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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
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(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. [X]
As of December 9, 1998, there were issued and outstanding 2,820,154
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 closing
price of such stock on the Nasdaq National Market as of December 9, 1998 was
approximately $40.2 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 III of Form 10-K--Proxy Statement for the Annual Meeting of Stockholders to
be held in 1999 for the fiscal year ended September 30, 1998.
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TABLE OF CONTENTS
PART I
Item 1. Business............................................................1
Item 2. Properties.........................................................10
Item 3. Legal Proceedings..................................................10
Item 4. Submission of Matters to a Vote of Security Holders................10
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters...................................11
Item 6. Selected Consolidated Financial Data...............................11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................14
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.........43
Item 8. Financial Statements and Supplementary Data........................44
Item 9. Changes In and Disagreements with Accountants .....................69
PART III
Item 10. Directors and Executive Officers of the Registrant.................69
Item 11. Executive Compensation.............................................69
Item 12. Security Ownership of Certain Beneficial Owners and Management.....69
Item 13. Certain Relationships and Related Transactions.....................69
PART IV
Item 14. Exhibits and Reports on Form 8-K...................................70
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PART I
ITEM 1. BUSINESS
GENERAL
Damen Financial Corporation, a Delaware corporation ("DFIN" or the
"Company"), was formed in 1995 at the direction of Damen Federal Savings Bank
(the "Savings Bank") for the purpose of becoming a savings and loan holding
company and owning all of the outstanding stock of the Savings Bank issued on
September 29, 1995 in connection with the Savings Bank's conversion from the
mutual to stock form of organization (the "Conversion"). The Company issued
3,967,500 shares of Common Stock at $10.00 per share in the Conversion. On
February 27, 1997, the Savings Bank converted from a federal savings bank to a
national bank (the "Bank Conversion"), and in connection therewith changed its
name to Damen National Bank ("Damen" or the "Bank"). Upon consummation of the
Bank Conversion, the Company de-registered as a thrift holding company and
registered as a bank holding company.
At September 30, 1998, the Company had total assets of $228.0 million,
deposits of $115.7 million and stockholders' equity of $45.3 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.
The Bank 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 in 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 and commercial real estate and commercial consumer loans primarily
in its market area. See the "Lending Activities," section of Management's
Discussion and Analysis of Financial Condition and Results of Operations below.
At September 30, 1998, $84.9 million, or 76.43% of the Company'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
Activities--Investment Securities" and "--Mortgage-Backed and Related
Securities," section of Management's Discussion and Analysis of Financial
Condition and Results of Operations below.
SUBSIDIARY ACTIVITIES
At September 30, 1998 the Bank had one wholly-owned service
corporation, Dasch, Inc. ("Dasch"). The principal activity of Dasch is to offer
investment products and services thru INVEST Financial Corporation, a large
financial service company which provides support with marketing, financial
planning programs, market research and a wide variety of investment products. In
late 1997, Dasch hired an experienced full-time sales representative to provide
investment products and services at all three Bank locations. Net income of
Dasch for the years ended September 30, 1998, 1997 and 1996 was ($39,683),
$2,999 and $3,895, respectively.
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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 three market areas is 4.57%
in Schaumburg, 10.99% in Burbank and less than 1% of the entire Chicago market.
EMPLOYEES
At September 30, 1998, the Company had a total of 34 full-time
employees. None of the Company's employees are represented by any collective
bargaining agreement. Management considers its employee relations to be good.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following is a description of the Company's and Bank's executive
officers who were not also directors as of September 30, 1998.
GERALD J. GARTNER. Mr. Gartner, age 55, has served as Treasurer and
Chief Financial Officer of the Company since its incorporation in 1995, and as
Cashier and Chief Financial Officer of the Bank since 1975.
KENNETH D. VANEK. Mr. Vanek, age 68, 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 the Bank in 1971 as an accounting clerk.
REGULATION
GENERAL
The Company is a registered bank holding company, subject to broad
federal regulation and oversight by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). The Bank is a national bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, the Bank is subject to broad
federal regulation and oversight extending to all its operations by the OCC, the
FDIC and the Federal Reserve Board. The Bank is also a member of the FHLB of
Chicago. The Bank is a member of the SAIF and the deposits of the Bank are
insured by the FDIC.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
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FEDERAL REGULATION OF NATIONAL BANKS
The OCC has extensive authority over the operations of national banks.
As part of this authority, the Bank is required to file periodic reports with
the OCC and is subject to periodic examinations by the OCC. All national banks
are subject to a semi-annual assessment, based upon the institution's total
assets, to fund the operations of the OCC.
The OCC also has extensive enforcement authority over all national
banks, including the Bank. 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
OCC. Except under certain circumstances, public disclosure of final enforcement
actions by the OCC is required.
The OCC, 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 OCC 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
The Bank 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 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 OCC 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 are made by the FDIC for each semi-annual assessment period.
