<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-13676
KANKAKEE BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-3846489
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
310 S. Schuyler Avenue, Kankakee, Illinois 60901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (815) 937-4440
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- ------------------------
Common Stock, par value $.01 per share American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
================================================================================
<PAGE>
As of March 1, 2000, the Registrant had issued and outstanding 1,236,383
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, 2000, was
$23,543,038.*
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and IV of Form 10-K--Portions of the 1999 Annual Report to
Stockholders.
PART III of Form 10-K--Portions of the Proxy Statement for the 2000 Annual
Meeting of Stockholders.
- ---------------------------
* Based on the last reported price ($21.50) of an actual transaction in the
Registrant's Common Stock on March 1, 2000, and reports of beneficial
ownership filed by directors and executive officers of the Registrant and
by beneficial owners of more than 5% of the outstanding shares of Common
Stock of the Registrant; however, such determination of shares owned by
affiliates does not constitute an admission of affiliate status or
beneficial interest in shares of the Registrant's Common Stock.
<PAGE>
KANKAKEE BANCORP, INC.
1999 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page Number
-----------
PART I
Item 1. Business.......................................................... 4
Item 2. Properties........................................................47
Item 3. Legal Proceedings.................................................48
Item 4. Submission of Matters to a Vote of Security Holders...............48
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters..........................................48
Item 6. Selected Financial Data...........................................48
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................48
Item 7a. Quantitative and Qualitative Disclosures About Market Risk........48
Item 8. Financial Statements and Supplementary Data.......................49
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure..............................49
PART III
Item 10. Directors and Executive Officers of the Registrant................49
Item 11. Executive Compensation............................................50
Item 12. Security Ownership of Certain Beneficial Owners and
Management.......................................................50
Item 13. Certain Relationships and Related Transactions....................50
Item 14. Exhibits, Financial Statement Schedules, and Reports on 8-K.......52
Form 10-K Signature Page......................................................53
3
<PAGE>
PART I
Item 1. Business
THE COMPANY
General
Kankakee Bancorp, Inc., a Delaware corporation (the "Company"), is a
savings and loan holding company registered under the Home Owner's Loan Act, as
amended (the "HOLA"). The Company's primary business activity is acting as the
holding company for Kankakee Federal Savings Bank, a federally chartered savings
bank (the "Bank"). The Bank has two subsidiaries, KFS Service Corp. ("KFS"), and
its wholly-owned subsidiary, KFS Insurance Agency, Inc., which engage in the
business of providing securities brokerage services and insurance and annuity
products to its customers and appraisal services to the Bank and other lenders
in the Kankakee area. All references to KFS include KFS Insurance Agency, Inc.,
unless clearly indicated otherwise. The Company was organized in 1992, in
connection with the Bank's conversion from the mutual to the stock form of
organization (the "Conversion") which was completed on December 30, 1992. As
part of the Conversion, the Company issued 1,750,000 shares of its common stock,
$.01 par value per share (the "Common Stock"), at a price of $9.875 per share.
On March 24, 1995, the Company's Common Stock was listed on the American Stock
Exchange ("AMEX") under the symbol "KNK". Prior to March 24, 1995, the Company's
Common Stock was quoted on The Nasdaq 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, 1999, the Company had consolidated assets of $404.7 million, deposits of
$355.0 million and stockholders' equity of $36.2 million.
4
<PAGE>
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
<PAGE>
Kankakee is located approximately 35 miles south of the metropolitan
Chicago area. The metropolitan Kankakee area has a population of just under
60,000 and has experienced a slight decrease in population since 1990. Kankakee
County has a mixed agricultural and industrial economy with the largest number
of residents employed in the agricultural, health care, food processing,
chemical and retail redistribution industries. Major employers include Riverside
HealthCare, Provena St. Mary's Hospital, Shapiro Development Center, the Baker
and Taylor Company, CIGNA Companies, Armstrong World Industries, Aventis
Behring, Bunge Edible Oil Corporation, Cognis 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, with its 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.
6
<PAGE>
Loan and Mortgage-Backed Securities Portfolio Composition. The following
table provides information concerning the composition of the Company's loan and
mortgage-backed securities portfolios in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowances for losses) as of the dates indicated. Loans held for sale are
included primarily in one-to-four family real estate loans.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
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.......... $165,089 56.61% $159,956 59.23% $157,764 58.22% $149,544 54.74% $147,007 54.28%
Multi-family................ 8,923 3.06 5,556 2.06 7,480 2.76 14,172 5.19 14,475 5.35
Commercial.................. 28,869 9.90 21,291 7.88 20,881 7.71 28,721 10.51 28,273 10.44
Construction or
development................ 14,235 4.88 13,938 5.16 9,004 3.32 5,525 2.02 8,248 3.05
Mortgage-backed
securities and parti-
cipation certificates...... 17,600 6.03 18,746 6.94 28,503 10.52 34,713 12.71 36,481 13.47
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans
and mortgage-backed
securities............... 234,716 80.48 219,487 81.27 223,632 82.53 232,675 85.17 234,484 86.59
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Other Loans:
- ------------
Consumer Loans:
Deposit account............ 788 0.27 827 0.31 820 0.30 588 0.21 745 0.27
Student.................... 151 0.05 231 0.09 825 0.30 918 0.34 1,151 0.43
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Automobile................. 5,541 1.90 3,830 1.42 4,476 1.65 4,033 1.48 3,219 1.19
Home equity................ 17,028 5.84 17,215 6.37 16,795 6.20 14,166 5.19 12,847 4.74
Home improvement........... 2 0.00 7 0.00 13 0.00 56 0.02 208 0.08
Mobile home................ 2,158 0.74 2,826 1.05 3,293 1.22 3,161 1.16 3,122 1.15
Credit cards............... 1,286 0.44 1,376 0.51 1,534 0.57 1,705 0.62 1,870 0.69
Personal................... 7,946 2.73 6,900 2.55 7,407 2.73 5,942 2.17 3,919 1.45
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
Total consumer loans..... 34,900 11.97 33,212 12.30 35,163 12.97 30,569 11.19 27,081 10.00
Commercial business loans...... 22,013 7.55 17,365 6.43 12,185 4.50 9,943 3.64 9,246 3.41
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
Total other loans.......... 56,913 19.52 50,577 18.73 47,348 17.47 40,512 14.83 36,327 13.41
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
Total loans and mortgage-
backed securities
receivable................... 291,629 100.00% 270,064 100.00% 270,980 100.00% 273,187 100.00% 270,811 100.00%
------- ====== ------- ====== ------- ====== ------- ====== ------- ======
Less:
- -----
Loans in process............. 1,394 1,671 1,121 1,726 957
Deferred fees and
discounts.................. 104 129 176 425 517
Allowance for losses
on loans................... 2,171 2,375 2,130 2,360 2,388
----- ----- ----- ----- -----
Total loans and mortgage-
backed securities
receivable, net............$287,960 $265,889 $267,553 $268,676 $266,949
======== ======== ======== ======== =======
</TABLE>
8
<PAGE>
The following table shows the composition of the Company's loan and
mortgage-backed securities portfolios by fixed and adjustable rate at the dates
indicated. Loans held for sale are included primarily as fixed-rate one-to-four
family residential loans.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans and (Dollars in thousands)
Mortgage-Back Securities
- ------------------------
Real estate:
One-to-four family....... $83,407 28.60% $75,352 27.90% $56,908 21.00% $50,758 18.58% $51,620 19.06%
Multi-family............. 693 0.24 390 0.14 --- --- --- --- --- ---
Commercial............... 7,664 2.63 2,076 0.77 1,392 0.51 3,520 1.29 6,128 2.26
Construction or
development............ 2,380 0.82 2,708 1.00 1,711 0.63 690 0.25 1,583 0.58
Mortgage-backed securities. 11,731 4.02 9,296 3.44 12,502 4.61 17,489 6.40 18,341 6.77
-------- ------ -------- ------ -------- ------ -------- ------ ------- -----
Total real estate loans
and mortgage-backed
securities............. 105,875 36.31 89,822 33.25 72,513 26.75 72,457 26.52 77,672 28.67
Consumer..................... 18,826 6.46 19,087 7.07 19,918 7.35 17,065 6.25 14,876 5.49
Commercial business.......... 11,215 3.85 8,020 2.97 3,005 1.11 2,867 1.05 2,665 0.98
-------- ------ -------- ------ -------- ------ -------- ------ ------- -----
Total fixed-rate loans
and mortgage-backed
securities............... 135,916 46.62 116,929 43.29 95,436 35.21 92,389 33.82 95,213 35.14
-------- ------ -------- ------ -------- ------ -------- ------ ------- ------
Adjustable-Rate Loans and
Mortgage-Backed Securities
- --------------------------
Real estate:
One-to-four family....... 81,682 28.01 84,604 31.33 100,856 37.22 98,786 36.16 95,387 35.22
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Multi-family................... 8,230 2.82 5,166 1.92 7,480 2.76 14,172 5.19 14,475 5.35
Commercial..................... 21,205 7.27 19,215 7.11 19,489 7.19 25,201 9.22 22,145 8.18
Construction or
development................... 11,855 4.06 11,230 4.16 7,293 2.69 4,835 1.77 6,665 2.47
Mortgage-backed securities..... 5,869 2.01 9,450 3.50 16,001 5.91 17,224 6.31 18,140 6.70
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans
and mortgage-backed
securities................... 128,841 44.17 129,665 48.02 151,119 55.77 160,218 58.65 156,812 57.92
Consumer......................... 16,074 5.51 14,125 5.23 15,245 5.63 13,504 4.94 12,205 4.51
Commercial business.............. 10,798 3.70 9,345 3.46 9,180 3.39 7,076 2.59 6,581 2.43
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total adjustable-rate loans
and mortgage-backed
securities.................... 155,713 53.38 153,135 56.71 175,544 64.78 180,798 66.18 175,598 64.86
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans and mortgage-
backed securities............. 291,629 100.00% 270,064 100.00% 270,980 100.00% 273,187 100.00% 270,811 100.00%
------- ====== ------- ====== ------- ====== ------- ====== ------- ======
Less:
Loans in process............... 1,394 1,671 1,121 1,726 957
Deferred fees and discounts.... 104 129 176 425 517
Allowance for losses on loans.. 2,171 2,375 2,130 2,360 2,388
------- ------- ------- ------- -------
Total loans and mortgage-
backed securities
receivable, net.............. $287,960 $265,889 $267,553 $268,676 $266,949
======== ======== ======== ======== ========
</TABLE>
10
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Company's loan and mortgage-backed securities portfolio at December 31, 1999.
Loans that have adjustable or renegotiable interest rates are shown as maturing
in the period during which the contract matures. The schedule does not reflect
the effects of possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
---------------------------------------------------------------------------------
One-to-four family and
Mortgage-Backed Multi-family and Construction or
Securities Commercial Development
----------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Due During Twelve (Dollars in thousands)
Month Periods
Ending
December 31,
- ------------
2000(1)..................... $ 1,328 8.33% $ 6,756 8.67% $11,597 9.01%
2001 and 2002............... 2,223 8.66 1,793 8.83 1,133 9.02
2003 and 2004............... 2,450 8.05 4,064 7.95 109 8.75
2005 and 2009............... 24,792 7.09 7,479 8.56 413 8.19
2010 and 2024............... 97,212 6.95 15,760 8.15 983 7.40
2025 and following.......... 54,684 7.22 1,940 8.70 - -
-------- ------- -------
Total..................... $182,689 $37,792 $14,235
======== ======= =======
Commercial
Consumer Business Total
----------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Due During Twelve
Month Periods
Ending
December 31,
2000(1)..................... $ 3,601 12.14% $13,003 8.70% $ 36,285 9.12%
2001 and 2002............... 7,351 9.43 3,872 8.64 16,372 9.04
2003 and 2004............... 15,167 8.57 3,183 8.58 24,973 8.42
2005 and 2009............... 7,993 7.50 499 7.31 41,176 7.45
2010 and 2024............... 788 10.04 1,456 8.27 116,199 7.15
2025 and following.......... - - - - 56,624 7.27
------- ------- --------
Total..................... $34,900 $22,013 $291,629
======= ======= ========
</TABLE>
- -----------------------------
(1) Includes demand loans and loans having no stated maturity.
11
<PAGE>
As of December 31, 1999, the total amount of loans and mortgage-backed
securities due after December 31, 2000, which had predetermined interest rates
was $123.7 million, while the total amount of loans and mortgage-backed and
related securities due after such date which had floating or adjustable interest
rates was $131.6 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, 1999,
the Bank's regulatory loan-to-one borrower limit was $4.7 million. On the same
date, the Bank's largest total of loans to one borrower was $4.4 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, 1999, $165.1
million, or 56.6% 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 $52,300
and the largest outstanding residential loan had a book value of $871,000.
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. The Company continues to originate long term fixed-rate
residential loans. Through the end of 1999, the Company sold substantially all
of such loans in the secondary market, except its fixed-rate residential loans
having terms of 20 years or less, and which met predetermined minimum interest
rates, as was consistent with its asset/liability management objectives.
Currently, the Company is retaining all fixed-rate one-to-four family
residential loans it originates, except for Federal Housing Administration and
Veterans' Administration loans.
12
<PAGE>
Most of the Company's fixed-rate loans are originated with terms which
conform to secondary market standards (i.e., Freddie Mac standards). Most of the
Company's fixed-rate residential loans have contractual terms to maturity of 15
to 30 years. Under the Company's current policy, the Company retains most of the
fixed-rate loans that it originates. Through the end of 1999, the Company sold,
with servicing retained, most of the fixed-rate loans it originated, except for
loans with terms of 20 years or less which met, or exceeded, certain
predetermined minimum interest rates. The predetermined minimum interest rate
was evaluated on a regular basis and adjusted, as necessary. At December 31,
1999, the Company had $67.1 million of 15 year fixed-rate residential loans and
$16.3 million of 30 year fixed-rate residential loans in its portfolio.
The Company offers ARM loans at rates, terms and fees determined in
accordance with market and competitive factors. The Company's current one-to-
four family residential ARMs are fully amortizing loans with contractual
maturities of up to 30 years. The interest rates on the ARMs originated by the
Company are subject to adjustment at stated intervals based on a margin over a
specified index and are subject to annual as well as lifetime adjustment limits.
The Company's current ARMs do not permit negative amortization of principal and
carry no prepayment penalty. At December 31, 1999, the Company had $37.2
million, $3.4 million, and $41.1 million of one-year, three-year and five-year
ARMs, respectively.
The Company's delinquency experience on its ARMs has generally been similar
to that on fixed-rate residential loans. Of the $630,000 of one-to-four family
loans delinquent 60 days or more at December 31, 1999, $490,000 (or 0.3% of one-
to-four family loans) consisted of ARMs and $140,000 (or 0.1% of the Company's
one-to-four family loans) represented fixed-rate loans.
The Company evaluates both the borrower's ability to make principal,
interest and escrow payments and the value of the property that will secure the
loan. The Company originates residential mortgage loans with loan-to-value
ratios generally up to 95% except for a program applicable to first time home
buyers where this ratio can go up to 97% with private mortgage insurance and/or
other collateral. On any mortgage loan exceeding an 80% loan-to-value ratio at
the time of origination, the Company generally requires private mortgage
insurance in an amount intended to reduce the Company's exposure to 80% or less
of the appraised value of the underlying property.
In September 1999, the Company announced a $30,000 grant program to assist
qualified first-time home buyers in purchasing owner-occupied single-family
homes in the Company's market areas. The program provides one-time grants of up
to $1,000 to assist qualified applicants who meet low-to-moderate income
guidelines.
The Company, on occasion, originates loans in excess of $240,000 (the
Freddie Mac maximum during 1999). As of December 31, 1999, the Company had 41
residential mortgage loans having an aggregate balance of $12.7 million with
original balances in excess of $240,000
13
<PAGE>
("Jumbo Loans"). The Company's historical delinquency experience on its Jumbo
Loans has been excellent.
The Company is an approved one-to-four family lender for both the Federal
Housing Administration ("FHA") and the Veterans' Administration ("VA"). The
Company sells, with servicing released, all FHA and VA loans it originates to
other investors. During 1999, eight such loans totaling $505,000 were originated
and sold. Borrowers are notified at the time of application that their loan will
be sold to, and serviced by, a party other than the Company.
Multi-Family and Commercial Real Estate Lending. The Company also makes
multi-family and commercial real estate loans in its primary market areas. At
December 31, 1999, the Company had $37.8 million in multi-family and commercial
real estate loans, representing 13.0% of the Company's total loan and mortgage-
backed securities portfolio. Included in such loans were $1.1 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, 1999 and the amounts of such loans which were non-performing or "of
concern" at December 31, 1999. The amounts shown do not reflect allowances for
losses.
Original Outstanding Amount
Number Loan Principal Non-Performing
of Loans Amount Balance or of Concern
-------- -------- ----------- --------------
(Dollars in thousands)
Multi-family residential... 22 $10,464 $ 8,924 $1,106
Improved real estate....... 19 10,088 4,174 1,779
Churches................... 17 3,739 2,903 ---
Agricultural related....... 14 1,198 1,090 20
Industrial and warehouse... 49 20,119 12,250 69
Retail..................... 20 6,651 4,202 80
Office..................... 8 1,697 1,285 ---
Other...................... 36 3,263 2,964 ---
--- ------- ------- ------
Total................... 185 $57,219 $37,792 $3,054
=== ======= ======= ======
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, 1999. At December
31, 1999, the Bank had $424,000 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, 1999 Dec. 31, 1999 or of Concern
- ----------------------------- ----------- ------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Apartment buildings:
Everett, Washington 09/12/86 $5,500 $1,375 $1,106 --- $1,106
====== ======
</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 receivable, inventory, equipment and agriculture. The Company does not
have any energy or foreign loans.
15
<PAGE>
At December 31, 1999, the Company had $22.0 million in commercial business
loans outstanding (representing 7.6% of the Company's total loan and mortgage-
backed securities portfolio) with additional commercial business loan
commitments totaling $6.3 million, most of which were undrawn lines of credit.
In addition, at December 31, 1999, the Company had seventeen letters of credit
outstanding, in an aggregate amount of $2.1 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, 1999, the Company had
fifteen commercial business loans with balances of $250,000 or more, in an
aggregate amount of $8.1 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, 1999.
<TABLE>
<CAPTION>
Total Outstanding Amount
Number Loan Principal Non-Performing
of Loans Commitment Balance or of Concern
-------- ---------- ----------- --------------
(Dollars in thousands)
Secured Loans:
<S> <C> <C> <C> <C>
Accounts receivable...................... 9 $ 1,165 $ 1,140 $18
Inventory................................ 5 6,206 590 ---
Equipment................................ 66 4,335 3,078 5
Other business assets.................... 34 5,568 3,783 ---
Stocks and bonds......................... 15 1,277 1,239 ---
Heavy duty vehicles...................... 92 5,418 4,293 ---
Other motor vehicles..................... 22 1,244 701 29
Crops.................................... 5 2,038 855 ---
Stand-by letters of credit............... 5 1,676 --- ---
Beneficial interest in real estate trust. 29 6,392 4,350 ---
Unsecured loans........................... 71 2,886 1,984 ---
Unsecured stand-by letters of credit...... 12 417 --- ---
--- ------- ------- ---
Total commercial business loans.......... 365 $38,622 $22,013 52
=== ======= ======= ===
</TABLE>
Consumer Lending. Management believes that offering consumer loan products
helps to expand the Company's customer base and to create stronger ties to its
existing customer base. In addition, because consumer loans generally have
shorter terms to maturity and/or adjustable-rates and carry higher rates of
interest than do residential mortgage loans, they can be valuable
asset/liability management tools. The Company currently originates substantially
all of its consumer loans in its market areas. At December 31, 1999, the
Company's consumer loans totaled $34.9 million or 12.0% of the Company's loan
and mortgage-backed securities portfolio.
