,534 --
Data processing services...................................................... 382,263 280,054 318,609
Telephone and postage......................................................... 353,626 246,857 282,040
Amortization of intangible assets............................................. 407,191 231,682 231,683
Other general and administrative.............................................. 1,711,455 1,368,812 1,535,042
------------ ------------ ------------
Total other expenses...................................................... 10,431,547 8,184,594 10,214,901
------------ ------------ ------------
Income before income taxes.................................................... 3,440,213 4,093,136 2,489,210
Income taxes...................................................................... 1,151,047 1,081,500 712,771
------------ ------------ ------------
Net income.................................................................... $ 2,289,166 $ 3,011,636 $ 1,776,439
------------ ------------ ------------
------------ ------------ ------------
Basic Earnings Per Share.......................................................... $ 1.66 $ 2.13 $ 1.24
------------ ------------ ------------
------------ ------------ ------------
Diluted Earnings Per Share........................................................ $ 1.56 $ 2.00 $ 1.18
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
32
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
--------------------------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
EMPLOYEE BANK
ADDITIONAL ACCUMULATED STOCK INCENTIVE
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE OWNERSHIP PLANS AND
STOCK CAPITAL INCOME STOCK INCOME PLAN LOAN TRUSTS
----------- ---------- ---------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995.......... $ 17,500 $16,186,914 $26,015,559 $(5,126,646) $ 188,849 $(756,055) $ (75,434)
Comprehensive income:
Net income........................ -- -- 1,776,439 -- -- -- --
Unrealized gain on securities
available for sale arising
during the period, net of tax of
$(386,176)...................... -- -- -- -- (610,665) -- --
Less: Reclassifications adjustment
for gains included in net
income, net of tax of $7,881.... -- -- -- -- 12,463 -- --
--------------
(598,202)
--------------
Comprehensive income................
Purchase of 39,200 shares of
treasury stock..................... -- -- -- (761,963) -- -- --
Exercise of stock options........... -- -- -- 6,912 -- -- --
Adjustment to paid-in capital due to
exercise of stock options.......... -- (5,188) -- 5,188 -- -- --
Dividends paid on common stock--$.40
per share.......................... -- -- (572,257) -- -- -- --
Principal payment on ESOP loan...... -- -- -- -- -- 151,211 --
Amortization of award of Bank
Incentive Plan stock............... -- -- -- -- -- -- 41,394
----------- ---------- ---------- ---------- -------------- ----------- -----------
Balance, December 31, 1996.......... 17,500 16,181,726 27,219,741 (5,876,509) (409,353) (604,844) (34,040)
Comprehensive income:
Net income........................ -- -- 3,011,636 -- -- -- --
Unrealized gain on securities
available for sale arising
during the period, net of tax of
$291,098........................ -- -- -- -- 460,316 -- --
Less: Reclassifications adjustment
for gains included in net
income, net of tax of $13,228... -- -- -- -- 20,918 -- --
--------------
481,234
--------------
Comprehensive income................
Purchase of 55,000 shares of
treasury stock..................... -- -- -- (1,790,253) -- -- --
Exercise of stock options........... -- -- -- 115,735 -- -- --
Adjustment to paid-in capital due to
exercise of stock options.......... -- (91,487) -- 91,487 -- -- --
Dividends paid on common stock--$.48
per share.......................... -- -- (676,457) -- -- -- --
Principal payment on ESOP loan...... -- -- -- -- -- 151,211 --
Amortization of award of Bank
Incentive Plan stock............... -- -- -- -- -- -- 34,040
----------- ---------- ---------- ---------- -------------- ----------- -----------
Balance, December 31, 1997.......... 17,500 16,090,239 29,554,920 (7,459,540) 71,881 (453,633) --
Comprehensive income:
Net income........................ -- -- 2,289,166 -- -- -- --
Unrealized gain on securities
available for sale arising
during the period, net of tax of
$162,880........................ -- -- -- -- 257,564 -- --
Comprehensive income
Purchase of 13,650 shares of
treasury stock..................... -- -- -- (346,995) -- -- --
Exercise of stock options........... -- -- -- 92,529 -- -- --
Adjustment to paid-in capital due to
exercise of stock options.......... -- (20,082) -- 92,407 -- -- --
Dividends paid on common stock--$.48
per share.......................... -- -- (660,558) -- -- -- --
Principal payment on ESOP loan...... -- -- -- -- -- 151,211 --
----------- ---------- ---------- ---------- -------------- ----------- -----------
Balance, December 31, 1998.......... $ 17,500 $16,070,157 $31,183,528 $(7,621,599) $ 329,445 $(302,422) $ --
----------- ---------- ---------- ---------- -------------- ----------- -----------
----------- ---------- ---------- ---------- -------------- ----------- -----------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balance, December 31, 1995.......... $36,450,687
Comprehensive income:
Net income........................ 1,776,439
Unrealized gain on securities
available for sale arising
during the period, net of tax of
$(386,176)...................... (610,665)
Less: Reclassifications adjustment
for gains included in net
income, net of tax of $7,881.... 12,463
------------
(598,202)
------------
Comprehensive income................ 1,178,237
Purchase of 39,200 shares of
treasury stock..................... (761,963)
Exercise of stock options........... 6,912
Adjustment to paid-in capital due to
exercise of stock options.......... --
Dividends paid on common stock--$.40
per share.......................... (572,257)
Principal payment on ESOP loan...... 151,211
Amortization of award of Bank
Incentive Plan stock............... 41,394
------------
Balance, December 31, 1996.......... 36,494,221
Comprehensive income:
Net income........................ 3,011,636
Unrealized gain on securities
available for sale arising
during the period, net of tax of
$291,098........................ 460,316
Less: Reclassifications adjustment
for gains included in net
income, net of tax of $13,228... 20,918
------------
481,234
------------
Comprehensive income................ 3,492,870
Purchase of 55,000 shares of
treasury stock..................... (1,790,253)
Exercise of stock options........... 115,735
Adjustment to paid-in capital due to
exercise of stock options.......... --
Dividends paid on common stock--$.48
per share.......................... (676,457)
Principal payment on ESOP loan...... 151,211
Amortization of award of Bank
Incentive Plan stock............... 34,040
------------
Balance, December 31, 1997.......... 37,821,367
Comprehensive income:
Net income........................ 2,289,166
Unrealized gain on securities
available for sale arising
during the period, net of tax of
$162,880........................ 257,564
------------
Comprehensive income 2,546,730
Purchase of 13,650 shares of
treasury stock..................... (346,995)
Exercise of stock options........... 92,529
Adjustment to paid-in capital due to
exercise of stock options.......... 72,325
Dividends paid on common stock--$.48
per share.......................... (660,558)
Principal payment on ESOP loan...... 151,211
------------
Balance, December 31, 1998.......... $39,676,609
------------
------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
33
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income................................................................... $ 2,289,166 $ 3,011,636 $ 1,776,439
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for losses on loans............................................ -- 33,395 41,647
Provision for losses on real estate held for sale........................ 20,442 7,534 --
Depreciation and amortization............................................ 1,064,712 763,483 692,304
Amortization of investment premiums and discounts, net................... 299,937 139,640 335,089
Accretion of loan fees and discounts..................................... (45,066) (33,971) (94,362)
Deferred income tax provision (benefit).................................. (33,968) (28,728) 17,894
Origination of loans held for sale....................................... (38,590,159) (6,673,198) (5,684,990)
Proceeds from sales of loans............................................. 37,092,150 7,117,165 5,670,634
