<PAGE> 1
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 [Fee Required]
For the fiscal year ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
Commission file number 0-25484
DAMEN FINANCIAL CORPORATION
(Exact Name of Issuer as Specified in its Charter)
Delaware 36-4029638
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 West Higgins Road, Schaumburg, Illinois 60195
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (847) 882-5320
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the Issuer was required to file such reports), and (2)
has been subject to such requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of Issuer'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. [ ]
As of December 23, 1996, there were issued and outstanding 3,750,278
shares of the Issuer's Common Stock. The aggregate market value of the voting
stock held by non-affiliates of the Issuer, computed by reference to the
average of the closing bid and asked price of such stock on the Nasdaq National
Market System as of December 23, 1996 was approximately $43.5 million. (The
exclusion from such amount of the market value of the shares owned by any
person shall not be deemed an admission by the Issuer that such person is an
affiliate of the Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
PART II of Form 10-K--Annual Report to Stockholders for the fiscal year ended
September 30, 1996.
PART III of Form 10-K--Proxy Statement for the Annual Meeting of Stockholders
to be held in 1997 for the fiscal year ended September 30, 1996.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Damen Financial Corporation ("DFC" or the "Company") was formed at the
direction of Damen Federal Savings Bank ("Damen" or the "Bank") in 1995 for the
purpose of becoming a savings and loan holding company and owning all of the
outstanding stock of the Bank issued on September 29, 1995 in connection with
the Bank's conversion from the mutual to stock form of organization (the
"Conversion"). The Company is incorporated under the laws of the State of
Delaware and is authorized to do business in the State of Illinois, and
generally is authorized to engage in any activity that is permitted by the
Delaware General Corporation Law. The Company issued 3,967,500 shares of
Common Stock at $10.00 per share in the Conversion.
At September 30, 1996, the Company had total assets of $234.6 million,
deposits of $119.0 million and stockholders' equity of $52.9 million. The
Company's Common Stock is quoted on the Nasdaq National Market System under the
symbol "DFIN." Unless the context otherwise requires, all references herein to
the Bank or the Company include the Company and the Bank on a consolidated
basis.
Damen was originally chartered in 1916 to service a primarily Slovak
community on Chicago's South Side and became a federal savings bank in 1990.
The Company serves the financial needs of communities in its market area
through its main office located at 200 West Higgins Road, Schaumburg, Illinois
and two branch offices located in Chicago and Burbank, Illinois.
The Company's business involves attracting deposits from the general
public and using such deposits, together with other funds, to originate one- to
four-family residential mortgage loans and, to a much lesser extent,
multi-family, commercial real estate and consumer loans primarily in its market
area. See " - Lending Activities." At September 30, 1996, $77.7 million, or
83.09% of the Damen's total loan portfolio consisted of residential one- to
four-family mortgage loans.
The Company also invests in mortgage-backed and related securities and
investment securities and other permissible investments. See " - Investment
Securities" and " - Mortgage-Backed and Related Securities."
The executive offices of the Company and the Bank are located at 200 West
Higgins Road, Schaumburg, Illinois 60195-3788, and the telephone number at that
address is (847) 882-5320.
The Company's and the Bank's operations are regulated by the Office of
Thrift Supervision (the "OTS"). The Bank is a member of the Federal Home Loan
Bank System ("FHLB System") and a stockholder in the Federal Home Loan Bank
("FHLB") of Chicago. The Bank is also a member of the Savings Association
Insurance Fund ("SAIF") and its deposit
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<PAGE> 3
accounts are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC").
LENDING ACTIVITIES
GENERAL. With the exception of a loan to its Employee Stock Ownership
Plan, all of the Company's lending activities are conducted through the Bank.
The principal lending activity of the Bank is originating for its portfolio
primarily fixed-rate mortgage loans secured by one- to four-family residences
located primarily in Damen's market area. In addition, in order to provide
more comprehensive financial services in its market area, the Bank also
originates a limited amount of multi-family, commercial real estate and
consumer loans, primarily in its market area. See " - Originations, Purchases
and Sales of Loans and Mortgage-Backed and Related Securities." At September
30, 1996, the Bank's total loans receivable, net, totaled $91.1 million.
Damen's President and Senior Vice President have the authority to approve
owner occupied, one- to four-family residential mortgage loans which satisfy
the following criteria: (i) the applicant and the property fall within Damen's
loan underwriting guidelines; (ii) the borrower is salaried; (iii) the
mortgage's loan-to-value ratio does not exceed 80%; and (iv) the mortgage
amount does not exceed $200,000. All other loan applications are considered by
Damen's Loan Committee and those loans which satisfy the Bank's lending
policies are submitted to the Bank's Board of Directors for ratification.
Under Damen's loan policy, the loan officer processing an application is
responsible for ensuring that all documentation is obtained prior to the
submission of the application to the Loan Committee. In addition, the loan
officer verifies that the application meets the underwriting guidelines
described below.
All of the Bank's lending is subject to its written underwriting standards
and to loan origination procedures. Decisions on loan applications are made on
the basis of detailed applications and property valuations (consistent with the
Bank's appraisal policy). 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 or confirmations.
The Bank requires title insurance on its mortgage loans as well as fire
and extended coverage casualty insurance 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. The Bank also requires flood insurance to
protect the property securing its interest when the property is located in a
flood plain.
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LOAN PORTFOLIO COMPOSITION. The following information concerning the
composition of the Bank's loan 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.
<TABLE>
<CAPTION>
September 30, November 30,
---------------------------------- ----------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family .............. $77,725 83.09% $75,471 83.56% $76,736 84.71% $77,460 86.41% $75,094 90.11%
Multi-family ..................... 12,239 13.08 12,060 13.35 11,218 12.38 10,171 11.34 6,835 8.20
Commercial ....................... 3,317 3.55 2,598 2.88 2,473 2.73 1,802 2.01 1,238 1.49
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans ....... 93,281 99.72% 90,129 99.79% 90,427 99.82% 89,433 99.76% 83,167 99.80%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Other Loans:
Consumer Loans:
Deposit account ................ 260 .28 188 .21 167 .18 219 .24 166 .20
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total consumer loans .......... 260 .28% 188 .21% 167 .18% 219 .24% 166 .20%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans ................... 93,541 100.00% 90,317 100.00% 90,594 100.00% 89,652 100.00% 83,333 100.00%
====== ====== ====== ====== ======
Less:
Loans in process ............... 466 792 527 3,007 3,206
Deferred fees and discounts ...... 1,584 1,694 1,717 1,706 1,455
Allowance for losses ............. 345 275 125 125 125
------- ------- ------- ------- -------
Total loans receivable, net ... $91,146 $87,556 $88,225 $84,814 $78,547
======= ======= ======= ======= =======
</TABLE>
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The following table shows the composition of the Bank's loan portfolios by
fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
September 30, November 30,
---------------------------------- ----------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real Estate:
One- to four-family .............. $77,577 82.93% $75,321 83.40% $76,509 84.45% $76,857 85.73% $72,739 87.29%
Multi-family ..................... 12,239 13.08 12,060 13.35 11,218 12.38 10,171 11.34 6,835 8.20
Commercial real estate ........... 3,317 3.55 2,598 2.88 2,473 2.73 1,802 2.01 1,238 1.49
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans ....... 93,133 99.56% 89,979 99.63 90,200 99.56 88,830 99.08 80,812 96.98
------- ------
Consumer .......................... 260 .28 188 .21 167 .18 219 .24 166 .20
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total fixed-rate loans ....... 93,393 99.84 90,167 99.84 90,367 99.74 89,049 99.32 80,978 97.18
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family .............. 148 .16% 150 .16 227 .26 603 .68 2,355 2.82
Total loans ................... ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
93,541 100.00% 90,317 100.00% 90,594 100.00% 89,652 100.00% 83,333 100.00%
====== ====== ====== ====== ======
Less:
Loans in process ............... 466 792 527 3,007 3,206
Deferred fees and discounts ...... 1,584 1,694 1,717 1,706 1,455
Allowance for loan losses ........ 345 275 125 125 125
------- ------- ------- ------- -------
Total loans receivable, net ... $91,146 $87,556 $88,225 $84,814 $78,547
======= ======= ======= ======= =======
</TABLE>
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<PAGE> 6
The following schedule sets forth the weighted average interest rate by
contractual maturity of the Bank's loan portfolio at September 30, 1996. The
table does not reflect prepayments, scheduled principal repayments or
enforcement of due-on-sale clauses. Loans which have adjustable or
renegotiable interest rates are shown as maturing in the period during which
the contract is due.
<TABLE>
<CAPTION>
Real Estate
------------------------------------------------
Multi-family and
One- to Four-Family Commercial real estate Consumer Total
---------------------- ------------------------ ---------------- ------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
---------- ---------- ----------- ----------- ------ -------- -------- --------
(Dollars in Thousands)
Due During
Twelve Months
Ending September 30,
- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 ................. $ 117 8.13% $ --- ---% $ 89 7.84% $ 206 8.00%
1998 ................. 149 9.29 8 13.00 98 7.19 255 8.60
1999 and 2000 ........ 2,651 7.63 373 7.95 73 7.24 3,097 7.66
2001 to 2005 ......... 19,823 7.49 5,388 8.03 -- -- 25,211 7.61
2006 to 2020 ......... 45,617 7.40 9,787 8.04 -- -- 55,404 7.51
2021 and following ... 9,368 7.87 --- --- -- -- 9,368 7.87
------- --------- ------- ----- ---- ---- ------- ----
$77,725 $15,556 $260 $93,541
======= ======= ==== =======
</TABLE>
The total amount of loans due after September 30, 1996, which have
predetermined interest rates is approximately $93.4 million, while the total
amount of loans due after such dates which have floating or adjustable interest
rates is $148,000.
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" value
or 30% for certain residential development loans). At September 30, 1996,
based on the above, the Bank's regulatory loans-to-one borrower limit was
approximately $5.5 million. On the same date, the Bank had no borrowers with
outstanding balances in excess of this amount. As of September 30, 1996, the
two largest dollar amounts outstanding to one borrower or, group of related
borrowers, were approximately $961,000 and $848,000. These loans are secured
by both one- to four-family and multi-family properties located primarily in
the Bank's market area and, as of September 30, 1996, were performing in
accordance with their terms.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. The cornerstone of
the Bank's lending program is the origination of loans secured by mortgages on
owner-occupied one- to four-family residences. The Bank offers fixed-rate
loans with terms of 7, 10, 15, 20 and 30 years and during the mid 1980s
originated a limited amount of one and three year adjustable rate mortgage
loans ("ARMs"). At September 30, 1996, $77.7 million, or 83.09% of the Bank's
loan portfolio consisted of mortgage loans on one- to four-family residences.
At that date, the average outstanding residential loan balance was
approximately $48,800.
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<PAGE> 7
Substantially all of the one- to four-family residential loans originated
by Damen are secured by properties located in the Bank's market area and all
mortgage loans originated by the Bank are retained and serviced by it. Because
of competitive factors, most of the Bank's one- to four-family residential
loans have been made to persons residing near its Chicago office, which is
located in a low and moderate income community. The Bank has been an active
lender in this market for many years and has never experienced a delinquency
level on these loans which was not consistent with that of its loan portfolio
as a whole.
The Bank offers fixed-rate loans with maximum terms of up to 30 years for
retention in its own portfolio as a central part of its lending program.
However, consistent with its asset/liability management philosophy, the Bank
focuses its fixed-rate loan origination activities on loans having terms to
maturity of 15 years or less. At September 30, 1996, $80.4 million or 86.2% of
the Bank's mortgage loans had original terms of 15 years or less. The interest
rate on the Bank's fixed-rate loans is generally set based on competitive
factors.
During the mid 1980s, the Bank originated a limited amount of ARMs for
retention in its own portfolio. However, as a result of strong competition and
price cutting on these loans in its market area, the Board concluded that
continued efforts to originate ARMs were no longer justified from an economic
point of view. In the future, the Board may consider reinstating the Bank's
ARM lending program, although there can be no assurance as to when, if ever,
this will be the case.
In underwriting one- to four-family residential real estate loans, the
Bank evaluates the borrower's ability to make principal, interest and escrow
payments, the value of the property that will secure the loan and the
borrower's debt to income ratios. Because of the economic conditions in parts
of the Bank's market area, the Bank's underwriting practices do not comply in
every way with those required by most purchasers in the secondary market. For
instance, some of the Bank's low and moderate income borrowers do not have the
net worth or income/debt service levels required by many secondary market
purchasers. The non-compliance of many of the Bank's loans with secondary
market standards limits the Bank's ability to build a held-for-sale portfolio,
which could be useful for asset/liability management structuring and for the
development of non-interest income. Also, such non-compliance may limit to
some extent the Bank's ability to use such loans as collateral for borrowings.
However, the Bank believes that non-compliance with secondary market standards
does not in and of itself cause credit problems since the Bank has engaged in
this type of lending for many years and its delinquency experience on these
loans has been satisfactory to date.
Properties securing one- to four-family residential real estate loans made
by Damen are appraised by independent appraisers. Damen originates virtually
all of its residential mortgage loans with loan-to-value ratios of less than
95%; provided, however, that private mortgage insurance is obtained in an
amount sufficient to reduce the Bank's exposure to not more than 80% of the
appraised value or sales price, as applicable.
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.
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<PAGE> 8
Many of the Bank's one- to four-family loans are on properties with more
than one unit. In some cases, at least one unit in the property is occupied by
the borrower while other one- to four-family loans are on non-owner occupied
properties.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. During recent years,
Damen has increased its origination of permanent multi-family and commercial
real estate loans secured by properties generally located in its market area.
At September 30, 1996, the Bank had $12.2 million in multi-family loans
representing 13.08% of the Bank's total loan portfolio, and $3.3 million in
commercial real estate loans, or 3.55% of the Bank's total loan portfolio.
The Bank's multi-family and commercial real estate loan portfolio includes
loans secured by apartment buildings and other non-residential building
properties. Because of competitive factors, most of the Bank's multi-family
and commercial real estate loans are originated in the southern portion of the
Bank's market area.
Permanent multi-family and commercial real estate loans are generally
originated for a maximum term of 15 years and have fixed rates. Multi-family
and commercial real estate loans are written in amounts of up to 75% of the
appraised value of the property.
Appraisals on properties serving multi-family and commercial real estate
loans originated by the Bank are performed by an independent appraiser prior to
the time the loan is made. All appraisals on commercial and multi-family real
estate are reviewed by the Bank's management. The Bank's underwriting
procedures require verification of the borrower's credit history, income and
financial statements, banking relationships. The Bank generally requires
personal guarantees on loans secured by multi-family and commercial real
estate.
Multi-family 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. Furthermore, the repayment
of loans secured by multi-family and commercial real estate is typically
dependent upon the successful operation of the related real estate project. If
the cash flow from the project is reduced (for example, if leases are not
obtained or renewed), the borrower's ability to repay the loan may be impaired.
At September 30, 1996, the Bank had two multi-family loans totaling $252,000
and no commercial real estate loans 90 days or more delinquent.
In the future, the Bank intends to continue to emphasize multi-family and
commercial real estate lending.
CONSUMER LENDING. The Bank offers only consumer loans secured by certain
types of deposit accounts. At September 30, 1996, deposit loans totaled
$260,000 or .28% of net loans outstanding.
The Bank's consumer loans secured by deposit accounts are made in amounts
not to exceed 90% of the deposit holders available passbook or certificate of
deposit balance and carry a maximum term of three years when secured by
passbook accounts and as of the maturity date
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<PAGE> 9
for loans secured by certificates of deposit. Such loans carry an interest
rate which is 2.5% above the stated interest rate for the pledged account. The
Bank may determine to increase the types of consumer loan products offered.
ORIGINATIONS, PURCHASES AND SALES OF LOANS AND MORTGAGE-BACKED AND RELATED
SECURITIES
Real estate loans are originated by Damen's staff of salaried loan
officers through referrals from real estate brokers, attorneys and customers.
In addition, in the future, the Bank may utilize commissioned loan originators
in an attempt to increase loan production, although there are no specific plans
to do so at this time. Loan applications are taken and processed at each of
Damen's offices.
The Bank's ability to originate loans is dependent upon customer demand
for loans in its market and to a limited extent, various marketing efforts.
Demand is affected by both the local economy and the interest rate environment.
Historically, all loans originated by Damen are retained in the Bank's
portfolio.
In order to supplement loan originations, the Company has acquired
mortgage-backed and related securities which are held, depending on the
investment intent, in the "held-to-maturity" or "available-for-sale"
portfolios. During the year ended September 30, 1996 and the ten months ended
September 30, 1995, the Company purchased $23.2 million and $21.9 million,
respectively, of mortgaged-backed and related securities. During the same
periods, the Company sold $920,000 and $1.3 million, respectively, of
mortgage-backed and related securities. In the future, in order to supplement
loan production, the Bank may also consider purchasing loans from third party
originators, although there are no specific plans to do so at this time and the
Bank has not done so in recent years. See " - Investment Activities -
Mortgage-Backed and Related Securities" and Notes 4 and 5 to the Notes to
Consolidated Financial Statements in the Annual Report to Stockholders for the
fiscal year ended September 30, 1996 attached hereto as Exhibit 13 (the "Annual
Report").
9
<PAGE> 10
The following table shows the loan origination, purchase, sale and
repayment activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
Ten Months
Year Ended Ended Year Ended
September 30, September 30, November 30,
------------- ------------- ------------
1996 1995 1994
------------- ------------- ------------
(In Thousands)
<S> <C> <C> <C>
ORIGINATIONS BY TYPE:
Fixed rate:
Real estate - one- to four-family ....... $15,612 $ 9,280 $14,881
- multi-family .............. 2,137 2,051 3,777
- commercial ................ 1,528 626 1,058
Consumer ................................ 212 315 146
------- ------- -------
Total loans originated .............. 19,489 12,272 19,862
------- ------- -------
PURCHASES:
Mortgage-backed securities (excluding
REMICs and CMOs) ...................... 21,828 18,911 25,565
REMICs and CMOs ........................ 1,365 2,986 14,491
------- ------- -------
Total purchased ...................... 23,193(1) 21,897 40,056
------- ------- -------
SALES AND REPAYMENTS:
Mortgage-backed securities ............. 920 1,288 3,575
------- ------- -------
Total sales ......................... 920 1,288 3,575
Principal repayments .................... 31,888 20,212 51,046
------- ------- -------
Total reductions ..................... 32,808 21,500 54,621
Increase (decrease) in other items, net .. (377) 1,111 594
------- ------- -------
Net increase ......................... $ 9,497 $13,780 $ 5,891
======= ======= =======
</TABLE>
- --------------
(1) Includes $8.6 million of adjustable-rate mortgage-backed and related
securities.
DELINQUENCIES AND NON-PERFORMING ASSETS
DELINQUENCY PROCEDURES. When a borrower fails to make a required payment
on a loan, the Bank attempts to cure the delinquency by contacting the
borrower. A late notice is sent on all delinquent loans. Additional written
and verbal contacts may be made with the borrower between 30 and 90 days after
the due date. If the loan is contractually delinquent 90 days, the Bank either
arranges payment with the borrower or institutes appropriate action to
foreclose on the property. If a borrower agrees to a payment plan to bring a
delinquent loan current, a designated officer monitors the loan for compliance
with the payment agreement. If foreclosed, the property is sold at sheriff's
sale and may be purchased by the Bank. Delinquent consumer loans are generally
handled in a similar manner. Once a loan has been set to Damen's attorney to
begin foreclosure proceedings, no payments are accepted without the prior
approval of Damen's President.
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Real estate acquired by Damen 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 by foreclosure or deed in lieu of foreclosure, it is
recorded at the lower of cost or estimated fair value less estimated selling
costs. After acquisition, all costs incurred in maintaining the property are
expensed. Costs relating to the development and improvement of the property,
however, are capitalized.
The following table sets forth the Bank's loan delinquencies by type, by
amount and by percentage of type at September 30, 1996.
<TABLE>
<CAPTION>
Loans Delinquent For:
--------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
------------------------ ------------------------ ----------------------------
Percent Percent Percent
of Total of Total of Total
Number Amount Loans Number Amount Loans Number Amount Loans
------ ------ -------- ------ ------ -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family ..... 3 $29 .03% 6 $ 99 .11% 9 $128 .14%
Multi-family ............ -- -- -- 2 252 .27 2 252 .27
Commercial real estate .. -- -- -- -- -- -- -- -- --
Consumer ................. -- -- -- -- -- -- -- -- --
---- --- --- ---- ---- ----
Total 3 $29 .03% 8 $351 .38% 11 $380 .41%
==== === ==== === ==== ==== ==== ==== ====
</TABLE>
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. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the Bank will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of Substandard assets, with the additional characteristics that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified Loss is considered uncollectible and
of such little value that continuance as an asset on the balance sheet of the
institution is not warranted. Assets classified as Substandard or Doubtful
require the institution to establish prudent general allowances for loan
losses. If an asset or portion thereof is classified as Loss, the institution
must either establish specific allowances for loan losses in the amount of 100%
of the portion of the asset classified Loss, or charge off such amount. If an
institution does not agree with an examiner's classification of an asset, it
may appeal this determination to the District Director of the OTS.
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<PAGE> 12
On the basis of management's review of its assets, at September 30, 1996,
the Bank had classified a total of $351,000 of its loans and other assets as
follows:
<TABLE>
<CAPTION>
At
September 30,
1996
--------------
(In Thousands)
<S> <C>
Special Mention ................ $--
Substandard .................... 243
Doubtful assets ................ 108
Loss assets .................... --
----
Total ...................... 351
====
General loss allowance ......... 345
====
Specific loss allowance ........ --
====
Charge-offs .................... --
====
</TABLE>
Damen's classified assets consist of the non-performing loans and loans
and other assets of concern discussed herein. As of the date hereof, these
asset classifications are materially consistent with those of the OTS and FDIC.
NON-PERFORMING ASSETS. Loans are reviewed monthly and any loan whose
collectibility is doubtful is placed on non-accrual status. 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, the loan is well collateralized and
in the process of collection. Interest accrued and unpaid at the time a 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. Restructured loans include troubled debt restructurings (which
involved forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than the market rate). At September 30, 1996,
the Bank had no restructured loans or foreclosed assets.
12
<PAGE> 13
NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of non-performing assets in the Bank's portfolio.
<TABLE>
<CAPTION>
September 30, November 30,
---------------- -----------------------
1996 1995 1994 1993 1992
------- ------- ----- ----- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family ................... $ 99 $65 $109 $156 $ 159
Multi-family .......................... 252 -- -- -- --
Commercial real estate ................ -- -- -- -- --
Consumer .............................. -- -- 7 -- --
---- --- ---- ---- ------
Total .............................. 351 65 116 156 159
---- --- ---- ---- ------
Accruing loans delinquent more than 90 days:
Total ............................... -- -- -- -- --
---- --- ---- ---- ------
Foreclosed assets:
Commercial real estate ................. -- -- -- -- 2,079(1)
---- --- ---- ---- ------
Total ............................... -- -- -- -- 2,079
---- --- ---- ---- ------
Total non-performing assets ............. $351 $65 $116 $156 $2,238
==== === ==== ==== ======
Total as a percentage of total assets ... .15% .03% .06% .09% 1.27%
==== === ==== ==== ======
</TABLE>
- --------------
(1) Represents Damen's Schaumburg office.
For the year ended September 30, 1996 and the ten months ended September
30, 1995, gross interest income which would have been recorded had the
non-accruing loans been current in accordance with their original terms
amounted to $8,900 and $4,800, respectively.
OTHER LOANS OF CONCERN. In addition to the non-performing assets set
forth in the table above, as of September 30, 1996, there were no loans with
respect to which known information about the possible credit problems of the
borrowers or the cash flows of the security properties have caused management
to have concerns as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories.
Management has considered the Bank's non-performing and "of concern"
assets in establishing its allowance for loan losses.
13
<PAGE> 14
ALLOWANCE FOR LOSSES ON LOANS. The following table sets forth information
with respect to the Bank's allowance for loan losses for the periods indicated.
During each of the periods presented, there were no recoveries of amounts
charged off.