16
<PAGE>
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, 1999, mobile home loans totaled $2.2
million or approximately 0.7% 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,
1999, the Company held $151,000 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, 1999, $388,000, or
approximately 1.1% of the consumer loan portfolio was 90 days or more
delinquent), there can be no assurance that delinquencies will not increase in
the future.
Construction Lending. Historically, construction lending was a relatively
minor part of the Company's business activities. However, in light of the
economic recovery in its principal market areas and in order to increase the
yield on, and the proportion of, interest rate sensitive loans in its portfolio
and to provide more comprehensive financial services to families and community
businesses within its market areas, the Company expanded its construction
lending. At December 31, 1999, the Company had $2.0 million of residential
construction loans and $588,000 of lot loans to borrowers intending to live in
the properties upon completion of construction.
17
<PAGE>
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, 1999, the Bank had approximately $3.4 million in loans
to builders of residences, and $4.5 million in loans on commercial construction.
In addition, on the same date, the Company had $3.7 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, 1999, only six of the
Company's construction loans had a principal balance in excess of $500,000. The
total principal balances of these loans was $7.2 million.
The table below sets forth the number and amount of the Company's
construction loans at December 31, 1999, 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..... 23 $ 9,576 $ 5,212 $ ---
Multi-family residential........... 1 540 540 ---
Land acquisition and development... 38 10,651 6,849 ---
Church............................. 2 202 190 ---
Retail and Industrial.............. 4 1,462 1,444 ---
-- ------- ------- -----
Total......................... 68 $22,431 $14,235 $ ---
== ======= ======= =====
</TABLE>
Construction lending to persons other than owner occupants is generally
considered to involve a higher level of credit risk than one-to-four family
residential lending due to the concentration of principal in a limited number of
loans and borrowers and the effects of general economic conditions on
construction projects, real estate developers and managers. In addition, the
nature of these loans is such that they are more difficult to evaluate and
monitor.
Originations, Purchases and Sales of Loans. The Company originates real
estate and other loans through employees located at each of the Company's
offices. Walk-in customers and referrals from real estate brokers and builders
are also important sources of loan originations. The Company does not generally
utilize the services of mortgage brokers.
From time to time, in order to supplement its loan production, particularly
during periods of low loan demand, the Company purchases residential and other
loans from third parties. Under
18
<PAGE>
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.
Through the end of 1999, the Company sold a majority of its 30-year, fixed-
rate loan production in the secondary market. In addition, the Company sold a
portion of its newly originated conventional 15-year, fixed-rate residential
mortgage loans and conventional 20-year, fixed-rate residential mortgage loans
bearing an interest rate of less than a specified level, with servicing
retained. The specified rate level was evaluated on a regular basis and
adjusted, as necessary. The Company's sales during recent years have been made
through sales contracts entered into after the Company has committed to fund the
loan. When loans are designated for sale, the Company attempts to limit 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, 1999, excluding
mortgage-backed securities, approximately $1.8 million of the Company's loan
portfolio consisting of purchased loans and purchased participations was
serviced by others and the Company serviced $70.5 million of loans for others.
During the year ended December 31, 1999, the Company received fee income of
$186,000 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,
-------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Originations By Type:
- ---------------------
Adjustable-Rate:
Real estate - one-to-four family........... $ 15,318 $ 17,315 $20,180
- multi-family................. - 99 -
- commercial................... 23,884 17,434 8,911
Non-real estate - consumer................. 12,976 12,930 16,521
- commercial business........ 16,304 12,531 8,085
-------- -------- -------
Total adjustable-rate................ 68,482 60,309 53,697
-------- -------- -------
Fixed-Rate:
Real estate - one-to-four family........... 29,516 62,295 20,354
- multi-family................. - - -
- commercial................... 6,104 3,204 3,757
Non-real estate - consumer................. 14,600 9,672 13,470
- commercial business........ 14,806 7,244 2,870
-------- -------- -------
Total fixed-rate..................... 65,026 82,415 40,451
-------- -------- -------
Total loans originated............... 133,508 142,724 94,148
-------- -------- -------
Purchases:
- ----------
Real estate - one-to-four family............. - - -
- commercial..................... 1,366 - 260
Non-real estate - consumer................... - - -
- commercial business.......... - 300 1,920
Loans acquired with CCNB..................... - 17,958 -
-------- -------- -------
Total loans......................... 1,366 18,258 2,180
Mortgage-backed securities................... 6,992 8,772 -
Mortgage-backed securities
acquired with CCNB..................... - 286 -
-------- -------- -------
Total purchased..................... 8,358 27,316 2,180
-------- -------- -------
Sales and Repayments:
- ---------------------
Sales:
Real estate - one-to-four family............. 9,587 35,654 6,565
- commercial..................... 1,050 191 -
Non-real estate - consumer................... 365 1,089 493
- commercial business.......... - - -
-------- -------- -------
Total loans.......................... 11,002 36,934 7,058
Mortgage-backed securities................... - - -
-------- -------- -------
Total sales.......................... 11,002 36,934 7,058
Principal repayments......................... 107,671 133,538 89,386
-------- -------- -------
Total reductions..................... 118,673 170,472 96,444
-------- -------- -------
Decrease in other items, net................. (1,628) (484) (2,091)
-------- -------- -------
Net increase (decrease).............. $ 21,565 $ (916) $(2,207)
======== ======== =======
</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, 1999.
<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
------ ------ -------- ------ ------ --------- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Real Estate:
One-to-four family........ 4 $157 0.10% 11 $ 473 0.29% 15 $ 630 0.39%
Multi-family.............. -- -- -- -- -- -- -- -- --
Commercial................ -- -- -- 4 887 3.07 4 887 3.07
Construction and
development............. -- -- -- -- -- -- -- -- --
Consumer.................... 18 202 0.58 39 388 1.11 57 590 1.69
Commercial business......... -- -- -- -- -- -- -- -- ---
--- ---- --- ------ --- ------
Total................ 22 $359 0.13 54 $1,748 0.64 76 $2,107 0.77
=== ==== === ====== === ======
</TABLE>
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
------ ------ -------- ------ ------ --------- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
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>
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, 1999, on a net basis, the Company had classified $2.3
million of its assets as Special Mention, $2.5 million as Substandard and
$50,000 as Loss. No assets were classified as Doubtful at December 31, 1999. 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, 1999,
there were 42 loans with outstanding principal balances totaling $1.2 million
which were 90 days or more past due and continuing to accrue interest.
Interest accrued and unpaid at the time a consumer loan is placed on non-
accrual status is charged against interest income. Subsequent payments are
either applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the loan.
For all years presented, the Company had no troubled debt restructurings other
than those included in the non-performing assets table. Foreclosed assets
include assets acquired in settlement of loans. The loan and foreclosed asset
amounts shown are stated net of the specific reserves which have been
established against such assets.
23
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Non-accruing loans:
One-to-four family(1).................. $ 473 $ 606 $ 659 $ 524 $ 516
Multi-family........................... --- --- --- --- ---
Commercial............................. 80 265 207 1,396 111
Construction and development........... --- --- 669 --- ---
Consumer............................... --- --- --- --- ---
Commercial business.................... --- 90 --- --- ---
------ ------ ------ ------ ------
Total............................... 553 962 1,535 1,920 627
------ ------ ------ ------ ------
Accruing loans delinquent more
than 90 days:
One-to-four family(1).................. --- --- --- --- ---
Multi-family........................... --- --- 556 557 557
Commercial............................. 807 41 73 1,005 ---
Construction and development........... --- --- 234 170 169
Consumer............................... 388 438 399 177 108
Commercial business.................... --- 40 19 45 ---
------ ------ ------ ------ ------
Total............................... 1,195 519 1,281 1,954 834
------ ------ ------ ------ ------
Foreclosed assets:
One-to-four family..................... 344 387 --- 96 84
Multi-family........................... --- --- --- --- 675
Commercial............................. 157 1,489 1,317 69 69
Construction and development........... --- --- --- --- ---
Consumer............................... 68 --- 3 --- ---
Commercial business.................... --- --- --- --- ---
------ ------ ------ ------ ------
Total foreclosed assets............. 569 1,876 1,320 193 828
------ ------ ------ ------ ------
Troubled debt restructuring
Real estate:
One-to-four family..................... 122 --- 209 --- ---
Commercial............................. 342 --- --- --- ---
------ ------ ------ ------ ------
Total troubled debt restructuring... 464 --- 209 --- ---
------ ------ ------ ------ ------
Total non-performing assets.............. $2,781 $3,357 $4,345 $4,067 $2,289
====== ====== ====== ====== ======
Total as a percentage of total
assets................................. 0.69% 0.82% 1.27% 1.16% 0.64%
====== ====== ====== ====== ======
</TABLE>
- -------------------------
(1) Includes loans held for sale.
For the years ended December 31, 1999 and 1998, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $32,000 and $44,000, respectively. The
amount that was included in interest income on such loans was $26,000 and
$29,000 for 1999 and 1998, respectively.
24
<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,
-------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of period........ $2,375 $2,130 $2,360 $2,388 $2,251
Charge-offs:
One-to-four family.................. 21 20 --- --- ---
Multi-family........................ --- --- --- --- ---
Commercial real estate.............. 29 --- --- --- ---
Construction........................ --- --- 160 --- ---
Consumer............................ 114 160 136 125 59
Commercial business................. 123 44 --- 1 ---
------ ------ ------ ------ ------
287 224 296 126 59
------ ------ ------ ------ ------
Recoveries:
One-to-four family.................. --- --- --- --- ---
Multi-family........................ --- --- --- --- ---
Commercial real estate.............. 16 --- --- --- ---
Construction........................ --- --- --- --- ---
Consumer............................ 42 71 33 56 20
Commercial business................. 25 --- --- --- 3
------ ------ ------ ------ ------
83 71 33 56 23
------ ------ ------ ------ ------
Net charge-offs....................... (204) (153) (263) (70) (36)
Additions charged to operations....... --- --- 33 42 173
Additions through acquisitions........ --- 398 --- --- ---
------ ------ ------ ------ ------
Balance at end of period.............. $2,171 $2,375 $2,130 $2,360 $2,388
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average loans
outstanding during the period....... 0.08% 0.06% 0.11% 0.03% 0.02%
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average non-
performing assets.................. 6.65% 3.97% 6.25% 2.20% 1.58%
====== ====== ====== ====== ======
</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.
25
<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,
-------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------- ------------------- ------------------- ------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four
family.......... $ 313 60.24% $ 415 63.65% $ 521 65.06% $ 408 62.71% $ 403 62.74%
Multi-family...... 66 3.26 83 2.21 172 3.09 451 5.94 437 6.18
Commercial real
estate.......... 611 10.54 469 8.47 444 8.61 496 12.04 561 12.07
Construction or
development..... 208 5.19 301 5.55 150 3.71 294 2.32 272 3.52
Consumer.......... 207 12.74 208 13.21 215 14.50 185 12.82 170 11.56
Commercial
business........ 600 8.03 556 6.91 352 5.03 276 4.17 259 3.95
Unallocated....... 166 --- 343 --- 276 --- 250 --- 286 ---
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total........ $2,171 100.00% $2,375 100.00% $2,130 100.00% $2,360 100.00% $2,388 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
26
<PAGE>
Investment Activities
The Company has traditionally invested in U.S. Government securities and
agency obligations of both long and short terms to supplement its lending
activities. During recent years, the Company has refocused its investment
activities on short and medium term securities, although the Company has
retained a number of longer term securities in its portfolio which are held for
investment. In addition, from time to time, the Bank has acquired securities for
trading purposes. The Company's securities held for trading are recorded on the
Company's books at market value. At December 31, 1999, 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, 1999, the Bank's liquidity ratio (liquid assets as
a percentage of net withdrawable savings and current borrowings) was 20.0% as
compared to the OTS requirement of 4%.
27
<PAGE>
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Investment Securities (1):
U.S. government securities..................... $13,449 19.85% $21,690 27.60% $ 7,587 19.33%
Federal agency obligations..................... 51,307 75.73 53,865 68.54 28,876 73.56
Municipal bonds................................ 306 0.45 342 0.44 70 0.18
Non-marketable equity securities............... 501 0.74 501 0.64 501 1.28
Mutual fund shares............................. 377 0.56 388 0.49 360 0.92
------- ------ ------- ------ ------- ------
Subtotal................................. 65,940 97.33 76,786 97.71 37,394 95.27
FHLB Stock........................................ 1,811 2.67 1,801 2.29 1,856 4.73
------- ------ ------- ------ ------- ------
Total investment securities and FHLB
stock................................. $67,751 100.00% $78,587 100.00% $39,250 100.00%
======= ====== ======= ====== ======= ======
Average remaining life or term to repricing of
investment securities excluding FHLB stock
and non-marketable securities..................33 months 43 months 52 months
Other Interest-Earning Assets:
Federal funds sold............................. $ 6,322 37.67% $18,525 58.10% $ 8,575 38.91%
Money market funds............................. 4,653 27.72 13,311 41.74 5,067 22.99
FHLB overnight investments..................... 5,759 34.31 --- --- 6,793 30.83
Certificates of deposit........................ 50 0.30 50 0.16 1,602 7.27
------- ------ ------- ------ ------- -------
Total....................................... $16,784 100.00% $31,886 100.00% $22,037 100.00%
======= ====== ======= ====== ======= =======
</TABLE>
- ---------------------
(1) Includes securities available-for-sale.
28
<PAGE>
The composition and maturities of the investment securities portfolios,
excluding Federal Home Loan Bank of Chicago ("FHLB of Chicago") stock and
non-marketable equity securities at December 31, 1999, are indicated in the
following table.
<TABLE>
<CAPTION>
At December 31, 1999
---------------------------------------------------------------------
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
----------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Securities available-for-
sale:
U.S. government
securities................ $13,449 $ --- $ --- $ --- $13,449
Federal agency
obligations............... 3,488 43,110 4,709 --- 51,307
Mutual fund
shares.................... 377 --- --- --- 377
------- ------- ------ ----- ------
Total...................... $17,314 $43,110 $4,709 $ --- $65,133
======= ======= ====== ===== =======
Weighted average
yield..................... 5.46% 5.94% 6.40% ---% 5.85%
======= ======= ====== ===== =======
Securities held-to-
maturity:
Municipal Bonds............ $ 35 $ 40 $ 167 $ 64 $ 306
======= ======= ====== ===== =======
Weighted average
yield..................... 5.77% 5.25% 4.63% 6.40% 5.21%
======= ======= ====== ===== =======
</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
29
<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:
Year Ended December 31,
----------------------------------
1999 1998 1997
--------- --------- ------------
(Dollars in thousands)
Opening balance....... $346,803 $280,022 $277,348
Deposits.............. 955,019 872,751 533,933
Withdrawals........... 958,610 869,404 541,843
Purchased deposits.... --- 51,688 ---
Increase (decrease)
before interest
credited............ (3,591) 55,035 (7,910)
Interest credited..... 11,765 11,746 10,584
-------- -------- --------
Ending balance........ $354,977 $346,803 $280,022
======== ======== ========
Net increase.......... $ 8,174 $ 66,781 $ 2,674
======== ======== ========
Percent increase...... 2.36% 23.85% 0.96%
======== ======== ========
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.
30
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
-------- -------- -------- -------- -------- --------
Transaction and (Dollars in thousands)
Savings
Deposits(1):
- ------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Demand
0%......................... $ 17,011 4.79% $ 15,327 4.42% $ 9,720 3.47%
Savings Accounts
2.44%...................... 60,699 17.10 60,583 17.47 50,727 18.12
NOW Accounts
2.70%...................... 44,291 12.48 46,553 13.42 32,759 11.70
Money Market
Accounts
2.92%..................... 14,566 4.10 13,655 3.94 6,699 2.39
-------- ------ -------- ------ -------- ------
Total Non-Certificates...... 136,567 38.47 136,118 39.25 99,905 35.68
-------- ------ -------- ------ -------- ------
Certificates:
- ------------
0.00 - 4.99%................ 67,699 19.07 29,665 8.55 2,561 0.91
5.00 - 5.49%................ 67,810 19.10 36,662 10.57 41,636 14.87
5.50 - 5.99%................ 48,156 13.57 114,663 33.06 103,602 37.00
6.00 - 7.99%................ 34,386 9.69 29,390 8.48 32,025 11.44
8.00 - over................. 6 0.00 23 0.01 97 0.03
-------- ------ -------- ------ -------- ------
Total Certificates.......... 218,057 61.43 210,403 60.67 179,921 64.25
-------- ------ -------- ------ -------- ------
Accrued Interest............ 353 0.10 282 0.08 196 0.07
-------- ------ -------- ------ -------- ------
Total Deposits.............. $354,977 100.00% $346,803 100.00% $280,022 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
- --------------------------
(1) Rates on transaction and savings deposits are those in effect on December
31, 1999.
31
<PAGE>
The following table shows rate and maturity information for the Company's
certificates of deposit as of December 31, 1999.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
0.00- 5.00- 5.50- 6.00- Percent
4.99% 5.49% 5.99% 7.99% 8% and Over Total of Total
------- ------- ------- ------- ----------- -------- --------
(Dollars in thousands)
Certificate Accounts
Maturing
In Quarter Ending:
- ------------------
March 31, 2000......... $25,331 $ 7,700 $11,334 $ 4,156 $ --- $ 48,521 22.25%
June 30, 2000.......... 20,177 6,185 5,788 3,189 --- 35,339 16.21
September 30, 2000..... 10,491 9,631 3,517 1,250 --- 24,889 11.41
December 31, 2000...... 6,544 12,583 8,815 3,370 --- 31,312 14.36
March 31, 2001......... 3,093 9,897 2,967 10,246 6 26,209 12.02
June 30, 2001.......... 1,426 12,740 4,885 780 --- 19,831 9.09
September 30, 2001..... 207 1,829 6,116 7,701 --- 15,853 7.27
December 31, 2001...... 92 1,378 264 1,302 --- 3,036 1.39
March 31, 2002......... 210 1,132 739 382 --- 2,463 1.13
June 30, 2002.......... 99 460 483 523 --- 1,565 0.72
September 30, 2002..... 2 48 56 561 --- 667 0.31
December 31, 2002...... 22 356 42 763 --- 1,183 0.54
Thereafter............. 5 3,871 3,150 163 --- 7,189 3.30
------- ------- ------- ------- ----------- -------- ------
Total............... $67,699 $67,810 $48,156 $34,386 $ 6 $218,057 100.00%
======= ======= ======= ======= =========== ======== ======
Percent of total.... 31.05% 31.10% 22.08% 15.77% 0.00%
======= ======= ======= ======= ===========
</TABLE>
32
<PAGE>
The following table indicates the amount of the Company's certificates of
deposit and other deposits by time remaining until maturity as of December 31,
1999.