(Increase) decrease in interest receivable............................... 196 172,472 (172,918)
Increase (decrease) in interest payable on deposits...................... 86,190 (28,120) (86,326)
Proceeds from sales of trading securities................................ -- -- 21,412,500
Purchase of trading securities........................................... -- -- (21,644,844)
Net gain on sales of loans............................................... (158,551) (58,512) (44,451)
Net gain on sales of securities available-for-sale....................... -- (34,146) (20,344)
Net gain on sales of real estate held for sale........................... (20,367) (19,008) (44,555)
Net gain on sale of branch............................................... -- -- (707,675)
Other, net............................................................... (489,956) (38,494) (62,941)
------------- ------------- -------------
Net cash from operating activities............................................... 1,514,726 4,331,148 1,383,101
------------- ------------- -------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Cash Flow from Investing Activities
Investment securities:
Available-for-sale:
Purchases....................................................... (55,944,227) (3,194,888) (26,967,466)
Proceeds from sales............................................. -- 8,024,060 7,301,376
Proceeds from calls and maturities.............................. 32,295,000 10,189,000 15,500,000
Held-to-maturity:
Purchases....................................................... (1,150,000) -- --
Proceeds from maturities........................................ 1,056,629 2,471 2,322
Mortgage-backed securities:
Available-for-sale:
Purchases....................................................... (8,771,840) -- (12,998,838)
Proceeds from sales............................................. -- -- 4,912,617
Proceeds from maturities and paydowns........................... 18,473,627 6,295,394 9,330,390
Held-to-maturity:
Proceeds from maturities and paydowns........................... 35,921 42,641 116,540
Purchases of certificates of deposit.................................. (765,692) (2,357,500) (826,640)
Proceeds from maturities of certificates of deposit................... 2,317,692 805,500 1,064,140
Proceeds from sales of real estate.................................... 323,492 209,351 945,481
Deferred loan fees and costs, net..................................... 23,210 (179,669) 1,910
Loans originated...................................................... (104,134,300) (87,475,090) (76,214,411)
Loans purchased....................................................... (300,000) (2,180,000) (1,120,000)
Principal collected on loans.......................................... 115,028,208 83,047,771 69,821,907
Purchases of office properties and equipment, net..................... (2,665,242) (1,151,147) (320,326)
Cash transferred to buyer on sale of branch........................... -- -- (3,852,993)
Payment of acquisition costs.......................................... -- -- (22,868)
Acquisition of Coal City National Bank................................ (8,084,596) -- --
Payments of improvements on real estate............................... (328,986) -- --
----------- ----------- -----------
Net cash from investing activities...................................... (12,591,104) 12,077,894 (13,326,859)
----------- ----------- -----------
Cash Flows from Financing Activities
Net increase (decrease) in non-certificate of deposit accounts........ 7,039,825 (1,072,434) (725,722)
Net increase in certificate of deposit accounts....................... 7,790,818 3,774,086 704,198
Increase (decrease) in advance payments by borrowers for taxes and
insurance........................................................... 103,172 (43,940) (141,806)
Proceeds from short-term borrowings................................... -- 66,430,000 59,280,000
Repayments of short-term borrowings................................... (8,220,000) (85,030,000) (52,830,000)
Proceeds from other borrowings........................................ 8,000,000 34,550,000 3,650,000
Repayments of other borrowings........................................ (375,000) (27,000,000) (5,200,000)
Proceeds from exercise of stock options............................... 164,854 115,735 6,912
Dividends paid........................................................ (660,558) (676,457) (572,257)
Purchase of treasury stock............................................ (346,995) (1,790,253) (761,963)
----------- ----------- -----------
Net cash from financing activities...................................... 13,496,116 (10,743,263) 3,409,362
----------- ----------- -----------
</TABLE>
34
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
-------------------------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents................................. $ 2,419,738 $ 5,665,779 $ (8,534,396)
Cash and cash equivalents:
Beginning of year.............................................................. 22,825,892 17,160,113 25,694,509
Cash acquired with Coal City National Bank..................................... 21,745,008 -- --
------------- ------------- -------------
End of year.................................................................... $ 46,990,638 $ 22,825,892 $ 17,160,113
------------- ------------- -------------
------------- ------------- -------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest on deposits......................................................... $ 14,924,400 $ 12,735,400 $ 13,413,300
------------- ------------- -------------
------------- ------------- -------------
Interest on borrowed funds................................................... $ 1,308,500 $ 1,580,700 $ 1,709,200
------------- ------------- -------------
------------- ------------- -------------
Income taxes................................................................. $ 1,177,335 $ 1,386,969 $ 789,436
------------- ------------- -------------
------------- ------------- -------------
Supplemental Disclosures of Noncash Investing Activities:
Real estate acquired through foreclosure....................................... $ 550,603 $ 1,314,939 $ 281,817
------------- ------------- -------------
------------- ------------- -------------
(Increase) decrease in unrealized gains (losses) on securities
available-for-sale........................................................... $ 361,490 $ 729,140 $ (906,232)
------------- ------------- -------------
------------- ------------- -------------
Increase (decrease) in deferred taxes attributable to the unrealized gains
(losses) on securities available-for-sale.................................... $ (103,926) $ (247,906) $ 308,030
------------- ------------- -------------
------------- ------------- -------------
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
------------- ------------- -------------
------------- ------------- -------------
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 accompanying Notes to Consolidated Financial Statements.
35
<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 15 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 and Financial Statement Presentation
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.
Effective January 1, 1998, the Bank adopted Financial Accounting Standards
Board's Statement No. 130, which was issued in June 1997. Statement No. 130
establishes new rules for the reporting and display of comprehensive income and
its components, but has no effect on the Company's net income or total
stockholders' equity. Statement No. 130 requires unrealized gains and losses on
the Company's available-for-sale securities which prior to adoption were
reported separately in stockholders' equity to be included in comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of Statement No. 130.
Effective January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information." Statement No. 131 requires a publicly-held entity to
disclose financial and other descriptive information about all of its reportable
operating segments. The Statement requires disclosure of net income or loss,
certain specific revenue and expense items, and assets for each segment
presented and disclosure of a reconciliation of this information with the
corresponding amounts recognized in the financial statements of the entity. This
Statement also requires disclosure of other pertinent segment information,
including the products and services provided by its operating segments and the
method by which the operating segments were determined.