<TABLE>
<CAPTION>
Ten Months
Year Ended Ended
September 30, September 30, Year Ended November 30,
------------- ------------- ----------------------------
1996 1995 1994 1993 1992
------------- ------------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period .................. $275 $ 125 $125 $125 $100
Charge-offs:
One- to four-family ........................... -- 9 -- -- 4
Multi-family .................................. -- -- -- -- --
Consumer ...................................... -- 4 -- -- --
---- ------ ---- ---- ----
Total ...................................... -- 13 -- -- 4
---- ------ ---- ---- ----
Recoveries:
Total ...................................... -- -- -- -- --
---- ------ ---- ---- ----
Net charge-offs ................................. -- 13 -- -- 4
---- ------ ---- ---- ----
Additions charged to operations ................. 70 163 -- -- 29
---- ------ ---- ---- ----
Balance at end of period ........................ $345 $ 275 $125 $125 $125
==== ====== ==== ==== ====
Ratio of net charge-offs during the period to
average loans outstanding during the period .... --% .01% -- % -- % .01%
==== ====== ==== ==== ====
Ratio of net charge-offs during the period to
average non-performing assets .................. --% 11.21% -- % -- % .02%
==== ====== ==== ==== ====
</TABLE>
14
<PAGE> 15
The following table sets forth the allocation of the Bank's allowance for
loan losses by loan category and the percent of loans in each category to total
loans receivable, net, at the end of the periods indicated. The portion of the
loan loss allowance allocated to each loan category does not represent the
total available for future losses which may occur within the loan category
since the total loan loss allowance is a valuation reserve applicable to the
entire loan portfolio.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------
1996 1995
----------------------------- -----------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
One- to four-family ...... $201 $77,725 83.09% $196 $75,471 83.56%
Multi-family ............. 119 12,239 13.08 57 12,060 13.35
Commercial real estate ... 25 3,317 3.55 19 2,598 2.88
Consumer ................ -- 260 .28 -- 188 .21
Unallocated .............. -- -- -- 3 -- --
---- ------- ------ ---- ------- ------
Total ................ $345 $93,541 100.00% $275 $90,317 100.00%
==== ======= ====== ==== ======= ======
<CAPTION>
November 30,
-------------------------------------------------------------------------------------------
1994 1993 1992
----------------------------- ----------------------------- -----------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- -------- --------- -------- --------
(In Thousands)
<C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family ...... $ 82 $76,736 84.71 $ 85 $77,460 86.41 $ 86 $75,094 90.11
Multi-family ............. 22 11,218 12.38 20 10,171 11.34 14 6,835 8.20
Commercial real estate ... 6 2,473 2.73 5 1,802 2.01 1 1,238 1.49
Consumer ................ 1 167 .18 -- 219 .24 --- 166 .20
Unallocated .............. 14 -- -- 15 --- --- 24 --- ---
---- ------- ------ ---- ------ ------ --------- -------- -------
Total ................ $125 $90,594 100.00% $125 $89,652 100.00% $125 $83,333 100.00%
==== ======= ====== ==== ======= ======= ========= ======== =======
</TABLE>
15
<PAGE> 16
The allowance for losses on loans is established through a provision for
losses on loans charged to earnings based on management's evaluation of the risk
inherent in its entire loan portfolio and changes in the nature and volume of
its loan activity. Such evaluation, which includes a review of all loans of
which full collectibility may not be reasonably assured, considers specific
occurrences, general and local economic conditions, loan portfolio composition,
historical and local experience and other factors that warrant recognition in
providing for an adequate allowance for loan losses. In determining the general
reserves under these policies, historical charge-offs and recoveries, changes in
the mix and levels of the various types of loans, net realizable values, the
current loan portfolio and current economic conditions are considered. The Bank
also requires additional reserves for all classified loans.
While management believes that it uses the best information available to
determine the allowance for losses on loans, unforeseen economic and market
conditions could result in adjustments to the allowance for losses on loans,
and net earnings could be significantly affected, if circumstances differ
substantially from the assumptions used in making the final determination.
INVESTMENT ACTIVITIES
GENERAL. Damen must maintain minimum levels of investments and other
assets that qualify as liquid assets under OTS regulations. Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans. Historically, Damen
has maintained liquid assets at levels significantly above the minimum
requirements imposed by the OTS regulations and above levels believed adequate
to meet the requirements of normal operations, including potential deposit
outflows. At September 30, 1996, Damen's liquidity ratio for regulatory
purposes was 8.36%. Damen's level of liquidity is a result of management's
asset/liability strategy. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset/Liability Management"
and " - Liquidity and Capital Resources" in the Annual Report.
Generally, the investment policy of DFC and the Bank is to invest funds
among categories of investments and maturities based upon the Company's and the
Bank's asset/liability management policies, investment quality, loan and
deposit volume, liquidity needs and performance objectives. Prior to
December 1, 1994, the Company recorded its investments in its investment
securities portfolio at the lower of cost or current market value if
held-for-sale or at amortized cost if held-for-investment. Unrealized declines
in the market value of securities held-to-maturity were not reflected in the
financial statements; however, unrealized losses in the market value of
securities held-for-sale were recorded as a charge to current earnings.
Effective December 1, 1994, the Company adopted SFAS 115, which resulted in a
one-time charge to stockholders' equity of approximately $1.1 million,
while the cumulative effect of this change in accounting principle, net of
taxes, resulted in a one-time $907,000 credit to earnings. As required by SFAS
115, securities are classified into three categories: trading, held-to-maturity
and available-for-sale. Securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and are reported at fair value with unrealized gains and losses included in
trading account activities in the statement of operations. Securities that DFC
has the positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost. All other securities not
classified as held-to-maturity are classified as available-for-sale. At
September 30, 1996, DFC had no
16
<PAGE> 17
securities which were classified as trading. Available-for-sale securities
are reported at fair market value with unrealized gains and losses included, on
an after-tax basis, in a separate component of stockholders' equity. At
September 30, 1996, $43.3 million of investment securities and $52.6 million of
mortgage-backed and related securities were classified as available-for-sale.
INVESTMENT SECURITIES. The Company and the Bank have used investment
securities to supplement loan volume and to provide adjustable rate and/or
short and intermediate-term assets for asset/liability management purposes. To
date, the Company's and the Bank's investments have been directed toward
high-quality assets with various terms to maturity. In the last several years,
the Bank has increased its holdings in tax-exempt investments based on their
after tax yield. In addition to federal agency obligations and tax-exempt
municipal bonds, but to a much lesser extent, the Company and the Bank invest
in FHLB stock, equity securities and mutual funds. At September 30, 1996 and
1995, the Company's investment securities portfolio totaled $48.2 million and
$37.3 million, respectively. At September 30, 1996, the Company did not own
any investment securities of a single issuer which exceeded 10% of the
Company's equity, other than federal agency obligations, Federal Home Loan
Mortgage Corporation ("FHLMC") stock and FHLB stock. See Notes 2 and 3 of the
Notes to the Consolidated Financial Statements in the Annual Report for
additional information regarding the Company's investment securities portfolio.
As part of DFC's asset/liability management strategy, the Company's
investment securities portfolio contains both short- and intermediate-term
(five years or less) securities. At September 30, 1996, $17.9 million of the
Company's investment securities (excluding FHLB stock) had terms to maturity of
five years or less. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset/Liability Management" in the Annual
Report.
In the past several years, DFC carried a portion of this investment
portfolio as "held-for-sale", contributing to some earnings' volatility.
However, subsequent to the adoption of SFAS 115 effective December 1, 1994 and
the recording of a cumulative effect adjustment, the effect of changes in the
value of securities available-for-sale caused by interest rate movements will
affect the Company's stockholders' equity and not results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Accounting Pronouncements" in the Annual Report.
17
<PAGE> 18
The following table sets forth the carrying value of the Company's
investment securities and FHLB stock at the dates indicated. At September 30,
1996, the market value of the Company's held-to-maturity investment securities
portfolio was $4.9 million.
<TABLE>
<CAPTION>
September 30, November 30,
-------------------------------------------- ---------------------
1996 1995 1994
--------------------- --------------------- ---------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------------ ------- ------------ ------- ------------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Held-to-Maturity:
Tax-Exempt securities(1) ...................... $ -- -- % $ -- -- % $16,711 59.27%
FHLB stock .................................... 3,110 6.45 2,570 6.88 2,220 7.87
Other ......................................... 1,777 3.68 1,090 2.92 1,017 3.61
------- ------ ------- ------ ------- ------
Subtotal ..................................... 4,887 10.13 3,660 9.80 19,948 70.75
------- ------ ------- ------ ------- ------
Available-for-Sale:
Tax-Exempt securities(1) ...................... $24,905 51.64% $20,478 54.83% $ -- -- %
Federal Agency Obligations .................... 14,785 30.66 11,166 29.90 6,407 22.73
Equity securities .............................. 3,653 7.57 2,045 5.47 1,839 6.52
------- ------ ------- ------ ------- ------
Subtotal ..................................... 43,343 89.87 33,689 90.20 8,246 29.25
------- ------ ------- ------ ------- ------
Total investment securities ................. $48,230 100.00% $37,349 100.00% $28,194 100.00%
======= ====== ======= ====== ======= ======
Average remaining life of investment securities
(excluding FHLB stock and other equities) ....... 9.4 years 11.3 years 9.9 years
Other interest-earning assets:
Interest-earning deposits with banks ............ $ 1,011 100.00% $19,938 100.00% $ 172 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
- --------------
(1) Effective with the adoption of SFAS 115 on December 1, 1994, the Company's
tax-exempt securities were classified as available-for-sale.
The following table sets forth certain information regarding the
composition and maturities of the securities portfolio, excluding FHLB stock,
equity securities and other items, at September 30, 1996. See Note 3 of the
Notes to the Consolidated Financial Statements in the Annual Report for a
discussion of the Company's investment securities portfolio. A portion of the
Company's municipal bonds have been prerefunded and the maturity on these bonds
reflect the prerefunded maturity dates.
<TABLE>
<CAPTION>
September 30, 1996
------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Investment Securities
---------- ---------- ---------- ---------- ------------------------------
Book Value Book Value Book Value Book Value Book Value Market Value
---------- ---------- ---------- ---------- -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Municipal bonds ......................... $1,929 $ 5,054 $1,375 $16,547 $24,905 $24,905
Federal agency obligations .............. 2,497 8,409 3,879 --- 14,785 14,785
------ ------- ------ ------- ------- -------
Total investment securities
(excluding FHLB stock, equity
securities and other items) ......... $4,426 $13,463 $5,254 $16,547 $39,690 $39,690
====== ======= ====== ======= ======= =======
Weighted average yield ................... 6.87% 6.41% 6.67% 5.97% 6.31% 6.31%
</TABLE>
18
<PAGE> 19
MORTGAGE-BACKED AND RELATED SECURITIES. In order to supplement loan and
investment activities and achieve its asset/liability management goals, the
Company invests in mortgage-backed and related securities. As of September 30,
1996, all of the mortgage-backed and related securities owned by the Company
are issued, insured or guaranteed either directly or indirectly by a federal
agency or are rated "A" (in most cases "AAA") or higher by a nationally
recognized credit rating agency. However, it should be noted that, while a
(direct or indirect) federal guarantee or a high credit rating may indicate a
high degree of protection against default, they do not indicate that the
securities will be protected from declines in value based on changes in
interest rates or prepayment speeds.
At September 30, 1996, DFC had $88.1 million of mortgage-backed and
related securities, representing 37.6% of total assets. On that date, the
Company had $48.1 million of Federal National Mortgage Association ("FNMA"),
FHLMC and Government National Mortgage Association ("GNMA") participation
certificates and conventional mortgage-backed securities and $40.0 million of
collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs"). At September 30, 1996, $40.9 million of the
Company's mortgage-backed securities were issued by either FHLMC, FNMA or GNMA
and the remaining $7.2 million were privately issued mortgage-backed
securities. On that date, $12.5 million of the Company's CMOs and REMICs were
issued either by FHLMC or FNMA and the remaining $27.5 million were privately
issued securities. None of the Company's privately issued mortgage-backed or
related securities are insured or guaranteed by FHLMC or FNMA. All of the
privately issued securities were rated "AA" or higher by a nationally
recognized credit rating agency at the time of purchase.
Consistent with its asset/liability management strategy, at September 30,
1996, $40.2 million or 45.6% of DFC's mortgage-backed and related securities
had adjustable interest rates. In addition, the Company has a substantial
portfolio of CMOs and REMICs with anticipated average lives of five years or
less. For information regarding the Company's mortgage-backed and related
securities portfolio, see Notes 4 and 5 of the Notes to the Consolidated
Financial Statements in the Annual Report.
At September 30, 1996, the Company did not have any mortgage-backed or
related securities in excess of 10% of stockholders' equity except for FNMA,
FHLMC and GNMA issues, amounting to $18.9 million, $9.6 million and $24.9
million, respectively.
In addition to its conventional mortgage-backed securities, the Company
invests in CMOs and REMICs. CMOs and REMICs are securities derived by
reallocating the cash flows from mortgage-backed securities or pools of
mortgage loans in order to create multiple classes, or tranches, of securities
with coupon rates and average lives that differ from the underlying collateral
as a whole. The terms to maturity of any particular tranche is dependent upon
the prepayment speed of the underlying collateral as well as the structure of
the particular CMO or REMIC. Although a significant proportion of the
Company's CMOs are interests in tranches which have been structured (through
the use of cash flow priority and "support" tranches) to give somewhat more
predictable cash flows, the cash flow and hence the value of CMOs and REMICs
are subject to change.
19
<PAGE> 20
The Company invests in CMOs and REMICs as an alternative to mortgage loans
and conventional mortgage-backed securities as part of its asset/liability
management strategy. Management believes that CMOs and REMICs can represent
attractive investment alternatives relative to other investments due to the
wide variety of maturity and repayment options available through such
investments. In particular, the Company has from time to time concluded that
short and intermediate duration CMOs and REMICs (five year or less average
life) represent a better combination of rate and duration than adjustable rate
mortgage-backed securities. Because the Company's CMOs and REMICs (with the
exception of those classified as "high risk" at the time of purchase, as
described below) are purchased as an alternative to mortgage loans and because
the Company has the ability and intent to hold such securities to maturity, all
such securities (with the exception of those classified as "high risk" at the
time of purchase) are classified as held-to-maturity. At September 30, 1996,
the Company held $40.0 million of CMOs and REMICs, including $34.4 million of
short and intermediate duration (five year or less average life) or adjustable
rates.
Substantially all mortgage derivatives recently purchased by the Company
are not classified as "high-risk" under regulatory guidelines and are subject
to normal effects of changes in interest rates. To assess price volatility,
the Federal Financial Institutions Examination Council ("FFIEC") adopted a
policy in 1992 which requires an annual "stress" test of mortgage derivative
securities. This policy, which has been adopted by the OTS, requires the Bank
to annually test its CMOs and other mortgage-related securities to determine
whether they are high-risk or nonhigh-risk securities. Mortgage derivative
products with an average life or price volatility in excess of a benchmark
30-year mortgage-backed pass-through security are considered high-risk mortgage
securities. Under the policy, savings institutions may generally only invest
in high-risk mortgage securities in order to reduce interest rate risk. In
addition, all high-risk mortgage securities acquired after February 9, 1992
which are classified as high risk at the time of purchase must be carried in
the institution's trading account or as assets held-for-sale. Additionally,
DFC's investment policy limits the amount of "high-risk" CMOs that the Company
may purchase to 12% of total assets and mandates that these assets must be
retested and monitored quarterly. At September 30, 1996, the Company held CMOs
and REMICs that did not meet the criteria established by the FFIEC policy and
were classified as "high-risk" with a carrying value of $12.0 million
(including $8.6 million of securities which were held for investment because
there was an ability and intent to hold to maturity and such securities were
either acquired before February 9, 1992 or were not classified as high risk
until sometime after purchase) and a market value of $11.6 million. While the
Company's current investment policy permits its investment, subject to certain
limitations, in CMOs and REMICs classified as "high-risk," it is currently
anticipated that any future investments in "high-risk" securities will be
minimal. To date, the OTS has not required the Company to dispose of any
high-risk securities.
20
<PAGE> 21
The following table sets forth the contractual maturities of the Company's
mortgage-backed and related securities at the dates indicated. These
securities are anticipated to be repaid in advance of their contractual
maturities as a result of projected mortgage loan prepayments. In addition,
under the structure of the Company's REMICs, the Company's short- and
intermediate-tranche interests have repayment priority over the longer term
tranches of the same underlying mortgage pool. The amounts set forth below
represent principal balances only and do not include premiums, discounts and
market value adjustments.
<TABLE>
<CAPTION>
September 30, 1996
5 to 10 10 to 20 Over 20 Balance
Years Years Years Outstanding
------- -------- ------- ------------------
(In Thousands)
<S> <C> <C> <C> <C>
CMOs and REMICs $ -- $8,136 $32,144 $40,280
FNMA participation certificates -- 27 10,832 10,859
Conventional mortgage-backed securities -- -- 7,117 7,117
FHLMC participation certificates -- 156 4,846 5,002
GNMA participation certificates -- -- 24,929 24,929
---- ------ ------- -------
Total $ -- $8,319 $79,868 $88,187
==== ====== ======= =======
</TABLE>
The Company's holdings of mortgage-backed and related securities have
increased in recent years as a result of loan competition and deposit growth.
Since federal agency mortgage-backed securities generally carry a yield
approximately 50 to 100 basis points below that of the corresponding type of
residential loan (due to the implied federal agency guarantee fee and the
retention of a servicing spread by the loan servicer), and the Company's other
mortgage related securities also carry lower yields (due to the implied federal
agency guarantee and because such securities tend to have shorter actual
durations than 30 year loans), in the event that the proportion of the
Company's assets consisting of mortgage-backed and related securities
increases, the Company's asset yields could be somewhat adversely affected.
The Company will evaluate mortgage-backed and related securities purchases in
the future based on its asset/liability objectives, market conditions and
alternative investment opportunities.
The market values of a significant portion of the Company's
mortgage-backed and related securities held-to-maturity have been from time to
time significantly lower than their carrying values. However, for financial
reporting purposes, such declines in value are considered to be temporary in
nature since they have been due to changes in interest rates rather than credit
concerns. See Note 4 of the Notes to the Consolidated Financial Statements in
the Annual Report.
21
<PAGE> 22
The following table sets forth the carrying value of the Company's
mortgage-backed and related securities at the dates indicated. At September
30, 1996, the market value of the Company's mortgage-backed and related
securities portfolio was $87.2 million.
<TABLE>
<CAPTION>
September 30, November 30,
---------------------------------- ----------------
1996 1995 1994
---------------- ---------------- ----------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity:
CMOs and REMICs ................................. $35,504 40.30% $42,533 51.75% $44,832 66.18%
------- ------ ------- ------ ------- ------
Subtotal ..................................... 35,504 40.30 42,533 51.75 44,832 66.18
------- ------ ------- ------ ------- ------
Available-for-Sale:
CMOs and REMICs ................................. $ 4,458 5.06% $ 3,636 4.42% $ 3,386 5.00%
FNMA participation certificates ................. 10,928 12.40 13,711 16.68 7,978 11.78
FHLMC participation certificates ................ 5,149 5.85 7,232 8.80 6,214 9.17
GNMA participation certificates ................. 24,826 28.18 7,833 9.53 2,717 4.01
Conventional mortgage-backed securities ......... 7,233 8.21 7,247 8.82 2,615 3.86
------- ------ ------- ------ ------- ------
Subtotal .................................... 52,594 59.70 39,659 48.25 22,910 33.82
------- ------ ------- ------ ------- ------
Total mortgage-backed securities ............ $88,098 100.00% $82,192 100.00% $67,742 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
SOURCES OF FUNDS
GENERAL. The Company's primary sources of funds are deposits, payments
(including prepayments) of loan principal, interest earned on loans and
securities, repayments of securities, borrowings and funds provided from
operations.
DEPOSITS. Damen offers a variety of deposit accounts having a wide range
of interest rates and terms. The Bank's deposits consist of passbook, NOW,
money market and various certificate accounts. The Bank relies primarily on
competitive pricing policies and customer service to attract and retain these
deposits.
The variety of deposit accounts offered by the Bank has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. However, as customers have become more interest rate
conscious, the Bank has become more susceptible to short-term fluctuations in
deposit flows.
22
<PAGE> 23
The Bank manages the pricing of its deposits in keeping with its
asset/liability management, profitability and growth objectives. For instance,
the Bank has recently implemented several marketing initiatives in order to
attract intermediate and long term deposits. However, the Bank has found it
difficult to increase rapidly its deposits on a cost effective basis as a
result of intense competition throughout its market area and slow economic
growth in the community located near its Chicago office. For information
regarding the amount of the Bank's deposit accounts in prior periods, see Note
10 of the Notes to the Consolidated Financial Statements in the Annual Report.
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Ten Months
Year Ended Ended Year Ended
September 30, September 30, November 30,
------------- ------------- ------------
1996 1995 1994
------------- ------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance ................ $126,632 $126,210 $126,586
Deposits ....................... 66,969 67,709 82,777
Withdrawals .................... (79,781) (71,146) (87,316)
Interest credited .............. 5,153 3,859 4,163
-------- -------- --------
Ending balance ................. $118,973 $126,632 $126,210
======== ======== ========
Net increase (decrease) ........ $ (7,659) $ 422 $ (376)
======== ======== ========
Percent increase (decrease) .... (6.05)% .33% (.30)%
======== ======== ========
</TABLE>
23
<PAGE> 24
Deposits in the Bank as of September 30, 1996, were represented by various
types of savings programs described below.
<TABLE>
<CAPTION>
September 30, November 30,
-------------------------------------- --------------------
1996 1995 1994
------------------ ------------------ --------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
TRANSACTIONS AND SAVINGS DEPOSITS:
Passbook Accounts 3.05%(1) ................... $ 20,386 17.13% $ 23,350 18.44% $ 27,181 21.54%
NOW and Money Market Accounts 2.50 -
4.35%(1) .................................. 10,764 9.05 11,467 9.05 12,292 9.74
-------- ------ -------- ------ -------- ------
Total Non-Certificates .................. 31,150 26.18 34,817 27.49 39,473 31.28
-------- ------ -------- ------ -------- ------
CERTIFICATES:
2.00 - 3.99% ................................. -- -- 1 .03 15,134 11.99
4.00 - 5.99% ................................. 63,143 53.07 54,536 43.05 53,810 42.64
6.00 - 7.99% ................................. 23,390 19.66 35,729 28.21 12,433 9.85
8.00 - 9.99% ................................. 1,290 1.09 1,549 1.22 5,360 4.24
-------- ------ -------- ------ -------- ------
Total Certificates ........................ 87,823 73.82 91,815 72.51 86,737 68.72
-------- ------ -------- ------ -------- ------
Total Deposits ........................... $118,973 100.00% $126,632 100.00% $126,210 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
- --------------
(1) Rates in effect at September 30, 1996.
24
<PAGE> 25
The following table shows rate and maturity information for the Bank's
certificates of deposit as of September 30, 1996.
<TABLE>
<CAPTION>
0.00- 4.00- 5.00- 6.00- 7.00- 8.00- 9.00- Percent
3.99% 4.99% 5.99% 6.99% 7.99% 8.99% 9.99% Total of Total
----- ------- -------- -------- ------- ----- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Certificate accounts maturing in
quarter ending:
December 31, 1996 .................. $--- $3,600 $12,906 $ 1,502 $1,358 $--- $218 $19,584 22.30%
March 31, 1997 ..................... --- 772 12,275 352 4,523 18 --- 17,940 20.43
June 30, 1997 ...................... --- 195 6,766 1,007 --- --- --- 7,968 9.07
September 30, 1997 ................. --- 123 6,547 1,914 --- --- --- 8,584 9.77
December 31, 1997 .................. --- 13 2,323 398 --- --- 7 2,741 3.12
March 31, 1998 ..................... --- --- 3,333 118 --- 75 --- 3,526 4.01
June 30, 1998 ...................... --- --- 2,987 218 --- 331 400 3,936 4.48
September 30, 1998 ................. --- --- 2,984 4,354 --- --- --- 7,338 8.36
December 31, 1998 .................. --- --- 2,558 145 74 --- 91 2,868 3.27
March 31, 1999 ..................... --- --- 2,756 151 7 --- 107 3,021 3.44
June 30, 1999 ...................... --- --- 1,340 737 --- --- 43 2,120 2.41
September 30, 1999 ................. --- --- 253 1,879 --- --- --- 2,132 2.43
Thereafter ......................... --- --- 1,412 3,222 1,431 --- --- 6,065 6.91
----- ------ ------- ------- ------ ---- ---- -------
Total ........................... $--- $4,703 $58,440 $15,997 $7,393 $424 $866 $87,823 100.00%
===== ====== ======= ======= ====== ==== ==== ======= =======
Percent of total ................ ---% 5.36% 66.54% 18.22% 8.42% .48% .98%
===== ====== ======= ======= ====== ==== ====
</TABLE>
25
<PAGE> 26
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of September
30, 1996.
<TABLE>
<CAPTION>
Maturity
-------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------- ------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 ................. $ 9,848 $12,524 $11,481 $25,203 $59,056
Certificates of deposit of $100,000 or more ................. 4,534 1,874 4,294 8,544 19,246
(excluding Public Funds)
Public funds(1) ............................................ 5,202 3,542 777 --- 9,521
-------- ------- ------- --------- -------
Total certificates of deposit ............................... $19,584 $17,940 $16,552 $33,747 $87,823
======== ======= ======= ========= =======
</TABLE>
- --------------
(1) Deposits from governmental and other public entities.