Maturity
-------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------- ------- --------- --------
(Dollars in thousands)
Certificates of deposit less
than $100,000 (1).............. $40,768 $30,137 $49,541 $69,821 $190,267
Certificates of deposit of
$100,000 or more (1)........... 5,185 2,099 4,495 5,290 17,069
Public funds (2)................ 2,568 3,103 2,165 2,885 10,721
------- ------- ------- ------- --------
Total certificates of
deposit........................ $48,521 $35,339 $56,201 $77,996 $218,057
======= ======= ======= ======= ========
- ---------------------------
(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, 1999, borrowed
money totaled $11.2 million, all of which was in advances from the FHLB of
Chicago. Interest expense on borrowed money totaled $1.0 million during 1999 and
$1.3 million during 1998.
33
<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, 1999, the Company's equity
investment in KFS was approximately $765,000. During 1999, KFS recorded net
consolidated income of $46,000. During 1999 and 1998, gross revenues related to
securities and annuities brokerage, appraisal activities and insurance agency
activities totaled approximately $195,000, $177,000 and $72,000, and $202,000,
$235,000 and $62,000, 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 18.4%, 65.4%, 16.3% 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.
34
<PAGE>
Under the Gramm-Leach-Bliley Act of 1999, effective March 11, 2000,
securities firms and insurance companies that elect to become financial holding
companies may acquire banks and other financial institutions. The Gramm-Leach-
Bliley Act may significantly change the competitive environment in which the
Company and the Bank conduct business. The financial services industry is also
likely to become more competitive as further technological advances enable more
companies to provide financial services. These technological advances may
diminish the importance of depository institutions and other financial
intermediaries in the transfer of funds between parties.
Employees
As of December 31, 1999, the Company had 147 full-time employees and 29
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 Office of Thrift Supervision (the "OTS")
the Board of Governors of the Federal Reserve System (the "Federal Reserve"),
the Federal Deposit Insurance Corporation (the "FDIC"), 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.
35
<PAGE>
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.
Recent Regulatory Developments
On November 12, 1999, President Clinton signed legislation that will allow
bank holding companies to engage in a wider range of nonbanking activities,
including greater authority to engage in securities and insurance activities.
Under the Gramm-Leach-Bliley Act (the "Act"), a bank holding company that elects
to become a financial holding company may engage in any activity that the
Federal Reserve, in consultation with the Secretary of the Treasury, determines
by regulation or order is (i) financial in nature, (ii) incidental to any such
financial activity, or (iii) complementary to any such financial activity and
does not pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally. The Act specifies certain
activities that are deemed to be financial in nature, including lending,
exchanging, transferring, investing for others, or safeguarding money or
securities; underwriting and selling insurance; providing financial, investment,
or economic advisory services; underwriting, dealing in or making a market in,
securities; and any activity currently permitted for bank holding companies by
the Federal Reserve under section 4(c)(8) of the Bank Holding Company Act. A
bank holding company may elect to be treated as a financial holding company only
if all depository institution subsidiaries of the holding company are well-
capitalized, well-managed and have at least a satisfactory rating under the
Community Reinvestment Act.
National banks are also authorized by the Act to engage, through "financial
subsidiaries," in any activity that is permissible for a financial holding
company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve, determines is financial in
nature or incidental to any such financial activity, except (i) insurance
underwriting, (ii) real estate development or real estate investment activities
(unless otherwise permitted by law), (iii) insurance company portfolio
investments and (iv) merchant banking. The authority of a national bank to
invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well-managed
and well-capitalized (after deducting from capital the bank's outstanding
investments in financial subsidiaries). The Act provides that state banks may
invest in financial subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same conditions that apply
to national bank investments in financial subsidiaries.
At this time, it is not possible to predict the impact the Act may have on
the Company. Various bank regulatory agencies have just begun issuing
regulations as mandated by the Act. The Federal Reserve has issued an interim
rule that sets forth procedures by which bank holding
36
<PAGE>
companies may become financial holding companies, the criteria necessary for
such a conversion, and the Federal Reserve's enforcement powers should a holding
company fail to maintain compliance with the criteria. The Office of the
Comptroller of the Currency has issued a final rule discussing the procedures by
which national banks may establish financial subsidiaries as well as the
qualifications and safeguards that will be required. In addition, in February,
2000, all federal bank regulatory agencies jointly issued a proposed rule that
would implement the financial privacy provisions of the Act.
The Act limits the nonbanking activities of unitary savings and loan
holding companies by generally prohibiting any savings and loan holding company
from engaging in any activity other than activities that (i) are currently
permitted for multiple savings and loan holding companies or (ii) are
permissible for financial holding companies (as described above) (collectively
"permissible activities"). The Act also generally prohibits any company from
acquiring control of a savings association or savings and loan holding company
unless the acquiring company engages solely in permissible activities. The Act
creates an exemption from the general prohibitions for unitary savings and loan
holding companies in existence, or formed pursuant to an application pending
before the Office of Thrift Supervision, on or before May 4, 1999.
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, like the Company, controls only
one savings association subsidiary and either was a savings and loan holding
company on or before May 4, 1999 or became a savings and loan holding company
pursuant to an application pending before the OTS on or before May 4, 1999 (a
"grandfathered company"), 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"). A savings and loan holding company that
controls only one savings association subsidiary but is not a grandfathered
company is subject to certain restrictions on the non-banking activities in
which it may engage (see "Recent Regulatory Developments"). In all cases,
however, if, 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 appropriate federal bank regulator. "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.
38
<PAGE>
Federal Securities Regulation. The Company's common stock is registered
with the SEC under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the Company
is subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act.
The Bank
General. The Bank is a federally chartered savings association, the
deposits of which are insured by the 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, 1999, SAIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2000, 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
39
<PAGE>
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. Between January 1, 2000 and the final maturity of
the outstanding FICO obligations in 2019, BIF members and SAIF members will
share the cost of the interest on the FICO bonds on a pro rata basis. During the
year ended December 31, 1999, the FICO assessment rate for SAIF members ranged
between approximately 0.058% of deposits and approximately 0.061% of deposits,
while the FICO assessment rate for BIF members ranged between approximately
0.0116% of deposits and approximately 0.0122% of deposits. During the year ended
December 31, 1999, 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, 1999, the Bank paid supervisory assessments to the OTS totaling
$85,000.
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% for savings associations assigned a composite
rating of 1 as of the association's most recent OTS examination, with a minimum
core capital requirement of 4% of total assets for all other savings
associations; 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, nontraditional activities, or securities trading activities.
During the year ended December 31, 1999, the Bank was not required by the
OTS to increase its capital to an amount in excess of the minimum regulatory
requirement. As of
40
<PAGE>
December 31, 1999, the Bank exceeded its minimum regulatory capital requirements
with a core capital ratio of 7.40%, a tangible capital ratio of 7.40% and a
risk-based capital ratio of 13.33%.
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, 1999, the Bank was "well capitalized", as
defined by OTS regulations.
Dividends. OTS regulations 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
are not required to obtain OTS approval prior to making a capital distribution
unless: (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 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 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
41
<PAGE>
Bank exceeded its minimum capital requirements under applicable guidelines as of
December 31, 1999. 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, 1999, approximately $10.5 million was available to be paid as
dividends to the Company by the Bank. Notwithstanding the availability of funds
for dividends, however, the OTS may prohibit the payment of any dividends by the
Bank if the OTS determines such payment would constitute an unsafe or unsound
practice.
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. Since the fourth quarter of 1998, and through the first quarter of
2000, the federal banking regulators have 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.
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
42
<PAGE>
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, 1999, 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, 1999, the Bank satisfied the QTL test, with a ratio of
qualified thrift investments to portfolio assets of 78.8%, 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
43
<PAGE>
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, 1999, the Bank was in compliance with OTS liquidity requirements,
with a liquidity ratio of 20.0%.
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 $44.3 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $44.3 million, the reserve
requirement is $1.329 million plus 10% of the aggregate amount of total
transaction accounts in excess of $44.3 million. The first $5.0 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 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 the 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 each tax year from 1996 through 1999. 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
44
<PAGE>
against this amount. If, in the future, the Bank ceases to qualify as a "bank"
for federal income tax purposes or if these retained earnings are liquidated,
federal income taxes may be imposed at the then-applicable rates. If federal
income taxes had been provided, the deferred liability would have been
approximately $3,059,000.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds
corporation's regular income tax. During the years ended December 31, 1997, 1998
and 1999, the Bank was not required to pay alternative minimum tax.
The Company, the Bank and its subsidiary file consolidated federal income
tax returns on a calendar year basis using the accrual method of accounting.
The Bank and its consolidated subsidiaries have been audited by the IRS
with respect to consolidated federal income tax returns through December 31,
1982. With respect to years examined by the IRS, all deficiencies have been
satisfied. In the opinion of management, any examination of still open returns
would not result in a deficiency which could have a material adverse effect on
the financial condition of the Company and its consolidated subsidiaries.
EXECUTIVE OFFICERS OF THE COMPANY
The business experience during the past five years with respect to
executive officers of the Company and the Bank who do not serve on the Company's
Board of Directors is listed below. Each officer is elected annually to serve
until his or her successor is elected and qualified, or until he or she is no
longer employed by the Company or its subsidiaries or is removed by the Board of
Directors. There are no arrangements or understandings between the persons named
and any other person pursuant to which such officers were selected.
Ronald J. Walters, age 50, 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,
information technology, and buildings and grounds. Mr. Walters joined the Bank
in 1984 as Controller and Chief Financial Officer, was named Vice President and
Treasurer in 1985, and promoted to Senior Vice President in 1996. Mr. Walters is
a certified public accountant.
David B. Cox, age 61, 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
45
<PAGE>
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 63, is a Senior Vice President and Chief Commercial
Lending Officer of the Bank, a position he has held since 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
Commercial Lending Department. 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 50, is a Senior Vice President and Regional
Commercial Lending Officer of the Bank, a position he was appointed to in 1999.
Previously, Mr. Roseland was Regional Branch Manger responsible for the
operation of the Coal City, Diamond and Braidwood, Illinois branches of the Bank
since 1998. 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.
Carol Hoekstra, age 44, was elected a Senior Vice President of the Bank in
1999. She is also an Assistant Secretary of the Company, a position she has held
since 1992. Previously, she was a Vice President of the Bank since 1995. Mrs.
Hoekstra is responsible for oversight of the Bank's retail mortgage and consumer
lending operations. Mrs. 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.
Monte S. Crowl, age 35, 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.
Terry L. Ralston, age 50, was elected a Vice President of the Bank in 1998.
He is also Information Technology Manager of the Bank, a position he was
appointed to in 2000. Previously, since joining the Bank in February, 1996, he
was Data Processing Manager. He is responsible for the day-to-day operation of
the Bank's Data Processing Department and Deposit Services Center. He has over
twenty-five years of experience in similar positions with financial institutions
in northern Illinois and southern Wisconsin.
46
<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, 1999. At December 31, 1999, the
Company's premises had an aggregate net book value of approximately $6.9
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 $2,036
Kankakee, Illinois
Full Service Branches
- ----------------------- 1977 Owned N/A 24
Main Street and U.S. 45
Ashkum, Illinois
680 S. Main Street 1974 Owned N/A 263
Bourbonnais, Illinois
990 N. Kinzie Avenue 1998 Leased October 22, 2013 (2) 211
Bradley, Illinois
180 N. Front Street 1998 Leased July 24, 2000 (3) ---
Braidwood, Illinois
1001 S. Neil Street 1992 Owned N/A 780
Champaign, Illinois
100 S. Broadway 1998 Leased July 24, 2000 (3) 169
Coal City, Illinois
660 S. Broadway 1998 Owned N/A 751
Coal City, Illinois
1275 E. Division Street 1998 Owned N/A 377
Diamond, Illinois
302 W. Mazon Avenue 1987 Owned N/A 405
Dwight, Illinois
654 N. Park Road 1998 Owned N/A 600
Herscher, Illinois
323 E. Main Street 1994 Owned N/A 169
Hoopeston, Illinois
310 Section Line Road 1975 Owned N/A 220
Manteno, Illinois
200 W. Washington Street 1995 Owned N/A 158
Momence, Illinois
1708 S. Philo Road 1998 Owned N/A 748
Urbana, Illinois
------
$6,911
======
</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.
47
<PAGE>
The Company believes that its current facilities are adequate to meet
present and immediately foreseeable needs.
The Company maintains depositor and borrower customer files on an in-house
system. The net book value of the data processing and computer equipment
utilized by the Company at December 31, 1999 was $122,000.
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,
1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Page 54 of the 1999 Annual Report to Stockholders is incorporated by
reference.
Item 6. Selected Financial Data
Pages 8 and 9 of the 1999 Annual Report to Stockholders is incorporated by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Pages 10 through 26 of the 1999 Annual Report to Stockholders are
incorporated by reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Pages 10 through 26 of the 1999 Annual Report to Stockholders are
incorporated by reference.
48
<PAGE>
Item 8. Financial Statements and Supplementary Data
Pages 27 through 52 of the 1999 Annual Report to Stockholders are
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 by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in 2000 (the "2000 Proxy Statement"), a copy of which
was filed on March 17, 2000.
At its monthly meeting on March 14, 2000 the board of directors of the
Company appointed Brenda L. Baird to the board to fill the vacancy created by
the unexpected death of James G. Schneider on February 15, 2000. Mrs. Baird, a
Kankakee County native and president and CEO of a local wireless communication
company, which she established, was also elected to fill the vacancy on the
Bank's board of directors.
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 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 1999, 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 1999.
49
<PAGE>
Item 11. Executive Compensation
Information concerning executive compensation called for by Item 11 of this
Form 10-K is incorporated by reference from the section in the Company's 2000
Proxy Statement entitled "Executive Compensation." The report of the Company's
Compensation Committee is not incorporated into this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management called for by Item 12 of this Form 10-K is incorporated by reference
from the section in the Company's 2000 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 by reference from the
section in the Company's 2000 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 1999 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................................. 8-9
Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 10-26
Report of Independent Auditors.......................... 27
Consolidated Statements of Financial Condition.......... 28-29
Consolidated Statements of Income....................... 30
Consolidated Statements of Stockholders' Equity......... 31
Consolidated Statements of Cash Flows................... 32-33
Notes to Consolidated Financial Statements.............. 34-52
Quarterly Financial Information......................... 52
</TABLE>
50
<PAGE>
With the exception of those sections specifically incorporated by
reference, the Registrant's 1999 Annual Report to Stockholders is not deemed
filed as part of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules:
------------------------------------
Financial statement schedules have been omitted as the required information
is contained in the consolidated financial statements and notes thereto, or
because such schedules are not required or applicable.
(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 1999 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 2000 Proxy Statement N/A
99.2 Rights Agreement (4)
</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.
51
<PAGE>
(3) Filed on March 30, 1994, as an exhibit to the Registrant's Annual Report on
Form 10-K. Such previously filed documents are hereby incorporated herein
by reference in accordance with Item 601 of Regulation S-K.
(4) Filed on May 21, 1999, as an exhibit to the Registrant's Form 8-K. Such
previously filed document is 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, 1999.
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 24, 2000 By: /s/ William Cheffer
-------------- -------------------
William Cheffer
Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ William Cheffer 3-24-00 Chief Executive Officer and Chairman
- -------------------------- ------- of the Board (Principal Executive Officer)
William Cheffer Date
/s/ Ronald J. Walters 3-24-00 Vice President and Treasurer (Principal
- -------------------------- ------- Financial and Accounting Officer)
Ronald J. Walters Date
Director
- -------------------------- -------
Brenda L. Baird Date
/s/ Charles C. Huber 3-24-00 Director
- -------------------------- -------
Charles C. Huber Date
/s/ Wesley E. Walker 3-24-00 Director
- -------------------------- -------
Wesley E. Walker Date
/s/ Larry D. Huffman 3-24-00 Director
- -------------------------- -------
Larry D. Huffman Date
/s/ Thomas M. Schneider 3-24-00 Director
- -------------------------- -------
Thomas M. Schneider Date
/s/ Michael A. Stanfa 3-24-00 Director
- -------------------------- -------
Michael A. Stanfa Date
</TABLE>
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 1999 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 2000 Proxy Statement N/A
99.2 Rights Agreement (4)
</TABLE>
- ---------------------------
(1) Filed on September 11, 1992, as exhibits to the Registrant's Registration
Statement No. 33-51950 on Form S-1. Such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-K.
(2) Filed on March 29, 1993, as exhibits to the Registrant's Annual Report on
Form 10-K. Such previously filed documents are hereby incorporated herein
by reference in accordance with Item 601 of Regulation S-K.
(3) Filed on March 30, 1994, as an exhibit to the Registrant's Annual Report on
Form 10-K. Such previously filed documents are hereby incorporated herein
by reference in accordance with Item 601 of Regulation S-K.
(4) Filed on May 21, 1999, as an exhibit to the Registrant's Form 8-K. Such
previously filed document is hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
54
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Financial
Condition Data:
Total assets.......... $ 404,718 $ 411,779 $ 343,409 $ 350,643 $ 355,103
Loans, net, including
loans held for sale.. 270,360 247,144 239,050 233,963 230,467
Mortgage-backed
securities held-to-
maturity............. 109 168 204 246 363
Mortgage-backed
securities available-
for-sale............. 17,491 18,578 28,300 34,467 36,119
Investment securities
held-to-maturity (1). 857 893 2,173 623 913
Investment securities
available-for-sale... 65,132 75,943 36,823 51,345 47,711
Deposits.............. 354,977 346,803 280,022 277,348 286,080
Total borrowings...... 11,200 22,900 23,495 34,545 29,645
Stockholders' equity.. 36,248 39,677 37,821 36,494 36,451
Shares outstanding.... 1,243,383 1,367,358 1,371,638 1,414,918 1,453,418
Stockholders' equity
per share............ $ 29.15 $ 29.02 $ 27.57 $ 25.79 $ 25.08
Stockholders' tangible
equity per share (2). 24.97 24.93 26.00 24.10 23.29
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations
Data:
Total interest income. $ 26,900 $ 27,522 $ 24,895 $ 25,808 $ 22,830
Total interest
expense.............. 15,343 16,126 14,273 15,199 12,562
---------- ---------- ---------- ---------- ----------
Net interest income. 11,557 11,396 10,622 10,609 10,268
Provision for losses
on loans............. -- -- 33 42 173
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
losses on loans...... 11,557 11,396 10,589 10,567 10,095
Fee income............ 1,925 1,532 1,023 791 620
Gain on sales of
loans, mortgage-
backed securities and
investment
securities........... 365 179 112 109 69
Other non-interest
income............... 674 765 554 1,237 492
---------- ---------- ---------- ---------- ----------
Total non-interest
income............. 2,964 2,476 1,689 2,137 1,181
Other expenses........ 11,900 10,432 8,185 10,215 8,494
Income tax expense.... 862 1,151 1,081 713 934
---------- ---------- ---------- ---------- ----------
Total non-interest
expense............ 12,762 11,583 9,266 10,928 9,428
---------- ---------- ---------- ---------- ----------
Net income............ $ 1,759 $ 2,289 $ 3,012 $ 1,776 $ 1,848
========== ========== ========== ========== ==========
</TABLE>
- -------
(1) Includes certificates of deposit and non-marketable equity securities.