Based on the Company's approach to decision making, it has decided that its
business is comprised of a single segment and that Statement No. 131 therefore
has no impact on its consolidated financial statements.
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
NOTES TO CONSOLIDATED STATEMENTS 36
<PAGE>
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 accumulated
comprehensive income, 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.
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
NOTES TO CONSOLIDATED STATEMENTS 37
<PAGE>
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.
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 twenty 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
Basic earnings per share is computed by dividing net income for the year by the
average number of shares outstanding of 1,375,553, 1,412,136 and 1,431,011 for
1998, 1997 and 1996, respectively.
Diluted earnings per share is determined by dividing net income for the year by
the 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 average shares outstanding were 1,464,029, 1,502,639 and 1,507,827
for 1998, 1997 and 1996, 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.
NOTES TO CONSOLIDATED STATEMENTS 38
<PAGE>
Trust Assets
Assets of the trust department, other than trust cash on deposit at the Bank,
are not included in these financial statements because they are not assets of
the Bank.
Reclassifications
Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform with the 1998 presentation. Such reclassifications have
no effect on previously reported net income.
Emerging Accounting Standards
In June 1998, The Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Bank has not determined whether to adopt the new statement early.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings.
Because of the Bank's minimal use of derivatives, management does not anticipate
that the adoption of the new Statement will have a significant effect on the
Bank's earnings or financial position.
Note 2. Acquisition of Coal City National Bank
On January 29, 1998, the Company acquired for cash all of the outstanding shares
of Coal City National Bank for $8,084,596. The acquisition has been accounted
for using the purchase method of accounting. As such, the results of operations
of the acquired entity is excluded from the consolidated financial statements of
income for the periods prior to the acquisition date. The purchase price has
been allocated based on the fair values at the date of acquisition. This
allocation resulted in intangible assets of $3,833,128 which are being amortized
over twenty years. At closing, Coal City National Bank had assets of
$55,973,464, deposits of $51,688,027 and stockholders' equity of $3,646,851.
The following information presents a summary of consolidated operations for
unaudited pro forma results of operations for the years ended December 31, 1998
and 1997 as though Coal City National Bank had been acquired as of January 1,
1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Interest income................................................................... $ 27,737 $ 28,827
Interest expense.................................................................. 16,155 16,116
Net income........................................................................ 2,166 3,322
Basic earnings per share.......................................................... 1.57 2.35
Diluted earnings per share........................................................ 1.48 2.21
</TABLE>
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional amortization expense as
a result of goodwill and additional depreciation expense on the revaluation of
purchased assets. They do not purport to be indicative of the results of
operations that actually would have resulted had the combination occurred on
January 1, 1997 or of future results of operations of the consolidated entities.
NOTES TO CONSOLIDATED STATEMENTS 39
<PAGE>
Note 3. Securities
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, 1998
U. S. government and agency securities........... $ 75,186,187 $ 485,222 $ 116,501 $ 75,554,908
Mutual fund shares............................... 387,040 888 -- 387,928
------------ ----------- ----------- ------------
Total investment securities.................. 75,573,227 486,110 116,501 75,942,836
Mortgage-backed securities....................... 18,477,002 127,403 26,478 18,577,927
------------ ----------- ----------- ------------
Total........................................ $ 94,050,229 $ 613,513 $ 142,979 $ 94,520,763
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
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
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
<CAPTION>
HELD-TO-MATURITY
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
December 31, 1998
Municipal bonds.................................. $ 341,647 $ 3,739 $ 68 $ 345,318
Mortgage-backed securities....................... 167,741 4,599 -- 172,340
------------ ----------- ----------- ------------
Total........................................ $ 509,388 $ 8,338 $ 68 $ 517,658
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
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
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The amortized cost and fair value of securities classified as held-to-maturity
and available-for-sale at December 31, 1998, 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............................... $ 31,488 $ 31,711 $ 15,016,068 $ 15,040,506
Due after 1 year through 5 years................ 55,715 56,489 49,168,921 49,516,836
Due after 5 through 10 years.................... 176,745 179,308 9,001,198 9,002,976
Due after 10 years.............................. 77,699 77,810 2,000,000 1,994,596
Mortgage-backed securities...................... 167,741 172,340 18,477,002 18,577,927
Mutual fund shares.............................. -- -- 387,040 387,922
----------- --------- ------------ ------------
Total....................................... $ 509,388 $ 517,658 $ 94,050,229 $ 94,520,763
----------- --------- ------------ ------------
----------- --------- ------------ ------------
</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
NOTES TO CONSOLIDATED STATEMENTS 40
<PAGE>
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
$17,126,000 and $5,639,000 at December 31, 1998 and 1997, 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,
---------------------------------
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Realized gains...................................................... $ -- $ 34,146 $ 280,039
Realized losses..................................................... -- -- (259,695)
--------- ---------- ----------
Net gain (loss)................................................. $ -- $ 34,146 $ 20,344
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
Note 4. Loans
Loans consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Real estate mortgage loans:
One-to-four family.................................................. $ 158,044,604 $ 157,510,095
Multifamily......................................................... 5,556,309 7,480,075
Commercial.......................................................... 21,291,086 20,880,715
Construction and development........................................ 13,937,820 9,004,399
Consumer loans:
Mobile home loans................................................... 2,825,500 3,292,603
Student loans....................................................... 231,319 824,768
Home improvement loans.............................................. 6,915 13,393
Home equity loans................................................... 17,215,139 16,794,915
Credit card loans................................................... 1,376,329 1,533,987
Motor vehicle loans................................................. 3,830,236 4,475,984
Personal loans...................................................... 6,900,189 7,407,321
Loans secured by savings accounts................................... 826,849 819,537
Commercial loans........................................................ 17,365,311 12,184,593
------------- -------------
Gross loans............................................................. 249,407,606 242,222,385
Less:
Unearned discounts.................................................. 904 12,935
Deferred loan fees, net............................................. 126,860 162,973
Undisbursed portion of loan proceeds................................ 1,671,528 1,121,022
------------- -------------
$ 247,608,314 $ 240,925,455
------------- -------------
------------- -------------
</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 $71,322,000, $36,999,000
and $35,377,000 at December 31, 1998, 1997 and 1996.