For additional information regarding the composition of the Bank's
deposits, see Note 10 of the Notes to the Consolidated Financial Statements in
the Annual Report.
BORROWINGS. The Bank's other available sources of funds include advances
from the FHLB of Chicago and other borrowings. As a member of the FHLB of
Chicago, the Bank is required to own capital stock in the FHLB of Chicago and
is authorized to apply for advances from the FHLB of Chicago. Each FHLB 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.
Consistent with its asset/liability management strategy, the Bank may
utilize FHLB advances to extend the term to maturity of its liabilities. Also,
the Bank uses FHLB borrowings to fund loan demand and other investment
opportunities and to offset deposit outflows. At September 30, 1996, the Bank
had $59.6 million of FHLB advances outstanding with a weighted average interest
rate of 6.05%. See Note 11 of the Notes to the Consolidated Financial
Statements in the Annual Report.
26
<PAGE> 27
The following table sets forth the maximum month-end balance and average
balance of FHLB advances and all other borrowings for the periods indicated.
<TABLE>
<CAPTION>
Ten Months
Year Ended Ended Year Ended
September 30, September 30, November 30,
------------- ------------- ------------
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
(In Thousands)
MAXIMUM BALANCE:
FHLB advances ........ $61,800 $51,400 $44,400
AVERAGE BALANCE:
FHLB advances ........ $51,950 $45,949 $37,564
</TABLE>
The following table sets forth certain information as to the Bank's FHLB
advances at the dates indicated.
<TABLE>
<CAPTION>
September 30, November 30,
------------------ ------------
1996 1995 1994
-------- -------- ------------
<S> <C> <C> <C>
(Dollars in Thousands)
FHLB advances ...................................... $59,600 $45,500 $44,000
------- ------- -----------
Total borrowings .............................. $59,600 $45,500 $44,000
======= ======= ===========
Weighted average interest rate of FHLB advances .... 6.05% 6.33% 6.10%
</TABLE>
SUBSIDIARY AND OTHER ACTIVITIES
As a federally chartered savings bank, Damen is permitted by OTS
regulations to invest up to 2% of its assets in the stock of, or loans to,
service corporation subsidiaries, and may invest an additional 1% of its assets
in service corporations where such additional funds are used for inner-city or
community development purposes. In addition to investments in service
corporations, federal institutions are permitted to invest an unlimited amount
in operating subsidiaries engaged solely in activities which a federal savings
bank may engage in directly.
At September 30, 1996, Damen had one wholly-owned service corporation,
Dasch, Incorporated ("Dasch" or the "Subsidiary"). Dasch, an Illinois
corporation, was incorporated on March 25, 1976 for the purpose of operating a
retail insurance agency selling primarily homeowners and mortgage disability
insurance. The insurance agency was sold in August 1985 and since that time
the Subsidiary has remained inactive. The Company may utilize Dasch in the
future to promote investment sales operations through a third party.
27
<PAGE> 28
At September 30, 1996, the Subsidiary's assets consisted entirely of
$185,700 in a savings and a money market account at Damen. At that date, the
Subsidiary had liabilities of $3,400 and equity consisted of $5,000 of capital
stock owned by Damen and $177,300 of retained earnings. Net income for the
year ended September 30, 1996 and the ten months ended September 30, 1995 was
$3,895 and $3,115, respectively.
COMPETITION
The Bank faces strong competition both in originating real estate and
consumer loans and in attracting deposits. Competition in originating loans
comes primarily from other savings institutions, commercial banks, credit
unions and mortgage bankers which also make loans secured primarily by real
estate located in the Bank's market area. The Bank 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 Bank attracts its deposits through its main and branch offices,
primarily from the communities in which those offices are located; therefore,
competition for those deposits is principally from other savings institutions,
commercial banks, credit unions, mutual funds and securities firms located in
the same communities. The ability of the Bank 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 Bank competes for these deposits by offering
a variety of deposit accounts at competitive rates, convenient business hours,
interbranch deposit and withdrawal privileges and a customer oriented staff.
The Bank's share of the loan and deposit markets in its market area is less
than 1%.
EMPLOYEES
At September 30, 1996, the Company had a total of 32 full-time employees.
None of the Company's employees are represented by any collective bargaining
agreement. Management considers its employee relations to be good.
REGULATION
GENERAL. Damen is a federally chartered mutual savings bank, the deposits
of which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, Damen is subject to broad federal
regulation and oversight extending to all its operations. Damen is a member of
the FHLB of Chicago and is subject to certain limited regulation by the Federal
Reserve Board. Damen is a member of the SAIF and the deposits of Damen are
insured by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over Damen.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
28
<PAGE> 29
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, Damen is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The last regular OTS
and FDIC examinations of Damen were as of December 31, 1995 for the OTS
examination and September 30, 1990, respectively. Under agency scheduling
guidelines, it is likely that another examination will be initiated in the near
future. When these examinations are conducted by the OTS and the FDIC, the
examiners may require Damen to provide for higher general or specific loan loss
reserves. All savings associations are subject to a semi-annual assessment,
based upon the savings association's total assets, to fund the operations of
the OTS. The Bank's OTS assessment for the fiscal period ended September 30,
1996 was approximately $62,000.
The OTS also has extensive enforcement authority over all savings
institutions, including Damen and the Company. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease-and-desist or removal orders and to initiate injunctive actions.
In general, these enforcement actions may be initiated for violations of laws
and regulations and unsafe or unsound practices. Other actions or inactions
may provide the basis for enforcement action, including misleading or untimely
reports filed with the OTS. Except under certain circumstances, public
disclosure of final enforcement actions by the OTS is required.
In addition, the investment, lending and branching authority of Damen is
prescribed by federal laws and it is prohibited from engaging in any activities
not permitted by such laws. For instance, no savings association may invest in
non-investment grade corporate debt securities. In addition, the permissible
level of investment by federal associations in loans secured by non-residential
real property may not exceed 400% of total capital, except with approval of the
OTS. Federal savings associations are also generally authorized to branch
nationwide. Damen is in compliance with the noted restrictions.
Damen's general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus).
At September 30, 1996, Damen's lending limit under this restriction was $5.5
million. Damen is in compliance with the loans-to-one borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any
institution which fails to comply with these standards must submit a compliance
plan. A failure to submit a plan or to comply with an approved plan will
subject the institution to further enforcement action. The OTS and the other
federal banking agencies have also proposed additional guidelines on asset
quality and earnings standards. No assurance can be given as to whether or in
what form the proposed regulations will be adopted.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. Damen is a member of
the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith
and credit of the United States Government. As
29
<PAGE> 30
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious risk to the FDIC.
The FDIC also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices, or is in an unsafe or unsound
condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier
1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or
a risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all
insured institutions will be made by the FDIC for each semi-annual assessment
period.
On September 30, 1996, federal legislation was enacted that requires the
Savings Association Insurance Fund ("SAIF") to be recapitalized with a one-time
assessment on virtually all SAIF-insured institutions, such as the Bank, equal
to 65.7 basis points on SAIF-insured deposits maintained by those institutions
as of March 31, 1995. This SAIF assessment, which is to be paid to the FDIC by
November 27, 1996, is approximately $860,000 and has been accrued by the
Company at September 30, 1996.
As a result of the SAIF recapitalization, the FDIC has proposed to amend
its regulation concerning the insurance premiums payable by SAIF-insured
institutions. Effective October 1, 1996 through December 31, 1996, the FDIC
has proposed that the SAIF insurance premium for all SAIF-insured institutions
that are required to pay the Financing Corporation (FICO) obligation, such as
the Bank, be reduced to a range of 18 to 27 basis points from 23 to 31 basis
points per $100 of domestic deposits. The Bank currently qualifies for the
minimum SAIF insurance premium of 23 basis points. The FDIC has also proposed
to further reduce the SAIF insurance premium to a range of 0 to 27 basis points
per $100 of domestic deposits, effective January 1, 1997. Management cannot
predict whether or in what form the FDIC's final regulation may be promulgated.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings associations,
such as Damen, are required to maintain a minimum level of regulatory capital.
The OTS has established capital standards, including a tangible capital
requirement, a leverage ratio (or core capital) requirement and a risk-based
capital requirement applicable to such savings associations. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
30
<PAGE> 31
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital. At September 30, 1996, Damen
had no intangible assets which were required to be deducted from tangible
capital. Unrealized gains and losses on debt securities available-for-sale are
excluded from tangible, core and risk-based capital.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the Bank's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. The Bank's Subsidiary is an includable subsidiary.
At September 30, 1996, Damen had tangible capital of $36.6 million, or
16.48% of adjusted total assets, which is approximately $33.3 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital
plus certain intangible assets, including a limited amount of purchased credit
card relationships. As a result of the prompt corrective action provisions
discussed below, however, a savings association must maintain a core capital
ratio of at least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it to maintain a 3% ratio. At September
30, 1996, Damen had no intangibles which were subject to these tests.
At September 30, 1996, Damen had core capital equal to $36.6 million, or
16.48% of adjusted total assets, which is $29.9 million above the minimum
leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
At September 30, 1996, Damen had no capital instruments that qualify as
supplementary capital and $345,000 of general loss reserves, which was less
than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Damen had no such
exclusions from capital and assets at September 30, 1996.
31
<PAGE> 32
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings association
with more than normal interest rate risk exposure to deduct from its total
capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the
present value of its assets. This exposure is a measure of the potential
decline in the net portfolio value of a savings association, greater than 2% of
the present value of its assets, based upon a hypothetical 200 basis point
increase or decrease in interest rates (whichever results in a greater
decline). Net portfolio value is the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. The rule provides for a
two quarter lag between calculating interest rate risk and recognizing any
deduction from capital. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may
be completed. Any savings association with less than $300 million in assets
and a total capital ratio in excess of 12% is exempt from this requirement
unless the OTS determines otherwise.
On September 30, 1996, Damen had total capital of $36.9 million (including
$36.6 million in core capital and $345,000 in qualifying supplementary capital)
and risk-weighted assets of $75.4 million (including no converted off-balance
sheet assets); or total risk-based capital of 48.97% of risk-weighted assets.
This amount was $30.9 million above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to
meet their capital requirements. The OTS is generally required to take action
to restrict the activities of an "undercapitalized association" (generally
defined to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized
associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically
32
<PAGE> 33
undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to
further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the
OTS must appoint a receiver (or conservator with the concurrence of the FDIC)
for a savings association, with certain limited exceptions, within 90 days
after it becomes critically undercapitalized. Any undercapitalized association
is also subject to the general enforcement authority of the OTS and the FDIC,
including the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the Bank
may have a substantial adverse effect on the Bank's operations and
profitability. DFC shareholders do not have preemptive rights, and therefore,
if the Company is directed by the OTS or the FDIC to issue additional shares of
Common Stock, such issuance may result in the dilution in the percentage of
ownership of the Company.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. OTS regulations
impose various restrictions or requirements on associations with respect to
their ability to pay dividends or make other distributions of capital. OTS
regulations prohibit an association from declaring or paying any dividends or
from repurchasing any of its stock if, as a result, the regulatory capital of
the Bank would be reduced below the amount required to be maintained for the
liquidation account established in connection with its mutual to stock
conversion.
The OTS utilizes a three-tiered approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account. See " - Regulatory Capital
Requirements."
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital
requirements, may make capital distributions during any calendar year equal to
the greater of 100% of net income for the year-to-date plus 50% of the amount
by which the lesser of the Bank's tangible, core or risk-based capital exceeds
its fully phased-in capital requirement for such capital component, as measured
at the beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. Damen meets the requirements
for a Tier 1 association and has not been notified of a need for more than
normal supervision. Tier 2 associations, which are associations that before
and after the proposed distribution meet their current minimum capital
requirements, may make capital distributions of up to 75% of net income over
the most recent four quarter period.
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of
the noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
33
<PAGE> 34
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior
to such distribution. As a subsidiary of the Holding Company, Damen will also
be required to give the OTS 30 days' notice prior to declaring any dividend on
its stock. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. See " - Regulatory Capital
Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered
structure and the safe-harbor percentage limitations. Under the proposal a
savings association may make a capital distribution without notice to the OTS
(unless it is a subsidiary of a holding company) provided that it has a CAMEL 1
or 2 rating, is not in troubled condition and would remain adequately
capitalized (as defined in the OTS prompt corrective action regulations)
following the proposed distribution. Savings associations that would remain
adequately capitalized following the proposed distribution but do not meet the
other noted requirements must notify the OTS 30 days prior to declaring a
capital distribution. The OTS stated it will generally regard as permissible
that amount of capital distributions that do not exceed 50% of the
institution's excess regulatory capital plus net income to date during the
calendar year. An institution may not make a capital distribution without
prior approval of the OTS and the FDIC if it is undercapitalized before, or as
a result of, such a distribution. As under the current rule, the OTS may
object to a capital distribution if it would constitute an unsafe or unsound
practice. No assurance may be given as to whether or in what form the
regulations may be adopted.
LIQUIDITY. All savings associations, including Damen, are required to
maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
the Bank includes in liquid assets, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of
all savings associations. At the present time, the minimum liquid asset ratio
is 5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the Bank's average daily balance of
net withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon associations for violations of either liquid asset ratio
requirement. At September 30, 1996, Damen was in compliance with both
requirements, with an overall liquid asset ratio of 8.36% and a short-term
liquid assets ratio of 2.91%.
ACCOUNTING. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance
with GAAP. Under the policy statement, management must support its
classification of and accounting for loans and securities (i.e., whether
held-for-investment, sale or trading) with appropriate documentation. Damen is
in compliance with these amended rules.
34
<PAGE> 35
The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent then GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
QUALIFIED THRIFT LENDER TEST. All savings associations, including Damen,
are required to meet a qualified thrift lender ("QTL") test to avoid certain
restrictions on their operations. This test requires a savings association to
have at least 65% of its portfolio assets (as defined by regulation) in
qualified thrift investments on a monthly average for nine out of every 12
months on a rolling basis. Such assets primarily consist of residential
housing related loans and investments. At September 30, 1996, Damen met the
test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after
the failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act ("CRA"),
every FDIC insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection
with the examination of the Bank, to assess the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the
past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in 1996 and received a rating of "satisfactory."
35
<PAGE> 36
TRANSACTIONS WITH AFFILIATES. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the Bank as transactions with non-affiliates. In addition,
certain of these transactions are restricted to a percentage of the Bank's
capital. Affiliates of Damen include the Company and any company which is
under common control with Damen. In addition, a savings association may not
lend to any affiliate engaged in activities not permissible for a bank holding
company or acquire the securities of most affiliates. Damen's subsidiary is
not deemed an affiliate, however; the OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
persons.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super checking
accounts). At September 30, 1996, Damen was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See " - Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds,
including FHLB borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM. Damen is a member of the FHLB of Chicago,
which is one of 12 regional FHLBs, that administers the home financing credit
function of savings associations. Each FHLB serves as a reserve or central
bank for its members within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes loans to members (i.e., advances) in accordance with policies and
procedures established by the board of directors of the FHLB. These policies
and procedures are subject to the regulation and oversight of the Federal
Housing Finance Board. All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB. In addition, all
long-term advances are required to provide funds for residential home
financing.
As a member, Damen is required to purchase and maintain stock in the FHLB
of Chicago. At September 30, 1996, Damen had $3.1 million in FHLB stock, which
was in compliance with this requirement. In past years, Damen has received
substantial dividends on its FHLB stock. Over the past five calendar years
such dividends have averaged 6.4% and were 6.6% for calendar year 1995.
36
<PAGE> 37
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies
on advances targeted for community investment and low- and moderate-income
housing projects. These contributions have affected adversely the level of
FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of Damen's FHLB stock may result in a
corresponding reduction in Damen's capital.
FEDERAL AND STATE TAXATION. Savings associations such as Damen that meet
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), are permitted to establish reserves for bad debts and to make annual
additions thereto which may, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying loans" is computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) may be computed under either the experience method or the percentage of
taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming
the maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, Damen may
not deduct any addition to a bad debt reserve and generally must include
existing reserves in income over a four-year period. No representation can be
made as to whether Damen will meet the 60% test for subsequent taxable years.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. The
12% limitation has restricted the percentage bad debt deduction available to
the Bank effective with the tax year ended November 30, 1994 and, subsequently,
the tax periods ended September 30, 1995 and 1996, as well.
37
<PAGE> 38
In August 1996, legislation was enacted that repeals the reserve method of
accounting used by many thrifts to calculate their bad debt reserve for federal
income tax purposes. As a result, small thrifts such as the Bank must recapture
that portion of the reserve that exceeds the amount that could have been taken
under the experience method for post-1987 tax years. The legislation also
requires thrifts to account for bad debts for federal income tax purposes on
the same basis as commercial banks for tax years beginning after December 31,
1995. The recapture will occur over a six-year period, the commencement of
which will be delayed until the first taxable year beginning after December 31,
1997, provided the institution meets certain residential lending requirements.
The management of the Company does not believe that the legislation will have a
material impact on the Company or the Bank.
In addition to the regular income tax, corporations, including savings
associations such as Damen, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such
as Damen, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax)
over $2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of Damen's supplemental reserves for losses
on loans ("Excess"), such Excess may not, without adverse tax consequences, be
utilized for the payment of cash dividends or other distributions to a
shareholder (including distributions on redemption, dissolution or liquidation)
or for any other purpose (except to absorb bad debt losses). As of September
30, 1996, Damen's Excess for tax purposes totaled approximately $4.9 million.
The Company and its subsidiaries filed separate federal income tax returns
on a fiscal year basis using the accrual method of accounting. Savings
associations, such as Damen, that file federal income tax returns as part of a
consolidated group are required by applicable Treasury regulations to reduce
their taxable income for purposes of computing the percentage bad debt
deduction for losses attributable to activities of the non-savings association
members of the consolidated group that are functionally related to the
activities of the savings association member.
Neither Damen nor its subsidiary have been audited by the IRS with respect
to their federal income tax returns during the last ten years. In the opinion
of management, any examination of still open returns (including returns of
subsidiaries and predecessors of, or entities merged into, Damen) would not
result in a deficiency which could have a material adverse effect on the
financial condition of Damen and its consolidated subsidiary.
38
<PAGE> 39
ILLINOIS TAXATION. The Company and its subsidiaries file separate income
tax returns. For Illinois income tax purposes, corporations are presently
taxed at a rate equal to 7.2% of net income. For these purposes, "net income"
generally means federal taxable income, subject to certain adjustments
(including the addition of interest income on state and municipal obligations
and the exclusion of interest income on United States Treasury obligations).
The exclusion of income on United States Treasury obligations has the effect of
reducing Illinois taxable income. Damen has been audited by the Illinois
Department of Revenue for the years ended November 30, 1992 and 1993, resulting
in no additional liability.
DELAWARE TAXATION. As a Delaware holding company, the Company is exempted
from Delaware corporate income tax but is required to file an annual report
with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
ITEM 2. DESCRIPTION OF PROPERTIES
DFC conducts its business at its main office and two other locations in
its market area. The following table sets forth information concerning each of
DFC's offices as of September 30, 1996. At September 30, 1996, the total net
book value of DFC's premises and equipment (including land, building and
leasehold improvements, and furniture, fixtures and equipment) was
approximately $3.5 million.
<TABLE>
<CAPTION>
YEAR OWNED OR NET BOOK VALUE AT
LOCATION ACQUIRED LEASED SEPTEMBER 30, 1996
----------------------- -------- -------- ------------------
<S> <C> <C> <C>
Main Office:
200 West Higgins Road
Schaumburg, Illinois 1993(1) Owned $2,000,000
Full Service Branches:
5100 South Damen Avenue
Chicago, Illinois 1964 Owned 181,000
5750 West 87th Street
Burbank, Illinois 1991 Owned 758,000
</TABLE>
- --------------
(1) Office first occupied in 1975.
The Company believes that its current facilities are adequate to meet the
present and foreseeable future needs of the Company. The Company's Schaumburg
office currently has approximately 15,300 square feet of unoccupied office
space which Damen intends to lease to a third party.
The Bank's depositor and borrower customer files are maintained by an
independent data processing company. The net book value of the data processing
and computer equipment utilized by the Company at September 30, 1996 was
approximately $351,000. The Company upgraded its data processing and computer
equipment during fiscal 1996 at a cost of $333,000.
39
<PAGE> 40
ITEM 3. LEGAL PROCEEDINGS
From time to time, DFC is involved as plaintiff or defendant in various
legal proceedings arising in the normal course of its business. While the
ultimate outcome of these various 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 DFC's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A Special Meeting of Stockholders (the "Meeting") of Damen Financial
Corporation was held May 9, 1996 at 10:30 a.m. at the William Rainey Harper
College located at 1200 West Algonquin Road, Building H, Room 108, Palatine,
Illinois.
(b) Proxies for the Meeting were solicited pursuant to Section 14 of the
Securities and Exchange Act of 1934; there were no soliciations in opposition.
(c) The following are the results of each matter voted upon at the
Meeting:"
(i) The ratification of the adoption of the 1996 Stock Option and
Incentive Plan; and
<TABLE>
<S> <C>
Votes For: 2,327,656
Votes Against: 420,024
Abstentions: 181,816
Broker Non-Votes: 82,357
</TABLE>
(ii) The ratification of the adoption of the 1996 Recognition and
Retention Plan.
<TABLE>
<S> <C>
Votes For: 2,278,827
Votes Against: 552,272
Abstentions: 180,754
Broker Non-Votes: -0-
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 45 of the attached 1996 Annual Report to Stockholders is herein
incorporated by reference.
40
<PAGE> 41
ITEM 6. SELECTED FINANCIAL DATA
Pages 8 and 9 of the attached 1996 Annual Report to Stockholders is herein
incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pages 10 through 21 of the attached 1996 Annual Report to Stockholders is
herein incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following information appearing in the Company's Annual Report to
Stockholders for the year ended September 30, 1996, is incorporated by
reference in this Annual Report on Form 10-K as Exhibit 13.
<TABLE>
<CAPTION>
PAGES IN
ANNUAL
ANNUAL REPORT SECTION REPORT
- --------------------- --------
<S> <C>
Report of Independent Auditors ................................................... 22
Consolidated Statement of Financial Condition as of September 30, 1996 and
September 30, 1995 ............................................................ 23
Consolidated Statement of Earnings for the Periods Ended September 30, 1996
and September 30, 1995 and November 30, 1994 .................................. 24 and 25
Consolidated Statement of Changes in Stockholders' Equity for the Periods Ended
September 30, 1996 and September 30, 1995 and November 30, 1994 ................ 26
Consolidated Statement of Cash Flows for the Periods Ended September 30, 1996
and September 30, 1995 and November 30, 1994 ................................... 27 and 28
Notes to Consolidated Financial Statements ........................................ 29 through 43
</TABLE>
With the exception of the aforementioned information, the Company's Annual
Report to Stockholders for the year ended September 30, 1996, is not deemed
filed as part of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no Current Report on Form 8-K filed within 24 months prior
to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting
principle or financial statement disclosure.
41
<PAGE> 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information concerning directors of the Registrant is incorporated herein
by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held in 1997, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
EXECUTIVE OFFICER WHO IS NOT A DIRECTOR
The following is a description of the Company's and Bank's executive
officer who is not also a director as of September 30, 1996.
KENNETH D. VANEK. Mr. Vanek, age 66, has served as a branch manager and
Senior Vice President of the Bank since 1988, and of the Company since its
incorporation in 1995. Mr. Vanek joined Damen in 1971 as an accounting clerk.
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than 10% stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended September 30, 1996, the
Registrant complied with all Section 16(a) filing requirements applicable to
its officers, directors and greater than 10 percent beneficial owner were
complied with.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1997, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
42
<PAGE> 43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
43
<PAGE> 44
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
NUMBER WHERE
REFERENCE TO ATTACHED EXHIBITS
REGULATION PRIOR FILING OR ARE LOCATED IN
S-K EXHIBIT EXHIBIT NUMBER THIS FORM 10-K
NUMBER DOCUMENT ATTACHED HERETO REPORT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2 Plan of acquisition, reorganization, arrangement, liquidation or succession None Not applicable
3(a) Articles of Incorporation * Not applicable
3(b) By-Laws * Not applicable
4 Instruments defining the rights of security holders, including debentures * Not applicable
9 Voting Trust Agreement None Not applicable
10 Material contracts
Profit Sharing Plan and Trust
Money Purchase Plan and Trust
Form of 1995 Stock Option and Incentive Plan * Not applicable
Employment Agreements of Mary Beth Poronsky * Not applicable
Stull, Janine M. Poronsky, Gerald J. Gartner and * Not applicable
Kenneth D. Vanek * Not applicable
Form of Recognition and Retention Plan ** Not applicable
Employee Severance Compensation Plan ** Not applicable
11 Statement regarding computation of per share earnings None Not applicable
13 Annual Report to Security Holders
16 Letter regarding change in certifying accountants None Not applicable
18 Letter regarding change in accounting principles None Not applicable
21 Subsidiaries of Registrant
22 Published report regarding matters submitted to vote of security holders None Not applicable
23 Consents of Experts and Counsel
24 Power of Attorney None Not applicable
27 Financial Data Schedule
28 Information from reports furnished to state insurance regulatory authorities None Not applicable
99 Additional Exhibits None Not applicable
</TABLE>
- --------------
* Filed as exhibits to the Company's Form S-1 registration statement filed
on June 23, 1995 (File No. 33-93868) pursuant to Section 5 of the
Securities Act of 1933. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of Regulation
S-K.