(2) Calculated by subtracting intangible assets from stockholders' equity.
8
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION (continued)
---------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<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).. 0.43% 0.57% 0.87% 0.50%(3) 0.58%
Interest rate spread information:
Average during the year......... 2.99% 2.92% 2.86% 2.78% 2.98%
End of year..................... 2.96% 2.68% 2.73% 2.88% 2.64%
Net interest margin (1)......... 3.08% 3.07% 3.22% 3.11% 3.37%
Ratio of operating expense to
average total assets........... 2.92% 2.60% 2.36% 2.87%(4) 2.67%
Return on equity (ratio of net
income to average equity)...... 4.61% 5.86% 8.04% 4.95%(5) 5.10%
Ratio of average interest-
earning assets to average
interest-bearing liabilities... 102.39% 103.47% 108.25% 107.40% 109.33%
Quality Ratios:
Non-performing assets to total
assets at end of period.......... 0.69% 0.82% 1.27% 1.16% 0.64%
Allowance for loan losses to non-
performing loans................. 124.20% 160.43% 75.64% 60.92% 163.45%
Classified assets to total assets
at end of period (2)............. 1.20% 1.70% 1.89% 1.88% 2.15%
Allowance for loan losses to
classified assets................ 44.84% 33.95% 32.86% 35.80% 31.30%
Capital Ratios:
Equity to total assets at end of
period........................... 8.96% 9.64% 11.01% 10.41% 10.26%
Average equity to average assets.. 9.38% 9.75% 10.71% 10.06% 11.38%
Dividend payout ratio............. 37.50% 30.77% 24.00% 33.90% 33.90%
Other data:
Number of full service branch
offices.......................... 15 15 9 9 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%.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
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, through
the end of 1999, 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
within that same time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap 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, 1999, total interest-earning assets maturing or
repricing within one year exceeded total interest-bearing liabilities maturing
or repricing in the same period by $8.8 million, representing a positive
cumulative one-year gap equal to 2.2% 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
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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.
The Company attempts to reduce its interest rate risk to the extent consistent
with its interest margin objectives through management of the mix of 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 30.3% of one-to-four family residential loans originated in 1999
were ARMs. In excess of half of the fixed-rate one-to-four family loan
originations, including loans originated for sale, during 1999 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, 1999, approximately $81.7 million, or 49.5%, 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 through the end of
1999, sold substantially all of its newly originated conventional 30-year,
fixed-rate residential mortgage loans with servicing retained.
At December 31, 1999, the Company held $83.4 million of fixed-rate one-to-four
family loans, of which $16.3 million had original terms of more than 15 years
(i.e., long-term loans). These loans are seasoned loans that have been carried
in the Company's permanent loan portfolio and are intended to be held until
maturity. Through December 31, 1999, the Company's policy was to sell
substantially all newly originated 30 year, fixed-rate loans, and at December
31, 1999, there were no loans classified as held for sale.
The Company currently does not enter into derivative financial instruments
including futures, forwards, interest rate risk swaps, option contracts, or
other financial instruments with similar characteristics. However, the Company
is party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers such as
commitments to extend credit and letters of credit.
Commitments to extend credit and letters of credit are not recorded as an asset
by the Company until the instrument is exercised.
The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee. Interest rate risk is the potential of economic
losses due to future interest rate changes. These economic losses can be
reflected as a loss of future net interest income and/or a loss of current fair
market values. Tools used by management include the standard GAP report and the
quarterly Office of Thrift Supervision (the "OTS") report measuring interest
rate 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 300 basis points in 100 basis point increments. The Company
has no market risk sensitive instruments held for trading purposes. It appears
that the Company's market risk is reasonable at this time. The following
condensed GAP report summarizing the Company's interest rate sensitivity sets
forth the interest rate sensitivity of the Bank's assets and
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
liabilities at December 31, 1999. 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 $136.6 million at December 31, 1999, 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 Over Over Over
1-3 Months to One Year 1-3 Years 3-5 Years 5 Years Total
---------- ----------- --------- --------- ------- --------
Amount Amount Amount Amount Amount Amount
---------- ----------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate one-to-four
family (including
mortgage-backed
securities, commercial
real estate and
construction loans).... $ 8,903 $ 12,104 $ 25,141 $17,933 $41,794 $105,875
Adjustable rate one-to-
four family (including
mortgage-backed
securities, commercial
real estate and
construction loans).... 38,392 61,470 17,673 11,306 -- 128,841
Commercial business
loans.................. 14,951 3,721 2,709 541 91 22,013
Consumer loans.......... 16,764 6,255 7,749 2,681 1,451 34,900
Investment securities
and other.............. 26,469 6,505 19,251 23,496 7,117 82,838
-------- -------- -------- ------- ------- --------
Total interest-earning
assets................ 105,479 90,055 72,523 55,957 50,453 374,467
-------- -------- -------- ------- ------- --------
Savings deposits........ 2,276 6,829 14,317 10,344 26,933 60,699
Checking and money
market................. 7,112 21,336 28,917 11,309 7,264 75,938
Certificates............ 52,846 90,169 67,853 7,189 -- 218,057
FHLB advances........... 6,200 -- 5,000 -- -- 11,200
Other borrowings........ -- -- -- -- -- --
-------- -------- -------- ------- ------- --------
Total interest-bearing
liabilities........... 68,434 118,334 116,087 28,842 34,197 365,894
-------- -------- -------- ------- ------- --------
Interest-earning assets
less interest-bearing
liabilities............ $ 37,045 $(28,279) $(43,564) $27,115 $16,256 $ 8,573
======== ======== ======== ======= ======= ========
Cumulative interest-rate
sensitivity gap........ $ 37,045 $ 8,766 $(34,798) $(7,683) $ 8,573
======== ======== ======== ======= =======
Cumulative interest-rate
gap as a percentage of
assets................. 9.15% 2.17% (8.60%) (1.90%) 2.12%
======== ======== ======== ======= =======
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as ARMs, have
features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels could deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate debt may decrease in the event of an interest
rate increase.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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 were recorded as a result of this
purchase.
In addition to the purchase of CCNB, three new branch offices of the Bank were
opened during 1998. A branch in a grocery store in Coal City, Illinois, and a
stand-alone branch in Urbana, Illinois, opened for business in June. A branch
in a superstore in Bradley, Illinois, opened for business in November. The
Company also completed construction of a new building to replace its Herscher,
Illinois, branch. The new building was occupied and opened for business in
August.
During the second quarter of 1998, the Company's item processing was converted
to an in-house operation. Additionally, during the second quarter the Company
completed the data processing conversion of the deposit and loan accounts
acquired with the acquisition of CCNB.
During 1999, the Company completed an addition to its main office building in
Kankakee, Illinois, which relocated the primary entrance, additional office
space and provided improved customer parking and building access.
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, 2000, and are not projected to break even or produce a small
profit until the year 2001.
The Year 2000 posed a unique set of challenges to those industries reliant on
information technology. Financial institutions are particularly dependent 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.
The Company's cumulative costs of the Year 2000 project through the end of 1999
were approximately $100,000. This included costs to upgrade equipment
specifically for the purpose of Year 2000 compliance and certain administrative
expenditures. Additional costs related to Year 2000 will be limited to payment
of invoices, if any, received after the end of 1999.
As a result of the efforts of the Company's Year 2000 Committee, the Company
and its subsidiaries experienced an uneventful transition from 1999 to 2000.
There was no disruption of services to customers or with internal operations.
Among the benefits derived from the time, effort and costs related to Year 2000
was a complete review and update of the Company's disaster recovery and
contingency plans. As a result, the Company is now better prepared to deal with
technical or natural disasters which could threaten the Company's operations.
The Company will continue to remain aware of dates during 2000 which are
considered critical, such as 2/29/2000 and 10/10/2000, and will address issues,
should they arise.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
Financial Condition
Total assets decreased by $7.1 million or 1.7% to $404.7 million at December
31, 1999, from $411.8 million at December 31, 1998. The decrease in total
assets during 1999 was primarily attributed to decreases in cash and cash
equivalents, investment securities and mortgage-backed securities, which were
partially offset by an increase in net loans.
Cash and cash equivalents decreased by $16.9 million to $30.1 million at
December 31, 1999, from $47.0 million at December 31, 1998. The decrease was
primarily attributed to the net loan growth and repayment of other borrowings.
At December 31, 1999, investment securities available-for-sale totaled $65.4
million, a decrease of $10.8 million or 14.2% from the amount classified as
available-for-sale at December 31, 1998. The decrease was the result of
maturities and calls of $24.0 million of available-for sale securities, sales
of $2.0 million of available-for-sale securities and a negative adjustment of
$1.7 million in the market value of available-for-sale securities, which were
partially offset by purchases totaling $17.0 million of available-for-sale
securities, during the fiscal year ended December 31, 1999.
At December 31, 1999, mortgage-backed securities available-for-sale totaled
$17.5 million, a decrease of $1.1 million from the amount classified as
available-for-sale at December 31, 1998. The decrease in mortgage-backed
securities available-for-sale was the result of principal repayments totaling
$7.5 million, and a negative adjustment to market value of $424,000 during the
year, which were partially offset by the purchase of $7.0 million in mortgage-
backed securities available-for-sale.
During the year ended December 31, 1999, net loans increased by $25.2 million
or 10.2% to $270.4 million from $245.2 million at December 31, 1998. The
increase was the result of the origination of $66.1 million of real estate
loans, the origination of $58.3 million of consumer and commercial business
loans, the purchase of $1.4 million of commercial real estate loans, and loan
repayments which totaled $100.2 million. During 1998, low market rates
resulted in a high volume of refinancing in one-to-four family, commercial and
consumer loans, which produced a high level of loan repayments. During 1999,
increasing market rates resulted in a significantly lower volume of
refinancing in one-to-four family and consumer loans, while increased volume
in shorter term commercial loans resulted in an increase in prepayments. The
net result was an overall decrease in total repayments.
There were no loans held for sale at December 31, 1999, representing a
decrease of $1.9 million from December 31, 1998. This was the result of the
origination for sale of approximately $7.2 million of fixed-rate loans, offset
by the sale with servicing retained of approximately $9.1 million of such
loans, primarily to Freddie Mac.
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 1999, $505,000 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.
During the second quarter of 1998, as a result of legislation which changed
the pricing on education loans purchased by the Student Loan Marketing
Association ("Sallie Mae"), the Company elected to sell its education loan
portfolio. As the result of this decision, education loans totaling $867,000
were sold, resulting in a gain of $22,000. The Company continues to offer
student loans. Pursuant to its ongoing agreement with Sallie Mae, during 1999
the Company sold $365,000 in student loans at the time the loans were fully
disbursed.
Held-to-maturity investment securities and non-marketable equity securities
decreased by $36,000 to $807,000 at December 31, 1999, from $843,000 at
December 31, 1998. This decrease was the result of the maturity of held-to-
maturity securities.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Real estate held for sale decreased by $1.3 million (69.4%) to $575,000 at
December 31, 1999 from $1.9 million at December 31, 1998. The decrease was the
result of the disposal of nine one-to-four family properties and the sale of a
large commercial building in Champaign, Illinois. The sale of the commercial
building resulted in a deferred gain of $311,000. The gain was not recognized
in current income due to the Bank's participation in the buyer's financing
through a second mortgage in the amount of $350,000. The second mortgage was
made with market terms and at a market rate. The decreases were partially
offset by the transfer of nine one-to-four family properties and one small
commercial property to real estate held for sale during the year ended December
31, 1999, and to additional expenditures incurred in connection with the
commercial building.
Deposits increased by $8.2 million (2.4%) to $355.0 million at December 31,
1999, from $346.8 million at December 31, 1998. The increase resulted from a
$7.7 million increase in certificates of deposit, and a $449,000 increase in
passbook savings, checking and money market accounts.
Borrowed money decreased by $11.7 million (51.1%) to $11.2 million at December
31, 1999, from $22.9 million at December 31, 1998. 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, 1999. Borrowed money was primarily used to purchase and retain
mortgage-backed securities in order to generate additional net interest income
and as a method of increasing the leverage on the Company's capital.
Periodically, borrowed money is used for both short-term and long-term cash
management requirements.
Stockholders' equity on a per share basis increased from $29.02 at December 31,
1998, to $29.15 at December 31, 1999. Stockholders' equity decreased by $3.5
million (8.6%) to $36.2 million at December 31, 1999. The decrease in
stockholders' equity was attributed to the repurchase of 136,000 shares of
Company common stock at a total cost of $3.5 million, the payment of dividends
of $634,000 during the year ended December 31, 1999, and to a decrease in the
market value adjustment on available-for-sale securities, which, net of
provision for income taxes, amounted to $1.4 million. The decrease was
partially offset by net income of $1.8 million.
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, 1999, to the Year Ended
December 31, 1998--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, 1999, total classified assets decreased by $2.2 million
to $4.8 million from $7.0 million at December 31, 1998. This decrease was due
to decreases of $83,000 in assets classified as Loss, $1.7 million in assets
categorized as Substandard, and $402,000 in assets classified as Special
Mention. The decrease in assets classified as Substandard was due primarily to
the sale of the commercial building in Champaign, Illinois.
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,
1999, total non-performing assets decreased by $576,000, or 17.2%, to $2.8
million from $3.4 million at December 31, 1998. The decrease was due to
decreases of $1.3 million in foreclosed assets, $185,000 in non-accruing
commercial loans, $133,000 in non-
accruing one-to-four family loans, $91,000 in non-accruing commercial business
loans, $50,000 in accruing consumer loans 90 days or more past due and accruing
commercial loans 90 days or more past due. These decreases were partially
offset by increases of $766,000 and $464,000 in accruing commercial real estate
loans 90 days or more past due, and restructured troubled debt, respectively.
Based on its review of the non-performing loans, management does not anticipate
that the Company will incur a material loss.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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.
Net Interest Income Analysis
The following table presents for the periods indicated the total dollar amount
of interest income from average interest-earning assets and resultant yields,
as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended December 31,
1999
----------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
----------- -------- ------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)............................. $261,883 $20,407 7.79%
Mortgage-backed securities (2)................... 19,075 1,125 5.90%
Investments securities (3)....................... 69,980 4,138 5.91%
Other interest-earning assets.................... 21,998 1,109 5.04%
FHLB stock....................................... 1,808 121 6.69%
-------- -------
Total interest-earning assets.................. 374,744 26,900 7.18%
-------- -------
Other assets 32,194
--------
Total assets................................... $406,938
========
Interest-bearing liabilities:
Time deposits.................................... $210,899 11,141 5.28%
Savings deposits................................. 61,413 1,503 2.45%
Demand and NOW deposits.......................... 74,903 1,683 2.25%
Borrowings....................................... 18,769 1,016 5.41%
-------- -------
Total interest-bearing liabilities............. 365,984 15,343 4.19%
-------- -------
Other liabilities.................................. 2,799
--------
Total liabilities.............................. 368,783
--------
Stockholders' equity............................... 38,155
--------
Total liabilities and stockholders' equity..... $406,938
========
Net interest income................................ $11,557
=======
Net interest rate spread........................... 2.99%
=====
Net earning assets................................. $ 8,760
========
Net yield on average interest-earning assets (net
interest margin).................................. 3.08%
=====
Average interest-earning assets to average
interest-bearing liabilities...................... 102.39%
=======
</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.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
Year Ended December 31, 1998 1997
- --------------------------------- ----------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
- ---------------- -------- ------ ----------- -------- ------
<S> <C> <C> <C> <C> <C>
$ 248,148 $20,291 8.18% $233,745 $18,894 8.08%
24,409 1,486 6.09% 32,309 2,198 6.80%
61,739 3,813 6.18% 46,817 2,941 6.28%
34,879 1,809 5.19% 14,775 734 4.97%
1,848 123 6.66% 1,887 128 6.78%
------------- ------- -------- -------
371,023 27,522 7.42% 329,533 24,895 7.55%
------------- ------- -------- -------
29,486 14,750
------------- --------
$ 400,509 $344,283
============= ========
$ 204,622 11,465 5.60% $177,357 9,968 5.62%
59,242 1,598 2.70% 51,777 1,409 2.72%
71,010 1,775 2.50% 49,021 1,387 2.83%
23,722 1,288 5.43% 26,273 1,509 5.74%
------------- ------- -------- -------
358,596 16,126 4.50% 304,428 14,273 4.69%
------------- ------- -------- -------
2,876 2,394
------------- --------
361,472 306,822
------------- --------
39,037 37,461
------------- --------
$ 400,509 $344,283
============= ========
$11,396 $10,622
======= =======
2.92% 2.86%
===== =====
$ 12,427 $ 25,105
============= ========
3.07% 3.22%
===== =====
103.47% 108.25%
======= =======
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
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,
-----------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable (1)....................................... 7.78% 7.77% 8.02%
Mortgaged-backed securities (2)............................ 6.41% 7.18% 6.89%
Investment securities (3).................................. 5.85% 5.89% 6.08%
Other interest-earning assets.............................. 4.44% 4.60% 5.37%
Combined weighted average yield on interest-earning assets. 7.22% 7.09% 7.53%
Weighted average rate paid on:
Saving deposits............................................ 2.50% 2.44% 2.77%
Demand and NOW deposits.................................... 2.19% 2.27% 2.79%
Certificates............................................... 5.42% 5.63% 5.80%
Borrowings................................................. 5.37% 5.34% 5.67%
Combined weighted average rate paid on interest-bearing
liabilities............................................... 4.26% 4.41% 4.80%
Spread....................................................... 2.96% 2.68% 2.73%
</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 December 31, Year Ended December 31,
1999 vs. 1998 1998 vs. 1997
--------------------------- ---------------------------------
Increase
(Decrease) Due Increase (Decrease)
to Total Due to Total
--------------- Increase --------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ------- ---------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans receivable...... $1,104 $ (988) $ 116 $ 1,152 $ 245 $1,397
Mortgage-backed
securities........... (316) (45) (361) (538) (174) (712)
Investment securities. 484 (159) 325 935 (63) 872
Other interest-earning
assets............... (650) (50) (700) 998 77 1,075
Federal Home Loan Bank
stock................ (3) 1 (2) (3) (2) (5)
------ ------- ----- ---------- --------- ------
Total interest-
earning assets..... $ 619 $(1,241) $(622) $ 2,544 $ 83 $2,627
====== ======= ===== ========== ========= ======
Interest bearing liabil-
ities:
Certificate accounts.. $ 345 $ (669) $(324) $ 1,537 $ ( 40) $1,497
Savings deposits...... 57 (152) (95) 202 (13) 189
Demand and NOW
deposits............. 94 (186) (92) 622 (234) 388
Borrowings............ (267) (5) (272) (147) (74) (221)
------ ------- ----- ---------- --------- ------
Total interest-
bearing
liabilities........ $ 229 $(1,012) $(783) $ 2,214 $ ( 361) $1,853
====== ======= ===== ========== ========= ======
Net interest income..... $ 161 $ 774
===== ======
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Comparison of Operating Results for the Year Ended December 31, 1999, to the
Year Ended December 31, 1998
General
Consolidated net income was $1.8 million, or $1.28 per share (diluted), for the
year ended December 31, 1999 compared to $2.3 million, or $1.56 per share
(diluted), for the year ended December 31, 1998.