NOTES TO CONSOLIDATED STATEMENTS 41
<PAGE>
Note 5. Allowance for Losses on Loans
Changes in the allowance for losses on loans were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year................................... $ 2,130,146 $ 2,359,889 $ 2,387,856
Balance acquired............................................... 398,178 -- --
Provision for losses on loans.................................. -- 33,395 41,647
Charge-offs.................................................... (223,869) (296,432) (125,666)
Recoveries..................................................... 71,078 33,294 56,052
----------- ----------- -----------
Balance at end of year......................................... $ 2,375,533 $ 2,130,146 $ 2,359,889
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Note 6. Office Properties and Equipment
Office properties and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Office properties:
Land.................................................................. $ 1,667,011 $ 1,050,278
Building.............................................................. 5,936,174 4,357,469
Leasehold improvements................................................ 205,826 --
Parking facilities:
Land.................................................................. 340,862 340,862
Improvements.......................................................... 133,418 133,418
Land acquired for future use.............................................. 1,493,634 1,303,484
Furniture and equipment................................................... 5,495,194 4,039,788
------------ ------------
15,272,119 11,225,299
Less: Accumulated depreciation and amortization........................... 6,542,148 5,884,893
------------ ------------
$ 8,729,971 $ 5,340,406
------------ ------------
------------ ------------
</TABLE>
Depreciation and amortization expense amounted to $657,521, $531,801 and
$460,621 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company leases space inside three grocery stores, which are the locations of
the Bank's Braidwood and Bradley offices, and one of its Coal City offices. The
leases on the Braidwood and Coal City locations expire in 2000 with options to
renew for three additional periods of five years. The lease on the Bradley
location expires in 2013, but the lease terms provide for early termination in
either 2003 or 2008, providing certain advance notice requirements are met.
The total minimum rental commitment including all option periods, at December
31, 1998, under the leases mentioned above is as follows:
<TABLE>
<CAPTION>
YEAR OF MATURITY AMOUNT
-------------
<S> <C>
1999................................................................................... $ 71,946
2000................................................................................... 81,449
2001................................................................................... 84,067
2002................................................................................... 84,067
2003................................................................................... 85,911
Thereafter............................................................................. 1,049,194
-------------
$ 1,456,634
-------------
-------------
</TABLE>
The total rental expense included in the income statement for the year ended
December 31, 1998 was $27,797. There was no expense related to these lease
agreements included in the income statement for the year ended December 31,
1997.
NOTES TO CONSOLIDATED STATEMENTS 42
<PAGE>
Note 7. Deposits
As of December 31, 1998, certificates of deposit had scheduled maturity dates as
follows:
<TABLE>
<CAPTION>
YEAR OF MATURITY AMOUNT
-------------
<S> <C>
1999................................................................................... $ 150,745,011
2000................................................................................... 43,842,060
2001................................................................................... 9,512,536
2002................................................................................... 3,750,437
2003 and thereafter.................................................................... 2,552,992
-------------
$ 210,403,036
-------------
-------------
</TABLE>
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $24,717,651 and $15,477,441 at December 31, 1998 and 1997,
respectively.
Note 8. Short-Term Borrowings
Short-term borrowings consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Securities sold under agreements to repurchase.............................. $ -- $ 3,220,000
Federal Home Loan Bank short-term advances.................................. -- 5,000,000
----------- -----------
Total....................................................................... $ -- $ 8,220,000
----------- -----------
----------- -----------
</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 were pledged to collateralize the repurchase agreements
as of December 31, 1997.
Advances from the FHLB which were due within three months or less are considered
short term. The advances from the FHLB are collateralized by one-to-four family
residential mortgages.
Average and maximum balances and rates on aggregate short-term borrowings
outstanding were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997
----------- ------------
<S> <C> <C>
Maximum month-end balance.................................................. $ 8,220,000 $ 24,990,000
Average month-end balance.................................................. 685,000 12,071,000
Weighted average interest rate for the year................................ 5.77% 5.60
Weighted average interest rate at year-end................................. -- 5.78
</TABLE>
Note 9. Other Borrowings
Other borrowings at December 31, 1998 and 1997 consisted of advances from the
FHLB of $22,900,000 and $15,275,000, respectively. The weighted average maturity
date was approximately 60 months and 44 months, respectively, and the weighted
average interest rates were approximately 5.34% and 5.61%, respectively.
Advances from the FHLB are collateralized by one-to-four family residential
mortgages.
NOTES TO CONSOLIDATED STATEMENTS 43
<PAGE>
Future payments at December 31, 1998, for all other borrowings were as follows:
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT
------------
<S> <C>
1999.................................................................................... $ 4,200,000
2000.................................................................................... --
2001.................................................................................... --
2002.................................................................................... 10,700,000
2003.................................................................................... --
Thereafter.............................................................................. 8,000,000
------------
Total................................................................................... $ 22,900,000
------------
------------
</TABLE>
Note 10. 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, 1998 and 1997 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, 1998 and 1997.
As of December 31, 1998, the Bank had State net operating loss carryforwards of
approximately $9,123,000 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 $432,324 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,
-----------------------------------
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Current.......................................................... $ 1,185,015 $ 1,110,228 $ 694,877
Deferred......................................................... (33,968) (28,728) 17,894
----------- ----------- ---------
$ 1,151,047 $ 1,081,500 $ 712,771
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
NOTES TO CONSOLIDATED STATEMENTS 44
<PAGE>
The Company's income tax expense differed from the maximum statutory federal
rate of 35% as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Expected income taxes............................................ $ 1,204,075 $ 1,432,598 $ 871,224
Income tax effect of:
State income tax, net of federal benefit..................... 9,816 65,399 --
Income taxed at lower rate................................... (34,402) (40,932) (24,893)
Utilization of state net operating loss carryforwards........ (9,816) (65,399) --
Bank Incentive Plan.......................................... (3,329) (31,168) (38,495)
Other........................................................ (15,297) (278,998) (95,065)
----------- ----------- ---------
$ 1,151,047 $ 1,081,500 $ 712,771
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
Significant components of the deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for losses on loans........................................... $ 811,472 $ 724,590
State net operating loss carryforwards.................................. 432,324 447,673
Accrued benefits........................................................ 125,256 67,614
Intangible assets....................................................... 43,454 46,550
Other................................................................... 37,511 136,927
----------- -----------
Total deferred tax assets........................................... 1,450,017 1,423,354
Valuation allowance for deferred tax assets............................. 432,324 447,673
----------- -----------
Total deferred tax assets, net of valuation allowance............... 1,017,693 975,681
----------- -----------
Deferred tax liabilities:
Unrealized gain in assets available-for-sale............................ (141,089) (37,163)
Loan fees deferred for income tax purposes.............................. (79,850) (105,229)
Excess of tax accumulated provision for losses over base year........... (109,747) (146,330)
Stock dividend on FHLB stock............................................ (50,280) (51,812)
Loan costs deferred for book purposes................................... (171,923) (113,056)
Mortgage servicing rights............................................... (105,465) (28,194)
Other................................................................... (40,832) (37,496)
----------- -----------
Total deferred tax liabilities...................................... (699,186) (519,280)
----------- -----------
Net deferred tax assets..................................................... $ 318,507 $ 456,401
----------- -----------
----------- -----------
</TABLE>
The Company believes that it is more likely than not that the deferred tax asset
will be realized based upon historical taxable income levels. The Company has
reported federal taxable income and pretax book income amounts totaling
approximately $8.6 million and $8.5 million over the past three years,
respectively.