** Filed as exhibits to the Company's Amendment No. 1 to Form S-1
registration statement filed on August 4, 1995 (File No. 33-93868)
pursuant to Section 5 of the Securities Act of 1933. All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
44
<PAGE> 45
B) REPORTS ON FORM 8-K
During the quarter ended September 30, 1996, the Company filed the
following current reports on Form 8-K.
1. Current Report on Form 8-K dated July 9, 1996 (File No. 0-25484).
2. Current Report on Form 8-K dated July 23, 1996 (File No. 0-25484).
3. Current Report on Form 8-K dated July 30, 1996 (File No. 0-25484).
45
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 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.
DAMEN FINANCIAL CORPORATION
By: /s/ Mary Beth Poronsky Stull
--------------------------------------------
Mary Beth Poronsky Stull, Chairman of the
Board, President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
/s/ Edward R. Tybor /s/ Mary Beth Poronsky Stull
- ------------------------------ -------------------------------------------
Edward R. Tybor, Director Mary Beth Poronsky Stull, Chairman of the
Board, President and Chief Executive
Officer
(Principal Executive and Operating Officer)
December 30, 1996 December 30, 1996
Date: Date:
/s/ Charles J. Caputo /s/ Carol A. Diver
- ------------------------------ ------------------------------------------
Charles J. Caputo, Director Carol A. Diver, Director
December 30, 1996 December 30, 1996
Date: Date:
/s/ Mark C. Guinan, M.D. /s/ Janine M. Poronsky
- ------------------------------ ------------------------------------
Mark C. Guinan, M.D., Director Janine M. Poronsky, Vice President,
Corporate Secretary and Director
December 30, 1996 December 30, 1996
Date: Date:
/s/ Gerald J. Gartner
- -----------------------------------
Gerald J. Gartner, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date:
December 30, 1996
46
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
13 Annual Report to Security Holders
21 Subsidiaries of Registrant
23 Consent of Experts and Counsel
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 13
[LOGO]
DAMEN FINANCIAL CORPORATION
ANNUAL REPORT 1996
MOVING AHEAD WITH CONFIDENCE
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders..................................................... 2
Selected Consolidated Financial Information................................ 8
Management's Discussion and Analysis.......................................10
Report of Independent Auditors.............................................22
Consolidated Financial Statements..........................................23
Notes to Consolidated Financial Statements.................................29
Board of Directors and Officers............................................44
Shareholder Information....................................................45
</TABLE>
<PAGE> 3
COMPANY PROFILE
Damen Financial Corporation was incorporated in 1995 as the holding company for
Damen Federal Bank for Savings.
Damen Federal was founded in 1916 to help the many families settling in
Chicago's southwest side save and invest in new homes. Damen has remained
focused to this purpose and, as a result, has performed consistently throughout
its 80 year history. Despite the Great Depression, several recessions and other
volatile economic times, Damen has posted a profit in all of its 80 years except
four in the early eighties.
Steadfast in its purpose, Damen has accomplished much during fiscal year
1996 to ensure that the Corporation is poised to meet the evolving needs and
demands of its customers. New technology, an expanded product line and
responsive customer service have laid the groundwork for future growth and
profitability.
Damen Financial Corporation is headquartered in Schaumburg, Illinois and
had assets of $235 million at fiscal year-end 1996. The Company's common stock
trades on the NASDAQ Stock Market under the symbol: DFIN.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
(dollars in thousands) 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Total Assets $234,555 $232,358
Total Loans 91,146 87,555
Mortgage-Backed and Other Securities 136,328 119,541
Deposits 118,973 126,632
Borrowings 59,600 45,500
Net Income 1,780 1,375
Earnings Per Share:
Without SAIF special assessment .63 .38
With SAIF special assessment .49 .38
Stockholders' Equity 52,870 55,710
Stockholders' Equity as a Percent of Assets 22.54% 23.98%
</TABLE>
NET INCOME*
1995 1.4 million
1996 1.8 million
*FOR 12 MONTHS ENDED SEPTEMBER 30,
AFTER EFFECT OF 1996 SAIF ASSESSMENT
<PAGE> 4
WE HAVE CONTINUED TO FOCUS ON SEEKING NEW OPPORTUNITIES FOR GROWTH THROUGH
EXPANDED HOME RELATED LENDING PRODUCTS, THE ENHANCEMENT OF ALL OUR SERVICES AND
THE EXPANSION OF OUR MARKET.
MESSAGE TO OUR SHAREHOLDERS
We are pleased to present our second annual report to shareholders. Pleased,
because this report gives evidence of growing strength and success as well as
promises made and promises kept. Our strength and success have been built upon
our ability to focus on the things we know and do best, providing home mortgages
and other related home lending products to our local communities and providing
competitive services for depositors of our subsidiary, Damen Federal Bank. We
also continued to focus on seeking new opportunities for growth through expanded
home related lending products, the enhancement of all our services and the
expansion of our market. We continue to move toward our ultimate objective of
optimizing shareholder value in the corporation.
The benchmarks that were set when we converted to a stock institution in
1995 are now being realized. We are positioned for significant progress and are
moving ahead with confidence as you will see by the highlights of our most
recent fiscal year ended September 30, 1996 and the other information contained
in this report.
Most significant and encouraging among our financial highlights has been
our ability to operate at a profitable level. The Company's performance over the
past fiscal year saw earnings from operations increase by 130% over the previous
year, from $1.0 million to $2.3 million, before a government mandated special
industry-wide assessment to replenish the Savings Association Insurance Fund
(SAIF). Net income for the year amounted to $1.8 million compared to $1.4
million for the previous year in spite of that special one-time assessment,
which we anticipated. This increase in net income was due primarily to
continued demand for our home lending products, significant non-interest income
and an increase in our net interest spread.
Our strong capital position, which was due, in part, to the proceeds from
our conversion to a stock institution and the current earnings for the fiscal
year just ended,
[PHOTO]
2
<PAGE> 5
[PHOTO]
enabled us to easily absorb the SAIF assessment. The one-time SAIF assessment
will ultimately have a positive effect on our earnings capability since our
future premiums to the insurance fund will be substantially lower.
Stockholders will be pleased to note that we experienced an increase in our
net interest income spread, our primary source of earnings. That spread, which
had been under pressure for several years, increased 5 basis points at fiscal
year-end over the previous year. Continuing to increase our spread remains one
of our greatest challenges.
Other good news was that our return on average assets for the year
increased to 0.97%, excluding the effect of the SAIF special assessment net of
taxes. Even with the special assessment, return on average assets was 0.76%, an
increase of 41% over the previous year. Our total assets also rose to $235
million, a new high. Deposits for the Bank amounted to $119.0 million at fiscal
year end as compared to $126.6
EARNINGS
FROM OPERATIONS*
1995 1.0 million
1996 2.3 million
*For 12 months ended September 30,
before the 1996 SAIF special assessment
and 1995 unrealized losses of securities
net of tax effect.
INTEREST RATE
SPREAD*
1995 1.65%
1996 1.70%
*as of September 30
3
<PAGE> 6
OUR STRONG CAPITAL POSITION HAS ENABLED US TO ACQUIRE NEW TOOLS TO SERVE OUR
CURRENT AND POTENTIAL CUSTOMER BASE EVEN MORE EFFICIENTLY AND PROFITABLY.
million the previous year. As the stock market continued on its "bullish"
course, many traditional depositors across the nation switched part of their
savings to riskier but seemingly more lucrative mutual funds and stocks. While
this caused a deposit drain through much of the banking business, we were
pleased to have retained a high level of customer deposits. It indicates that
we have remained competitive in the market and that our insured accounts remain
an important part of the investment portfolios of our customer base.
Damen Financial Corporation remains well capitalized. All government
standards for capital have been easily met by Damen Federal. Requirements for
risk-based capital, core capital and tangible capital are set at 8.0%, 3.0% and
1.5%, respectively. Damen Federal's capital ratios ended the fiscal year at
49.0%, 16.5% and 16.5%, respectively.
As of September 30, 1996 stockholder's equity amounted to $52.9 million, a
decrease of $2.8 million from the $55.7 million at the end of fiscal year 1995.
We had promised that our capital would be used to ultimately enhance stockholder
value. To accomplish that goal, we initiated several actions. The Company
declared a quarterly dividend of $.06 per share in each of the last two quarters
of fiscal 1996. We obtained a waiver from the Office of Thrift Supervision
(OTS) to repurchase stock from the open market prior to the time period allowed
by regulators. We, then, repurchased $2.3 million of stock that was retired as
treasury stock, thus creating a positive effect on shareholder value. An
additional $1.9 million of stock was purchased for our Recognition and Retention
Plan.
Of even greater importance to our future viability was the ability to
upgrade our systems and services. Automatic Teller Machines were installed at
our Schaumburg and Burbank offices, a service very much requested by our
customers. Our affiliation with the Cash Station(R) and Cirrus(R) networks will
enable people from a much broader geographic
[PHOTO]
4
<PAGE> 7
[PHOTO]
area to access our services and will be a further incentive in attracting new
deposits, especially profitable checking accounts.
A new computer system was also incorporated into our operations during
1996. The new technology integrates all our previous systems and has enabled us
to operate more efficiently and effectively. Not only does it provide us with
quicker response time and greater accuracy for transactions, but it is a
powerful marketing tool. It has the potential to utilize customer data to
provide information that will enable us to more efficiently and profitably
serve the people who are our most important market, our current customer base.
The software programs now available with the new computer system have also
enabled us to expand our product line. We have introduced statement savings
accounts which qualify for ATM usage as well as a Home Equity Line of Credit.
These new accounts and services are expected to add to our revenue and are also
incentives for
BANK CAPITAL
RATIOS*
<TABLE>
Required
Minimum
Damen Rates Ratios
<S> <C> <C>
Risk-based capital 8.0 49.0
Core capital 3.0 16.5
Tangible capital 1.5 16.5
</TABLE>
*as a percentage of total assets
at September 30, 1996
5
<PAGE> 8
ONE BENCHMARK OF OUR SUCCESS IS THE QUALITY AND SOUNDNESS OF OUR LOAN PORTFOLIO.
OUR COMMUNITY-BASED LENDING PROGRAMS HAVE HELPED US REMAIN SAFE, SECURE AND
PROFITABLE.
potential customers to consider Damen Federal Bank.
Strong capital has made all this possible and puts us in a position to
remain forward thinking. It lets us be planners instead of plodders. We will
not rest on our laurels but will continue to move ahead with a great deal of
confidence.
While much of our concentration this past year has been on the bottom
line, we have not forgotten who we are and the commitments we have to our
customers and the communities we serve, as well as our commitment to our
shareholders. In fulfilling those commitments we continued to provide funds
for home mortgages to qualified families and individuals. Over 220 first
mortgage home loans were added to our loan portfolio during the fiscal year
ended September 30, 1996. The home mortgages were, for the most part, made on
properties within our primary market communities. At fiscal year-end, our
total loan portfolio amounted to $91.1 million.
The quality and soundness of that portfolio continued in a strong position.
Loans delinquent two months or more remained at a very low level of .16% of
total assets. Non-performing assets, another barometer of asset quality,
amounted to $351,000, or .15% of total assets at September 30, 1996.
Non-performing assets include any asset on which we are receiving no interest,
such as loans 90 days or more delinquent, foreclosures and loans in process of
foreclosure. It continues to be our practice to set aside reserves as a safety
net for unexpected loan difficulties. A provision of $70,000 was provided for
the fiscal year-ended September 30, 1996, giving us an ample $345,000 in loan
loss reserves. Our community based lending programs have helped us remain safe,
secure and profitable.
The past year has certainly been a busy year, a year of getting things
done. And yes, we are moving ahead with confidence, heading in the right
direction on behalf of our stockholders and their investment in Damen Financial
Corporation. In the coming year, we will direct our
[PHOTO]
6
<PAGE> 9
[PHOTO]
efforts toward further utilizing our new computer technology in developing
greater customer relationships. Cross-selling of our newly developed lending
products to our customer base will be important to the continued growth of
income. We will, of course, continue in our efforts to maintain our credit
quality and to exercise control over expenditures.
We believe that we have the people, products, capital and management
direction to keep Damen Financial Corporation moving ahead. The challenges
remain substantial, but we are well-poised to meet them head-on. We shall do
everything in our power to justify your continued confidence and support.
[PHOTO]
Mary Beth Poronsky Stull
Mary Beth Poronsky Stull
Chairman of the Board
and President
Damen Financial Corporation
LOAN PORTFOLIO
1995 88 MILLION
1996 91 MILLION
NON-PERFORMING
ASSETS*
1995 .03%
1996 .15%
*assets on which we receive no interest
As a percentage of total assets.
7
<PAGE> 10
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SEPTEMBER 30 SEPTEMBER 30 NOVEMBER 30
(in thousands) 1996 1995(1) 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL
CONDITION DATA
Total assets $234,555 $232,358 $190,643 $183,001 $176,558
Loans receivable, net 91,146 87,555 88,225 84,814 78,547
Mortgage-backed securities 88,098 82,192 67,742 65,262 69,061
Tax-exempt securities 24,905 20,478 16,711 12,810 11,457
Investment securities 23,325 16,871 11,483 13,446 12,147
Deposits 118,973 126,632 126,210 126,586 136,601
Borrowings 59,600 45,500 44,000 36,000 21,009
Total equity 52,870 55,710 17,874 17,406 15,096
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 YEAR ENDED NOVEMBER 30
(in thousands) 1996 1995 1995(1) 1994 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATIONS DATA
Total interest income $16,661 $14,029 $11,851 $ 10,555 $ 12,723 $ 13,576 $ 14,467
Total interest expense 9,672 9,397 7,997 6,234 7,632 7,784 9,365
-----------------------------------------------------------------------
Net interest income 6,989 4,632 3,854 4,321 5,091 5,792 5,102
Provision for loan losses 70 163 163 29
-----------------------------------------------------------------------
Net interest income after
provision for loan losses 6,919 4,469 3,691 4,321 5,091 5,792 5,073
Fees and service charges 109 77 69 54 72 129 118
Gain (loss) on sales of
mortgage-backed securities
and investment securities 84 (6) 3 48 40 483 543
Unrealized gain (loss) on
mortgage-backed securities
and investment securities
held-for-sale (892) (645) (1,537)
Other non-interest income 74 82 66 83 97 143 180
-----------------------------------------------------------------------
Total non-interest income 267 (739) 138 (460) (1,328) 755 841
Total non-interest expense 5,243 3,610 3,032 2,583 3,167 3,383 3,279
-----------------------------------------------------------------------
Income before taxes and change
in accounting principles 1,943 120 797 1,278 596 3,164 2,635
Income tax (provision)
benefit (163) 348 108 (277) 216 (860) (760)
Cumulative effect of change
in accounting for securities
available-for-sale, net of
tax effect 907 907
Cumulative effect of change in
accounting for income taxes (253) (253)
-----------------------------------------------------------------------
Net income $ 1,780 $ 1,375 $ 1,812 $ 748 $ 559 $ 2,304 $ 1,875
=======================================================================
(1)During 1995, the Company changed its fiscal year end from November 30 to September 30.
</TABLE>
8
<PAGE> 11
SELECTED FINANCIAL RATIOS AND OTHER DATA:
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR
THE YEAR ENDED TEN MONTHS ENDED AT OR FOR THE
SEPTEMBER 30 SEPTEMBER 30 YEAR ENDED NOVEMBER 30
1996 1995 1995(1) 1994 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS
AND OTHER DATA
Performance Ratios:
Return on average assets (ratio of net income to
average total assets)(2)(3) .76%(5) .69% .54% .52% .30% 1.28% 1.09%
Return on average stockholders' equity
(ratio of net income to average retained
earnings)(2)(3) 3.21 (6) 6.75 4.83 5.27 3.12 14.15 13.34
Efficiency ratio(7) 61.11 75.35 76.02 57.94 60.20 55.79 60.72
Interest rate spread information:
Average during period 1.80 1.89 1.82 2.48 2.42 2.92 2.55
End of period 1.70 1.65 1.65 2.08 1.94 2.69 2.83
Net interest margin(4) 3.07 2.41 2.37 2.91 2.84 3.32 3.00
Ratio of operating expense to average
total assets(2) 2.23 1.82 1.81 1.69 1.71 1.88 1.91
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.30X 1.11x 1.11x 1.10x 1.10x 1.09x 1.08x
Per Share Information:
Book value per share outstanding 14.02 14.04 14.04 N/A N/A N/A N/A
Earnings per share - primary .49 .38 .50 N/A N/A N/A N/A
Earnings per share - fully diluted .49 .38 .50 N/A N/A N/A N/A
Dividends declared per share .12 N/A N/A N/A N/A
Quality Ratios:
Non-performing assets to total assets at
end of period .15 .03 .03 .06 .06 .09 1.27
Allowance for loan losses to
non-performing loans 98.42 420.71 420.71 108.13 108.13 80.20 78.65
Allowance for loan losses to loans
receivable, net .38 .31 .31 .14 .14 .15 .16
Capital Ratios:
Stockholders' equity to total assets
at end of period 22.54 23.98 23.98 9.67 9.38 9.51 8.55
Average stockholders' equity to
average assets 23.63 10.26 11.16 9.77 9.64 9.04 8.19
Other Data:
Number of full-service offices 3 3 3 3 3 3 3
</TABLE>
(1) During 1995, the Company changed its fiscal year end from November 30 to
September 30.
(2) Ratios for the ten month period have been annualized.
(3) Calculated prior to cumulative effect of change in accounting for securities
available-for-sale. For the ten months ended September 30, 1995, the
Company's return on average assets and return on average equity would have
been .99% and 8.87%, respectively, if calculated to include the cumulative
effect of change in accounting.
(4) Net interest income divided by average interest earning assets.
(5) Return would have been .97% if calculated without regard to SAIF
assessment.
(6) Return would have been 4.12% if calculated without regard to SAIF
assessment.
(7) Non-interest expense, excluding SAIF special assessment, divided by net
interest income plus other income except for gains and losses on investments
available-for-sale and unrealized gains and losses on securities
held-for-sale.
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
ORGANIZATION AND HISTORY
On September 29, 1995, Damen Federal Bank for Savings (the "Bank") converted
from a federally chartered mutual savings bank to a federally chartered stock
savings bank (the "Conversion"). In connection with the Conversion, the Bank
sold all of its common stock to Damen Financial Corporation (the "Company") and
concurrently the Company issued 3,967,500 shares of Common Stock at $10.00 per
share. The Company is incorporated under the laws of the state of Delaware and
is authorized to do business in the State of Illinois, and generally is
authorized to engage in any activity that is permitted by the Delaware General
Corporation Law. As part of the Conversion, approximately 50% of the net
proceeds, or $19.2 million was used to purchase the stock of the Bank.
Damen Federal Bank for Savings was organized in 1916 to serve a primarily
Slovak community from an office established near 51st Street and South Damen
Avenue, on the south side of Chicago. This office has served the community with
uninterrupted service since 1916. In 1972 a branch office was opened in
Schaumburg, Illinois, a northwest suburb of Chicago. The Schaumburg office is
now designated as the "main office". In 1991 a branch office was opened in
Burbank, Illinois, a southwest suburb of Chicago. All offices are
"full-service" facilities.
GENERAL
The Company conducts no significant business other than holding investment
securities and holding the common stock of its subsidiary, the Bank. All
references to the Company include the Bank and its subsidiary, Dasch, Inc.,
unless otherwise indicated.
The business of the Company consists primarily of the business of the
Bank. Damen Federal Bank for Savings is principally engaged in attracting
deposits from the general public and using such deposits, together with other
funds, to originate primarily fixed rate one-to four-family residential
mortgages and, to a much lesser extent, multi-family, commercial real estate
and deposit loans primarily in its market area. The Bank also invests in
mortgage-backed securities, U.S. Government and Agency securities, tax exempt
securities and other investments.
The Company's results of operations are dependent primarily on net
interest income, which is the difference between the interest earned on loans,
mortgage-backed securities and other investments, and its cost of funds,
consisting of interest paid on deposits and borrowings. In addition, the
Company's operating results are affected by loan fees, service charges, other
income and operating expenses which primarily consist of employee compensation
and benefits, occupancy expense, advertising, federal insurance premiums and
other general and administrative expenses.
The operations of the Company are significantly influenced by general
economic conditions and by policies of financial institution regulatory
agencies, including the OTS and FDIC. The Company's cost of funds is
influenced by interest rates on competing investments and general market
interest rates. Lending activities are affected by the demand for financing of
real estate and other types of loans, which in turn is affected by the interest
rates at which such financings may be offered.
The Bank's basic mission is to provide quality financial products and
services in an efficient and caring manner in the communities it serves, and in
so doing, create growth opportunities and value to its shareholders. In order
to enhance shareholder value, the Company will strive to maintain strength and
flexibility through high capital ratios, maintain the Company's high asset
quality, increase the Company's net interest rate spread, control operating
expenses and increase efficiency. The Company will consider expanding products
and services where feasible and beneficial.
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition
and results of operations of the Company. The information contained in this
section should be read in conjunction with the financial statements and
accompanying notes.
10
<PAGE> 13
FINANCIAL CONDITION
SEPTEMBER 30, 1996 COMPARED TO SEPTEMBER 30, 1995. Total assets increased $2.2
million to $234.6 million as of September 30, 1996 from $232.4 million as of
November 30, 1995. Loans receivable and most categories of investments
increased as proceeds from the stock conversion in September 1995 were deployed
into loans and longer term investments, thereby reducing cash and
interest-bearing deposits by $19.2 million. Investment securities held to
maturity increased $687,000 to $1.8 million at September 30, 1996 from $1.1
million at September 30, 1995 due to additional investments of $785,000 less
repayments. Investment securities available-for-sale increased $9.6 million to
$43.3 million from $33.7 million due to purchases of $19.6 million, less
maturities and sales of $9.7 million and a net decrease in market value of
$298,000. Mortgage-backed securities held to maturity decreased $7.0 million to
$35.5 million from $42.5 million due primarily to repayments. Mortgage-backed
securities available-for-sale increased $12.9 million to $52.6 million as of
September 30, 1996 from $39.7 million as of September 30, 1995, which was the
result of purchases of $23.0 million exceeding repayments of $8.4 million and
sales of $1.0 million and a net decrease in market value of $748,000. Purchases
of mortgage-backed securities included $8.6 million of adjustable rate
securities purchased to help reduce interest rate sensitivity. Loans receivable
increased by $3.6 million to $91.1 million at September 30, 1996 from $87.5
million at September 30, 1995 due primarily to new loans disbursed of $19.8
million exceeding loan repayments during the year.
Deposits decreased by $7.6 million to $119.0 million at September 30, 1996
from $126.6 million at September 30, 1995 due to net withdrawals of $12.8
million exceeding interest credited, as depositors sought higher returns on
other investment products. Borrowings from the Federal Home Loan Bank of
Chicago increased by $14.1 million to $59.6 million at September 30, 1996 from
$45.5 million at September 30, 1995. Longer term borrowed money (terms over two
years) increased by $2 million while shorter term borrowings increased by $12.1
million. The proceeds were used primarily to offset net savings withdrawals,
and to a lesser extent, to fund loans and investments.
Stockholders' equity decreased by $2.8 million to $52.9 million at
September 30, 1996 from $55.7 million at September 30, 1995, due primarily to
the acquisition of stock for the previously unfunded Recognition and Retention
Plan at a cost of $1.9 million, an increase in net unrealized market losses on
investments available-for-sale, net of taxes, of $619,000 and the acquisition of
treasury shares at a cost of $2.3 million. In addition, the Company declared
cash dividends of twelve cents per share during the year ended September 30,
1996, which reduced stockholders' equity by $464,000. At September 30, 1996,
book value per share was $14.02 compared to $14.04 at September 30, 1995.