Net Interest Income
Net interest income was $11.6 million for the year ended December 31, 1999, an
increase of $162,000, or 1.4%, during 1999 as compared to 1998. Net interest
income increased due primarily to the decrease in interest expense resulting
from the decrease in rate of interest-bearing liabilities exceeding the
decrease in interest income resulting from the decrease in rate of interest-
earning assets.
Interest Income
Interest income totaled $26.9 million for the year ended December 31, 1999, a
decrease of $622,000 or 2.3%, as compared to $27.5 million for 1998. This
resulted from a decrease in the yield earned on assets from 7.42% during 1998
to 7.18% during 1999, which was partially offset by a $3.7 million increase in
average interest-earning assets from $371.0 million during 1998 to $374.7
million during 1999.
Interest on loans was $20.4 million for 1999, an increase of $116,000, or 0.6%,
as compared to 1998. This was primarily attributable to the effect of an
increase of $13.7 million in average outstanding loans, which was partially
offset by a decrease in the yield on loans from 8.18% during 1998 to 7.79%
during 1999.
Interest earned on mortgage-backed securities was $1.1 million for 1999, as
compared to $1.5 million for 1998. This represented a decrease of 24.3% between
the periods and was primarily due to a decrease of $5.3 million in average
mortgage-backed securities and a decrease in the yield on mortgage-backed
securities to 5.90% during 1999 from 6.09% during 1998.
Interest earned on investment securities and other interest-earning assets and
dividends on FHLB stock totaled $5.4 million for 1999, as compared to $5.7
million for 1998. This represented a decrease of 6.6% during 1999. This was
primarily due to a decrease in the average balance of these assets from $98.5
million in 1998 to $93.8 million in 1999 and a lower average yield on these
assets from 5.83% in 1998 to 5.72% in 1999.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
Interest Expense
Interest expense was $15.3 million for 1999, or $784,000 (4.9%) less than in
1998. This was due to a decrease in average yields to 4.19% for 1999 from
4.50% for 1998, which was partially offset by an increase of $7.4 million in
the average balance of interest-bearing liabilities to $366.0 million for 1999
from $358.6 million for 1998. The lower average yield during 1999 was
attributable to decreases in the average cost of deposit accounts, which
resulted from lower market rates during most of the year, and from a reduction
in higher cost borrowings.
During 1999, $1.0 million of the Company's interest expense, compared to $1.3
million during 1998, related to advances from the FHLB and from securities
sold under agreements to repurchase.
Provision for Losses on Loans
No provision for losses on loans was deemed necessary during either 1999 or
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
1999 increased to $287,000, from $224,000 during 1998. However, recoveries
during 1999 increased to $83,000 from $71,000 in 1998. The ratio of net
charge-offs to average outstanding loans increased to 0.08% in 1999 from 0.06%
in 1998.
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 for losses on loans
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 $2.2 million allowance
for losses on loans at December 31, 1999 was adequate. However, 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.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The following is a summary of loan loss experience and nonperforming assets for
the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Total loans.................................................. $272,531 $249,519
Total assets................................................. 404,718 411,779
Allowance for losses on loans................................ 2,171 2,376
Net loan charge-offs......................................... 204 153
Net loan charge-offs as a percentage of average loans........ 0.08% 0.06%
Nonperforming loans.......................................... $ 1,748 $ 1,481
Nonperforming assets......................................... 2,781 3,357
Nonperforming assets to total assets......................... 0.69% 0.82%
Allowance for losses on loans to nonperforming loans......... 124.2% 160.4%
</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.
Other Income
Other income increased $488,000 for 1999 to $3.0 million, compared to $2.5
million for 1998. The 19.7% increase in other income was primarily related to a
net gain of $316,000 on the sale of office-related properties, and to increases
of $251,000 in fee income, $17,000 in gain on the sale of real estate held for
sale and $59,000 in other income. These increases were partially offset by
decreases of $148,000 in gain on the sale of loans and $8,000 in insurance
commissions. The increase in fee income was attributable to the increase in
outstanding balances of transaction accounts through normal growth, and
attributable to the Company's ongoing review of service charges. The decrease
in gain on the sale of loans was the result of a decrease in the volume of
loans originated for sale due to increasing market rates during 1999. During
1999, the Company sold $7.2 million fixed-rate one-to-four family loans from
its held for sale portfolio, as compared to $35.1 million of similar sales
during 1998.
Other Expenses
Other expenses were $11.9 million for 1999, as compared to $10.4 million for
1998. This represented an increase of $1.5 million or 14.1% during 1999. The
increase in other expenses during 1999 was reflected in all but one category of
such expense. The amortization of intangible assets decreased by $16,000 (4.0%)
during 1999. The increases were due to several factors, including: the
operating of fifteen offices throughout 1999 compared to nine offices at the
start of 1998, additional costs related to staffing changes in the second year
of operations of a trust department; higher than anticipated operating costs
associated with the in-house item processing operation; and, an ongoing high
level of training required to continue moving the Company to a sales oriented
business approach. Compensation and benefits increased by $516,000 (9.3%),
occupancy increased by $200,000 (22.0%), furniture and equipment expense
increased by $116,000 (19.5%), advertising expense increased by $43,000
(12.8%), the provision for losses on foreclosed assets increased by $23,000
(114.9%) and other general and administrative expenses increased by $573,000
(33.5%).
Income Taxes
Federal income tax expense was $862,000 for 1999, as compared to $1.2 million
for 1998. This decrease was primarily the result of a decrease in pre-tax
income. The Company's effective tax rate was 33% for the years ended December
31, 1999 and 1998. A summary of the significant tax components is provided in
Note 9 of the Notes to Consolidated Financial Statements included later in this
report.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
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.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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.
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.
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.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
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, 1999, 1998 and 1997,
respectively:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Net income....................................... $ 1,759 $ 2,289 $ 3,012
Adjustments to reconcile net income to net cash
provided (used) by operating activities......... 3,724 (774) (1,319)
-------- -------- --------
Net cash provided by operating activities........ 5,483 1,515 4,331
Net cash provided (used) by investing activities. (14,903) (12,591) 12,078
Net cash provided (used) by financing activities. (7,477) 13,496 (10,743)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (16,897) 2,420 5,666
Cash and cash equivalents at beginning of period. 46,991 22,826 17,160
Cash acquired with Coal City National Bank....... -- 21,745 --
-------- -------- --------
Cash and cash equivalents at end of period....... $ 30,094 $ 46,991 $ 22,826
======== ======== ========
</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, 1999, 1998 and 1997, respectively, the Company's loan
originations totaled $133.5 million, $142.7 million and $94.1 million,
respectively, and purchases of loans totaled $1.4 million, $300,000 and $2.2
million, respectively. Purchases of mortgage-backed securities totaled $7.0
million and $8.8 million for 1999 and 1998, respectively. There were no
purchases of mortgage-backed securities during 1997. Other investment
activities included the purchase of investment securities which totaled $17.0
million, $57.1 million and $3.2 million for 1999, 1998 and 1997, respectively.
During 1999, 1998 and 1997, these activities were funded primarily by
maturities of investment securities totaling $24.0 million, $33.4 million and
$10.2 million, respectively, by principal repayments on loans and mortgage-
backed securities and proceeds from the sale of mortgaged-backed securities
totaling $107.7 million, $133.5 million and $89.4 million, respectively, and,
by sales of investment securities totaling $2.0 million in 1999 and $8.0
million in 1997. There were no sales of investment securities during 1998.
The major source of cash from financing activities during 1999 was an increase
of $8.1 million in deposit accounts. Additionally, financing activities for
1999 included the purchase of common stock totaling $3.5 million, the payment
of dividends to stockholders totaling $634,000 and the net repayment of
borrowings totaling $11.7 million. 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. Net cash used in financing activities and
investing activities was offset by the net cash provided by operating
activities for 1999. Net cash provided from financing activities was used to
offset the net cash used in investing activities for 1998. 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, currently
requires the Bank to maintain, for each calendar quarter, an average daily
balance of liquid assets (including cash and cash equivalent investments)
equal to at least 4% of its liquidity base as of the end of the preceding
calendar quarter or the average daily balance of its liquidity base during the
preceding calendar quarter. The liquidity base
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
consists of net withdrawable accounts plus borrowings repayable in 12 months or
less. The Bank's regulatory liquidity ratio was 20.0% at December 31, 1999.
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, 1999, 1998 and 1997, these liquid assets totaled
$30.1 million, $47.0 million, and $22.8 million, respectively. The high level
of liquid assets at December 31, 1999 was due, in part, to larger than normal
levels of cash on hand at the Company's offices during the weeks preceding the
Year 2000. The very high level of liquid assets at December 31, 1998 was due to
the net acquisition of cash with the 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 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, 1999,
the Company had outstanding borrowings totaling $11.2 million, all of which
were advances from the FHLB.
At December 31, 1999, the Company had outstanding commitments to originate
mortgage loans of $5.1 million, of which 48.8% 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, 1999, totaled $140.1 million. Based upon the historically stable
nature of the Company's deposit base, management believes that a significant
portion of such deposits will remain with the Company. The Company also had
unused lines of credit provided to customers of $26.1 million and $23.1 million
at December 31, 1999, and 1998, respectively.
At December 31, 1999, the Bank exceeded all of its capital requirements on a
fully phased-in basis. See Note 10 of the Notes to Consolidated Financial
Statements and the discussion of the Company's financial condition above.
Dividends
A federal thrift institution is precluded under current regulations of the OTS
from declaring or paying a dividend or repurchasing any of its common stock if
either of such actions would reduce the institution's core, tangible or risk-
based capital levels below its liquidation account balance or any of the three
current minimum regulatory capital requirements. Under presently effective OTS
regulations, the maximum amount of dividends that a thrift institution will be
permitted to pay in any calendar year without prior OTS approval is 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 $1.0
million, $1.2 million and $1.8 million to the Company, its sole stockholder,
during 1999, 1998 and 1997, 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
were paid during 1999, 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 declared a quarterly cash dividend of $.12 per share payable on
February 29, 2000, to stockholders of record as of February 11, 2000. 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.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995
This report, including the Chairman's Letter to Stockholders, contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. The Company intends such forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements contained
in the Private Securities Reform Act of 1995, and is including this statement
for purposes of these safe harbor provisions. Forward-looking statements,
which are based on certain assumptions and describe future plans, strategies
and expectations of the Company, are generally identifiable by use of the
words "believe," "expect," "intend," "anticipate," "estimate," "project" or
similar expressions. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse affect on the operations and future prospects of
the Company and the subsidiaries include, but are not limited to, changes in:
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U. S. Government, including policies of
the U. S. Treasury and the Federal Reserve Board, the quality of composition
of the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
account principles, policies and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue
reliance should not be placed on such statements. Further information
concerning the Company and its business, including additional factors that
could materially affect the Company's financial results, is included in the
Company's filings with the Securities and Exchange Commission.
26
<PAGE>
INDEPENDENT
AUDITOR'S
REPORT
- --------------------------------------------------------------------------------
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, 1999 and 1998, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
[McGladrey & Pullen, LLP Signature]
Champaign, Illinois
January 27, 2000
27
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
-----------------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
Assets
Cash and due from banks............................ $ 19,118,528 $ 15,154,733
Federal funds sold................................. 6,321,834 18,525,000
Money market funds................................. 4,653,221 13,310,905
------------ ------------
Cash and cash equivalents......................... 30,093,583 46,990,638
------------ ------------
Certificates of deposit............................ 50,000 50,000
------------ ------------
Securities:
Investment securities:
Available-for-sale, at fair value................ 65,131,965 75,942,836
Held-to-maturity, at cost (fair value: 1999
$284,038; 1998 $345,318)........................ 306,241 341,647
------------ ------------
Total investment securities..................... 65,438,206 76,284,483
------------ ------------
Mortgage-backed securities:
Available-for-sale, at fair value................ 17,490,841 18,577,927
Held-to-maturity, at cost (fair value: 1999
$109,819; 1998 $172,340)........................ 108,724 167,741
------------ ------------
Total mortgage-backed securities................ 17,599,565 18,745,668
------------ ------------
Nonmarketable equity securities, at cost.......... 501,100 501,100
------------ ------------
Loans, net of allowance for losses on loans of
$2,171,040 in 1999 and $2,375,533 in 1998......... 270,360,059 245,232,781
Loans held for sale................................ -- 1,910,966
Real estate held for sale.......................... 575,164 1,882,324
Federal Home Loan Bank stock, at cost.............. 1,811,400 1,801,100
Office properties and equipment.................... 8,850,579 8,729,971
Accrued interest receivable........................ 2,889,498 2,772,872
Prepaid expenses and other assets.................. 1,352,138 1,289,077
Intangible assets.................................. 5,196,634 5,587,678
------------ ------------
Total assets......................................... $404,717,926 $411,778,658
============ ============
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Liabilities
Deposits
Noninterest bearing.......................... $ 21,455,669 $ 17,533,020
Interest bearing............................. 333,521,782 329,269,826
Other borrowings............................... 11,200,000 22,900,000
Advance payments by borrowers for taxes and
insurance..................................... 1,548,998 1,532,482
Other liabilities.............................. 743,750 866,721
------------ ------------
Total liabilities................................ 368,470,199 372,102,049
------------ ------------
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..................... 16,019,390 16,070,157
Retained income, partially restricted.......... 32,309,425 31,183,528
Treasury stock (506,617 and 382,642 shares in
1999 and 1998, respectively), at cost......... (10,851,899) (7,621,599)
Accumulated other comprehensive income (loss).. (1,095,478) 329,445
------------ ------------
Total stockholders' equity before Employee Stock
Ownership Plan Loan ............................ 36,398,938 39,979,031
Employee Stock Ownership Plan Loan............. (151,211) (302,422)
------------ ------------
Total stockholders' equity....................... 36,247,727 39,676,609
------------ ------------
Total liabilities and stockholders' equity......... $404,717,926 $411,778,658
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
29
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
----------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans.................................... $20,406,989 $20,291,307 $18,893,603
Mortgage-backed securities............... 1,124,621 1,485,642 2,198,282
Investment securities and other.......... 5,368,712 5,745,120 3,802,714
----------- ----------- -----------
Total interest income.................. 26,900,322 27,522,069 24,894,599
----------- ----------- -----------
Interest expense:
Deposits................................. 14,326,288 14,838,161 12,763,541
Borrowed funds........................... 1,016,271 1,288,296 1,509,196
----------- ----------- -----------
Total interest expense................. 15,342,559 16,126,457 14,272,737
----------- ----------- -----------
Net interest income.................... 11,557,763 11,395,612 10,621,862
Provision for losses on loans.............. -- -- 33,395
----------- ----------- -----------
Net interest income after provision for
losses on loans....................... 11,557,763 11,395,612 10,588,467
----------- ----------- -----------
Other income:
Net gain on sales of securities
available-for-sale...................... 1,094 -- 34,146
Net gain on sales of real estate held for
sale.................................... 37,187 20,367 19,008
Net gain on sales of loans held for sale. 10,880 158,551 58,512
Net gain on sale of property held for
expansion............................... 315,596 -- --
Fee income............................... 1,924,663 1,673,609 1,023,243
Insurance commissions.................... 122,880 130,470 128,184
Other.................................... 551,884 493,151 426,170
----------- ----------- -----------
Total other income..................... 2,964,184 2,476,148 1,689,263
----------- ----------- -----------
Other expenses:
Compensation and benefits................ 6,069,433 5,553,788 4,411,759
Occupancy................................ 1,106,006 906,201 748,084
Furniture and equipment.................. 709,565 593,600 480,930
Federal insurance premiums............... 168,388 168,322 170,107
Advertising.............................. 377,605 334,659 238,775
Provision for losses on real estate held
for sale................................ 43,936 20,442 7,534
Data processing services................. 391,155 382,263 280,054
Telephone and postage.................... 358,887 353,626 246,857
Amortization of intangible assets........ 391,043 407,191 231,682
Other general and administrative......... 2,284,297 1,711,455 1,368,812
----------- ----------- -----------
Total other expenses................... 11,900,315 10,431,547 8,184,594
----------- ----------- -----------
Income before income taxes ............ 2,621,632 3,440,213 4,093,136
Income taxes............................... 862,150 1,151,047 1,081,500
----------- ----------- -----------
Net income............................. $ 1,759,482 $ 2,289,166 $ 3,011,636
=========== =========== ===========
Basic Earnings Per Share................... $ 1.35 $ 1.66 $ 2.13
=========== =========== ===========
Diluted Earnings Per Share................. $ 1.28 $ 1.56 $ 2.00
=========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
30
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
-----------------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Accumulated Employee Bank
Additional Other Stock Incentive Total
Common Paid-In Retained Treasury Comprehensive Ownership Plans and Stockholders'
Stock Capital Income Stock Income (Loss) Plan Loan Trusts Equity
------- ----------- ----------- ------------ ------------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... $17,500 $16,181,726 $27,219,741 $(5,876,509) $ (409,353) $(604,844) $(34,040) $36,494,221
Comprehensive income:
Net income............. -- -- 3,011,636 -- -- -- -- 3,011,636
Unrealized gain on
securities available-
for-sale arising
during the period, net
of tax of $291,098.... -- -- -- -- 460,316 -- -- 460,316
Less: Reclassifications
adjustment for gains
included in net
income, net of tax of
$13,228............... -- -- -- -- 20,918 -- -- 20,918
-----------
481,234
-----------
Comprehensive income.... 3,492,870
Purchase of 55,000
shares of treasury
stock.................. -- -- -- (1,790,253) -- -- -- (1,790,253)
Exercise of stock
options................ -- -- -- 115,735 -- -- -- 115,735
Adjustment to paid-in
capital due to exercise
of stock options....... -- (91,487) -- 91,487 -- -- -- --
Dividends paid on common
stock--$.48 per share.. -- -- (676,457) -- -- -- -- (676,457)
Principal payment on
ESOP loan.............. -- -- -- -- -- 151,211 -- 151,211
Amortization of award of
Bank Incentive Plan
stock.................. -- -- -- -- -- -- 34,040 34,040
------- ----------- ----------- ------------ ----------- --------- -------- -----------
Balance, December 31,
1997................... 17,500 16,090,239 29,554,920 (7,459,540) 71,881 (453,633) -- 37,821,367
Comprehensive income:
Net income............. -- -- 2,289,166 -- -- -- -- 2,289,166
Unrealized gain on
securities available-
for-sale arising
during the period, net
of tax of $162,880.... -- -- -- -- 257,564 -- -- 257,564
-----------
257,564
-----------
Comprehensive income.... 2,546,730
Purchase of 13,650
shares of treasury
stock.................. -- -- -- (346,995) -- -- -- (346,995)