Note 11. 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
NOTES TO CONSOLIDATED STATEMENTS 45
<PAGE>
(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, 1998, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1998, 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 UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Tangible Capital to Tangible Assets
Kankakee Federal Savings Bank.......... $ 27,832 6.95% $ 6,011 1.50% N/A
Core Capital to Tangible Assets
Kankakee Federal Savings Bank.......... 27,832 6.95% 16,030 4.00% $ 20,037 5.00%
Tier I Capital to Risk Weighted Assets
Kankakee Federal Savings Bank.......... 27,832 12.61% N/A 13,239 6.00%
Total Capital to Risk Weighted Assets
Kankakee Federal Savings Bank.......... 30,045 13.62% 17,653 8.00% 22,066 10.00%
As of December 31, 1997
Tangible Capital to Tangible Assets
Kankakee Federal Savings Bank $ 30,259 9.00% $ 5,044 1.50% N/A
Core Capital to Tangible Assets
Kankakee Federal Savings Bank.......... 30,259 9.00% 13,451 4.00% $ 16,814 5.00%
Tier I Capital to Risk Weighted Assets
Kankakee Federal Savings Bank.......... 30,259 15.26% N/A 11,898 6.00%
Total Capital to Risk Weighted Assets
Kankakee Federal Savings Bank.......... 32,314 16.30% 15,864 8.00% 19,830 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 of accounts, the balance in the
liquidation account has been reduced to $5,343,857 as of December 31, 1998.
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.
NOTES TO CONSOLIDATED STATEMENTS 46
<PAGE>
Note 12. 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 $245,000, $210,000 and $204,000, for the years ended December
31, 1998, 1997 and 1996, 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 $15,400, $14,700 and $11,100, for
the years ended December 31, 1998, 1997 and 1996, 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. The BIPs
were fully amortized at December 31, 1997. Expense relating to the BIPs was
approximately $34,040 and $41,394 for the years ended December 31, 1997 and
1996, 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
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Shares allocated to participants.................................. 82,172.0 70,833.5 58,886.0
Unallocated shares (grandfathered under SOP 93-6)................. 30,625.0 45,937.5 61,250.0
--------- --------- ---------
Total............................................................. 112,797.0 116,771.0 120,136.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
The ESOP borrowed from the Company to purchase the shares of common stock. The
loan obligation is considered unearned employee compensation and is recorded as
a reduction of stockholders' equity.
The Bank makes discretionary cash contributions to the ESOP which, along with
dividend payments, will be sufficient to service the principal payments plus
interest at 7 percent over the eight year loan term.
Interest expense recognized by the ESOP was $29,108, $39,693 and $50,278 for the
years ended December 31, 1998, 1997 and 1996, respectively. The Bank contributed
$158,061, $165,764 and $174,409 to the ESOP to fund principal and interest
payments for the years ended December 31, 1998, 1997 and 1996, respectively.
NOTES TO CONSOLIDATED STATEMENTS 47
<PAGE>
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
nonqualified stock options, restricted stock and stock appreciation rights and
limited stock appreciation rights. Activity in the Stock Option Plan was as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
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..... 137,005 $ 9.947 148,725 $ 9.941 149,425 $ 9.940
Granted.............................. -- -- -- -- -- --
Exercised............................ (9,370) 9.875 (11,720) 9.875 (700) 9.875
Forfeited............................ -- -- -- -- -- --
--------- --------- ---------
Outstanding at end of year........... 127,635 9.952 137,005 9.947 148,725 9.941
--------- --------- ---------
--------- --------- ---------
Options exercisable at year-end...... 127,635 137,005 148,725
--------- --------- ---------
--------- --------- ---------
Weighted-average fair value of
options granted during the year.... -- -- --
----------- ----------- -----------
----------- ----------- -----------
</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 13. 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.
Note 14. 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.
NOTES TO CONSOLIDATED STATEMENTS 48
<PAGE>
Financial instruments whose contract represent credit risk at December 31, 1997
and 1998 follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Commitments to originate new loans........................................ $ 14,184,000 $ 6,511,000
Commitments to extend credit.............................................. 23,055,000 19,246,000
Standby letters of credit................................................. 2,212,000 1,240,000
</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.
The Company has entered into a construction contract in the amount of $1.1
million for the renovation of the main facility in Kankakee.
Note 15. 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
----------------------------------------------------------
1998 1997
---------------------------- ----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents............ $ 46,990,638 $ 46,990,638 $ 22,825,892 $ 22,825,892
Certificates of deposit.............. 50,000 50,000 1,602,000 1,602,000
Investment and mortgage-backed
securities......................... 95,030,151 95,038,421 65,396,029 65,400,182
Nonmarketable equity securities...... 501,100 501,100 501,100 501,100
Loans................................ 247,608,314 248,188,723 240,925,455 241,212,400
Loans held for sale.................. 1,910,966 1,936,844 254,406 258,499
FHLB stock........................... 1,801,100 1,801,100 1,856,000 1,856,000
Accrued interest receivable.......... 2,772,872 2,772,872 2,465,594 2,465,594
Liabilities:
Deposits............................. $ 346,802,846 $ 348,206,411 $ 280,021,739 $ 280,755,697
Borrowed funds....................... 22,900,000 22,883,988 23,495,000 23,321,613
Advance payments by borrowers for
taxes and insurance................ 1,532,482 1,532,482 1,428,880 1,428,880
Accrued interest payable............. 385,442 385,442 319,667 319,667
</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
NOTES TO CONSOLIDATED STATEMENTS 49
<PAGE>
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. The carrying amounts of accrued interest approximates their fair
values.
NONMARKETABLE EQUITY SECURITIES AND FHLB STOCK: Those 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. The carrying amounts of accrued interest approximates
their fair value.
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. The carrying amounts of
accrued interest approximates their fair value.
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.
Note 16. Branch Disposition
On September 13, 1996, the Company completed the sale of the Bank's branch
office in Carlyle, Illinois. The sale of the branch's $8.6 million in deposits,
fixed assets and a portion of the outstanding loans resulted in a gain of
$707,675.
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.