SEPTEMBER 30, 1995 COMPARED TO NOVEMBER 30, 1994. Total assets increased $41.8
million to $232.4 million as of September 30, 1995 from $190.6 million as of
November 30, 1994. This increase was due primarily to a $19.7 million increase
in interest earning deposits to $19.9 million at September 30, 1995 from $.2
million at November 30, 1994. This increase was due to proceeds from the stock
sale at September 29,1995 not yet being fully deployed. In addition,
mortgage-backed securities increased $14.5 million to $82.2 million as of
September 30, 1995 from $67.7 million as of November 30, 1994, which was the
result of purchases exceeding repayments and sales and an increase in market
value of $1.5 million. Purchases of mortgage-backed securities totaled $21.9
million and consisted primarily of adjustable rate securities in order to reduce
interest rate sensitivity. Also, investment securities increased $5.4 million
to $16.9 million at September 30, 1995 from $11.5 million at November 30, 1994,
as purchases exceeded sales and maturities. Investments in tax-exempt
securities increased $3.8 million to $20.5 million at September 30, 1995 from
$16.7 million as of November 30, 1994 due to purchases of $2.8 million and
unrealized gains of $1.0 million. Such investments were attractive to the Bank
in view of its loss of eligibility (as a result of its high capital) to use the
percentage of taxable income method of calculating its bad debt deductions for
federal income tax purposes. Loans receivable decreased by $670,000 to $87.5
million at September 30, 1995 from $88.2 million at November 30, 1994, due
primarily to loan repayments exceeding new loans of $12.3 million during the ten
month period.
Deposits increased by $422,000 to $126.6 million at September 30, 1995 from
$126.2 million at November 30, 1994 due to interest credited exceeding net
withdrawals of $3.4 million, as depositors sought higher returns on other
investment products, including Damen Financial Corporation stock. Borrowings
from the Federal Home Loan Bank of Chicago increased by $1.5 million to $45.5
million at September 30, 1995 from $44.0 million at November 30, 1994. Longer
term borrowed money (terms over two years) increased by $4 million
11
<PAGE> 14
while shorter term borrowings decreased by $2.5 million, in part to reduce
interest rate risk.
Total equity increased by $37.8 million to $55.7 million at September 30,
1995 from $17.9 million at November 30, 1994. This increase was primarily due
to net proceeds from the sale of the Company's stock of $38.3 million less $3.2
million of stock acquired by the ESOP. In addition, the increase was due to
earnings of $1.8 million, and the adjustment (net of taxes) of securities
available- for-sale to market of $2.0 million, which were partially offset by
the initial effect of adapting SFAS 115, resulting in a one-time charge to
equity of $1.1 million, net of tax effect.
ASSET/LIABILITY MANAGEMENT
The Company's profitability is dependent to a large extent upon its net interest
income, which is the difference between its interest income on interest-earning
assets, such as loans and investments, and its interest expense on
interest-bearing liabilities, such as deposits and borrowings. When
interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net interest
income. Finally, a flattening of the "yield curve" (i.e., a decline in the
difference between long and short-term interest rates), could adversely impact
net interest income to the extent that the Company's assets have a longer
average term than its liabilities.
In an attempt to manage its exposure to changes in interest rates,
management monitors the Company's and the Bank's interest rate risk. Since the
late 1980s, the Bank's Investment - Asset/Liability Committee has met monthly to
review the Bank's interest rate risk position and profitability and to make
recommendations for adjustments to the Bank's Board of Directors. Management
also reviews the Company's and the Bank's portfolios, formulates investment
strategies and oversees the timing and implementation of transactions to assure
attainment of the Board's objectives in the most effective manner.
Until 1990, the Bank's interest rate monitoring efforts were focused
primarily on an analysis of the difference or "gap" between the amounts of its
assets and liabilities repricing during specific time periods. However,
beginning in 1991, the Bank also began to focus on a "Net Portfolio Value"
analysis (described on the next page) in order to avoid distortions in gap
analysis that could be caused by changes in mortgage loan prepayment speeds and
changes in the relationship between long and short-term interest rates.
In managing its asset/liability mix, and depending on the relationship
between long and short-term interest rates, market conditions and consumer
preference, and in view of its substantial capital position, Damen may place
more emphasis on managing net interest margin than on better matching the
interest rate sensitivity of its assets and liabilities in an effort to enhance
net interest income. Management believes that the increased net interest income
resulting from a mismatch in the maturity of its asset and liability portfolios
can, during periods of declining or stable interest rates and "positively
sloped" yield curves, provide high enough returns to justify the increased
exposure to sudden and unexpected increases in interest rates. However, in view
of the above, the Bank's results of operations and net portfolio values remain
vulnerable to increases in interest rates and to declines in the difference
between long and short-term interest rates.
To the extent consistent with its interest rate spread objectives and
market conditions, the Bank attempts to manage its interest rate risk and has
taken several steps in this regard. First, a significant portion of the Bank's
recent mortgage-backed and related securities acquisitions have been of
securities having adjustable interest rates or anticipated average lives of five
years or less. As of September 30, 1996, the Bank had $68.2 million of
adjustable rate and/or short or intermediate anticipated term (average life
projected to be five years or less) mortgage-backed and related securities.
Second, the Bank has devoted a portion of its investment securities to
instruments having short or intermediate (five years or less) terms. As of
September 30, 1996, the Bank had $17.9 million in investment securities maturing
in five years or less. Third, the Bank has devoted a portion of its borrowing
activity to indebtedness having terms of three years or more. At September 30,
1996, the Bank had $18.0 million of borrowed money due after September 30, 1999.
Fourth, a portion of the Bank's deposits consists of passbook accounts, which
are considered by management to be somewhat more resistant to interest rate
changes than most other types of accounts, and certificates of deposit, having
maturities of three years or more. As of September 30, 1996, the Bank had $20.4
million of passbook accounts and $6.1 million of certificates of deposit due
after September 30, 1999. Also, although the Bank
12
<PAGE> 15
does not make adjustable-rate loans due to competitive factors, Damen's
fixed-rate lending program is focused on loans with terms of 15 years or less.
At September 30, 1996, the Bank had mortgage loans with principal balances of
$80.4 million or 86.2% of mortgage loans with original terms of 15 years or
less.
Net Portfolio Value ("NPV") analysis provides a quantification of interest
rate risk. In essence, this approach calculates the difference between the
present value of liabilities, expected cash flows from assets and cash flows
from off balance sheet contracts. Under OTS regulations, an institution's
"normal" level of interest rate risk in the event of an immediate and sustained
200 basis point change in interest rates is a decrease in the institution's NPV
in an amount not exceeding 2.0% of the present value of its assets. A current
OTS proposal would require that most thrift institutions with greater than
"normal" interest rate exposure take a deduction from their total capital
available to meet their risk-based capital requirement. The amount of the
proposed deduction is one-half of the difference between (a) the institution's
actual calculated exposure to the 200 basis point interest rate increase or
decrease (whichever results in the greater pro forma decrease in NPV) and (b)
its "normal" level of exposure which is 2.0% of the present value of its assets.
Savings institutions, however, with less than $300 million in assets and a total
capital ratio in excess of 12%, would be exempt from this requirement unless the
OTS determines otherwise.
At September 30, 1996, 2.0% of the present value of the Bank's assets was
approximately $4.4 million, which was less than $10.8 million, the decrease in
NPV resulting from a 200 basis point change in interest rates. As a result, if
the rule were in effect and were applicable to Damen, the Bank would have been
required to make a $3.2 million deduction from total capital in calculating its
risk-based capital requirement, although the Bank's capital would have remained
far in excess of regulatory minimums.
Presented in the next column, as of September 30, 1996, is an analysis of
the Bank's estimated interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in interest rates, up and down 400
basis points in 100 point increments.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE
ASSUMED CHANGE
IN INTEREST RATES $AMOUNT $CHANGE % CHANGE
- ---------------------------------------------------
(basis points) (dollars in thousands)
<S> <C> <C> <C>
+ 400 $15,997 $(21,503) (57)%
+ 300 21,264 (16,236) (43)
+ 200 26,676 (10,823) (29)
+ 100 32,148 (5,352) (14)
0 37,499
- 100 42,375 4,876 13
- 200 46,206 8,707 23
- 300 49,586 12,087 32
- 400 53,251 15,752 42
</TABLE>
As noted above, the market value of the Bank's net assets would be
anticipated to decline significantly in the event of certain designated
increases in interest rates. For instance, in the event of a 200 basis point
increase in interest rates, NPV is anticipated to fall by $10.8 million or 29%.
On the other hand, a decrease in interest rates is anticipated to cause an
increase in NPV.
Certain assumptions utilized by the OTS in assessing the interest rate risk
of thrift institutions were employed in preparing the previous table. These
assumptions related to interest rates, loan prepayment rates, deposit decay
rates and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates would not change as a
result of changes in interest rates although there can be no assurance that this
would be the case. In the event that interest rates change to the designated
levels, there can be no assurance that the Bank's assets and liabilities would
perform as set forth above. In addition, a change in Treasury rates to the
designated levels accompanied by a change in the shape of the Treasury yield
curve would cause significantly different changes to the NPV than indicated
above.
During the last several years, the Board has determined to reduce the level
of tolerated interest rate risk as measured by the Bank's interest rate
sensitivity gap and, beginning in 1991, by the changes to its NPV based upon
specified interest rate shocks. The actual and targeted levels of tolerated
interest rate risk are reviewed on a quarterly basis and are subject to change
depending on economic and competitive factors. The level of interest rate risk
in the NPV table set forth above as of September 30, 1996, is within the Bank's
current guidelines for tolerated interest rate risk.
13
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
Damen's principal sources of funds are deposits and borrowings, amortization
and prepayment of loan principal and mortgage-backed securities, maturities of
investment securities and operations. While scheduled loan repayments and
maturing investments are relatively predictable, deposit flows and early loan
repayments are more influenced by interest rates, floors and caps on loan
rates, general economic conditions and competition. Damen generally manages
the pricing of its deposits to be competitive and increase core deposit
relationships. However, management has from time to time decided not to pay
deposit rates that are as high as those of its competitors and, when necessary,
to supplement deposits with longer term and/or less expensive alternative
sources of funds.
Federal regulations require Damen to maintain minimum levels of liquid
assets. The required percentage has varied from time to time based upon
economic conditions and savings flows and is currently 5% of net withdrawable
savings deposits and borrowings payable on demand or in one year or less during
the preceding calendar month. Liquid assets for purposes of this ratio include
cash, certain time deposits, U.S. Government, government agency and corporate
securities and other obligations generally having remaining maturities of less
than five years. Damen has historically maintained its liquidity ratio for
regulatory purposes at levels in excess of those required. At September 30,
1996, Damen's liquidity ratio for regulatory purposes was 8.36%.
The Bank's most liquid assets are cash and cash equivalents, which consist
of short-term highly liquid investments with original maturities of less than
three months that are readily convertible to known amounts of cash and
interest-bearing deposits. The level of these assets is dependent on the
Bank's operating, financing and investing activities during any given period.
At September 30, 1996 and 1995, cash and cash equivalents totaled $1.2 million
and $20.4 million, respectively. The significant decrease was due to the
proceeds from the sale of the Company's stock being fully deployed.
Operating activities provided positive cash flows for the year ended
September 30, 1996, the ten months ended September 30, 1995 and the fiscal year
ended November 30, 1994.
The primary investing activities of Damen are originating loans and
purchasing mortgage-backed and investment securities. During the year ended
September 30, 1996, the ten months ended September 30, 1995 and the fiscal year
ended November 30, 1994, the Bank's loan originations totaled $19.5 million,
$12.3 million and $19.9 million, respectively. Purchases of mortgage-backed
and investment securities totaled $43.5 million during the year ended September
30, 1996, $32.2 million for the ten months ended September 30, 1995 and $47.8
million during the fiscal year ended November 30, 1994, respectively. A
substantial portion of loan originations and purchases of mortgage-backed
securities and other investments were funded by proceeds from the sale of the
Company's stock, loan repayments and the maturity or sale of securities.
The primary financing activities of Damen are deposits and borrowings.
For the year ended September 30, 1996, deposits decreased $7.6 million due to
net withdrawals of approximately $12.8 million exceeding interest credited of
$5.2 million. During the ten months ended September 30, 1995, deposits
increased $422,000 due to interest credited of approximately $3.9 million
exceeding net withdrawals of $3.4 million. During the fiscal year ended
November 30, 1994, the Bank experienced a decrease in deposits of $375,000 due
primarily to disintermediation. During the fiscal year ended September 30,
1996, the ten months ended September 30, 1995 and the fiscal year ended
November 30, 1994, the Bank's net (proceeds less repayments) financing activity
with the FHLB totaled $14.1 million, $1.5 million and $8.0 million,
respectively.
Liquidity management is both a daily and long-term responsibility of
management. Damen adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-earning deposits and investment
securities, and (iv) the objectives of its asset/liability management program.
Excess liquidity generally is invested in interest-earning overnight deposits
and short and intermediate-term U.S. Government and agency obligations and
mortgage-backed securities of short duration. If Damen requires funds beyond
its ability to generate them internally, it has additional borrowing capacity
with the FHLB of Chicago.
Damen anticipates that it will have sufficient funds available to meet
current loan commitments. At September 30, 1996, Damen had outstanding loan
commitments totaling $591,000.
Damen is subject to various regulatory capital requirements imposed by the
OTS. At September 30, 1996, Damen was in compliance with all applicable
capital requirements on a fully phased-in basis. See Note 16 of the Notes to
the Consolidated Financial Statements for a reconciliation of equity capital of
the Bank to regulatory capital.
14
<PAGE> 17
RESULTS OF OPERATIONS
The Bank's results of operations depend primarily upon the level of net interest
income, which is the difference between the interest income earned on its
interest-earning assets such as loans and investments, and the costs of the
Bank's interest-bearing liabilities, primarily deposits and borrowings. Results
of operations are also dependent upon the level of the Bank's non-interest
income, including fee income and service charges, and affected by the level of
its non-interest expenses, including its general and administrative 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,
respectively.
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND 1995
GENERAL. Net income for the year ended September 30, 1996 totaled $1.8 million,
an increase of $405,000 from net income of $1.4 million for the year ended
September 30, 1995. The increase was due primarily to an increase in net
interest income of $2.4 million and a reduction in the provision for loan losses
of $93,000, partially offset by an increase in non-interest expense of $1.6
million (including the $860,000 SAIF special assessment) and an increase in
income taxes of $511,000.
NET INTEREST INCOME. Net interest income increased $2.4 million to $7.0 million
for the year ended September 30, 1996 from $4.6 million for the same period in
1995. Interest income increased $2.6 million due to increases in average
interest earning assets to $227.8 million from $192.2 million due to proceeds
from the September 1995 stock conversion being deployed and an increase in the
weighted average yield to 7.31% during the 1996 period from 7.30% during the
1995 period. The increase in interest income was partially offset by an
increase in interest expense of $275,000 to $9.7 million for the year ended
September 30, 1996 from $9.4 million for the previous year. The increase was
the result of an increase in average savings and borrowings in the year ended
September 30, 1996, as well as an increase of ten basis points in the average
cost of funds to 5.51% from 5.41% the previous year. The increase in the net
interest margin during the year was due primarily to a significant increase in
the ratio of interest earning assets to interest-bearing liabilities as the
result of the stock conversion in September 1995.
INTEREST INCOME. Interest income increased $2.6 million to $16.6 million for the
year ended September 30, 1996 from $14.0 million for the prior year. This
increase was due primarily to an increase in the interest earned on
mortgage-backed securities of $1.4 million caused by a $15.0 million increase in
the average outstanding balance of mortgage-backed securities, as well as an
increase in the average yield on these securities to 6.91% from 6.42% as a
result of adjustable rate mortgage-backed securities resetting at higher rates
during the year and a greater proportion of higher yielding fixed-rated
securities. Interest on tax-exempt securities increased $472,000 as the average
outstanding balance of these securities increased to $23.3 million from $17.5
million, and the yield increased to 6.35% for the year ended September 30, 1996
from 5.77% for the prior year. Also, interest on investment securities
increased $556,000 as the average balance increased by $13.0 million, but was
partially offset by a decrease in the average yield to 6.31% from 8.61%. The
average yield on loans increased by seven basis points to 8.26% from 8.19% as
new higher yielding fixed-rate loans replaced lower yielding fixed-rate loans
and the average outstanding balance increased by $1.5 million.
INTEREST EXPENSE. Interest expense increased $275,000 to $9.7 million for the
year ended September 30, 1996 from $9.4 million for the prior year. Interest on
deposits decreased $101,000 as average interest-bearing deposits decreased $5.3
million to $123.5 million for the year ended September 30, 1996 from $128.8
million for the prior year. The cost of savings increased to 5.21% from 5.07%
due primarily to maturing certificates renewing at higher rates, especially
earlier in the year. Also, due in part to the increase in general interest
rates, the proportion of the Bank's deposits consisting of non-certificate
accounts declined, thus contributing to the increase in the Bank's cost of
funds. Interest expense on borrowed money increased $376,000 as the average
balance of borrowings from the FHLB of Chicago increased $7.0 million to $52.0
million for the year ended September 30, 1996 from $45.0 million for the prior
year, partially offset by a decline in the cost of borrowings to 6.25% from
6.37% due primarily to a greater concentration of shorter term advances than in
the previous year.
15
<PAGE> 18
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased to $70,000
for the year ended September 30, 1996 from $163,000 for the prior year. The
provision is based upon management's review of the loan portfolio by property
type and delinquency status. There were no significant individual loans which
contributed to the increase in the allowance, and there were no regulatory
requests for additional provisions for loan losses during the year ended
September 30, 1996 and 1995.
OTHER INCOME. Other income increased $1.0 million for the year ended September
30, 1996. The increase was primarily the result of a decrease of $892,000 in
unrealized losses on securities held-for-sale as Damen adopted SFAS 115
effective December 1, 1994 and thereafter no longer charged unrealized losses on
securities available-for-sale to operations. The cumulative effect of the
change of this accounting principle, net of tax, resulted in a one-time $907,000
credit to earnings. Other income increased due to an increase of $90,000 in net
gains on mortgage-backed securities available-for-sale.
OTHER EXPENSES. Other expenses increased $1.6 million to $5.2 million for the
year ended September 30, 1996 from $3.6 million for the prior year primarily due
to the SAIF special assessment of $860,000. Also, compensation related expenses
increased $410,000 due to normal increases in salaries and the additional costs
of ESOP and RRP benefit plans. Occupancy expenses increased $22,000 during the
year ended September 30, 1996 due primarily to an increase in real estate taxes.
Legal, audit, and examination expenses increased $136,000 during the year ended
September 30, 1996 primarily as a result of becoming a public company in
September 1995. Advertising expense increased $110,000 to $458,000 for the year
ended September 30, 1996 due primarily to additional costs of operating as a
public company.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
$163,000 for the year ended September 30, 1996 from a benefit of $348,000 for
the prior year. This increase was due to an increase of $1.8 million in pre-tax
income to $1.9 million for the year ended September 30, 1996 from $120,000 for
the prior year. The Company realized a tax reduction due to tax exempt income
and low-income housing tax credits.
COMPARISON OF OPERATING RESULTS
FOR THE TEN MONTHS ENDED SEPTEMBER 30,
1995 AND 1994
GENERAL. Net income for the ten months ended September 30, 1995 totaled $1.8
million, an increase of $1.1 million from net income of $748,000 for the ten
months ended September 30, 1994. The increase was primarily the result of a
decrease in unrealized losses of $645,000 in securities held-for-sale and a
change in accounting for income tax under SFAS 109 of $253,000, plus a reduction
of income tax expense of $385,000. These increases in net income were partially
offset by a decrease of $467,000 in net interest income, an increase in the
provision for loan losses of $163,000 and an increase in non-interest expense of
$449,000.
NET INTEREST INCOME. Net interest income decreased $470,000 to $3.8 million for
the ten months ended September 30, 1995 from $4.3 million for the same period in
1994. Interest income increased $1.3 million due to increases in all categories
of average interest earning assets, and an increase of 19 basis points in the
weighted average yield to 7.29% during the 1995 period from 7.10% during the
1994 period. The increase in interest income was more than offset by an
increase in interest expense of $1.8 million to $8.0 million for the ten months
ended September 30, 1995 from $6.2 million for the ten months ended September
30, 1994. The increase was the result of an increase in average savings and
borrowings in the 1995 period, as well as an increase of 85 basis points in the
average cost of funds to 5.47% from 4.62%. The decrease in net interest income
was due primarily to a flattening of the yield curve during the ten month period
ended September 30, 1995.
INTEREST INCOME. Interest income increased $1.3 million to $11.9 million for
the ten months ended September 30, 1995 from $10.6 million for the ten months
ended September 30, 1994. This increase was primarily due to an increase in the
interest earned on mortgage-backed securities of $1.1 million caused by an
increase of $9.9 million in the average outstanding balance of mortgage-backed
securities, as well as an increase in the average yield on these securities to
6.53% from 5.49%. Also, interest on tax-exempt securities increased $154,000 as
the average outstanding balance of these securities increased to
16
<PAGE> 19
$17.8 million from $15.2 million, and the yield increased to 6.44% for the ten
months ended September 30, 1995 from 6.32% for the ten months ended September
30, 1994. Also, interest on investment securities increased $108,000 as the
average balance increased by $2.5 million, but was partially offset by a
decrease in the average rate to 6.75% from 7.12%. The average yield on loans
decreased by 25 basis points to 8.20% as higher yielding fixed-rate loans were
replaced by lower yielding fixed-rate loans.
INTEREST EXPENSE. Interest expense increased $1.8 million to $8.0 million for
the ten months ended September 30, 1995 from the $6.2 million for the ten months
ended September 30, 1994. Interest on deposits increased $1.1 million as
average interest-bearing deposits increased $3.5 million to $129.4 million for
the ten months ended September 30, 1995 from $125.8 million for the ten months
ended September 30, 1994, and the cost of savings increased to 5.15% from 4.28%
because of an across the board increase in deposit rates (including those on
passbook and NOW accounts) caused by a rise in general interest rates and
because the Bank implemented a major marketing initiative to increase its nine
to twenty-four month certificates. Also, due in large part to the increase in
general interest rates, the proportion of the Bank's deposits consisting of
non-certificate accounts declined, thus contributing to the increase in the
Bank's cost of funds. Interest expense on borrowed money increased $695,000 as
the average balance of borrowing from the FHLB of Chicago increased $9.9 million
to $45.9 million for the ten months ended September 30, 1995 from $36.0 million
for the ten months ended September 30, 1994, and the cost of borrowing increased
to 6.39% from 5.84% due to an increase in general interest rates and, to a
lesser extent, an extension of the term to maturity of such liabilities as a
part of the Bank's asset/liability management program.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased to $163,000
for the ten months ended September 30, 1995 from no provision for the ten months
ended September 30, 1994. The increase was due to the increase in the Bank's
multi-family lending, the increase in loans on non-owner occupied properties, an
overall evaluation of the Bank's loan portfolio and management's evaluation of
prevailing and projected economic conditions. There were no significant
individual loans which contributed to the increase in the allowance, and there
were no regulatory requests for additional provisions for loan losses during the
ten months ended September 30, 1995. OTHER INCOME. Other income increased
$598,000 for the ten months ended September 30, 1995. The increase was
primarily the result of a decrease in unrealized losses on securities
held-for-sale of $645,000, as Damen adopted SFAS 115 effective December 1, 1994
and thereafter no longer charged unrealized losses on securities
available-for-sale to operations. The cumulative effect of the change of this
accounting principle, net of tax, resulted in a one-time $907,000 credit to
earnings. This increase was partially offset by a decrease of $45,000 in gains
on the sale of securities.
OTHER EXPENSES. Other expenses increased $449,000 or 17.4% to $3.0 million for
the ten months ended September 30, 1995 from $2.6 million for the ten months
ended September 30, 1994. Compensation related expenses increased $385,000 due
to a general increase in salaries, as well as $50,000 in employee bonuses paid
in 1995. Occupancy expenses increased $124,000 or 30.8% during the ten months
ended September 30, 1995 due primarily to an increase in real estate taxes.
Legal, audit, and examination expenses increased $24,000, or 26.4%, during the
ten months ended September 30, 1995 as a result of increased internal audit,
independent audit, and legal retainer fees. Advertising expense increased
$84,000 to $320,000 for the ten months ended September 30, 1995 due to an
expanded effort to stimulate savings and lending programs.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased to a
benefit of $108,000 for the ten months ended September 30, 1995 from an expense
of $277,000 for the ten months ended September 30, 1994. This decrease was due
to a decrease in pre-tax income of $481,000 to $797,000 for the ten months ended
September 30, 1995 from $1.3 million for the ten months ended September 30,
1994. In addition, the ratio of tax-exempt income to pre-tax income increased
significantly reducing the effective tax rate from 21.7% to a negative 13.6%.