Exercise of stock
options................ -- -- -- 92,529 -- -- -- 92,529
Adjustment to paid-in
capital due to exercise
of stock options....... -- (20,082) -- 92,407 -- -- -- 72,325
Dividends paid on common
stock--$.48 per share.. -- -- (660,558) -- -- -- -- (660,558)
Principal payment on
ESOP loan.............. -- -- -- -- -- 151,211 -- 151,211
------- ----------- ----------- ------------ ----------- --------- -------- -----------
Balance, December 31,
1998................... 17,500 16,070,157 31,183,528 (7,621,599) 329,445 (302,422) -- 39,676,609
Comprehensive income:
Net income............. -- -- 1,759,482 -- -- -- -- 1,759,482
Unrealized loss on
securities available-
for-sale arising
during the period, net
of tax of $(705,677).. -- -- -- -- (1,425,645) -- -- (1,425,645)
Less: Reclassifications
adjustment for gains
included in net
income, net of tax of
$372.................. -- -- -- -- 722 -- -- 722
-----------
(1,424,923)
-----------
Comprehensive income.... 334,559
Purchase of 136,000
shares of treasury
stock.................. -- -- -- (3,472,591) -- -- -- (3,472,591)
Exercise of stock
options................ -- -- -- 118,747 -- -- -- 118,747
Adjustment to paid-in
capital due to exercise
of stock options....... -- (50,767) -- 123,544 -- -- -- 72,777
Dividends paid on common
stock--$.48 per share.. -- -- (633,585) -- -- -- -- (633,585)
Principal payment on
ESOP loan.............. -- -- -- -- -- 151,211 -- 151,211
------- ----------- ----------- ------------ ----------- --------- -------- -----------
Balance, December 31,
1999................... $17,500 $16,019,390 $32,309,425 $(10,851,899) $(1,095,478) $(151,211) -- $36,247,727
======= =========== =========== ============ =========== ========= ======== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
31
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Cash Flows from Operating
Activities
Net income........................ $ 1,759,482 $ 2,289,166 $ 3,011,636
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for losses on loans.. -- -- 33,395
Provision for losses on real
estate held for sale.......... 43,936 20,442 7,534
Depreciation and amortization.. 1,287,009 1,064,712 763,483
Amortization of investment
premiums and discounts, net... 250,846 299,937 139,640
Accretion of loan fees and
discounts, net................ 41,295 (45,066) (33,971)
Deferred income tax provision
(benefit)..................... 100,107 (33,968) (28,728)
Origination of loans held for
sale.......................... (9,091,292) (38,590,159) (6,673,198)
Proceeds from sales of loans... 11,013,138 37,092,150 7,117,165
(Increase) decrease in interest
receivable.................... (116,626) 196 172,472
Increase (decrease) in interest
payable on deposits........... 71,234 86,190 (28,120)
Net gain on sales of loans..... (10,880) (158,551) (58,512)
Net gain on sales of securities
available-for-sale............ (1,094) -- (34,146)
Net gain on sales of real
estate held for sale.......... (37,187) (20,367) (19,008)
Net gain on sale of property
held for expansion............ (315,596) -- --
Other, net..................... 488,978 (489,956) (38,494)
------------- ------------- ------------
Net cash from operating activities. 5,483,350 1,514,726 4,331,148
------------- ------------- ------------
Cash Flow from Investing Activities
Investment securities:
Available-for-sale:
Purchases...................... (16,972,198) (55,944,227) (3,194,888)
Proceeds from sales............ 2,001,094 -- 8,024,060
Proceeds from calls and
maturities.................... 24,000,000 32,295,000 10,189,000
Held-to-maturity:
Purchases...................... -- (1,150,000) --
Proceeds from maturities....... 33,797 1,056,629 2,471
Mortgage-backed securities:
Available-for-sale:
Purchases...................... (6,991,551) (8,771,840) --
Proceeds from maturities and
paydowns...................... 7,453,485 18,473,627 6,295,394
Held-to-maturity:
Proceeds from maturities and
paydowns...................... 59,017 35,921 42,641
Purchases of certificates of
deposit.......................... -- (765,692) (2,357,500)
Proceeds from maturities of
certificates of deposit.......... -- 2,317,692 805,500
Proceeds from sales of real
estate........................... 3,409,153 323,492 209,351
Deferred loan fees and costs, net. (79,600) 23,210 (179,669)
Loans originated.................. (124,417,009) (104,134,300) (87,475,090)
Loans purchased................... (1,366,276) (300,000) (2,180,000)
Principal collected on loans...... 100,159,376 115,028,208 83,047,771
Purchases of office properties and
equipment, net................... (1,845,158) (2,665,242) (1,151,147)
Acquisition of Coal City National
Bank............................. -- (8,084,596) --
Payments for improvements on real
estate........................... (347,623) (328,986) --
------------- ------------- ------------
Net cash from investing activities. (14,903,493) (12,591,104) 12,077,894
------------- ------------- ------------
</TABLE>
(continued)
32
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
----------------------------------------------------
KANKAKEE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Net increase (decrease) in non-
certificate of deposit accounts.... 448,994 7,039,825 (1,072,434)
Net increase in certificate of
deposit accounts................... 7,654,377 7,790,818 3,774,086
Increase (decrease) in advance
payments by borrowers for taxes and
insurance.......................... 34,369 103,172 (43,940)
Proceeds from short-term borrowings. 3,000,000 -- 66,430,000
Repayments of short-term borrowings. (3,000,000) (8,220,000) (85,030,000)
Proceeds from other borrowings...... -- 8,000,000 34,550,000
Repayments of other borrowings...... (11,700,000) (375,000) (27,000,000)
Proceeds from exercise of stock
options............................ 191,524 164,854 115,735
Dividends paid...................... (633,585) (660,558) (676,457)
Purchase of treasury stock.......... (3,472,591) (346,995) (1,790,253)
------------ ------------ ------------
Net cash from financing activities... (7,476,912) 13,496,116 (10,743,263)
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents......................... (16,897,055) 2,419,738 5,665,779
Cash and cash equivalents:
Beginning of year................... 46,990,638 22,825,892 17,160,113
Cash acquired with Coal City
National Bank...................... -- 21,745,008 --
------------ ------------ ------------
End of year......................... $ 30,093,583 $ 46,990,638 $ 22,825,892
============ ============ ============
Supplemental Disclosures of Cash Flow
Information
Cash paid during the year for:
Interest on deposits............... $ 14,326,300 $ 14,924,400 $ 12,735,400
============ ============ ============
Interest on borrowed funds......... $ 1,068,200 $ 1,308,500 $ 1,580,700
============ ============ ============
Income taxes....................... $ 632,072 $ 1,177,335 $ 1,386,969
============ ============ ============
Supplemental Disclosures of Noncash
Investing Activities:
Real estate acquired through
foreclosure........................ $ 534,936 $ 550,603 $ 1,314,939
============ ============ ============
Reduction of Employee Stock
Ownership Plan loan................ $ 151,211 $ 151,211 $ 151,211
============ ============ ============
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.
33
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- -------------------------------------------------------------------------------
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. Based on the Company's
approach to decision making, it has decided that its business is comprised of
a single business segment.
The consolidated financial statements of the Company 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 market value of investment and mortgage
backed securities, the allowance for losses on loans and valuation of real
estate and other properties acquired in connection with foreclosures or in
satisfaction of amounts due from borrowers on loans. Actual results could
differ from those estimates.
Securities
Securities classified as held-to-maturity are those securities the Company has
both the positive intent and ability to hold to maturity regardless of changes
in market conditions, liquidity needs or changes in general economic
conditions. These securities are carried at cost adjusted for amortization of
premium and accretion of discount, computed by the interest method over their
contractual lives.
Securities classified as available-for-sale are those securities that the
Company intends to hold for an indefinite period of time, but not necessarily
to maturity. 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 other comprehensive income (loss),
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.
Nonmarketable Equity Securities
Nonmarketable equity securities are carried at cost as fair values are not
readily determinable.
34
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- --------------------------------------------------------------------------------
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 discount 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 a provision for losses on loans in the same
manner in which impairment initially was recognized or as a reduction in the
amount of a provision for losses on loans 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 ("allowance") is established through a
provision for losses on loans charged to operating expenses. Loans are charged
against the allowance when management believes that the collectibility of the
principal is unlikely. The allowance is an amount that management believes will
be adequate to absorb losses on existing loans that may become uncollectible,
based on evaluations of the collectibility of loans and prior loan loss
experience. The evaluations take into consideration such factors as changes in
the nature and volume of the loan portfolio, overall portfolio quality, review
of specific problem loans and current economic conditions that may affect the
borrowers' ability to pay. While management uses the best information available
to make its evaluation, future adjustments to the allowance may be necessary if
there are significant changes in economic conditions. In addition, various
regulatory agencies periodically review the allowance. These agencies may
require the Bank to make additions to the allowance 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.
35
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- -------------------------------------------------------------------------------
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. On a periodic basis, the Company reviews the intangible
assets for events or circumstances that may indicate a change in
recoverability of the underlying basis.
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 1,312,235, 1,375,553 and 1,412,136
for 1999, 1998 and 1997, respectively.
Diluted earnings per share is determined by dividing net income for the year
by the average number of shares of common stock and dilutive potential common
shares outstanding. Dilutive potential common shares 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 1,383,613, 1,464,029
and 1,502,639 for 1999, 1998 and 1997, 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.
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.
Emerging Accounting Standards
Accounting for Derivative Instruments and Hedging Activities Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133) establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. This Statement
applies to all entities. FAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Earlier application is encouraged.
The Statement is not to be applied retroactively to financial statements of
prior periods. In June 1999, Statement of Financial Accounting Standard No.
137 was issued to extend the effective date by one year to all fiscal quarters
of fiscal years beginning after June 15, 2000. The Company does not believe
the adoption of FAS 133, as amended by FAS 137, will have a material impact on
the consolidated financial statements.
36
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- --------------------------------------------------------------------------------
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 are 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
------- -------
(in thousands)
<S> <C> <C>
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.
37
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- -------------------------------------------------------------------------------
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, 1999
U. S. government and agency
securities...................... $66,059,685 $ 4,939 1,309,264 $64,755,360
Mutual fund shares............... 409,040 -- 32,435 376,605
----------- -------- ---------- -----------
Total investment securities.... 66,468,725 4,939 1,341,699 65,131,965
Mortgage-backed securities....... 17,813,775 61,365 384,299 17,490,841
----------- -------- ---------- -----------
Total.......................... $84,282,500 $ 66,304 $1,725,998 $82,622,806
=========== ======== ========== ===========
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
=========== ======== ========== ===========
<CAPTION>
Held-to-maturity
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1999
Municipal bonds.................. $ 306,241 $ -- $ 22,203 $ 284,038
Mortgage-backed securities....... 108,724 1,095 -- 109,819
----------- -------- ---------- -----------
Total.......................... $ 414,965 1,095 $ 22,203 $ 393,857
=========== ======== ========== ===========
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
=========== ======== ========== ===========
</TABLE>
The amortized cost and fair value of securities classified as held-to-maturity
and available-for-sale at December 31, 1999, 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.................... $ 34,486 $ 33,883 $17,007,841 $16,936,515
Due after 1 year through 5 years..... 40,307 37,496 44,051,844 43,109,995
Due after 5 through 10 years......... 167,121 148,332 5,000,000 4,708,850
Due after 10 years................... 64,327 64,327 -- --
Mortgage-backed securities........... 108,724 109,819 17,813,775 17,490,841
Mutual fund shares................... -- -- 409,040 376,605
-------- -------- ----------- -----------
Total.............................. $414,965 $393,857 $84,282,500 $82,622,806
======== ======== =========== ===========
</TABLE>
38
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- --------------------------------------------------------------------------------
The Bank, as a member of the Federal Home Loan Bank of Chicago (the "FHLB"), is
required to maintain an investment in capital stock of the FHLB in an amount
equal to 1% of its outstanding home loans. No ready market exists for the FHLB
stock, and it has no quoted market value. For disclosure purposes, such stock
is assumed to have a market value which is equal to cost.
U. S. government and agency securities with a carrying value of approximately
$19,695,000 and $17,126,000 at December 31, 1999 and 1998, respectively, were
pledged to collateralize certain deposit accounts with balances in excess of
$100,000 for other purposes as required or permitted by law.
Realized gains and losses were as follows:
<TABLE>
<CAPTION>
Year Ended December
31,
-------------------
1999 1998 1997
------ ---- -------
<S> <C> <C> <C>
Realized gains.............................................. $1,094 $ -- $34,146
Realized losses............................................. -- -- --
------ ---- -------
Net gain (loss)........................................... $1,094 $ -- $34,146
====== ==== =======
</TABLE>
Note 4. Loans
Loans consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
Real estate mortgage loans:
One-to-four family................................. $165,088,747 $158,044,604
Multifamily........................................ 8,923,474 5,556,309
Commercial......................................... 28,868,801 21,291,086
Construction and development....................... 14,235,389 13,937,820
Consumer loans:
Mobile home loans.................................. 2,157,624 2,825,500
Student loans...................................... 151,055 231,319
Home improvement loans............................. 2,396 6,915
Home equity loans.................................. 17,027,560 17,215,139
Credit card loans.................................. 1,285,937 1,376,329
Motor vehicle loans................................ 5,541,134 3,830,236
Personal loans..................................... 7,945,906 6,900,189
Loans secured by savings accounts.................. 788,276 826,849
Commercial loans..................................... 22,012,684 17,365,311
------------ ------------
Gross loans.......................................... 274,028,983 249,407,606
Less:
Unearned discounts................................. 882 904
Deferred loan fees, net............................ 102,707 126,860
Undisbursed portion of loan proceeds............... 1,394,295 1,671,528
Allowance for losses on loans...................... 2,171,040 2,375,533
------------ ------------
$270,360,059 $245,232,781
============ ============
</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%.
39
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- -------------------------------------------------------------------------------
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 $70,545,000, $71,322,000
and $36,999,000 at December 31, 1999, 1998 and 1997.
Note 5. Allowance for Losses on Loans
Changes in the allowance for losses on loans were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year................ $2,375,533 $2,130,146 $2,359,889
Balance acquired............................ -- 398,178 --
Provision for losses on loans............... -- -- 33,395
Charge-offs................................. (287,719) (223,869) (296,432)
Recoveries.................................. 83,226 71,078 33,294
---------- ---------- ----------
Balance at end of year...................... $2,171,040 $2,375,533 $2,130,146
========== ========== ==========
</TABLE>
Note 6. Office Properties and Equipment
Office properties and equipment consist of:
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Office properties:
Land................................................. $ 1,751,039 $ 1,667,011
Building............................................. 7,036,809 5,936,174
Leasehold improvements............................... 444,902 205,826
Parking facilities:
Land................................................. 340,862 340,862
Improvements......................................... 133,418 133,418
Land acquired for future use........................... 1,020,074 1,493,634
Furniture and equipment................................ 5,471,423 5,495,194
----------- -----------
16,198,527 15,272,119
Less: Accumulated depreciation and amortization........ 7,347,948 6,542,148
----------- -----------
$ 8,850,579 $ 8,729,971
=========== ===========
</TABLE>
Depreciation and amortization expense amounted to $895,966, $657,521 and
$531,801 for the years ended December 31, 1999, 1998 and 1997, 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.
40
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- --------------------------------------------------------------------------------
The total minimum rental commitment including all option periods, at December
31, 1999, under the leases mentioned above is as follows:
<TABLE>
<CAPTION>
Amount
Year of Maturity ----------
<S> <C>
2000................................................................. $ 81,449
2001................................................................. 84,067
2002................................................................. 84,067
2003................................................................. 85,911
2004................................................................. 93,593
Thereafter........................................................... 955,601
----------
$1,384,688
==========
</TABLE>
The total rental expense included in the income statement for the years ended
December 31, 1999 and 1998 was $74,083 and $27,797, respectively.
Note 7. Deposits
As of December 31, 1999, certificates of deposit had scheduled maturity dates
as follows:
<TABLE>
<CAPTION>
Amount
Year of Maturity ------------
<S> <C>
2000............................................................... $140,060,987
2001............................................................... 64,928,780
2002............................................................... 5,878,290
2003............................................................... 2,796,646
2004 and thereafter................................................ 4,392,710
------------
$218,057,413
============
</TABLE>
The aggregate amount of time certificates of deposit in denominations of
$100,000 or more was $26,427,470 and $24,717,651 at December 31, 1999 and 1998,
respectively.
Note 8. Other Borrowings
Other borrowings at December 31, 1999 and 1998 consisted of advances from the
FHLB of $11,200,000 and $22,900,000, respectively. The weighted average
maturity date was approximately 60 months and 60 months, respectively, and the
weighted average interest rates were approximately 5.37% and 5.34%,
respectively.
Advances from the FHLB are collateralized by one-to-four family residential
mortgages.
Future payments at December 31, 1999, for all other borrowings were as follows:
<TABLE>
<CAPTION>
Amount
Year Ended -----------
<S> <C>
2000................................................................ $ --
2001................................................................ --
2002................................................................ 6,200,000
2003................................................................ --
2004................................................................ --
Thereafter.......................................................... 5,000,000
-----------
Total............................................................. $11,200,000
===========
</TABLE>
41
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- -------------------------------------------------------------------------------
Note 9. Income Taxes
Under provisions of the Internal Revenue Code and similar sections of the
Illinois income tax law that apply to tax years beginning before December 31,
1995, qualifying thrifts were allowed to claim bad debt deductions based on
the greater of (1) a specified percentage of taxable income, as defined, or
(2) actual loss experience. If, in the future, any of the accumulated bad debt
deductions are used for any purpose other than to absorb bad debt losses,
gross taxable income may result and income taxes may be payable.
The Small Business Job Protection Act became law on August 20, 1996. One of
the provisions in this law repealed the reserve method of accounting for bad
debts for thrift institutions so that the bad debt deduction described in the
preceding paragraph will no longer be effective for tax years beginning after
December 31, 1995. The change in the law requires that the tax bad debt
reserves accumulated after December 31, 1987 be recaptured into taxable income
over a six-year period. The start of the six-year period can be delayed for up
to two tax years if the Company meets certain residential lending thresholds.
Deferred taxes have been provided on the portion of the tax reserve for loan
loss that must be recaptured.
Retained earnings at December 31, 1999 and 1998 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, 1999 and 1998.