NOTES TO CONSOLIDATED STATEMENTS 50
<PAGE>
Note 18. Condensed Parent Company Only Financial Statements
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
STATEMENT OF FINANCIAL CONDITION
Assets:
Cash and cash equivalents............................................. $ 4,272,790 $ 3,702,223
Certificate of deposit................................................ 50,000 50,000
Investment and mortgage-backed securities, available-for-sale......... 387,928 469,132
Equity in net assets of Kankakee Federal Savings Bank................. 34,868,336 33,458,707
Other assets.......................................................... 156,640 216,814
------------ ------------
$ 39,735,694 $ 37,896,876
------------ ------------
------------ ------------
Liabilities and stockholders' equity:
Other liabilities..................................................... $ 59,085 $ 75,509
Common stock.......................................................... 17,500 17,500
Additional paid-in capital............................................ 16,070,157 16,090,239
Retained income....................................................... 31,183,528 29,554,920
Accumulated comprehensive income...................................... 329,445 71,881
Treasury stock........................................................ (7,621,599) (7,459,540)
Employee Stock Ownership Plan loan.................................... (302,422) (453,633)
------------ ------------
$ 39,735,694 $ 37,896,876
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
Dividends from subsidiary................................... $ 1,210,525 $ 1,776,237 $ 3,824,600
Interest income............................................. 259,616 308,308 258,639
------------ ------------ ------------
Operating income........................................ 1,470,141 2,084,545 4,083,239
------------ ------------ ------------
Equity in undistributed earnings of Kankakee Federal Savings
Bank...................................................... 1,155,542 1,195,689 (1,963,859)
Other noninterest income.................................... 400 2,641 4,839
------------ ------------ ------------
Total other income...................................... 1,155,942 1,198,330 (1,959,020)
Other expenses.............................................. 404,670 403,739 391,809
------------ ------------ ------------
Income before income tax benefit........................ 2,221,413 2,879,136 1,732,410
Income tax benefit.......................................... 67,753 132,500 44,029
------------ ------------ ------------
Net income.............................................. $ 2,289,166 $ 3,011,636 $ 1,776,439
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
COMPREHENSIVE INCOME
Net income.................................................. 2,289,166 3,011,636 1,776,439
Unrealized gain (loss) on securities available for sale
arising during the period, net of tax of $162,880,
$291,098, and $(386,176) in 1998, 1997, and 1996,
respectively.............................................. 257,564 460,316 (610,665)
Less: Reclassification adjustment for gains included in net
income, net of tax of $0, $13,228, and $7,881 in 1998,
1997 and 1996, respectively............................... -- 20,918 12,463
------------ ------------ ------------
257,564 481,234 (598,202)
------------ ------------ ------------
Comprehensive income........................................ 2,546,730 3,492,870 1,178,237
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTES TO CONSOLIDATED STATEMENTS 51
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF CASH FLOWS
Operating activities:
Net income.............................................. $ 2,289,166 $ 3,011,636 $ 1,776,439
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of Kankakee Federal
Savings Bank........................................ (1,155,542) (1,195,689) 1,963,859
Other................................................... 41,956 (161,650) 59,581
------------ ------------ ------------
Net cash provided by operating activities............. 1,175,580 1,654,297 3,799,879
------------ ------------ ------------
Investing activities:
Available-for-sale investment and mortgage backed
securities:
Purchase.............................................. (23,118) (23,064) (21,841)
Proceeds from maturities and paydowns................. 109,593 661,429 390,336
Purchase of certificate of deposit...................... -- -- (50,000)
------------ ------------ ------------
Net cash provided by investing activities............. 86,475 638,365 318,495
------------ ------------ ------------
Financing activities:
Principal collected on ESOP loan........................ 151,211 151,211 151,211
Purchase of treasury stock.............................. (346,995) (1,790,253) (761,963)
Dividends paid to stockholders.......................... (660,558) (676,457) (572,257)
Proceeds from exercise of stock options................. 164,854 115,735 6,912
------------ ------------ ------------
Net cash used in financing activities................. (691,488) (2,199,764) (1,176,097)
------------ ------------ ------------
Increase in cash and cash equivalents....................... 570,567 92,898 2,942,277
Cash and cash equivalents:
Beginning of period..................................... 3,702,223 3,609,325 667,048
------------ ------------ ------------
End of period........................................... $ 4,272,790 $ 3,702,223 $ 3,609,325
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTES TO CONSOLIDATED STATEMENTS 52
<PAGE>
Note 19. Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------
THREE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Interest income................................ $6,778,534 $6,972,569 $ 7,034,029 $ 6,736,937
Interest expense............................... 4,077,632 4,145,011 4,050,591 3,853,223
------------ ------------ ----------- -----------
Net interest income............................ 2,700,902 2,827,558 2,983,438 2,883,714
Provision for losses on loans.................. -- -- -- --
------------ ------------ ----------- -----------
Net interest income after provision for losses
on loans..................................... 2,700,902 2,827,558 2,983,438 2,883,714
Other income................................... 638,495 595,299 642,886 599,468
Other expense.................................. 2,809,506 2,611,673 2,720,990 2,289,378
------------ ------------ ----------- -----------
Income before income taxes..................... 529,891 811,184 905,334 1,193,804
Income taxes................................... 175,837 271,030 303,052 401,128
------------ ------------ ----------- -----------
Net income..................................... $ 354,054 $ 540,154 $ 602,282 $ 792,676
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Basic earnings per share....................... $ 0.26 $ 0.39 $ 0.44 $ 0.57
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
Diluted earnings per share..................... $ 0.24 $ 0.37 $ 0.41 $ 0.54
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
<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 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>
NOTES TO CONSOLIDATED STATEMENTS 53
<PAGE>
Exhibit 22
SUBSIDIARIES OF THE REGISTRANT
Kankakee Federal Savings Bank, a federally chartered savings bank
KFS Service Corporation, an Illinois corporation
KFS Insurance Agency, Inc., an Illinois corporation
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-1 No. 33-51950) pertaining to the 1992 Stock Option and Incentive
Plan of Kankakee Bancorp, Inc., of our report dated January 22, 1999, 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, 1998.
We also consent to the incorporation by reference in the Registration
Statement (Form S-1 No. 33-51950) pertaining to the Kankakee Federal Amended
and Restated 401 (K) Savings Plan of our report dated January 22, 1999, 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, 1998.
McGladrey & Pullen, LLP
Champaign, Illinois
March 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,155
<INT-BEARING-DEPOSITS> 13,361
<FED-FUNDS-SOLD> 18,525
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 94,521
<INVESTMENTS-CARRYING> 509
<INVESTMENTS-MARKET> 518
<LOANS> 247,608
<ALLOWANCE> 2,375
<TOTAL-ASSETS> 411,779
<DEPOSITS> 346,803
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,399
<LONG-TERM> 22,900
0
0
<COMMON> 16,088
<OTHER-SE> 23,589
<TOTAL-LIABILITIES-AND-EQUITY> 411,779
<INTEREST-LOAN> 20,291
<INTEREST-INVEST> 5,745
<INTEREST-OTHER> 1,486
<INTEREST-TOTAL> 27,522
<INTEREST-DEPOSIT> 14,838
<INTEREST-EXPENSE> 16,126
<INTEREST-INCOME-NET> 11,396
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,432
<INCOME-PRETAX> 3,440
<INCOME-PRE-EXTRAORDINARY> 2,289
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,289
<EPS-PRIMARY> 1.66
<EPS-DILUTED> 1.56
<YIELD-ACTUAL> 3.07
<LOANS-NON> 962
<LOANS-PAST> 519
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,130
<CHARGE-OFFS> 224
<RECOVERIES> 71
<ALLOWANCE-CLOSE> 2,375<F1>
<ALLOWANCE-DOMESTIC> 1,932
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 343
<FN>
<F1>balance includes amount acquired with bank purchase
</FN>
</TABLE>
<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
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 12, 1999
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 seventh Annual
Meeting of Stockholders of the Company. The meeting will be held at 10:00
a.m., on Friday, April 23, 1999, 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 1998
is also enclosed. Thank you for your attention to this important matter.