During the ten months ended September 30, 1994, Damen adopted SFAS 109 resulting
in a charge to operations of $253,000 reflecting the cumulative effect of the
change in accounting for income taxes.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between interest earned on
interest-earning assets and interest paid on interest-bearing liabilities. Net
interest income depends on the volumes of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
17
<PAGE> 20
The following table sets forth certain information relating to average balance
sheet and reflects the average yield on assets and average cost of liabilities
for the periods indicated and the average yields earned and rates paid. Such
yields and costs are derived by dividing income or expense by the average
balance of
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30 YEAR ENDED SEPTEMBER 30
1996 1995
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
(in thousands) BALANCE PAID RATE BALANCE PAID RATE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning Assets:
Loans receivable $ 89,288 7,373 8.26 $ 87,820 $ 7,191 8.19%
Mortgage-backed securities 88,034 6,082 6.91 73,054 4,690 6.42
Investment securities 24,440 1,542 6.31 11,447 986 8.61
Tax-exempt securities 23,341 1,482 6.35 17,508 1,010 5.77
FHLB stock 2,706 182 6.73 2,335 152 6.51
-------------------------------------------------------------------
Total interest-earning assets 227,809 16,661 7.31 192,164 14,029 7.30
Noninterest-earning assets 7,155 6,508
-------------------------------------------------------------------
Total Assets $234,964 $198,672
===================================================================
LIABILITIES AND
EQUITY CAPITAL
Interest-bearing Liabilities:
Savings deposits $ 21,662 710 3.28 $ 25,316 806 3.18
NOW and Money Market
Accounts 11,149 444 3.98 11,801 477 4.04
Certificate accounts 90,646 5,272 5.82 91,650 5,244 5.72
Borrowings 51,950 3,246 6.25 45,024 2,870 6.37
-------------------------------------------------------------------
Total interest-bearing
liabilities 175,407 9,672 5.51 173,791 9,397 5.41
Noninterest-bearing -------------------- ----------------------
liabilities 4,042 4,504
-------------------------------------------------------------------
Total Liabilities 179,449 178,295
Total Equity 55,515 20,377
-------------------------------------------------------------------
Total Equity and Retained
Earnings $234,964 $198,672
===================================================================
Net interest income $ 6,989 $ 4,632
===================================================================
Net interest rate spread(3) 1.80% 1.89%
===================================================================
Net interest-earning assets $52,402 $18,373
===================================================================
Net yield on average
interest-earning assets 3.07% 2.41%
===================================================================
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.30X 1.11x
===================================================================
</TABLE>
18
<PAGE> 21
assets or liabilities, respectively, for the periods presented. Average
balances are derived from month-end balances. Management does not believe that
the use of month-end balances instead of daily average balances has caused any
material differences in the information presented.
<TABLE>
<CAPTION>
TEN MONTHS ENDED SEPTEMBER 30 YEAR ENDED NOVEMBER 30
1994 1994
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE(2) BALANCE PAID RATE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$86,551 6,092 8.45 $86,793 7,272 8.38
63,916 2,922 5.49 64,709 3,592 5.55
10,785 640 7.12 10,479 748 7.14
15,180 799 6.32 15,503 987 6.37
1,999 102 6.12 2,026 124 6.12
- -------------------------------------------------------------------------------------
178,431 10,555 7.10 179,510 12,723 7.09
5,558 5,492
- -------------------------------------------------------------------------------------
$183,989 $185,002
=====================================================================================
$29,372 716 2.93 $28,886 872 3.02
13,113 351 3.21 12,896 427 3.31
83,352 3,417 4.92 83,908 4,158 4.96
35,973 1,750 5.84 37,564 2,175 5.79
- -------------------------------------------------------------------------------------
161,810 6,234 4.62 163,254 7,632 4.67
4,204 3,737
- -------------------------------------------------------------------------------------
166,014 166,991
17,975 18,011
- -------------------------------------------------------------------------------------
$183,989 $185,002
=====================================================================================
$ 4,321 $ 5,091
=====================================================================================
2.48% 2.42%
=====================================================================================
$16,621 $16,256
=====================================================================================
2.91% 2.84%
=====================================================================================
1.10x 1.10x
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
TEN MONTHS ENDED SEPTEMBER 30
1995(1)
AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE(2)
- -----------------------------------------
<S> <C> <C>
$ 87,775 6,000 8.20
73,829 4,020 6.53
13,303 748 6.75
17,752 953 6.44
2,361 130 6.61
- -----------------------------------------
195,020 11,851 7.29
6,313
- -----------------------------------------
$201,333
=========================================
$ 24,027 643 3.21
12,860 399 3.72
92,471 4,510 5.85
45,940 2,445 6.39
- -----------------------------------------
175,298 7,997 5.47
3,570
- -----------------------------------------
178,868
22,465
- -----------------------------------------
$201,333
=========================================
$ 3,854
=========================================
1.82%
=========================================
$ 19,722
=========================================
2.37%
=========================================
1.11x
=========================================
</TABLE>
(1) During 1995, the Company changed its fiscal year end from November 30 to
September 30.
(2) Yield/Rate for the ten months ended September 30, 1995 and 1994 has been
annualized.
(3) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
19
<PAGE> 22
The following table presents the weighted average yields earned on loans,
investments and other interest-earning assets, and the weighted average rates
paid on savings deposits and the resultant interest rate spreads at the dates
indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30 AT SEPTEMBER 30 AT NOVEMBER 30
1996 1995 (1) 1994 1993
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average yield on:
Loans receivable 7.58% 7.65% 7.64% 7.87%
Mortgage-backed securities 7.10% 6.97% 6.31% 6.74%
Tax-exempt securities 6.27% 6.39% 6.53% 6.71%
Investment securities 6.48% 6.77% 6.72% 6.70%
Other interest-earning assets 5.75% 6.21% 5.60% 3.07%
Combined weighted
average yield on
interest-earning assets 7.14% 7.18% 7.00% 7.28%
Weighted average rate paid on:
Savings deposits 3.05% 3.05% 3.25% 3.00%
NOW and Money Market
accounts 3.90% 4.23% 4.02% 3.02%
Certificate accounts 5.78% 5.92% 5.24% 4.97%
Borrowings 6.05% 6.33% 6.10% 5.54%
Combined weighted average
rate paid on interest-
bearing liabilities 5.44% 5.53% 5.06% 4.59%
Interest rate spread 1.70% 1.65% 1.94% 2.69%
Interest rate spread based on
taxable equivalent yields for
tax exempt securities 1.93% 1.92% 2.26% 2.95%
</TABLE>
(1)During 1995, the Company changed its fiscal year end from November 30 to
September 30.
RATE/VOLUME ANALYSIS OF
NET INTEREST INCOME
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 changes related to
outstanding balances and that due to the changes in 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 TEN MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30(1)
1995 VS. 1996 1994 VS. 1995
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO TOTAL DUE TO TOTAL
INCREASE INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable $ 120 $ 62 $ 182 $103 $(195) $ (92)
Mortgage-backed
securities 1,014 378 1,392 544 554 1,098
Investment securities 1,092 (536) 556 179 (71) 108
Tax-exempt securities 362 110 472 144 10 154
FHLB Stock 25 5 30 22 6 28
Total interest income $2,613 $ 19 $2,632 $992 $ 304 $1,296
Interest Expense:
Savings deposits (121) 25 (96) $(90) $ 75 $ (15)
NOW and Money
Market accounts (26) (7) (33) (1) 51 50
Certificate accounts (59) 87 28 375 658 1,033
Borrowings 432 (56) 376 519 176 695
Total interest expense $ 226 $ 49 $ 275 $803 $ 960 $1,763
Net interest income $2,357 $ (467)
- -------------------------------------------------------------------------------
</TABLE>
(1)During 1995, the Company changed its fiscal year from November 30 to
September 30.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of
20
<PAGE> 23
money over time due to inflation. The primary impact of inflation on the
operations of the Company is reflected in [increased/decreased] operating costs.
Unlike most industrial companies, virtually all of the assets and liabilities of
a financial institution are monetary in nature. As a result, interest rates,
generally, have a more significant impact on a financial institution's
performance than does inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of," is effective for
fiscal years beginning after December 15, 1995. The statement requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss is recognized if the sum of the expected future cash flows is
less than the carrying amount of the asset. Management does not expect the
implementation of SFAS 121 to have a material impact on the Company's
consolidated financial position or results of operations.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS. In May 1995, the FASB issued
Statement of Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting
for Mortgage Servicing Rights." This statement amends Statement of Financial
Accounting Standards No. 65 ("SFAS 65"), Accounting for Certain Mortgage Banking
Activities," to require that a mortgage banking enterprise recognize as separate
assets rights to service mortgage loans for others, however those servicing
rights are acquired. SFAS 122 requires that a mortgage banking enterprise
assess its capitalized mortgage servicing rights for impairment based on the
fair value of those rights. SFAS 122 is effective for fiscal years beginning
after December 15, 1995. Management does not believe the adoption of SFAS 122
will have a material effect on the Company's consolidated financial position or
results of operations.
ACCOUNTING FOR STOCK-BASED COMPENSATION. In October 1995, the FASB issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock- Based Compensation." This statement establishes a value-based method
of accounting for stock options which encourages employers to account for stock
compensation awards based on their fair value at the date the awards are
granted. The resulting compensation award would be shown as an expense on the
income statement.
SFAS 123 also permits entities to continue to use the intrinsic value
method contained in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," (the "APB Opinion No. 25 Method"), allowing them to
continue to apply current accounting requirements, which generally result in no
compensation cost for most fixed stock-option plans. If the intrinsic value
method is retained, SFAS 123 requires significantly expanded disclosures,
including disclosure of the pro forma amount of net income and earnings per
share as if the fair value-based method were used to account for stock based
compensation. SFAS 123 is effective for fiscal years beginning after December
15, 1995, however, employers will be required to include in that year's
financial statements, information about options granted in 1995. The Company
has determined that it will continue to apply the APB Opinion No. 25 method in
preparing its consolidated financial statements.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES. In June 1996, the FASB issued SFAS No. 125 ("SFAS 125"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." This statement, among other things, applies a
"financial-components approach" that focuses on control, whereby an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes assets when control has been surrendered, and
derecognizes liabilities when extinguished. SFAS 125 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996. The Company does not anticipate that this pronouncement will
have a significant impact on its consolidated financial condition or results of
operations.
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Company keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.
21
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Damen Financial Corporation
Schaumburg, Illinois
We have audited the consolidated statements of financial condition of
Damen Financial Corporation and subsidiaries as of September 30, 1996 and 1995,
and the related consolidated statements of earnings, stockholders' equity, and
cash flows for the periods ended September 30, 1996 and 1995 and November 30,
1994. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated 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 financial position of Damen
Financial Corporation and subsidiaries at September 30, 1996 and 1995, and the
results of their operations and their cash flows for the periods ended
September 30, 1996 and 1995 and November 30, 1994 in conformity with generally
accepted accounting principles.
FPO Signature
November 1, 1996
Hickory Hills, Illinois
22
<PAGE> 25
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 170,034 425,218
Interest-bearing deposits 1,011,197 19,937,941
-----------------------------
Total cash and cash equivalents 1,181,231 20,363,159
Investment securities (fair value: 1996 - $1,777,000;
1995 - $1,089,800)(note 2) 1,776,979 1,089,775
Investment securities, available for sale, at fair
value (note 3) 43,342,710 33,689,700
Mortgage-backed securities (fair value: 1996 -
$34,641,300; 1995 - $41,910,600) (note 4) 35,503,531 42,533,362
Mortgage-backed securities, available for sale, at fair
value (note 5) 52,594,450 39,658,434
Loans receivable (net of allowance for loan losses:
1996 - $345,000; 1995 - $275,000) (note 6) 91,145,893 87,555,261
Stock in Federal Home Loan Bank of Chicago 3,110,500 2,570,000
Accrued interest receivable (note 7) 1,661,087 1,187,613
Office properties and equipment - net (note 8) 3,502,987 3,332,658
Prepaid expenses and other assets (note 9) 736,041 377,832
-----------------------------
Total assets 234,555,409 232,357,794
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (note 10) 118,973,335 126,631,760
Borrowed money (note 11) 59,600,000 45,500,000
Advance payments by borrowers for taxes and insurance 638,768 2,801,314
Other liabilities (note 12) 2,473,435 1,714,740
-----------------------------
Total liabilities 181,685,538 176,647,814
=============================
Stockholders' Equity
Preferred stock, $.01 par value; authorized 100,000
shares; none outstanding
Common stock, $.01 par value; authorized 4,500,000
shares; 3,967,500 shares issued and 3,770,117 shares
outstanding at September 30, 1996 and 3,967,500
shares issued and outstanding
at September 30, 1995 39,675 39,675
Additional paid-in capital 38,345,966 38,280,338
Retained earnings, substantially restricted 21,131,170 19,777,497
Unrealized gain on securities available for sale,
net of income taxes 167,679 786,470
Treasury stock, at cost (197,383 shares at
September 30, 1996) (2,311,375)
Common stock acquired by Employee Stock
Ownership Plan (2,762,400) (3,174,000)
Common stock awarded by Recognition and Retention
Plan (1,740,844)
-----------------------------
Total stockholders' equity (notes 16 and 17) 52,869,871 55,709,980
-----------------------------
Commitments and contingencies (notes 19 and 20)
Total liabilities and stockholders' equity $234,555,409 232,357,794
=============================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 26
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 NOVEMBER 30, 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $7,372,382 5,999,647 7,271,643
Mortgage-backed securities 6,081,879 4,019,530 3,592,560
Tax-exempt securities 1,482,104 952,843 987,010
Interest and dividends on other
investments 1,541,742 748,169 748,077
Dividends on FHLB stock 182,342 130,350 123,785
-------------------------------------------------
Total interest income 16,660,449 11,850,539 12,723,075
-------------------------------------------------
Interest expense:
Deposits 6,426,006 5,551,631 5,456,895
Borrowings 3,245,920 2,445,028 2,175,167
-------------------------------------------------
Total interest expense 9,671,926 7,996,659 7,632,062
-------------------------------------------------
Net interest income before
provision for loan losses 6,988,523 3,853,880 5,091,013
Provision for loan losses 70,000 163,146
-------------------------------------------------
Net interest income after
provision for loan losses 6,918,523 3,690,734 5,091,013
-------------------------------------------------
Non-interest income:
Loan fees and service charges 108,797 68,818 72,224
Gain (loss) on sale of:
Mortgage-backed securities, held
for sale 8,722
Mortgage-backed securities, available
for sale 4,064 (13,553)
Investment securities, held for sale 42,044
Investment securities, available for
sale 79,509 16,820
Other investments - net (11,502)
Unrealized loss on securities held
for sale (1,537,000)
Other income 74,171 66,364 97,079
-------------------------------------------------
Total non-interest income 266,541 138,449 (1,328,433)
-------------------------------------------------
</TABLE>
(continued on next page)
24
<PAGE> 27
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED YEAR ENDED
(CONTINUED) SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 NOVEMBER 30, 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-interest expense:
Compensation, employee benefits, and related expenses
(notes 13 and 14) 2,190,681 1,500,551 1,419,492
Advertising and promotion 457,918 320,383 287,748
Occupancy and equipment expense (note 8) 661,776 526,983 624,668
Data processing 100,862 75,889 89,989
Insurance expense 73,058 55,962 65,254
Federal insurance premiums 295,265 245,714 288,405
SAIF special assessment (note 18) 860,000
Legal, audit, and examination services 264,659 114,976 112,549
Loss on sale of real estate owned - net 10,705
Other operating expenses 338,543 191,827 267,970
------------------------------------------------------------
Total non-interest expense 5,242,762 3,032,285 3,166,780
------------------------------------------------------------
Net income before income taxes and change
accounting principles 1,942,302 796,898 595,800
Provision for federal and state income taxes
(benefit) (note 15) 162,460 (108,206) (216,065)
------------------------------------------------------------
Net income before change in accounting principles 1,779,842 905,104 811,865
Cumulative effect of change in accounting
for securities available for sale, net of tax effect 907,180
Cumulative effect of change in accounting for income
taxes (252,619)
------------------------------------------------------------
Net income $ 1,779,842 1,812,284 559,246
============================================================
Earnings per share - primary
Income before change in accounting principle $.49 .25 N/A
Cumulative effect of change in accounting for
securities available for sale, net .25 N/A
------------------------------------------------------------
Net income $ .49 .50 N/A
============================================================
Earnings per share - fully diluted
Income before change in accounting principle $.49 .25 N/A
Cumulative effect of change in accounting for
securities available for sale, net .25 N/A
------------------------------------------------------------
Net income $ .49 .50 N/A
============================================================
Dividends declared per common share $ .12 N/A
============================================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 28
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ADDITIONAL ON SECURITIES
COMMON PAID-IN RETAINED AVAILABLE
STOCK CAPITAL EARNINGS FOR SALE
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at November 30, 1993 $ 17,405,967
Additions (deductions) for the year ended
November 30, 1994:
Net income 559,246
Adjustment of securities to fair value,
net of tax effect (91,450)
---------------------------------------------------------------
Balance at November 30, 1994 17,965,213 (91,450)
Additions (deductions) for the ten months
ended September 30, 1995:
Cumulative effect of change in accounting for
securities available for sale, net of tax
effect, at December 1, 1994 (1,126,880)
Net income 1,812,284
Adjustment of securities to fair value,
net of tax effect 2,004,800
Net proceeds of common stock issued in
stock conversion 39,675 38,280,338
---------------------------------------------------------------
Balance at September 30, 1995 39,675 38,280,338 19,777,497 786,470
Additions (deductions) for the year ended
September 30, 1996:
Net income 1,779,842
Adjustment of securities to fair value,
net of tax effect (618,791)
Purchase of treasury stock (197,383 shares)
Purchase of stock for RRP
Amortization of award of RRP stock
Contribution to fund ESOP loan 65,628
Dividends declared on common stock (426,169)
---------------------------------------------------------------
Balance at September 30, 1996 $39,675 38,345,966 21,131,170 167,679
===============================================================
<CAPTION>
COMMON COMMON
STOCK STOCK
TREASURY AQUIRED AWARDED
STOCK BY ESOP BY RRP TOTAL
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at November 30, 1993 17,405,967
Additions (deductions) for the year ended
November 30, 1994:
Net income 559,246
Adjustment of securities to fair value,
net of tax effect (91,450)
---------------------------------------------------------------
Balance at November 30, 1994 17,873,763
Additions (deductions) for the ten months
ended September 30, 1995:
Cumulative effect of change in accounting for
securities available for sale, net of tax
effect, at December 1, 1994 (1,126,880)
Net income 1,812,284
Adjustment of securities to fair value,
net of tax effect 2,004,800
Net proceeds of common stock issued in
stock conversion (3,174,000) 35,146,013
---------------------------------------------------------------
Balance at September 30, 1995 (3,174,000) 55,709,980
Additions (deductions) for the year ended
September 30, 1996:
Net income 1,779,842
Adjustment of securities to fair value,
net of tax effect (618,791)
Purchase of treasury stock (197,383 shares) (2,311,375) (2,311,375)
Purchase of stock for RRP (1,865,187) (1,865,187)
Amortization of award of RRP stock 124,343 124,343
Contribution to fund ESOP loan 411,600 477,228
Dividends declared on common stock (426,169)
---------------------------------------------------------------
Balance at September 30, 1996 (2,311,375) (2,762,400) (1,740,844) 52,869,871
===============================================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 29
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 NOVEMBER 30, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,779,842 1,812,284 559,246
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation 177,333 148,761 172,257
Amortization of cost of stock benefit plans 601,572
Provision for loan losses 70,000 163,146
Increase (decrease) in deferred loan income (110,405) (22,526) 10,898
Federal Home Loan Bank stock dividend (34,300)
(Increase) decrease in prepaid and deferred
federal and state income taxes 18,602 600,783 (416,434)
Gain on sale of mortgage-backed securities,
held for sale (8,722)
(Gain) loss on sale of mortgage-backed securities,
available for sale (4,064) 13,553
Gain on sale of investment securities, available for sale (79,509) (16,820) (30,542)
Unrealized (gain) loss on securities, held for sale (1,537,000) 1,537,000
Loss on sale of real estate owned 10,705
Increase in accrued interest receivable (473,474) (177,809) (19,935)
Increase (decrease) in accrued interest payable (286,500) 470,600 (41,200)
Increase in other assets (22,055) (24,998) (21,533)
Increase (decrease) in other liabilities 900,543 402,198 (101,181)
----------------------------------------------------------
Net cash provided by operating activities 2,571,885 1,797,872 1,650,559
----------------------------------------------------------
Cash flows from investing activities:
Purchase of investment securities,
available for sale (19,553,246) (10,076,434) (2,993,750)
Purchase of investment securities (785,126) (191,498) (4,775,763)
Purchase of mortgage-backed securities,
held for sale (20,679,631)
Purchase of mortgage-backed securities,
available for sale (22,963,828) (18,910,930)
Purchase of mortgage-backed securities (229,361) (2,985,736) (19,375,961)
Proceeds from sales of investment securities,
available for sale 3,133,750 515,000 4,575,607
Proceeds from sales of mortgage-backed securities,
held for sale 3,575,285
Proceeds from sales of mortgage-backed securities,
available for sale 919,975 1,288,365
Proceeds from maturities of investment securities,
available for sale 6,547,993 2,340,706 1,090,945
Proceeds from maturities of investment securities 97,922 118,081 37,982
Proceeds from maturities of mortgage-backed securities,
held for sale 6,287,652
Proceeds from maturities of mortgage-backed securities,
available for sale 8,364,322 2,391,513
Proceeds from maturities of mortgage-backed securities 7,259,192 5,284,201 26,454,413
Proceeds from redemption of Federal Home Loan Bank stock 130,000
Purchase of Federal Home Loan Bank stock (670,500) (315,700) (280,000)
Disbursements for loans (19,814,855) (12,006,880) (22,001,602)
Loan repayments 16,264,628 12,536,002 18,579,372
Property and equipment expenditures (347,662) (73,026) (373,912)
Proceeds from sale of real estate owned 19,964
----------------------------------------------------------
Net cash provided for investing activities (21,646,796) (20,086,336) (9,859,399)
----------------------------------------------------------
</TABLE>
(continued on next page)
27
<PAGE> 30
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED YEAR ENDED
(CONTINUED) SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 NOVEMBER 30, 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from sale of common stock 35,146,013
Deposit receipts 66,969,226 67,708,828 82,777,642
Deposit withdrawals (79,780,537) (71,146,187) (87,316,204)
Interest credited to deposit accounts 5,152,886 3,858,888 4,163,080
Proceeds from borrowed money 181,100,000 99,200,000 150,000,000
Repayment of borrowed money (167,000,000) (97,700,000) (142,000,000)
Increase (decrease) in advance payments by
borrowers for taxes and insurance (2,162,546) 958,953 (308,055)
Purchase of RRP stock (1,865,187)
Purchase of treasury stock (2,311,375)
Dividends paid on common stock (209,484)
-----------------------------------------------------
Net cash provided by (for) financing activities (107,017) 38,026,495 7,316,463
-----------------------------------------------------
Increase (decrease) in cash and cash equivalents (19,181,928) 19,738,031 (892,377)
Cash and cash equivalents at beginning of period 20,363,159 625,128 1,517,505
-----------------------------------------------------
Cash and cash equivalents at end of period $ 1,181,231 20,363,159 625,128
=====================================================
Cash paid during the period for:
Interest $ 9,958,426 7,526,059 7,673,262
Income taxes 232,229 421,000
Non-cash investing activities:
Transfer of loans to foreclosed real estate $ 12,506
=====================================================
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Damen Financial Corporation (the "Company") is a Delaware corporation
incorporated on June 30, 1995 for the purpose of becoming the savings and loan
holding company for Damen Federal Bank for Savings (the "Bank"). On September
29, 1995, the Bank converted from a mutual to a stock form of ownership, and
the Company completed its initial public offering, and, with a portion of the
net proceeds, acquired all of the issued and outstanding capital stock of the
Bank (the "Conversion"). In addition, management, upon completion of the
Conversion, elected to change the Company's fiscal year end from November 30 to
September 30.
The accounting and reporting policies of the Company and its subsidiaries
conform to generally accepted accounting principles and to general practice
within the thrift industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The following is a description of the more significant policies which the
Company follows in preparing and presenting its consolidated financial
statements.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company, and its wholly owned subsidiary, Damen Federal Bank for Savings and
the Bank's wholly owned subsidiary, Dasch, Inc. Significant intercompany
balances and transactions have been eliminated in consolidation.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
Investment securities available for sale are recorded in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities". SFAS 115 requires the use
of fair value accounting for securities available for sale or trading and
retains the use of the amortized cost method for securities the Company has the
positive ability and intent to hold to maturity.