As of December 31, 1999, the Bank had State net operating loss carryforwards
of approximately $4,356,243 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 $545,521 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,
-------------------------------
1999 1998 1997
-------- ---------- ----------
<S> <C> <C> <C>
Current........................................ $762,043 $1,185,015 $1,110,228
Deferred....................................... 100,107 (33,968) (28,728)
-------- ---------- ----------
$862,150 $1,151,047 $1,081,500
======== ========== ==========
</TABLE>
The Company's income tax expense differed from the maximum statutory federal
rate of 35% as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998 1997
-------- ---------- ----------
<S> <C> <C> <C>
Expected income taxes........................ $917,571 $1,204,075 $1,432,598
Income tax effect of:
State income tax (carryforward), net of
federal benefit........................... (46,246) 9,816 65,399
Income taxed at lower rate................. (26,216) (34,402) (40,932)
Utilization of (addition to) state net
operating loss carryforwards.............. 46,246 (9,816) (65,399)
Bank Incentive Plan........................ -- (3,329) (31,168)
Other...................................... (29,205) (15,297) (278,998)
-------- ---------- ----------
$862,150 $1,151,047 $1,081,500
======== ========== ==========
</TABLE>
42
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- --------------------------------------------------------------------------------
Significant components of the deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
<S> <C> <C>
---------- ----------
Deferred tax assets:
Allowance for losses on loans........................ $ 743,560 $ 811,472
State net operating loss carryforwards............... 545,521 432,324
Accrued benefits..................................... 138,863 125,256
Intangible assets.................................... 27,627 43,454
Unrealized loss on assets available for sale......... 564,216 --
Other................................................ 108,595 37,511
---------- ----------
Total deferred tax assets.......................... 2,128,382 1,450,017
Valuation allowance for deferred tax assets.......... 545,521 432,324
---------- ----------
Total deferred tax assets, net of valuation
allowance......................................... 1,582,861 1,017,693
---------- ----------
Deferred tax liabilities:
Unrealized gain in assets available-for-sale......... -- (141,089)
Loan fees deferred for income tax purposes........... (63,607) (79,850)
Excess of tax accumulated provision for losses over
base year........................................... (73,165) (109,747)
Stock dividend on FHLB stock......................... (50,280) (50,280)
Loan costs deferred for book purposes................ (215,760) (171,923)
Mortgage servicing rights............................ (146,161) (105,465)
Other................................................ (87,161) (40,832)
---------- ----------
Total deferred tax liabilities..................... (636,134) (699,186)
---------- ----------
Net deferred tax assets................................ $ 946,727 $ 318,507
========== ==========
</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 $8.4 million and $10.2 million over the past three years,
respectively.
Note 10. Stockholders' Equity and Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Tangible and Core capital (as defined by the regulations) to tangible
assets (as defined) and Total and Tier I capital (as defined) to risk-weighted
assets (as defined). Management believes, as of December 31, 1999, that the
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, 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
43
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- -------------------------------------------------------------------------------
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 Prompt
Corrective
For Capital Action
Actual Adequacy Purposes Provisions
-------------- --------------------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ --------- --------------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Tangible Capital to Tangible
Assets Kankakee Federal
Savings Bank.................. $29,525 7.40% $ 5,982 1.50% N/A
Core Capital to Tangible Assets
Kankakee Federal Savings Bank. 29,525 7.40% 15,951 4.00% $19,939 5.00%
Tier I Capital to Risk Weighted
Assets Kankakee Federal
Savings Bank.................. 29,525 12.44% N/A 14,237 6.00%
Total Capital to Risk Weighted
Assets Kankakee Federal
Savings Bank.................. 31,621 13.33% 18,983 8.00% 23,728 10.00%
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%
</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 $2,405,944 as of December 31,
1999.
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.
44
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- --------------------------------------------------------------------------------
Note 11. Officer, Director and Employee Plans
Money Purchase Pension Plan and Trust
The Bank sponsors a Money Purchase Pension Plan and Trust (the "Money Purchase
Plan") for the benefit of its employees meeting certain age and service
requirements. The Bank contributes to the Money Purchase Plan on behalf of each
Participant an amount equal to 7% of the Participant's compensation, as defined
by the Money Purchase Plan. Expense related to the Money Purchase Plan amounted
to approximately $267,000, $245,000 and $210,000, for the years ended December
31, 1999, 1998 and 1997, 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 $12,700, $15,400 and $14,700,
for the years ended December 31, 1999, 1998 and 1997, 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 for the year ended December 31, 1997.
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
-----------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Shares allocated to participants................. 93,552.5 82,172.0 70,833.5
Unallocated shares (grandfathered under SOP 93-
6).............................................. 15,312.5 30,625.0 45,937.5
--------- --------- ---------
Total.......................................... 108,865.0 112,797.0 116,771.0
========= ========= =========
</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 $18,523, $29,108 and $39,693 for
the years ended December 31, 1999, 1998 and 1997, respectively. The Bank
contributed $162,883, $158,061 and $165,764 to the ESOP to fund principal and
interest payments for the years ended December 31, 1999, 1998 and 1997,
respectively.
45
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- -------------------------------------------------------------------------------
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>
1999 1998 1997
------------------ ------------------ ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Fixed Options ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 127,635 $9.952 137,005 $9.947 148,725 $9.941
Granted................. -- -- -- -- -- --
Exercise................ (12,025) 9.875 (9,370) 9.875 (11,720) 9.875
Forfeited............... -- -- -- -- -- --
------- ------- -------
Outstanding at end of
year................... 115,610 9.960 127,635 9.952 137,005 9.947
======= ======= =======
Options exercisable at
year-end............... 115,610 127,635 137,005
======= ======= =======
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.
Stockholders' Rights Plan
On May 14, 1999, the Company's Board of Directors adopted a Stockholders'
Rights Plan. The Plan provides for the distribution of one Right on June 15,
1999, for each share of the Company's outstanding common stock as of May 24,
1999. The Rights have no immediate economic value to stockholders because they
cannot be exercised unless and until a person, group or entity acquires 15% or
more of the Company's common stock or announces a tender offer. The Plan also
permits the Company's Board of Directors to redeem each Right for one cent
under various circumstances.
In general, the Rights Plan provides that if a person, group or entity
acquires a 15% or larger stake in the Company or announces a tender offer, and
the Company's Board chooses not to redeem the Rights, all holders of Rights,
other than the 15% stockholder or the tender offeror, will be able to purchase
a certain amount of the Company's common stock for half of its market price.
Note 12. Commitments and Contingencies
In the normal course of business, there are outstanding various contingent
liabilities such as claims and legal action, which are not reflected in the
consolidated financial statements. In the opinion of management, the ultimate
resolution of these matters is not expected to have a material effect on the
financial position or on the results of operations of the Company and its
subsidiary.
46
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- --------------------------------------------------------------------------------
Note 13. Financial Instruments
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of
credit, and financial guarantees. Those instruments involve, to varying
degrees, elements of credit and interest rate risk. The contract or notional
amounts of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
The Bank's exposure to credit loss, in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit and standby
letters of credit, is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract represent credit risk at December 31, 1999
and 1998 follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Commitments to originate new loans..................... $16,944,000 $14,184,000
Commitments to extend credit........................... 26,080,000 23,055,000
Standby letters of credit.............................. 2,093,000 2,212,000
</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.
47
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- -------------------------------------------------------------------------------
Note 14. Fair Value of Financial Instruments
The following table reflects a comparison of carrying amounts and the fair
values of the financial instruments:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1999 1998
------------------------- -------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents............. $ 30,093,583 $ 30,093,583 $ 46,990,638 $ 46,990,638
Certificates of deposit.. 50,000 50,000 50,000 50,000
Investment and mortgage-
backed securities....... 83,037,771 83,016,663 95,030,151 95,038,421
Nonmarketable equity
securities.............. 501,100 501,100 501,100 501,100
Loans.................... 272,531,099 269,036,875 247,608,314 248,188,723
Loans held for sale...... -- -- 1,910,966 1,936,844
FHLB stock............... 1,811,400 1,811,400 1,801,100 1,801,100
Accrued interest
receivable.............. 2,889,498 2,889,498 2,772,872 2,772,872
Liabilities:
Deposits................. $354,977,451 $355,501,883 $346,802,846 $348,206,411
Borrowed funds........... 11,200,000 11,157,454 22,900,000 22,883,988
Advance payments by
borrowers for taxes and
insurance............... 1,548,998 1,548,998 1,532,482 1,532,482
Accrued interest payable. 404,781 404,781 385,442 385,442
</TABLE>
The fair values utilized in the table were derived using the information
described below for the group of instruments listed. It should be noted that
the fair values disclosed in this table do not represent market values of all
assets and liabilities of the Company and, thus, should not be interpreted to
represent a market or liquidation value for the Company.
The following methods and assumptions were used by the Bank in estimating the
fair value disclosures for financial instruments:
Cash and cash equivalents and certificates of deposit: The carrying amounts
reported in the balance sheet for cash and short-term instruments approximate
those assets' fair values.
Investment 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.
48
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- --------------------------------------------------------------------------------
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 payable and advance payments by borrowers for taxes and
insurance approximates their fair value.
Borrowed funds: Rates currently available to the Company for debt with similar
terms and remaining maturities are used to estimate fair value of existing
debt.
Note 15. Condensed Parent Company Only Financial Statements
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
Statement of financial condition
Assets:
Cash and cash equivalents......................... $ 1,284,825 $ 4,272,790
Certificate of deposit............................ 50,000 50,000
Investment securities, available-for-sale......... 376,605 387,928
Equity in net assets of Kankakee Federal Savings
Bank............................................. 34,413,574 34,868,336
Other assets...................................... 203,161 156,640
------------ -----------
$ 36,328,165 $39,735,694
============ ===========
Liabilities and stockholders' equity:
Other liabilities................................. $ 80,438 $ 59,085
Common stock...................................... 17,500 17,500
Additional paid-in capital........................ 16,019,390 16,070,157
Retained income................................... 32,309,425 31,183,528
Accumulated comprehensive income (loss)........... (1,095,478) 329,445
Treasury stock.................................... (10,851,899) (7,621,599)
Employee Stock Ownership Plan loan................ (151,211) (302,422)
------------ -----------
$ 36,328,165 $39,735,694
============ ===========
</TABLE>
49
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Statement of operations
Dividends from subsidiary.................. $ 1,011,253 $1,210,525 $1,776,237
Interest income............................ 170,631 259,616 308,308
----------- ---------- ----------
Operating income......................... 1,181,884 1,470,141 2,084,545
----------- ---------- ----------
Equity in undistributed earnings of
Kankakee Federal Savings Bank............. 948,175 1,155,542 1,195,689
Other noninterest income................... -- 400 2,641
----------- ---------- ----------
Total other income....................... 948,175 1,155,942 1,198,330
Other expenses............................. 473,577 404,670 403,739
----------- ---------- ----------
Income before income tax benefit......... 1,656,482 2,221,413 2,879,136
Income tax benefit......................... 103,000 67,753 132,500
----------- ---------- ----------
Net income............................... $ 1,759,482 $2,289,166 $3,011,636
=========== ========== ==========
Comprehensive income
Net income................................. $ 1,759,482 $2,289,166 $3,011,636
Unrealized gain (loss) on securities
available-for-sale arising during the
period, net of tax of $(705,677),
$162,880, and $291,098 in 1999, 1998 and
1997, respectively........................ (1,425,645) 257,564 460,316
Less: Reclassification adjustment for gains
included in net income, net of tax of
$372, $0, and $13,228 in 1999, 1998 and
1997, respectively........................ 722 -- 20,918
----------- ---------- ----------
(1,424,923) 257,564 481,234
----------- ---------- ----------
Comprehensive income..................... $ 334,559 $2,546,730 $3,492,870
=========== ========== ==========
</TABLE>
50
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Statement of cash flows
Operating activities:
Net income............................ $ 1,759,482 $ 2,289,166 $ 3,011,636
Adjustments to reconcile net income to
net cash provided by operating
activities:
Equity in undistributed earnings of
Kankakee Federal Savings Bank...... (948,175) (1,155,542) (1,195,689)
Other............................... (13,253) 41,956 (161,650)
----------- ----------- -----------
Net cash provided by operating
activities....................... 798,054 1,175,580 1,654,297
----------- ----------- -----------
Investing activities:
Available-for-sale investment and
mortgage backed securities:
Purchase............................ (21,999) (23,118) (23,064)
Proceeds from maturities and
paydowns........................... -- 109,593 661,429
Purchase of equipment................. (579) -- --
----------- ----------- -----------
Net cash provided by (used in)
investing activities............. (22,578) 86,475 638,365
----------- ----------- -----------
Financing activities:
Principal collected on ESOP loan...... 151,211 151,211 151,211
Purchase of treasury stock............ (3,472,591) (346,995) (1,790,253)
Dividends paid to stockholders........ (633,585) (660,558) (676,457)
Proceeds from exercise of stock
options.............................. 191,524 164,854 115,735
----------- ----------- -----------
Net cash used in financing
activities....................... (3,763,441) (691,488) (2,199,764)
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents............................ (2,987,965) 570,567 92,898
Cash and cash equivalents:
Beginning of period................... 4,272,790 3,702,223 3,609,325
----------- ----------- -----------
End of period......................... $ 1,284,825 $ 4,272,790 $ 3,702,223
=========== =========== ===========
</TABLE>
51
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
- -------------------------------------------------------------------------------
Note 16. Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
Year Ended December 31, 1999
----------------------------------------------
Three Months Ended
December 31 September 30 June 30 March 31
----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Interest income................. $6,771,650 $6,737,789 $6,752,705 $6,638,178
Interest expense................ 3,815,453 3,804,947 3,837,556 3,884,603
---------- ---------- ---------- ----------
Net interest income........... 2,956,197 2,932,842 2,915,149 2,753,575
Provision for losses on loans... -- -- -- --
---------- ---------- ---------- ----------
Net interest income after
provision for losses on
loans........................ 2,956,197 2,932,842 2,915,149 2,753,575
Other income.................... 942,170 605,044 631,285 785,685
Other expense................... 3,163,023 2,964,017 2,903,529 2,869,746
---------- ---------- ---------- ----------
Income before income taxes.... 735,344 573,869 642,905 669,514
Income taxes.................... 241,800 188,600 204,108 227,642
---------- ---------- ---------- ----------
Net income.................... $ 493,544 $ 385,269 $ 438,797 $ 441,872
========== ========== ========== ==========
Basic earnings per share........ $ 0.40 $ 0.29 $ 0.33 $ 0.33
========== ========== ========== ==========
Diluted earnings per share...... $ 0.38 $ 0.28 $ 0.31 $ 0.31
========== ========== ========== ==========
<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>
52
<PAGE>
Exhibit 22
SUBSIDIARIES OF THE REGISTRANT
Kankakee Federal Savings Bank, a federally chartered savings bank
KFS Service Corporation, an Illinois corporation
KFS Insurance Agency, Inc., an Illinois corporation
<PAGE>
[LETTERHEAD OF McGLADREY & PULLEN, LLP]
CONSENT OF INDEPENDENT AUDITOR'S
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 27, 2000, 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, 1999.
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 27, 2000, 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, 1999.
/s/ McGladrey & Pullen, LLP
Champaign, Illinois
March 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 19,119
<INT-BEARING-DEPOSITS> 4,703
<FED-FUNDS-SOLD> 6,322
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 82,623
<INVESTMENTS-CARRYING> 415
<INVESTMENTS-MARKET> 394
<LOANS> 272,531
<ALLOWANCE> 2,171
<TOTAL-ASSETS> 404,718
<DEPOSITS> 354,977
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,293
<LONG-TERM> 11,200
0
0
<COMMON> 16,037
<OTHER-SE> 20,211
<TOTAL-LIABILITIES-AND-EQUITY> 404,718
<INTEREST-LOAN> 20,407
<INTEREST-INVEST> 5,369
<INTEREST-OTHER> 1,124
<INTEREST-TOTAL> 26,900
<INTEREST-DEPOSIT> 14,326
<INTEREST-EXPENSE> 15,342
<INTEREST-INCOME-NET> 11,558
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 11,900
<INCOME-PRETAX> 2,622
<INCOME-PRE-EXTRAORDINARY> 1,759
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,759
<EPS-BASIC> 1.35
<EPS-DILUTED> 1.28
<YIELD-ACTUAL> 3.08
<LOANS-NON> 553
<LOANS-PAST> 1,195
<LOANS-TROUBLED> 464
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,375
<CHARGE-OFFS> 287
<RECOVERIES> 83
<ALLOWANCE-CLOSE> 2,171
<ALLOWANCE-DOMESTIC> 2,005
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 166
</TABLE>
<PAGE>
[KANKAKEE BANCORP, INC. LOGO]
310 South Schuyler Avenue
P.O. Box 3 (815) 937-4440
Kankakee, IL 60901-0003 Fax (815) 937-3674
March 17, 2000
Dear Fellow Stockholder:
On behalf of the board of directors and management of Kankakee Bancorp,
Inc., we cordially invite you to attend the eighth annual meeting of
stockholders of Kankakee Bancorp. The meeting will be held at 10:00 a.m., on
Friday, April 21, 2000, at Sully's-Sullivan's Warehouse, a restaurant located at
555 South West Avenue, Kankakee, Illinois 60901.
The three individuals whom your board of directors has nominated to serve
as directors are each incumbent directors. In addition to the election of the
three directors, stockholders are being asked to ratify the appointment of
McGladrey & Pullen, LLP, as auditors for Kankakee Bancorp. 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 us additional expense
in soliciting proxies and will ensure that your shares are represented at the
meeting.
A copy of our annual report to stockholders for the year 1999 is also
enclosed. Thank you for your attention to this important matter.
Very truly yours,
/s/ William Cheffer
------------------------------------
William Cheffer
Chairman of the Board, President
and Chief Executive Officer
<PAGE>
[KANKAKEE BANCORP, INC. LOGO]
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 21, 2000
Notice is hereby given that the annual meeting of stockholders of Kankakee
Bancorp, Inc. will be held at 10:00 a.m., Kankakee, Illinois time, on Friday,
April 21, 2000 at Sully's-Sullivan's Warehouse, a restaurant located at 555
South West Avenue, Kankakee, Illinois 60901. The annual meeting is for the
purpose of considering and acting upon:
1. The election of three directors of Kankakee Bancorp;
2. The ratification of the appointment of McGladrey & Pullen, LLP, as
auditors of Kankakee Bancorp for the fiscal year ending December 31,
2000; and
3. To act upon such other business as may properly come before the annual
meeting or any adjournments or postponements of the meeting.
We are not aware of any other business to come before the annual meeting.
Any action may be taken on any one of the foregoing proposals at the annual
meeting on the date specified above, or on any date or dates to which the annual
meeting may be adjourned or postponed. Stockholders of record at the close of
business on March 1, 2000 are the stockholders entitled to vote at the annual
meeting and any adjournments or postponements of the meeting. In the event there
are not sufficient votes for a quorum or to approve or ratify any of the
foregoing proposals at the time of the annual meeting, the meeting may be
adjourned or postponed in order to permit further solicitation of proxies by
Kankakee Bancorp.
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 annual meeting in person.
By Order of the Board of Directors
/s/ Michael A. Stanfa
----------------------------------
Michael A. Stanfa
Secretary
Kankakee, Illinois
March 17, 2000
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE US 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. LOGO]
310 South Schuyler Avenue
P.O. Box 3 (815) 937-4440
Kankakee, IL 60901-0003 Fax (815) 937-3674
ANNUAL MEETING OF STOCKHOLDERS
April 21, 2000
INTRODUCTION
This proxy statement is furnished in connection with the solicitation of
proxies on behalf of the board of directors of Kankakee Bancorp, Inc. to be used
at our annual meeting of stockholders and at all adjournments or postponements
of the meeting. The meeting will be held at Sully's-Sullivan's Warehouse, a
restaurant located at 555 South West Avenue, Kankakee, Illinois, on Friday,
April 21, 2000 at 10:00 a.m. The accompanying notice of meeting, proxy card and
this proxy statement are first being mailed to stockholders on or about March
17, 2000. Certain of the information provided in this proxy statement relates
to Kankakee Federal Savings Bank, our wholly owned subsidiary.