Very truly yours,
[SIG]
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 23, 1999
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 23, 1999 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, 1999;
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 1, 1999 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
[SIG]
Michael A. Stanfa
SECRETARY
Kankakee, Illinois
March 12, 1999
- -----------------------------------------------------------------------------
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 23, 1999
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 23,
1999 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 12, 1999. 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, 1999. On March
1, 1999, the Company had 1,357,508 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 1, 1999 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 1, 1999, 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 1, 1999,
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 BENEFICIALLY PERCENT OF
BENEFICIAL OWNER OWNED CLASS
---------------- ----- -----
<S> <C> <C>
5% STOCKHOLDERS
First Securities America, Inc.......... 165,000 12.2%
135 North Meramec
Clayton, Missouri 63141(1)
Jeffrey L. Gendell..................... 136,100 10.0%
200 Park Avenue, Suite 3900
New York, New York 10166(2)
EXECUTIVE OFFICERS
James G. Schneider..................... 68,706 4.9%
Chairman, President and
Chief Executive Officer(3)
David B. Cox........................... 20,443 1.5%
Vice President(4)
Ronald J. Walters...................... 11,794 0.9%
Vice President and
Chief Financial Officer(5)
Directors and executive officers....... 257,119 17.4%
of the Company as a group (15 persons)(6)
</TABLE>
- -----
(1) This information is as reported to the Securities and Exchange Commission
(the "SEC") in a Form 3 dated June 18, 1996.
(2) This information is as reported to the SEC on a Schedule 13D/A dated April
14, 1998. 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 10,113 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 presently exercisable, over which shares
Mr. Schneider has no voting and sole investment power. The amount reported
also includes 3,421 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 5,245 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
3,885 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 2,471 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 3,181 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 119,985 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 1, 1999,
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>
William Chefffer(3). . . . . . . . . . . 68 Vice Chairman of the 1988 2002 29,000 2.1%
Board
Michael A. Stanfa (4). . . . . . . . . . 49 Executive Vice 1995 2002 12,880 0.9%
President and Secretary
DIRECTORS CONTINUING IN OFFICE
Charles C. Huber(5). . . . . . . . . . . 75 Director 1979 2000 22,170 1.6%
Thomas M. Schneider(6) . . . . . . . . . 37 Director 1992 2000 9,740 0.7%
Wesley E. Walker(7). . . . . . . . . . . 63 Director 1986 2000 13,338 1.0%
James G. Schneider(8). . . . . . . . . . 73 Chairman of the Board, 1955 2001 68,706 4.9%
President and Chief
Executive Officer
Larry D. Huffman(9). . . . . . . . . . . 52 Director 1992 2001 13,400 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 became a director in 1995.
(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 10,000 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 9,000
shares held by Mr. Cheffer's spouse, with respect to which shares Mr.
Cheffer has no voting or investment power.
(4) The amount reported includes 2,708 shares held in the 401(k) Plan for the
benefit of Mr. Stanfa, over which shares Mr. Stanfa has shared voting and
sole investment power, and 5,950 shares subject to options granted under
the Stock Option Plan which are presently exercisable, with respect to
which Mr. Stanfa has no voting and sole investment power. The amount
reported also includes 2,828 shares allocated to Mr. Stanfa under the ESOP,
with respect to which shares Mr. Stanfa has sole voting and no investment
power.
(5) 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.
(6) 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 814
shares held jointly with his spouse, with respect to which Mr. Schneider
shares voting and investment power.
4
<PAGE>
(7) The amount reported includes 7,485 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.
(8) The amount reported includes 10,113 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 presently exercisable,
over which shares Mr. Schneider has no voting and sole investment power.
The amount reported also includes 3,421 shares allocated to Mr. Schneider
under the ESOP, with respect to which shares Mr. Schneider has sole voting
and no investment power.
(9) The amount reported includes 8,025 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 5,375
shares held jointly with his spouse, with respect to which Mr. Huffman
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 1998, 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, 1998 through December 31, 1998.
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, Corporate
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 has served as Executive Vice President of
the Company since 1994 and has served as Secretary of the Company since its
incorporation in 1992. In addition to his positions at the Company, Mr. Stanfa
is also Senior Vice President and Secretary of the Bank and has served as the
organization's in-house legal counsel since 1986.
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 1998. During 1998 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 1998 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 1998 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 1998 this
committee met three times.
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 1998 this committee met one time.
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 $100,000 for 1998.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
- ----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
FISCAL
YEAR SECURITIES
ENDED RESTRICTED UNDERLYING ALL OTHER
NAME AND DECEMBER OTHER ANNUAL STOCK OPTIONS/ COMPENSATION
PRINCIPAL POSITION 31ST SALARY($)(1) BONUS ($) COMPENSATION ($) AWARDS ($) SARS(#) ($)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
James G. Schneider 1998 $ 109,731 $ --- $ --- $ --- --- $12,581(2)
Chairman, President and 1997 103,962 --- --- --- --- 12,878(3)
Chief Executive Officer 1996 100,038 --- --- --- --- 18,555(4)
of the Company
- ----------------------------------------------------------------------------------------------------------------------------------
David B. Cox 1998 $ 147,115 $ --- $ --- $ --- --- $16,868(2)
Vice President of the 1997 144,818 --- --- --- --- 19,306(3)
Company and President 1996 115,701 --- --- --- --- 15,258(4)
and Chief Executive
Officer of the Bank
- ----------------------------------------------------------------------------------------------------------------------------------
Ronald J. Walters 1998 $ 107,966 $ --- $ --- $ --- --- $12,379(2)
Vice President and 1997 100,229 --- --- --- --- 13,352(3)
Chief Financial Officer 1996 95,227 --- --- --- --- 13,239(4)
of the Company
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</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 1998. The dollar amounts of these contributions and
allocations were $7,681 and $4,900 for Mr. Schneider, $10,298 and $6,570
for Mr. Cox, and $7,558 and $4,821 for Mr. Walters, respectively.
(3) 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.
7
<PAGE>
(4) 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 $11,319 and $7,236 for
Mr. Schneider, $9,001 and $6,257 for Mr. Cox, and $7,283 and $5,956 for Mr.