SFAS 115 requires the classification of debt and equity securities into
one of three categories: held to maturity, available for sale, or trading.
Held to maturity securities are measured at amortized cost. Unrealized gains
and losses for trading securities are included in income. Unrealized holding
gains and losses on available for sale securities are excluded from income and
reported net of taxes as a separate component of stockholders' equity.
The Company holds a portfolio of securities classified as available for
sale which are carried at current fair values. Premiums and discounts are
amortized and accreted into income over the remaining life of the security
using the level yield method. Unrealized gains and losses are recorded in a
valuation allowance, which is included as a separate component of stockholders'
equity, net of related income taxes. Gains and losses on the sale of available
for sale securities are determined using the specific identification method and
are reflected in earnings when realized.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES, HELD TO MATURITY
These securities are carried at cost, adjusted for amortization of premiums and
accretion of discounts over the term of the security using the level yield
method. These securities are not carried at fair value because the Company has
both the ability and the intent to hold them to maturity.
In November of 1995, the Financial Accounting Standards Board issued a
special report, "A Guide to Implementation of SFAS 115 on Accounting for
Certain Investments in Debt and Equity Securities," to aid entities in
understanding and implementing the provisions of SFAS 115. The special report
provided an opportunity for a one time reassessment of the classification of
securities as of a single measurement date without tainting the classification
of the remaining held-to-maturity debt securities. The one time
reclassification of securities based on this reassessment must have occurred
between November 15, 1995 and December 31, 1995. The Company
reclassified certain mortgage-backed securities to the available for sale
portfolio from the held to maturity portfolio effective December 29, 1995.
29
<PAGE> 32
LOANS RECEIVABLE AND RELATED FEES
Loans are stated at the principal amount outstanding, net of loans in process,
deferred fees and the allowance for losses. Interest on loans is credited to
income as earned and accrued only if deemed collectible. Loans are placed on
nonaccrual status when, in the opinion of management, the full timely collection
of principal or interest is in doubt. As a general rule, the accrual of
interest is discontinued when principal or interest payments become 90 days past
due or earlier if conditions warrant. When a loan is placed on nonaccrual
status, previously accrued but unpaid interest is charged against current
income.
Loan origination fees are being deferred in accordance with SFAS 91
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases". This statement requires
that loan origination fees and direct loan origination costs for a completed
loan be netted and then deferred and amortized into interest income as an
adjustment of yield.
The Company adopted the provisions of SFAS 114 "Accounting by Creditors for
Impairment of a Loan" and SFAS 118 "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures" effective October 1, 1995. These
statements apply to all loans that are identified for evaluation except for
large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment. These loans include, but are not limited to, credit
card, residential mortgage and consumer installment loans. Substantially all of
the Company's lending is excluded from the provisions of SFAS 114 and SFAS 118.
Under these statements, of the remaining loans which are evaluated for
impairment (a loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement), there were no
material amounts of loans which met the definition of an impaired loan during
the year ended September 30, 1996 and no loans to be evaluated for impairment at
September 30, 1996.
ALLOWANCE FOR LOAN LOSSES
The determination of the allowance for loan losses involves material estimates
that are susceptible to significant change in the near term. The allowance for
loan losses is maintained at a level adequate to provide for losses through
charges to operating expense. The allowance is based upon past loss experience
and other factors which, in management's judgement, deserve current recognition
in estimating losses. Such other factors considered by management include
growth and composition of the loan portfolio, the relationship of the allowance
for losses to outstanding loans, and economic conditions.
Management believes that the allowance is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for losses. Such agencies
may require the Company to recognize additions to the allowance based on their
judgements about information available to them at the time of their examination.
REAL ESTATE OWNED
Real estate acquired through foreclosure or deed in lieu of foreclosure is
carried at the lower of fair value minus estimated costs to sell or the
acquisition cost. Valuations are periodically performed by management and an
allowance for loss is established by a charge to operations if the carrying
value of a property exceeds its fair value minus estimated costs to sell.
DEPRECIATION
Depreciation of office properties and equipment is accumulated on the straight
line basis over the estimated lives of the related assets.
INCOME TAXES
The provision for federal and state income taxes is based on earnings reported
in the financial statements. Deferred income taxes arise from recognition of
certain items of income and expense for tax purposes in years different from
those in which they are recognized in the consolidated financial statements.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequence attributable to the differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income for the period that includes the
enactment date.
30
<PAGE> 33
CONSOLIDATED STATEMENT OF CASH FLOWS
For the purposes of reporting cash flows, the Company has defined cash and cash
equivalents to include cash on hand, amounts due from depository institutions,
and interest-bearing deposits in other financial institutions, with original
maturities of three months or less.
EARNINGS PER SHARE
Earnings per share for the year ended September 30, 1996 was determined by
dividing net income for the period by 3,633,541 and 3,634,834, the weighted
average number of primary and fully diluted shares of common stock and common
stock equivalents outstanding. Stock options are regarded as common stock
equivalents and are therefore considered in both primary and fully diluted
earnings per share calculations. Common stock equivalents are computed using
the treasury stock method. Earnings per share information for the year ended
November 30, 1994 is not meaningful because the Company was not a public
company until September 29, 1995.
NOTE 2: INVESTMENT SECURITIES
Investment securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1996
Debt securities (a) $ 836,328 28 836,300
Investment in limited
partnerships (b) 940,651 49 940,700
-----------------------------------------------
$1,776,979 49 28 1,777,000
===============================================
September 30, 1995
Debt securities (a) $ 623,187 13 623,200
Investment in limited
partnerships (b) 466,588 12 466,600
-----------------------------------------------
$1,089,775 25 1,089,800
===============================================
</TABLE>
(a) Investment in notes secured by mortgages originated by the Community
Investment Corporation; the weighted average yield on these notes was
7.00% and 6.79% at September 30, 1996 and 1995, respectively.
(b) Investment in limited partnership ventures for the purpose of investment in
low-income housing projects qualifying for tax credits over approximately
the next ten years.
NOTE 3: INVESTMENT SECURITIES, AVAILABLE FOR SALE
This portfolio is being accounted for at fair value in accordance with SFAS
115. A summary of investment securities available for sale is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1996
United States Government
and agency securities $15,012,555 8,772 236,772 14,784,555
Tax-exempt securities (a) 24,011,328 1,021,068 127,598 24,904,798
Corporate equity securities 3,547,827 105,530 3,653,357
------------------------------------------------
$42,571,710 1,135,370 364,370 43,342,710
================================================
September 30, 1995
United States Government
and agency securities $11,178,369 39,656 51,656 11,166,369
Tax-exempt securities 19,447,328 1,152,971 121,968 20,478,331
Corporate equity securities 1,995,001 49,999 2,045,000
------------------------------------------------
$32,620,698 1,242,626 173,624 33,689,700
================================================
</TABLE>
During the year ended September 30, 1996, the Company sold securities realizing
gross proceeds of $3,133,750 and gross gains of $104,824 and gross losses of
$25,315. Proceeds from the sale of investment securities totaled $515,000 for
the ten month period ended September 30, 1995, and $4,575,607 for the year ended
November 30, 1994. Gross gains of $16,820 and $58,443 and gross losses of $-0-
and $27,901 were realized for the periods ended September 30, 1995 and
31
<PAGE> 34
November 30, 1994, respectively. In addition, during the current period, the
decrease in net unrealized gains of $298,002, net of the tax effect of $121,640,
resulted in a $176,362 charge to stockholders' equity.
(a) Consists of obligations of school, city and park districts and general
obligations of various cities and municipalities. All securities carry at
least a AA rating due to financial strength or because of insurance
enhancements. At September 30, 1996, there were 73 tax-exempt securities
with an average balance of approximately $334,000. The largest
concentration (approximately $11,800,000) of securities are located within
the State of Illinois with the remainder spread throughout the country.
Tax-exempt securities with a cost basis of $6,095,000 and a fair value of
approximately $6,468,000 are pledged as collateral to secure the uninsured
portions of various municipalities' certificates of deposit at the Bank as
of September 30, 1996.
The contractual maturity of these investments are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
AMORTIZED FAIR AMORTIZED FAIR
TERM TO MATURITY COST VALUE COST VALUE
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------
Due in one year or less $ 3,907,611 3,952,816 1,010,957 1,021,094
Due after one year
through five years 13,432,689 13,550,809 10,102,844 10,157,203
Due after five years
through ten years 6,186,134 6,189,207 7,805,555 8,314,563
Due after ten years 19,045,276 19,649,878 13,701,342 14,196,840
-----------------------------------------------
$42,571,710 43,342,710 32,620,698 33,689,700
===============================================
</TABLE>
NOTE 4: MORTGAGE-BACKED SECURITIES
The investment in mortgage-backed securities held to maturity consists of
collaterized mortgage obligations and real estate mortgage investment conduits,
and is summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1996
CMOs and REMICs
FHLMC - fixed rate $ 4,459,202 86,702 4,372,500
FNMA - fixed rate (a) 6,215,360 273,460 5,941,900
Privately issued
- fixed rate 12,845,415 62,203 228,518 12,679,100
- adjustable rate 11,983,554 8,246 344,000 11,647,800
-----------------------------------------------
$35,503,531 70,449 932,680 34,641,300
===============================================
Weighted average
interest rate 6.87%
===============================================
September 30, 1995
CMOs and REMICs
FHLMC - fixed rate $ 5,372,195 72,595 5,299,600
FNMA - fixed rate 7,606,027 19,944 165,571 7,460,400
Privately issued
- fixed rate 15,093,942 167,339 206,581 15,054,700
- adjustable rate 14,461,198 365,298 14,095,900
-----------------------------------------------
$42,533,362 187,283 810,045 41,910,600
===============================================
Weighted average
interest rate 6.93%
===============================================
</TABLE>
During December of 1995, mortgage-backed securities held to maturity with a
book value totaling approximately $727,000 and a fair value totaling
approximately $735,000 were transferred to the available for sale portfolio as
permitted by the Financial Accounting Standards Board (see notes 1 and 5).
(a) Mortgage-backed securities with a cost basis of $992,404 and a fair value of
approximately $995,400 are pledged as collateral to secure advances from the
Federal Home Loan Bank of Chicago.
32
<PAGE> 35
NOTE 5: MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
Mortgage-backed securities with a cost basis totaling approximately $727,000
and a fair value totaling approximately $735,000 were transferred from the held
to maturity portfolio to the available for sale portfolio in December of 1995
as permitted by the Financial Accounting Standards Board. Mortgage-backed
securities available for sale are recorded at fair value in accordance with
SFAS 115.
<TABLE>
<CAPTION>
This portfolio is summarized as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1996
FHLMC participation
certificates
- adjustable rate (b) $ 4,155,038 122,291 3,719 4,273,610
- fixed rate 868,757 6,603 875,360
FNMA participation
certificates
- adjustable rate (a)(b) 10,162,121 129,199 40,868 10,250,452
- fixed rate 686,796 4,516 13,850 677,462
GNMA participation
certificates
- adjustable rate 6,467,392 24,789 28,084 6,464,097
- fixed rate (a)(b) 18,736,355 22,890 396,914 18,362,331
Conventional participation
certificates
- adjustable rate 7,169,611 105,547 42,220 7,232,938
CMOs and REMICs
FNMA - fixed rate 1,875,500 80,500 1,795,000
Privately issued
- fixed rate 2,956,459 293,259 2,663,200
-----------------------------------------------
$53,078,029 415,835 899,414 52,594,450
===============================================
Weighted average
interest rate 7.25%
===============================================
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1995
FHLMC participation
certificates
- adjustable rate $ 6,051,055 111,218 6,162,273
- fixed rate 1,057,945 11,615 1,069,560
FNMA participation
certificates
- adjustable rate 12,873,149 159,292 35,865 12,996,576
- fixed rate 710,413 3,711 714,124
GNMA participation
certificates
- adjustable rate 1,826,845 30,466 3,582 1,853,729
- fixed rate 5,953,096 54,104 27,582 5,979,618
Conventional participation
certificates
- adjustable rate 7,177,408 111,385 41,762 7,247,031
CMOs and REMICs
FHLMC - fixed rate 58,084 2,207 55,877
FNMA - fixed rate 735,180 16,692 751,872
Privately issued
- fixed rate 2,951,259 123,485 2,827,774
-----------------------------------------------
$39,394,434 498,483 234,483 39,658,434
===============================================
Weighted average
interest rate 7.01%
===============================================
</TABLE>
(a) FNMA and GNMA mortgage-backed securities with a cost basis of $4,609,284 and
a fair value of approximately $4,591,800 are pledged as collateral to secure
the uninsured portion of the Village of Hoffman Estates' and Schaumburg
Township's certificates of deposit at the Bank.
(b) FHLMC, FNMA, and GNMA mortgage-backed securities with a cost basis of
$18,655,274 and a fair value of approximately $18,660,000 are pledged as
collateral to secure advances from the Federal Home Loan Bank of Chicago.
During the year ended September 30, 1996, the Company sold mortgage-backed
securities available for sale, realizing gross proceeds of $919,975, and
profits of $7,829 and losses of $3,765. Proceeds from the sale of mortgage-
33
<PAGE> 36
backed securities totaled $1,288,365 for the ten month period ended September
30, 1995, resulting in losses of $13,553. In addition, during the current
period, the increase in net unrealized losses of $747,579, net of the tax
effect of $305,150, resulted in a $442,429 charge to stockholders equity.
NOTE 6: LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Mortgage loans:
One-to-four family $77,725,129 75,471,089
Multi-family 12,239,019 12,059,990
Non-residential 3,316,557 2,597,929
----------------------------------
Total mortgage loans 93,280,705 90,129,008
Other loans:
Loans on deposits 260,467 187,792
----------------------------------
Total loans receivable 93,541,172 90,316,800
----------------------------------
Less:
Loans in process 466,409 792,264
Deferred loan fees 1,583,870 1,694,275
Allowance for loan losses 345,000 275,000
----------------------------------
Loans receivable, net $91,145,893 87,555,261
==================================
Weighted average
interest rate 7.58% 7.65%
==================================
</TABLE>
There were eight loans delinquent three months or more and non-accruing
totaling $350,528, or .4% of total loans in force as of September 30, 1996.
Comparable figures at September 30, 1995 were five loans totaling $65,365, or
.1% of total loans. The Bank has established an allowance for loan losses of
$345,000 at September 30, 1996 as required by its internal policies.
For the year ended September 30, 1996, ten months ended September 30, 1995
and the year ended November 30, 1994, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to approximately $8,900, $4,800 and $10,700,
respectively.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30 SEPTEMBER 30 NOVEMBER 30
1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period $275,000 125,000 125,000
Provision for loan losses 70,000 163,146
Charge-offs (13,146)
---------------------------------------
Balance, end of period $345,000 275,000 125,000
=======================================
</TABLE>
At September 30, 1996 and 1995 and November 30, 1994, loans serviced for
others amounted to $86,015, $96,365 and $107,444, respectively.
The Bank is required to maintain qualifying mortgage collateral for the
Federal Home Loan Bank of Chicago representing 170 percent of current Bank
credit. At September 30, 1996 and 1995 the Bank met this requirement.
Qualifying mortgage collateral is defined as fully disbursed, whole first
mortgage loans on improved residential property. The mortgages must not be
past due more than 90 days. They must not be otherwise pledged or encumbered
as security for other indebtedness, and the documents must be in the physical
possession or control of the Bank. The documents that govern the determination
of the qualifying mortgage collateral are the (a) Federal Home Loan Bank of
Chicago's Credit Policy Statement, dated February 1, 1993, and (b) the
Advances, Collateral Pledge and Security Agreement between the institution and
the Federal Home Loan Bank of Chicago.
NOTE 7: ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government and agency securities $ 305,281 207,907
Mortgage-backed securities 574,659 531,836
Tax-exempt securities 468,047 360,722
Loans receivable 248,248 69,077
Allowance for uncollected interest on loans (8,900) (4,840)
Other investments 73,752 22,911
---------------------------
$1,661,087 1,187,613
</TABLE> ===========================
34
<PAGE> 37
NOTE 8: OFFICE PROPERTIES AND EQUIPMENT
Depreciation, computed by the straight line method, amounted to $177,333 for the
year ended September 30, 1996, $148,761 for the ten months ended September 30,
1995, and $172,257 for the year ended November 30, 1994. Office properties and
equipment are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
Cost:
Land - Chicago $ 181,411 181,411
Land - Burbank 112,000 112,000
Land - Schaumburg 840,000 840,000
Office building - Chicago 349,113 349,113
Office building - Burbank 752,773 752,773
Office building - Schaumburg 1,820,093 1,820,093
Parking lot improvements 47,394 47,394
Furniture, fixtures, and equipment 1,399,919 1,055,464
Automobiles 32,880 32,880
------------------------
5,535,583 5,191,128
------------------------
Less accumulated depreciation:
Office building - Chicago 349,113 349,113
Office building - Burbank 106,494 87,748
Office building - Schaumburg 194,171 139,791
Parking lot improvements 47,394 38,590
Furniture, fixtures, and equipment 860,964 774,408
Automobiles 8,460 2,820
------------------------
1,566,596 1,392,470
------------------------
Less valuation allowance:
Office building - Schaumburg 466,000 466,000
------------------------
$3,502,987 3,332,658
========================
</TABLE>
NOTE 9: PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
- --------------------------------------------------------------------
<S> <C> <C>
Current federal and state income
tax overpayment - net $ 240,521
Deferred federal and state income
tax benefit - net (a) 576,675
Prepaid examination fees 15,964 14,595
Prepaid federal insurance premiums 72,926 75,982
Other prepaid insurance 29,047 32,859
Prepaid advertising 24,510 1,893
Other prepaid expenses 14,317 9,726
Accounts receivable 2,602 2,256
----------------------
$736,041 377,832
======================
</TABLE>
(a) The approximate tax effect of temporary differences that give rise to the
Company's net deferred tax asset at September 30, 1996 under SFAS 109 is as
follows:
<TABLE>
<CAPTION>
ASSETS LIABILITIES NET
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
September 30, 1996
Loan fees deferred for financial
reporting purposes $ 454,355 454,355
Bad debt reserves established for
financial reporting purposes 141,450 141,450
Increases to tax bad debt
reserves since January 1, 1988 (384,701) (384,701)
Accelerated depreciation
for tax purposes (91,842) (91,842)
Valuation allowance on office building 191,060 191,060
Unrealized gain on securities
available for sale (119,740) (119,740)
Nondeductible incentive plan expense 50,981 50,981
SAIF special assessment (note 18) 352,600 352,600
Other items (17,488) (17,488)
----------------------------------
$1,190,446 (613,771) 576,675
==================================
</TABLE>
35
<PAGE> 38
NOTE 10: DEPOSITS
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
- -----------------------------------------------------------
<S> <C> <C>
Passbook accounts $ 20,385,674 23,349,626
Certificates 87,823,338 91,815,157
NOW and money market accounts 10,764,323 11,466,977
--------------------------
Total $118,973,335 126,631,760
==========================
</TABLE>
The composition of deposit accounts by interest rates is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
- -----------------------------------------------------------
<S> <C> <C>
Non-interest bearing $ 104,237 111,592
2.00 - 3.99% 22,078,773 25,062,435
4.00 - 4.99 13,671,245 20,538,241
5.00 - 5.99 58,439,500 43,642,268
6.00 - 6.99 15,996,973 26,666,072
7.00 - 7.99 7,392,701 9,062,551
8.00 - 8.99 424,211 758,853
9.00 - 9.99 865,695 789,748
--------------------------
Total $118,973,335 126,631,760
==========================
Weighted average interest rate 5.14% 5.24%
==========================
</TABLE>
A summary of certificates of deposits by maturity is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
- -----------------------------------------------------------
<S> <C> <C>
Within 12 months $ 54,076,495 52,700,269
12 months to 24 months 17,541,274 16,622,387
24 months to 36 months 10,141,388 11,037,032
36 months to 48 months 3,993,695 7,800,438
Over 48 months 2,070,486 3,655,031
--------------------------
Total $ 87,823,338 91,815,157
==========================
</TABLE>
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30 SEPTEMBER 30 NOVEMBER 30
1996 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Passbooks accounts $ 709,803 642,662 872,372
Certificates 5,271,871 4,509,964 4,157,912
NOW and money market accounts 444,332 399,005 426,611
--------------------------------------
Total $ 6,426,006 5,551,631 5,456,895
======================================
</TABLE>
The aggregate amount of deposit accounts with a balance of $100,000 or
greater was approximately $32,100,000 and $30,000,000 at September 30, 1996 and
1995, respectively. Deposits in excess of $100,000 are not insured by the
Federal Deposit Insurance Corporation.
NOTE 11: BORROWED MONEY
Borrowed money consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
- -----------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Bank Advances:
Due date and current rates:
Period ended within 12 months
Weighted average fixed rate
of 5.47% at September 30, 1996 $23,500,000 7,000,000
Weighted average adjustable rate
of 5.54% at September 30, 1996 600,000 6,500,000
Period from 12 months to 24 months
Weighted average fixed rate
of 6.38% at September 30, 1996 8,500,000 7,000,000
Period from 24 months to 36 months
Weighted average fixed rate
of 6.32% at September 30, 1996 9,000,000 7,000,000
Period from 36 months to 48 months
Weighted average fixed rate
of 6.09% at September 30, 1996 8,000,000 7,000,000
Period ended thereafter
Weighted average fixed rate
of 6.89% at September 30, 1996 10,000,000 11,000,000
------------------------
$59,600,000 45,500,000
========================
Weighted average interest rate 6.05% 6.33%
========================
</TABLE>
36
<PAGE> 39
See notes 4, 5 and 6 of the consolidated financial statements for collateral
securing this indebtedness.
Interest is accrued on all borrowings and recorded in other liabilities.
Interest expense on borrowed money totaled $3,245,920 for the year ended
September 30, 1996, $2,445,028 for the ten months ended September 30, 1995 and
$2,175,167 for the year ended November 30, 1994.
In connection with the Company's initial public offering, the Bank
established an Employee Stock Ownership Plan (ESOP). The ESOP was funded by the
proceeds from a loan from the Company. The loan carries an interest rate of
6.73% and matures in the year 2010. The loan is secured by the shares of the
Company purchased with the loan proceeds. The Bank has committed to make
contributions to the ESOP sufficient to allow the ESOP to fund the debt service
requirements of the loan.
NOTE 12: OTHER LIABILITIES
Other liabilities consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
Current federal and state income tax
liability - net $ 53,650
Deferred federal and state income tax
liability - net (a) 125,684
Accrued interest on borrowed money 303,600 235,100
Accrued interest on deposits 258,000 613,000
Accrued real estate taxes 160,000 275,000
Accrued ESOP contribution 200,000
Accrued SAIF special assessment (note 18) 860,000
Promissory note for capital contribution
due Kedzie Limited Partnership 497,045
Other accrued expenses 85,644 79,800
Accrued dividends payable 216,685
Accounts payable and other items 38,811 186,156
-----------------------
$2,473,435 1,714,740
=======================
</TABLE>
(a) The approximate tax effect of temporary differences that give rise to the
Company's net deferred tax liability at September 30, 1995 under SFAS 109
is as follows:
<TABLE>
<CAPTION>
ASSETS LIABILITIES NET
- ------------------------------------------------------------------------
<S> <C> <C> <C>
September 30, 1995
Loan fees deferred for financial
reporting purposes $590,381 590,381
Bad debt reserves established for
financial reporting purposes 112,750 112,750
Increases to tax bad debt
reserves since January 1, 1988 (384,701) (384,701)
Accelerated depreciation
for tax purposes (67,105) (67,105)
Valuation allowance on office building 191,060 191,060
Unrealized gain on securities
available for sale (546,530) (546,530)
Other items (21,539) (21,539)
-------------------------------
$894,191 (1,019,875) (125,684)
===============================
</TABLE>
NOTE 13: BENEFIT PLAN
The Bank has a self-administered deferred profit sharing plan which covers all
full-time employees over 21 years of age with one or more years of continuous
employment. This plan is funded by employer contributions, which are determined
annually by the Bank's Board of Directors. A contribution of $100,000 was made
for the year ended November 30, 1994, while no contributions were made for the
year ended September 30, 1996 or the ten month period ended September 30, 1995.
NOTE 14: DIRECTOR, OFFICER AND
EMPLOYEE PLANS
STOCK OPTION PLAN. On May 9, 1996, the stockholders of the Company approved
the Damen Financial Corporation 1996 Stock Option and Incentive Plan. This is
an incentive stock option plan for the benefit of the directors, officers and
employees of the Company and its affiliates. The number of shares authorized
37
<PAGE> 40
under the Plan is 396,750, equal to 10.0% of the total number of shares issued
in the Conversion. As of June 13, 1996, 376,909 options were granted at $11.625
per share, exercisable at a rate of 20% per year commencing May 9, 1997, and
expiring ten years from the date of grant, while 19,841 options were reserved
for future grants. No options were exercisable as of September 30, 1996.