At the annual meeting, our stockholders are being asked to consider and
vote upon the election of three directors and to ratify the appointment of
McGladrey & Pullen, LLP, as the independent auditors for the fiscal year ending
December 31, 2000. On March 1, 2000, we had 1,236,383 shares of common stock
outstanding, par value $.01 per share. Only holders of record of the common
stock at the close of business on March 1, 2000 will be entitled to vote at the
annual meeting and at all adjournments or postponements of the meeting.
Voting Rights and Proxy Information
All shares of common stock represented at the annual meeting by properly
executed proxies received prior to or at the meeting, and not revoked, will be
voted at the meeting in accordance with each stockholder's instructions. 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. We do not know of any matters, other than as described in the
notice of meeting, that are to come before the annual 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. A stockholder may revoke his or her proxy by:
. filing with our corporate secretary at or before the annual meeting a
written notice of revocation bearing a later date than the proxy;
. duly executing a subsequent proxy relating to the same shares and
delivering it to our corporate secretary at or before the annual
meeting; or
1
<PAGE>
. attending the annual 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.
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 annual 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, 2000, will be entitled to one vote for each share
then held.
Voting Securities and Principal Holders
The following table sets forth information as of March 1, 2000, regarding
share ownership of:
. those persons or entities known by us to beneficially own more than five
percent of our common stock;
. each executive officer named in the summary compensation table which can
be found later in this proxy statement; and
. 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 the shares. Unless otherwise noted, the address
of each five percent stockholder is 310 South Schuyler Avenue, Kankakee,
Illinois 60901.
<TABLE>
<CAPTION>
Shares Beneficially
Beneficial Owner Owned Percent of Class
- ---------------- ----- ----------------
<S> <C> <C>
First Securities America, Inc.(1)..................... 165,000 13.35%
135 North Meramec
Clayton, Missouri 63141
Jeffrey L. Gendell(2)................................. 117,400 9.50%
200 Park Avenue, Suite 3900
New York, New York 10166
Private Capital Management, Inc.(3)................... 98,700 7.98%
3003 Tamiami Trail N.
Naples, Florida 34103
Estate of James G. Schneider(4)....................... 51,561 4.01%
2803 Richard Road
Bloomington, Illinois 61704
David B. Cox(5)....................................... 21,159 1.70%
Vice President
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially
Beneficial Owner Owned Percent of Class
- ---------------- ----- ----------------
<S> <C> <C>
Ronald J. Walters(6).................................. 10,840 0.87%
Vice President and
Chief Financial Officer
Directors and executive officers...................... 233,505 17.38%
of Kankakee Bancorp as a group (12 persons)(7)
</TABLE>
_______________________
(1) This information is as reported to the Securities and Exchange Commission
in a Form 3 dated June 18, 1996.
(2) This information is as reported to the Securities and Exchange Commission
on a Schedule 13D/A dated April 14, 1998 and correspondence to us dated
January 12, 2000. 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.
(3) This information is as reported to the Securities and Exchange Commission
on a Schedule 13G dated February 16, 2000. Private Capital Management, Inc.
has no power to vote the shares and has shared power to dispose of the
shares.
(4) At the time of his death on February 15, 2000, Mr. Schneider served as
chairman, president and chief executive officer of Kankakee Bancorp. The
amount reported includes 49,875 shares subject to options granted under our
stock option plan and which are presently exercisable, over which shares
Mr. Schneider had no voting and sole investment power. Thomas M.
Schneider, a director and James G. Schneider's son, is the executor of the
estate.
(5) The amount reported includes 5,341 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 our
stock option plan and which are exercisable, over which shares Mr. Cox has
no voting and sole investment power. The amount reported also includes
4,506 shares allocated to Mr. Cox under our employee stock ownership plan,
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.
(6) The amount reported includes 2,516 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 4,500 shares subject to options granted under
our stock option plan and which are exercisable, over which shares Mr.
Walters has no voting and sole investment power. The amount reported also
includes 3,632 shares allocated to Mr. Walters under our employee stock
ownership plan, 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.
(7) This amount includes shares held directly, including 107,460 shares subject
to options granted under our stock option plan which are deemed to be
exercisable, as well as shares allocated to participant accounts under our
employee stock ownership plan, 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.
3
<PAGE>
ELECTION OF DIRECTORS
General
Our board of directors currently consists of six members. The board is
divided into three classes, each of which contains approximately one-third of
the board. One class of directors is elected annually. Our directors are
generally elected to serve for a three-year period or until their respective
successors are elected and qualified.
The table below sets forth information, as of March 1, 2000, regarding the
members of and nominees to our 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
annual 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 a substitute nominee recommended by the board of directors.
At this time, we do not know of any 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. We recommend that stockholders vote FOR each of the
nominees for director.
NOMINEES
<TABLE>
<CAPTION>
Shares of
Common
Term Stock Percent
Position(s) Held Director to Beneficially of
Name Age in Kankakee Bancorp Since(1) Expire Owned(2) Class
--- --- -------------------- --------- ------ ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Charles C. Huber(5).......... 76 Director 1979 2003 22,170 1.78%
Thomas M. Schneider(6)....... 38 Director 1992 2003 64,312 4.97%
Wesley E. Walker(7).......... 64 Director 1986 2003 13,198 1.06%
DIRECTORS CONTINUING IN OFFICE
Larry D. Huffman(8).......... 53 Director 1992 2001 13,400 1.08%
William Cheffer(3)........... 69 Vice Chairman of 1988 2002 26,000 2.09%
the Board
Michael A. Stanfa(4)......... 50 Executive Vice 1995 2002 13,325 1.07%
President and
Secretary
</TABLE>
_______________________
(1) Includes service as a director of Kankakee Federal. Each of our directors
has served as a director since our incorporation in August, 1992, except
for Michael A. Stanfa, who became a director in 1995. As of March 1, 2000
the board consisted of six members as a result of the death of James G.
Schneider, who served as a director and as chairman of the board until his
death on February 15, 2000. It is anticipated that the board will appoint
a replacement for Mr. Schneider's position, which term expires in 2001, at
its regular meeting in March, 2000.
4
<PAGE>
(2) Amounts reported include shares held directly, including shares subject to
options granted under our stock option plan which are presently
exercisable, as well as shares which are held in retirement accounts and
shares held by 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 5,800 shares subject to options granted under
our stock option plan which are presently exercisable, with respect to
which shares Mr. Cheffer has no voting and sole investment power, and
11,200 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 2,758 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
our 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 3,223 shares allocated to Mr. Stanfa under our
employee stock ownership plan, with respect to which shares Mr. Stanfa has
sole voting and no investment power.
(5) The amount reported includes 300 shares held by the estate of 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 our 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
our 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. This amount also includes 1,686 shares
owned directly by James Schneider at the time of his death, 49,875 shares
beneficially owned by the Estate of James G. Schneider, of which Thomas M.
Schneider is executor, 281 as trustee of the James G. Schneider Trust and
2,730 as co-trustee of the J&P Schneider Education Trust. James G.
Schneider was the father of Thomas M. Schneider and both served on the
board of directors until James G. Schneider's death on February 15, 2000
(7) The amount reported includes 5,460 shares subject to options granted under
our 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 4,925 shares subject to options granted under
our stock option plan which are presently exercisable, with respect to
which shares Mr. Huffman has no voting and sole investment power, and 8,475
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. 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
directors, executive officers and persons who own more than 10% of our common
stock file reports of ownership and changes in ownership with
5
<PAGE>
the Securities and Exchange Commission and with the exchange on which the shares
of common stock are traded. These persons are also required to furnish us with
copies of all Section 16(a) forms they file. Based solely on our review of the
copies of such forms furnished to us and, if appropriate, representations made
to us by any reporting person concerning whether a Form 5 was required to be
filed for 1999, we are not aware that any of our directors, executive officers
or 10% stockholders failed to comply with the filing requirements of Section
16(a) during 1999.
The business experience of each director and nominee is set forth below.
All directors have held their present positions for at least five years unless
otherwise indicated.
William Cheffer. On February 23, 2000, Mr. Cheffer was elected chairman,
president and chief executive officer of Kankakee Bancorp and chairman of
Kankakee Federal. Prior to that time, he had served as vice chairman of
Kankakee Bancorp and Kankakee Federal. In addition, until his retirement in
July, 1993, Mr. Cheffer was president and chief executive officer of Kankakee
Federal since June, 1990 and president and chief executive officer of Kankakee
Bancorp since August, 1992. Mr. Cheffer also served as president and chief
operating officer of Kankakee Federal from 1988 to 1990, and as senior vice
president and secretary of Kankakee Federal from 1974 to 1988. Mr. Cheffer
joined Kankakee Federal 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.
Larry D. Huffman, Ph.D. On February 23, 2000, Dr. Huffman was elected vice
chairman of both Kankakee Bancorp and Kankakee Federal. He 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, located in Bloomington, Illinois. Mr. Schneider has been
employed by State Farm Mutual Automobile Insurance Company in various capacities
since 1995.
Michael A. Stanfa. Mr. Stanfa has served as executive vice president of
Kankakee Bancorp since 1993 and has served as Secretary since its incorporation
in 1992. In addition to his positions at Kankakee Bancorp, Mr. Stanfa is also
senior vice president and secretary of Kankakee Federal and has served as the
organization's in-house legal counsel since 1986.
Meetings and Committees of the Board of Directors
Meetings of our board of directors are generally held on a monthly basis.
The board of directors met thirteen times during 1999. During 1999 no incumbent
director of Kankakee Bancorp 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. Our directors who are
also salaried officers are not paid for committee meetings attended.
The board of directors of Kankakee Bancorp has standing executive, audit,
long range planning, and stock option and compensation committees.
6
<PAGE>
The executive committee is comprised of Messrs. Cheffer, Huffman, Huber and
Walker. The executive committee meets on an as needed basis and exercises the
power of the board of directors between board meetings. This committee met two
times during 1999.
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 our books and records 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 Kankakee Federal
has an identical membership to that of Kankakee Bancorp and addresses many of
the same issues. Kankakee Bancorp's and Kankakee Federal's audit committees met
jointly five times during 1999.
The long range planning committee monitors economic trends, long-range
economic forecasts and makes recommendations for Kankakee Bancorp's and Kankakee
Federal's long-range business plans. The members of this committee are Messrs.
Cheffer, Huber, Huffman, T. Schneider and Stanfa. During 1999 this committee
met two times.
The stock option and compensation committee is comprised of Messrs. Huber
(chairman), Walker and Huffman. This committee is responsible for administering
our stock option plan and reviews compensation and benefit matters. During 1999
this committee met two times.
The entire board of directors acts as a nominating committee for selecting
nominees for election as directors. While our board of directors will consider
nominees recommended by stockholders, the board has not actively solicited such
nominations. Pursuant to our bylaws, nominations by stockholders must be
delivered in writing to the secretary at least 30 days before the date of the
annual meeting and must otherwise comply with the provisions of the bylaws.
EXECUTIVE COMPENSATION
Our executive officers do not receive any separate compensation for
services performed in their capacities as officers of Kankakee Bancorp.
However, for services performed for Kankakee Bancorp by certain officers, a
percentage of the salary paid by Kankakee Federal for those officers is
reimbursed by Kankakee Bancorp.
The following table sets forth information regarding compensation paid or
accrued to our chief executive officer and to each of our other most highly
compensated executive officers of Kankakee Bancorp and Kankakee Federal whose
aggregate salary and bonus exceeded $100,000 for 1999.
7
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation
Compensation Awards
- -------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
Fiscal
Year Restricted Securities
Ended Other Annual Stock Underlying All Other
Name and December Bonus ($) Compensation Awards ($) Options/ Compensation
Principal Position 31st Salary($)(1) ($) SARs(#) ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
James G. Schneider 1999 $106,692 $ --- $ --- $ --- $ --- $11,737(3)
Chairman, President 1998 109,731 --- --- --- --- 12,581(4)
and Chief Executive 1997 103,962 --- --- --- --- 12,878(5)
Officer of Kankakee
Bancorp(2)
- -------------------------------------------------------------------------------------------------------------------
David B. Cox 1999 $150,205 $ --- $ --- $ --- $ --- $16,504(3)
Vice President of 1998 147,115 --- --- --- --- 16,868(4)
Kankakee Bancorp 1997 144,818 --- --- --- --- 19,306(5)
and President and
Chief Executive
Officer of the
Kankakee Federal
Savings Bank
- -------------------------------------------------------------------------------------------------------------------
Ronald J. Walters 1999 $108,849 $ --- $ --- $ --- $ --- $11,974(3)
Vice President and 1998 107,966 --- --- --- --- 12,379(4)
Chief Financial 1997 100,229 --- --- --- --- 13,352(5)
Officer of Kankakee
Bancorp
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
_______________________
(1) Includes amounts deferred under the 401(k) plan.
(2) This information is required to be reported under the federal securities
laws with respect to Mr. Schneider because he was the chief executive
officer of Kankakee Bancorp in 1999.
(3) Represents contributions made under Kankakee Federal's retirement plan and
the cost to Kankakee Bancorp of share allocations made under our employee
stock ownership plan in 1999. The dollar amounts of these contributions
and allocations were $7,468 and $4,269 for Mr. Schneider, $10,501 and
$6,003 for Mr. Cox, and $7,619 and $4,355 for Mr. Walters, respectively.
(4) Represents contributions made under Kankakee Federal's retirement plan and
the cost to Kankakee Bancorp of share allocations made under our employee
stock ownership plan 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.
8
<PAGE>
(5) Represents contributions made under Kankakee Federal's retirement plan and
the cost to Kankakee Bancorp of share allocations made under our employee
stock ownership plan 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 $5,400 for Mr. Walters, respectively.
The following table sets forth certain information concerning the number
and value of stock options at December 31, 1999 held by the named executive
officers.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
- ---------------------------------------------------------------------------------------------------------------------------
Number of
Securities
Underlying Value of
Shares Unexercised Unexercised In-
Acquired Options/SARs at the-Money
on Value FY-End Options/SARs
Name Exercise Realized (#)(d) at FY-End ($)(e)
(#)(a) (#)(b) ($)(c) Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James G. Schneider(1) --- $ --- 49,875 --- $492,516 $ ---
- ---------------------------------------------------------------------------------------------------------------------------
David B. Cox --- $ --- 5,400 --- $ 53,325 $ ---
- ---------------------------------------------------------------------------------------------------------------------------
Ronald J. Walters 1,450 $28,831 4,500 --- $ 44,438 $ ---
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------
(1) This information is required to be reported under the federal securities
laws with respect to Mr. Schneider because he was the chief executive
officer of Kankakee Bancorp in 1999.
The Stock Option and Compensation Committee Report on Executive Compensation
The incorporation by reference of this proxy statement into any document
filed with the Securities and Exchange Commission by us 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 of the board of directors is
composed of three outside directors who are not employees or former employees of
Kankakee Bancorp, Kankakee Federal or its predecessors, and is responsible for
recommendations to the board for compensation of executive officers of Kankakee
Federal and Kankakee Bancorp. At this time no separate salary is paid to our
executive officers. However, a portion of the officers' Kankakee Federal salary
is allocated to Kankakee Bancorp expense for work performed by the officers. In
determining compensation, the following factors are generally taken into
consideration:
. Kankakee Federal maintains a base salary administration and performance
program. The purpose of the program is to provide equitable, competitive
and performance-based salaries for all Kankakee Federal employees. The
executive officers are reviewed on an annual basis by the president of
Kankakee Federal, 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.
. The performance of the executive officers in achieving the short and
long term goals of Kankakee Bancorp. Our long range planning committee
is responsible for establishing these short and long term goals.
9
<PAGE>
. Payment of compensation commensurate with the ability and expertise of
the executive officers.
. Attempt to structure compensation packages so that they are competitive
with similar companies.
The stock option and compensation committee considers the foregoing factors, as
well as others, in determining compensation. There is no assigned weight given
to any of these factors. In addition to salary and other benefits granted,
officers may also 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 Kankakee Federal's incentive plan, our
employee stock ownership plan and our 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 1999 compensation of Mr. James G. Schneider, the chief executive
officer of Kankakee Bancorp during 1999, and Mr. David B. Cox, a vice president
of Kankakee Bancorp and the president and chief executive officer of Kankakee
Federal, 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 Kankakee Federal and the
compensation of officers with similar duties and responsibilities at comparable
organizations.
Members of the stock option and compensation committee are:
Charles C. Huber, Chairman
Wesley E. Walker
Larry D. Huffman
The incorporation by reference of this proxy statement into any document
filed with the Securities and Exchange Commission by us 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 our 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 our request.
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Comparison of Cumulative Total Returns*
[PERFORMANCE GRAPH APPEARS HERE]
*Assumes $100 invested on December 31, 1994, and that all dividends were
reinvested.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99
- ------------------------------------------------------------------------------------------------------------------------------
Kankakee Bancorp-IL $ 100.00 $ 120.61 $ 161.30 $ 250.21 $ 173.32 $ 135.54
- ------------------------------------------------------------------------------------------------------------------------------
Standard & Poor's Stock 500 Index $ 100.00 $ 137.58 $ 169.03 $ 225.44 $ 289.79 $ 350.78
- ------------------------------------------------------------------------------------------------------------------------------
SNL AMEX Thrift Index $ 100.00 $ 141.85 $ 120.25 $ 289.35 $ 223.98 $ 214.60
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors and officers of Kankakee Bancorp and Kankakee Federal, and their
associates, were customers of and had transactions with Kankakee Bancorp and
Kankakee Federal during 1999. 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
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officers and certain employees of Kankakee Federal at the time, Ms. Carol S.
Hoekstra, a senior vice president of Kankakee Federal, 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, 1999 was approximately $88,000. As of 1990, this program was
discontinued for senior officers.
All loans by Kankakee Federal 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. Kankakee Federal presently does not offer any preferential loans to its
senior officers or directors.
On May 1, 1998, Kankakee Federal refinanced three loans to the Grace
Baptist Church in the aggregate amount of $500,317, including a new principal
amount of $21,267. Kankakee Federal 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 Kankakee Federal, 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, 1999, the loan was
performing and the balance of Kankakee Federal's interest in such loan was
approximately $309,457.
RATIFICATION OF THE APPOINTMENT OF AUDITORS
Stockholders will be asked to approve the appointment of McGladrey &
Pullen, LLP, as our independent public accountants to conduct the audit for the
year ending December 31, 2000. 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.
We unanimously recommend that you vote FOR the ratification of the
appointment of McGladrey & Pullen, LLP, as our auditors for the fiscal year
ending December 31, 2000.
STOCKHOLDER PROPOSALS
In order to be eligible for inclusion in our proxy materials for next
year's annual meeting of stockholders, any stockholder proposal to take action
at such meeting must be received at our executive offices, 310 S. Schuyler
Avenue, P.O. Box 3, Kankakee, Illinois 60901-0003, no later than November 18,
2000.
OTHER MATTERS
We are not aware of any business to come before the annual 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.
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We will pay the cost of the solicitation of proxies. We 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
our common stock. In addition to solicitation by mail, directors and officers
of Kankakee Bancorp and regular employees of Kankakee Federal may solicit
proxies personally, by fax or by telegraph or telephone, without additional
compensation. We have 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
/s/ Michael A. Stanfa
----------------------------------
Michael A. Stanfa
Secretary
Kankakee, Illinois
March 17, 2000
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