Walters, respectively.
The following table sets forth certain information concerning the number
and value of stock options at December 31, 1998 held by the named executive
officers. No stock options were exercised during 1998 by such persons.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
- ----------------------------------------------------------------------------------------------------------------------------------
SHARES NUMBER OF SECURITIES
ACQUIRED UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
ON VALUE OPTIONS/SARS AT FY-END THE-MONEY OPTIONS/SARS
NAME EXERCISE REALIZED (#)(d) AT FY-END ($)(e)
(#)(a) (#)(b) ($)(c) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James G. Schneider --- $--- 49,850 --- $ 791,369 $ ---
- ----------------------------------------------------------------------------------------------------------------------------------
David B. Cox --- $--- 5,400 --- $ 85,725 $ ---
- ----------------------------------------------------------------------------------------------------------------------------------
Ronald J. Walters --- $--- 5,950 --- $ 94,456 $ ---
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE INCORPORATION BY REFERENCE OF THIS PROXY STATEMENT INTO ANY DOCUMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE COMPANY SHALL NOT BE
DEEMED TO INCLUDE THE FOLLOWING REPORT UNLESS THE REPORT IS SPECIFICALLY STATED
TO BE INCORPORATED BY REFERENCE INTO SUCH DOCUMENT.
THE STOCK OPTION AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Stock Option and Compensation Committee of the Board of Directors is
composed of three outside directors who are not employees or former employees of
the Company, the Bank or its predecessors, and is responsible for
recommendations to the Board for compensation of executive officers of the Bank
and the Company. At this time no separate salary is paid to the Company's
executive officers. However, a portion of the officers' Bank salary is
allocated to Company expense for work performed by the officers for the Company.
In determining compensation, the following factors are generally taken into
consideration:
1. The Bank maintains a Base Salary Administration and Performance
Program. The purpose of the program is to provide equitable,
competitive and performance-based salaries for all Bank employees.
The executive officers are reviewed on an annual basis by the
president of the Bank, who makes compensation recommendations to the
committee based upon salary level, performance and adjustments for
items such as inflation. Information regarding industry comparisons
and adjustments is provided by an independent consulting firm.
2. The performance of the executive officers in achieving the short and
long term goals of the Company. The Long Range Planning Committee of
the Company is responsible for establishing these short and long term
goals.
3. Payment of compensation commensurate with the ability and expertise of
the executive officers.
4. Attempt to structure compensation packages so that they are
competitive with similar companies.
The Stock Option and Compensation Committee considers the foregoing factors, as
well as others, in determining compensation. There is no assigned weight given
to any of these factors. In addition to salary and other benefits
8
<PAGE>
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 1998 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
9
<PAGE>
THE INCORPORATION BY REFERENCE OF THIS PROXY STATEMENT INTO ANY DOCUMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY THE COMPANY SHALL NOT BE
DEEMED TO INCLUDE THE FOLLOWING PERFORMANCE GRAPH AND RELATED INFORMATION UNLESS
SUCH GRAPH AND RELATED INFORMATION ARE SPECIFICALLY STATED TO BE INCORPORATED
BY REFERENCE INTO SUCH DOCUMENT.
PERFORMANCE GRAPH
The following graph shows a 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*
[GRAPH]
*Assumes $100 invested on December 31, 1993, and that all dividends were
reinvested.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Kankakee Bancorp-IL $100.00 $ 97.25 $111.87 $149.61 $232.08 $160.76
Standard & Poor's Stock 500 Index $100.00 $101.32 $139.39 $171.26 $228.42 $293.69
SNL AMEX Thrift Index $100.00 $ 94.35 $133.83 $160.63 $273.00 $211.32
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</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
1998. Additional transactions may be expected to take place in the future. All
outstanding loans, commitments to loan, transactions in repurchase agreements
and certificates of deposit and depository relationships, in the opinion of
management, were made in the ordinary course of business, on substantially the
same terms, including interest rates and collateral as those prevailing at the
time for comparable transactions with other persons and did not involve more
than the normal risk of collectibility or present other unfavorable features,
except as follows. Pursuant to a program offered to senior officers and certain
employees of the Bank at the time, Ms. Carol S. Hoekstra, a Vice President of
the Bank, has a first mortgage loan at a rate which is one half percent lower
than that offered to the general public at the date of loan origination. The
outstanding balance on such loan at December 31, 1998 was $90,244. 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 May 1, 1998, the Bank refinanced three loans to the Grace Baptist Church
in the aggregate amount of $500,317, including a new principal amount of
$21,267. The Bank sold a participation interest in this loan to another
financial institution in the amount of $171,039. 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, 1998, the loan was performing and the
balance of the Bank's interest in such loan was approximately $308,497.
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, 1999. 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, 1999.
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 12, 1999.
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
[SIG]
Michael A. Stanfa
SECRETARY
Kankakee, Illinois
March 12, 1999
12
<PAGE>
KANKAKEE BANCORP, INC
PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS -- APRIL 23, 1999
The undersigned hereby appoints William Cheffer, James G. Schneider and
Michael A. Stanfa, or any of them acting in the absence of the others, with
power of substitution, attorneys and proxies, for and in the name and place
of the undersigned, to vote the number of shares of Common Stock that the
undersigned would be entitled to vote if then personally present at the
Annual Meeting of the Stockholders of Kankakee Bancorp, Inc., to be held at
Sully's-Sullivan's Warehouse, a restaurant located at 555 South West Avenue,
Kankakee, Illinois 60901, on Friday, April 23, 1999, at 10:00 a.m., local
time, or any adjournments or postponements thereof, upon the matters set
forth in the Notice of Annual Meeting and Proxy Statement (receipt of which
is hereby acknowledged) as designated on the reverse side, and in their
discretion, the proxies are authorized to vote upon such other business as
may come before the meeting:
/ / Check here for address change. / / Check here if you plan to
attend the meeting.
New Address:
----------------------
- ----------------------------------------
- ----------------------------------------
(Continued and to be signed on reverse side.)
<PAGE>
KANKAKEE BANCORP. INC
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY /X/
For All
1. Election of Directors: For Withheld Except
William Cheffer and / / / / / /
Michael A. Stanfa --------------------
Nominee's Excepted
For Against Abstain
2. To ratify the selection of McGladrey & / / / / / /
Pullen, LLP, as auditors for the Company
for 1999.
The Board of Directors recommends a vote FOR all proposals.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH SPECIFICATION MADE. IF NO CHOICES
ARE INDICATED, THIS PROXY WILL BE VOTED FOR ALL PROPOSALS
NOTE: Please sign exactly as your name(s) appears. For joint accounts, each
owner should sign. When signing as executor, administrator, attorney, trustee
or guardian, etc., please give your full title.
Dated , 1999
--------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Signature(s)
- FOLD AND DETACH HERE -
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