EMPLOYEE STOCK OWNERSHIP PLAN. In conjunction with the Conversion, the Bank
formed an Employee Stock Ownership Plan ("ESOP"). The ESOP covers substantially
all employees with more than one year of employment and who have attained the
age of 21. The ESOP borrowed $3,174,000 from the Company and purchased 317,400
common shares issued in the Conversion. The Bank will make scheduled
discretionary cash contributions to the ESOP sufficient to service the amount
borrowed. In accordance with generally accepted accounting principles, the
unpaid balance of the ESOP loan, which is comparable to unearned compensation,
is reported as a reduction of stockholders' equity. Total contributions by the
Bank to the ESOP which were used to fund principal and interest payments on the
ESOP debt totaled $609,808 for the year ended September 30, 1996, of which
$200,000 had been accrued at September 30, 1995.
On November 22, 1993, the AICPA issued Statement of Position No. 93-6,
"Employers' Accounting for Employee Stock Ownership Plans" ("SOP 93-6"). SOP
93-6 provides guidance for accounting for all ESOPs. SOP 93-6 requires that the
issuance or sale of treasury shares to the ESOP be reported when the issuance or
sale occurs and that compensation expense be recognized for shares committed to
be released to directly compensate employees equal to the fair value of the
shares committed. In addition, SOP 93-6 requires that leveraged ESOP debt and
related interest expense be reflected in the employer's financial statements.
Prior practice was to recognize compensation expense based on the amount of the
employer's contributions to the ESOP. SOP 93-6 is effective for fiscal years
beginning after December 31, 1992. The application of SOP 93-6 results in
fluctuations in compensation expense as a result of changes in the fair value of
the Company's common stock; however, any such compensation expense fluctuations
will result in an offsetting adjustment to additional paid-in capital. For the
year ended September 30, 1996, additional compensation expense of $65,628 was
recognized as a result of implementation of this accounting principle.
RECOGNITION AND RETENTION PLAN. On May 9, 1996, the stockholders of the Company
approved the Damen Financial Corporation 1996 Recognition and Retention Plan
("RRP"). This plan was established to award shares to directors and to
employees in key management positions in order to provide them with a
proprietary interest in the Company in a manner designed to encourage such
employees to remain with the Company. The number of shares authorized under the
Plan is 158,700, equal to 4.0% of the total number of shares issued in the
Conversion. These shares were purchased in the open market during the quarter
ended June 30, 1996 at a total cost of $1,865,187 . As of June 13, 1996,
138,861 shares were awarded, and will vest at a rate of 20% per year commencing
June 13, 1997, while 19,839 shares were reserved for future awards.
The $1,865,187 contributed to the RRP is being amortized to compensation
expense as the plan participants become vested in those shares. For the year
ended September 30, 1996, $124,343 had been amortized to expense. The
unamortized cost, which is comparable to deferred compensation, is reflected as
a reduction of stockholders' equity.
NOTE 15: INCOME TAXES
During the year ended November 30, 1994, the Company adopted Statement of
Financial Accounting Standards No. 109 (SFAS 109) which requires a change from
the deferred method to the liability method of accounting for income taxes.
Under the liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and tax bases of existing assets and liabilities.
Among the provisions of SFAS 109 which impact the Company is the tax
treatment of bad debt reserves. SFAS 109 provides that a deferred asset is to
be recognized for the bad debt reserve established for financial reporting
purposes and requires a deferred tax liability to be recorded for increases in
the tax bad debt reserve since January 1, 1988, the effective date of certain
changes made by the Tax Reform Act of 1986 to the calculation of savings
institutions' bad debt deduction. Accordingly, retained earnings at September
30, 1996 includes approximately $3,994,000 for which no deferred federal income
tax liability has been recognized.
38
<PAGE> 41
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30 SEPTEMBER 30 NOVEMBER 30
1996 1995 1994
<S> <C> <C> <C>
- ----------------------------------------------------------------------
Current (benefit) $ 438,031 (210,600) 363,155
Deferred (benefit) (275,571) 102,394 (579,220)
------------------------------------
$ 162,460 (108,206) (216,065)
====================================
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30 SEPTEMBER 30 NOVEMBER 30
1996 1995 1994
<S> <C> <C> <C>
- -------------------------------------------------------------------------
Statutory federal
income tax rate 34.0% 34.0% 34.0%
State income taxes 3.1 4.7 (2.5)
Tax-exempt interest income (22.8) (40.7) (56.3)
Tax credits (5.4) (13.2) (11.2)
Other (0.5) 1.6 (.3)
----------------------------------
Effective income tax rate 8.4% (13.6)% (36.3)%
==================================
</TABLE>
Deferred income tax expense (benefit) consists of the following tax effects of
timing differences:
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30 SEPTEMBER 30 NOVEMBER 30
1996 1995 1994
<S> <C> <C> <C>
- ----------------------------------------------------------------------------
Loan fees $ 136,026 113,507 (4,468)
Unrealized loss on
securities held for sale (630,170)
Book provision for loan losses
in excess of statutory bad
debt deduction (28,700) (61,500)
Depreciation 24,737 7,666 17,002
Compensation related expenses (50,981)
SAIF special assessment (352,600)
Other, net (4,053) 42,721 38,416
------------------------------------
$(275,571) 102,394 (579,220)
====================================
</TABLE>
NOTE 16: REGULATORY CAPITAL REQUIREMENTS
On August 9, 1989, the Financial Institution's Reform, Recovery and Enforcement
Act of 1989 ("FIRREA") was signed into law. FIRREA mandated that the OTS adopt
capital standards which require savings institutions to satisfy three separate
capital requirements. Under the requirements, savings institutions must
maintain "tangible" capital equal to 1.5% of adjusted total assets, "core"
capital equal to 3% of adjusted total assets and a combination of core and
"supplementary" capital equal to 8.0% of "risk-weighted" assets.
For purposes of the regulation at September 30, 1996, the core and
tangible capital of Damen Federal Bank for Savings is defined as stockholders'
equity, adjusted for investments in non-includable subsidiaries and unrealized
gains on debt securities available for sale, net of taxes. Adjusted total
assets are the Bank's total assets as determined under generally accepted
accounting principles, adjusted for assets of non-includable subsidiaries and
unrealized gains on debt securities available for sale, net of taxes.
In determining compliance with the risk-based capital requirement, the
Bank is allowed to use both core capital and supplementary capital provided the
39
<PAGE> 42
amount of supplementary capital used does not exceed the Bank's core capital.
Supplementary capital of Damen Federal Bank for Savings is defined to include
all of the Bank's general loss allowance. The risk-based capital requirement
is measured against risk-weighted assets which equals the sum of each asset and
the credit-equivalent amount of each off-balance sheet item after being
multiplied by an assigned risk weight.
At September 30, 1996, the Bank's regulatory equity capital was as follows:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Stockholders' equity $37,747,723 37,747,723 37,747,723
Non-includable subsidiaries (946,000) (946,000) (946,000)
Unrealized gain on debt securities
available for sale, net of taxes (219,679) (219,679) (219,679)
General loss allowances 345,000
-------------------------------------
Regulatory capital computed 36,582,044 36,582,044 36,927,044
Minimum capital requirements 3,329,000 6,659,000 6,033,000
-------------------------------------
Regulatory capital excess $33,253,044 29,923,044 30,894,044
=====================================
Computed capital ratio 16.48% 16.48% 48.97%
Minimum capital ratio 1.50 3.00 8.00
-------------------------------------
Regulatory capital excess 14.98% 13.48% 40.97%
=====================================
</TABLE>
NOTE 17: STOCKHOLDERS' EQUITY
As part of the Conversion, the Bank established a liquidation account for the
benefit of all eligible depositors who continue to maintain their deposit
accounts in the Bank after conversion. In the unlikely event of a complete
liquidation of the Bank, each eligible depositor will be entitled to receive a
liquidation distribution from the liquidation account, in the proportionate
amount of the then current adjusted balance for deposit accounts held, before
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 retained earnings of
the Bank to be reduced below the amount required for the liquidation account.
Except for such restrictions, the existence of the liquidation account does not
restrict the use or application of retained earnings.
The Bank's capital exceeds all of the fully phased-in capital requirements
imposed by FIRREA. OTS regulations generally provide that an institution that
exceeds all fully phased-in capital requirements before and after a proposed
capital distribution could, after prior notice but without the approval by the
OTS, make capital distributions during the fiscal year of up to 100% of its net
income to date during the fiscal year plus the amount that would reduce by
one-half its "surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the fiscal year. Any
additional capital distributions would require prior regulatory approval.
Unlike the Bank, the Company is not subject to these regulatory
restrictions on the payment of dividends to its stockholders. However, the
Company's source of funds for future dividends may depend upon dividends
received by the Company from the Bank.
NOTE 18: SAIF SPECIAL ASSESSMENT AND ITS IMPACT ON SAIF INSURANCE PREMIUMS
The deposits of savings associations, such as Damen Federal Bank for Savings,
are presently insured by the Savings Association Insurance Fund ("SAIF"), which
together with the Bank Insurance Fund ("BIF"), are the two insurance funds
administered by the Federal Deposit Insurance Corporation ("FDIC"). Financial
institutions which are members of the BIF are experiencing substantially lower
deposit insurance premiums because the BIF has achieved its required level of
reserves while the SAIF has not yet achieved its required reserves. In order
to help eliminate this disparity and any competitive disadvantage due to
disparate deposit insurance premium schedules, legislation to recapitalize the
SAIF was enacted in September 1996.
The legislation requires a special one-time assessment of approximately
65.7 cents per $100 of SAIF insured deposits held by the Bank at March 31,
1995. The one-time special assessment has resulted in a charge to earnings of
$860,000 during the year ended September 30, 1996. The after-tax effect of
this one-time charge to earnings totaled $507,400. The legislation is intended
to fully recapitalize the SAIF fund so that commercial bank and thrift deposits
will be charged the same FDIC premiums beginning October 1, 1996. As of such
date, deposit insurance premiums for highly rated institutions, such as the
Bank, have been substantially reduced.
40
<PAGE> 43
The Bank, however, will continue to be subject to an assessment to fund
repayment of the Financing Corporation's ("FICO") obligations. It is
anticipated that the FICO assessment for SAIF insured institutions will be 6.4
cents per $100 of deposits while BIF insured institutions will pay 1.3 cents
per $100 of deposits until the year 2000 when the assessment will be imposed at
the same rate on all FDIC insured institutions. Accordingly, as a result of
the reduction of the SAIF assessment and the resulting FICO assessment, the
annual after-tax decrease in assessment costs is expected to be approximately
$125,000 based upon a September 30, 1996 assessment base.
NOTE 19: FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
The Company is a party to various transactions with off-balance sheet risk in
the normal course of its business. These transactions are primarily
commitments to originate loans and to purchase investment securities. These
financial instruments carry varying degrees of credit and interest-rate risk in
excess of amounts recorded in the consolidated financial statements.
Commitments to originate mortgage loans represent amounts which the Bank
plans to fund within the normal commitment period of 60 to 90 days. At
September 30, 1996, commitments to originate mortgage loans totaled $591,000
with fixed rates ranging from 7.12% to 8.88%. At September 30, 1995,
commitments to originate mortgage loans totaled $886,000 with fixed rates
ranging from 7.00% to 8.25%. Because the credit worthiness of each customer is
reviewed prior to extension of the commitment, the Bank adequately controls
their credit risk on these commitments, as it does to loans recorded on the
balance sheet. The Bank conducts all of its lending activities in the
Chicagoland area which it serves. Management believes the Bank has a
diversified loan portfolio and the concentration of lending activities in these
local communities does not result in an acute dependency upon economic
conditions of the lending region.
At September 30, 1996, the Bank was committed to fund an additional
investment of $1,005,000, through the year 2000, in notes secured by adjustable
rate mortgage loans, issued by the Community Investment Corporation. The
outstanding commitment to fund this investment totaled $1,281,000 at September
30, 1995. The notes have an average maturity date of approximately twenty
years.
The Bank has issued a letter of credit in the amount of $409,275 for the
benefit of the City of Chicago in connection with the Kedzie Limited
Partnership (see note 2).
NOTE 20: CONTINGENCIES
The Bank is, from time to time, a party to certain lawsuits arising in the
ordinary course of its business, wherein it enforces its security interest.
Management, based upon discussions with legal counsel, believes that the
Company and the Bank are not engaged in any legal proceedings of a material
nature at the present time.
NOTE 21: DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS: For cash and interest-bearing deposits, the
carrying amount is a reasonable estimate of fair value.
U.S. GOVERNMENT AND AGENCY SECURITIES: Fair values for securities are based on
quoted market prices as published in financial publications.
MORTGAGE-BACKED SECURITIES: Fair values for mortgage-backed securities are
based on average quotes received from a third-party broker.
LOANS RECEIVABLE: The fair values of fixed-rate one-to-four family residential
mortgage loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions. The fair values for other
fixed-rate mortgage loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms and
collateral to borrowers of similar credit quality. For adjustable-rate loans
which reprice monthly and with no significant change in credit risk, fair
values approximate carrying values.
OTHER INVESTMENTS: Fair values for other investments are based on quoted
market prices received from third-party sources.
DEPOSIT LIABILITIES: The fair value of demand deposits, passbook accounts and
money market deposits is the amount payable on demand at the reporting date.
The fair value of fixed maturity certificates of deposit is estimated by
discounting
41
<PAGE> 44
the future cash flows using the rates currently offered for deposits of similar
original maturities.
BORROWED MONEY: Rates currently available to the Company for debt with similar
terms and original maturities are used to estimate fair value of existing debt.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: Fair values of the Company's
off-balance sheet financial instruments, which consists of loan commitments and
letters of credit, are based on fees charged to enter into these agreements. As
the Company currently charges no fees on these instruments, no estimate of fair
value has been made.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
- -----------------------------------------------------------------------------
<S> <C> <C>
September 30, 1996
Financial assets:
Cash and cash equivalents $ 1,181,231 1,181,231
Investment securities 1,776,979 1,777,000
Investment securities, available for sale 43,342,710 43,342,710
Mortgage-backed securities 35,503,531 34,641,300
Mortgage-backed securities, available for sale 52,594,450 52,594,450
Loans receivable, gross 93,541,172 93,061,700
Financial liabilities:
Deposits 118,973,335 119,065,000
Borrowed money 59,600,000 59,099,400
September 30, 1995
Financial assets:
Cash and cash equivalents $ 20,363,159 20,363,159
Investment securities 1,089,775 1,089,800
Investment securities, available for sale 33,689,700 33,689,700
Mortgage-backed securities 42,533,362 41,910,600
Mortgage-backed securities, available for sale 39,658,434 39,658,434
Loans receivable, gross 90,316,800 92,306,400
Financial liabilities:
Deposits 126,631,760 127,433,600
Borrowed money 45,500,000 45,636,500
</TABLE>
NOTE 22: CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial condition, as of September 30,
1996 and 1995 and condensed statements of earnings and cash flows for the year
ended September 30, 1996 and for the period from September 29, 1995 to
September 30, 1995 for Damen Financial Corporation, should be read in
conjunction with the consolidated financial statements and the notes thereto.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,120,417 16,107,007
Securities available for sale 11,297,960
Loans receivable 2,762,400 3,174,000
Equity investment in subsidiaries 40,224,816 38,937,503
Prepaid expenses and other assets 272,100
--------------------------------
55,677,693 58,218,510
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable 330,729 121,000
Common stock 39,675 39,675
Additional paid-in capital 38,280,338 38,280,338
Retained earnings 21,131,170 19,777,497
Unrealized loss on securities
available for sale, net of taxes (52,000)
Treasury stock (2,311,375)
Common stock awarded by
Recognition and Retention Plan (1,740,844)
--------------------------------
$55,677,693 58,218,510
================================
</TABLE>
42
<PAGE> 45
<TABLE>
<CAPTION>
STATEMENTS OF EARNINGS
PERIOD FROM
YEAR ENDED SEPTEMBER 29, 1995
SEPTEMBER 30, TO SEPTEMBER 30,
1996 1995
- -------------------------------------------------------------------------
<S> <C> <C>
Equity in earnings of subsidiaries $1,287,312
Interest and dividend income 1,085,013
Gain on sale of investment securities
available for sale 84,550
Non-interest expense (449,733)
Provision for federal and state
income taxes (227,300)
--------------------------------
Net income $1,779,842
================================
STATEMENTS OF CASH FLOWS
PERIOD FROM
YEAR ENDED SEPTEMBER 29, 1995
SEPTEMBER 30, TO SEPTEMBER 30,
1996 1995
- -------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net income $ 1,779,842
Equity in earnings of subsidiaries (1,287,312)
Gain on sale of investment securities
available for sale (84,550)
Increase in accrued interest receivable (182,320)
Decrease in accrued tax
and other liabilities (61,737)
Amortization of cost of stock benefit
plans 124,343
--------------------------------
Net cash provided by operating activities 288,266
--------------------------------
Investing activities:
Purchase of capital stock of subsidiary (19,160,006)
Loan disbursements (3,174,000)
Loan repayments 411,600
Purchase of securities available for sale (15,581,411)
Proceeds from maturities of investment
securities available for sale 1,637,563
Proceeds from sales of investment
securities available for sale 2,643,438
--------------------------------
Net cash provided for investing activities (10,888,810) (22,334,006)
--------------------------------
Financing activities:
Net proceeds from sale of common stock 38,320,013
Accrued conversion costs 121,000
Dividends paid on common stock (209,484)
Purchase of treasury stock (2,311,375)
Purchase of RRP stock (1,865,187)
--------------------------------
Net cash provided by (for) financing
activities (4,386,046) 38,441,013
--------------------------------
Increase (decrease) in cash and
cash equivalents (14,986,590) 16,107,007
Cash and cash equivalents at beginning
of period 16,107,007
--------------------------------
Cash and cash equivalents at end
of period $1,120,417 16,107,007
================================
</TABLE>
43
<PAGE> 46
DAMEN FINANCIAL CORPORATION
AND DAMEN FEDERAL BANK FOR SAVINGS
<TABLE>
<S> <C>
DIRECTORS OFFICERS
Mary Beth Poronsky Stull Mary Beth Poronsky Stull
Chairman of the Board of the Company, President and Chief Executive Officer
President and Chief Executive Officer of the
Company and the Bank Gerald J. Gartner
Treasurer and Chief Financial Officer
Edward R. Tybor
Chairman of the Board of the Bank, Owner, Janine M. Poronsky
Kubina-Tybor Funeral Home, Chicago, Illinois Vice President and Corporate Secretary
Gerald J. Gartner Kenneth D. Vanek
Treasurer and Chief Financial Officer of the Senior Vice President
Company and the Bank, Director of the Bank
Janine M. Poronsky
Vice President and Corporate Secretary of the
Company and the Bank, Director of the Company
Charles J. Caputo
Owner, Caputo Southwest Cement, Orland Hills, Illinois
Carol A. Diver
Corporate Secretary, Chicago Park District
Mark C. Guinan, M.D.
Retired physician
</TABLE>
44
<PAGE> 47
SHAREHOLDER INFORMATION
CORPORATE OFFICE
200 West Higgins Road
Schaumburg, Illinois 60195-3788
ANNUAL REPORT ON FORM 10-K
A copy of Damen Financial Corporation's Annual Report on Form 10-K as filed
with the Securities and Exchange Commission may be obtained without charge upon
written request to Janine M. Poronsky, Damen Financial Corporation, 200 West
Higgins Road, Schaumburg, Illinois 61095, or call (847) 882-5320.
REGISTRAR/TRANSFER AGENT
Communications regarding change of address, transfer of stock and lost
certificates should be sent to:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
ACCOUNTANTS
Cobitz, VandenBerg & Fennessy
Suite 301
7800 West 95th Street
Hickory Hills, Illinois 60457
LOCAL COUNSEL
Wheeler, Wheeler & Wheeler
Suite 300
6301 South Cass Avenue
Westmont, Illinois 60559
SPECIAL COUNSEL
Silver, Freedman & Taff, L.L.P.
Suite 700 - East Tower
1100 New York Avenue, N.W.
Washington, D.C. 20005
MARKET MAKERS
<TABLE>
<S> <C> <C>
Chicago Capital, Inc. Everen Securities, Inc. Mayer & Schweitzer, Inc.
The Chicago Corp. Friedman Billings Ramsey & Co. Robert W. Baird & Co. Inc.
Dean Witter Herzog, Heine, Geduld, Inc. Rodman & Renshaw, Inc.
Ernst & Co. Knight Securities, L.P. Sandler O'Neill & Partners
</TABLE>
STOCK LISTING
Damen Financial Corporation's common stock is traded over the counter and
is listed on the Nasdaq National Market System under the symbol "DFIN."
At December 10, 1996, there were 3,770,117 shares of Damen Financial
Corporation common stock issued and outstanding, and there were approxi-
mately 300 holders of record. The table below shows the range of the common
stock for each quarter since the common stock began trading on October 2, 1995.
These prices do not represent actual transactions and do not include retail
markups, markdowns or commissions.
<TABLE>
<CAPTION>
Per Share
Quarter Ended High Low Dividends
<S> <C> <C> <C>
December 31, 1995(1) ................... $12.25 $11.25
March 31, 1996 ......................... $11.75 $10.75
June 30, 1996 .......................... $12.25 $11.25 $.06
September 30, 1996 ..................... $12.13 $11.00 $.06
</TABLE>
(1) Reflects the period from October 2 through December 31, 1995.
The stock price information set forth in the table was provided by the National
Association of Securities Dealers, Inc. High, low and closing prices and daily
volume are reported in most major newspapers.
DIVIDENDS
The Company paid a six cents per share dividend to holders of record on June
30, 1996 and September 30, 1996. The Board of Directors will consider the
payment of future cash dividends based on the results of operations and
financial condition of the Company, tax considerations, industry standards,
economic conditions, regulatory restrictions, general business practices and
other factors. See Note 17 of the Notes to the Consolidated Financial
Statements for information regarding limitations of the Bank's ability to pay
dividends to the Company.
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 10:30 a.m., CST on
February 21, 1997 at the Schaumburg Golf Club, 401 North Roselle Road,
Schaumburg, Illinois.
45
<PAGE> 48
[DAMEN FINANCIAL CORPORATION LOGO]
DAMEN FEDERAL BANK FOR SAVINGS
OFFICE LOCATIONS
200 W. HIGGINS ROAD
SCHAUMBURG, IL 60195
PHONE (847) 882-5320
5100 S. DAMEN AVENUE
CHICAGO, IL 60609
PHONE (773) 776-2546
5750 W. 87TH STREET
BURBANK, IL 60459
PHONE (708) 636-7100
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage of State of Incorporation
Parent Subsidiary Ownership or Organization
<S> <C> <C> <C>
Damen Financial Damen Federal Bank for 100% Federal
Corporation Savings
Damen Federal Bank for Dasch, Incorporated 100% Illinois
Savings
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference and use of our
report, dated November 1, 1996, on the consolidated financial statements of
Damen Financial Corporation which appears in Damen Financial Corporation's
Annual Report of Shareholders and Form 10-K for the year ended September 30,
1996 in Damen Financial Corporation's previously filed Registration Statement
on Form S-8 (Registration No. 333-4091 and No. 333-4095).
Cobitz, VandenBerg & Fennessy
Hickory Hills, Illinois
December 27, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 170,034
<INT-BEARING-DEPOSITS> 1,011,197
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 95,937,160
<INVESTMENTS-CARRYING> 37,280,510
<INVESTMENTS-MARKET> 36,418,300
<LOANS> 91,145,893
<ALLOWANCE> (345,000)
<TOTAL-ASSETS> 234,555,409
<DEPOSITS> 118,973,335
<SHORT-TERM> 24,100,000
<LIABILITIES-OTHER> 2,473,435
<LONG-TERM> 35,500,000
0
0
<COMMON> 39,675
<OTHER-SE> 52,830,196
<TOTAL-LIABILITIES-AND-EQUITY> 234,555,409
<INTEREST-LOAN> 7,372,382
<INTEREST-INVEST> 9,288,067
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 16,660,449
<INTEREST-DEPOSIT> 6,426,006
<INTEREST-EXPENSE> 9,671,926
<INTEREST-INCOME-NET> 6,988,523
<LOAN-LOSSES> 70,000
<SECURITIES-GAINS> 83,573
<EXPENSE-OTHER> 5,242,762
<INCOME-PRETAX> 1,942,302
<INCOME-PRE-EXTRAORDINARY> 1,779,842
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,779,842
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
<YIELD-ACTUAL> 3.07
<LOANS-NON> 351,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (275,000)
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (345,000)
<ALLOWANCE-DOMESTIC> (345,000)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