In order to equalize the deposit insurance premium schedules for SAIF
insured institutions and institutions with deposits insured by the Bank
Insurance Fund (the "BIF"), the FDIC imposed a one-time special assessment on
all SAIF-assessable deposits held as of March 31, 1995 pursuant to legislation
enacted on September 30, 1996. The Company's special assessment, which was
$860,000, was paid in November 1996 but accrued for the fiscal year ended
September 30, 1996. Effective January 1, 1997, the premium schedule for BIF and
SAIF insured institutions ranged from 0 to 27 basis points. However,
SAIF-insured institutions are required to pay a Financing Corporation (FICO)
assessment, in order to
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fund the interest on bonds issued to resolve thrift failures in the 1980s, equal
to 6.48 basis points for each $100 in domestic deposits, while BIF-insured
institutions pay an assessment equal to 1.52 basis points for each $100 in
domestic deposits. The assessment is expected to be reduced to 2.43 basis points
no later than January 1, 2000, when BIF insured institutions fully participate
in the assessment. These assessments, which may be revised based upon the level
of BIF and SAIF deposits, will continue until the bonds mature in the year 2017.
REGULATORY CAPITAL REQUIREMENTS. The Bank is subject to the capital
regulations of the OCC. The OCC's regulations establish two capital standards
for national banks: a leverage requirement and a risk-based capital requirement.
In addition, the OCC may, on a case-by-case basis, establish individual minimum
capital requirements for a national bank that vary from the requirements which
would otherwise apply under OCC regulations. A national bank that fails to
satisfy the capital requirements established under the OCC's regulations will be
subject to such administrative action or sanctions as the OCC deems appropriate.
The leverage ratio adopted by the OCC requires a minimum ratio of "Tier
1 capital" to adjusted total assets of 3% for national banks rated composite 1
under the CAMEL rating system for banks. National banks not rated composite 1
under the CAMEL rating system for banks are required to maintain a minimum ratio
of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the level
and nature of risks of their operations. For purposes of the OCC's leverage
requirement, Tier 1 capital generally consists of common stockholders' equity
and retained income and certain non-cumulative perpetual preferred stock and
related income, except that no intangibles and certain purchased mortgage
servicing rights and purchased credit card relationships may be included in
capital.
The risk-based capital requirements established by the OCC's
regulations require national banks to maintain "total capital" equal to at least
8% of total risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" means Tier 1 capital (as described above) plus
"Tier 2 capital," provided that the amount of Tier 2 capital may not exceed the
amount of Tier 1 capital, less certain assets. The components of Tier 2 capital
include 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.
The OCC has revised its risk-based capital requirements to permit the
OCC to require higher levels of capital for an institution in light of its
interest rate risk. In addition, the OCC has proposed that a bank's interest
rate risk exposure would be quantified using either the measurement system set
forth in the proposal or the institution's internal model for measuring such
exposure, if such model is determined to be adequate by the institution's
examiner. Small institutions that are highly capitalized and have minimal
interest rate risk would be exempt from the rule unless otherwise determined by
the OCC. Management of the Bank has not determined what effect, if any, the
OCC's proposed interest rate risk component would have on the Bank's capital if
adopted as proposed.
PROMPT CORRECTIVE ACTION. The OCC is authorized and, under certain
circumstances required, to take certain actions against national banks that fail
to meet their capital requirements. The OCC 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 OCC 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 OCC is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
Any national banking 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
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restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the Bank. An association that becomes "critically
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 OCC must
appoint a receiver (or conservator with the concurrence of the FDIC) for a bank,
with certain limited exceptions, within 90 days after it becomes critically
undercapitalized. Any undercapitalized bank is also subject to the general
enforcement authority of the OCC, including the appointment of a conservator or
a receiver.
The OCC is also generally authorized to reclassify a bank 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 OCC of any of these measures on the Bank may have
a substantial adverse effect on the Bank's operations and profitability and the
value of the Company's Common Stock.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
The Bank's ability to pay dividends is governed by the National Bank
Act and OCC regulations. Under such statute and regulations, all dividends by a
national bank must be paid out of current or retained net profits, after
deducting reserves for losses and bad debts. The National Bank Act further
restricts the payment of dividends out of net profits by prohibiting a national
bank from declaring a cash dividend on its shares of common stock until the
surplus fund equals the amount of capital stock or, if the surplus fund does not
equal the amount of capital stock, until one-tenth of the Bank's net profits for
the preceding half year in the case of quarterly or semi-annual dividends, or
the preceding two half-year periods in the case of annual dividends, are
transferred to the surplus fund. In addition, the prior approval of the OCC is
required for the payment of a dividend if the total of all dividends declared by
a national bank in any calendar year would exceed the total of its net profits
for the year combined with its net profits for the two preceding years, less any
required transfers to surplus or a fund for the retirement of any preferred
stock.
The OCC has the authority to prohibit the payment of dividends by a
national bank when it determines such payment to be an unsafe and unsound
banking practice. In addition, the Bank would be prohibited by federal statute
and the OCC's prompt corrective action regulations from making any capital
distribution if, after giving effect to the distribution, the Bank would be
classified as "undercapitalized" under the OCC's regulations. See "Insurance of
Accounts and Regulation by the FDIC-- Prompt Corrective Action," above. Finally,
the Bank would not be able to pay dividends on its capital stock if its capital
would thereby be reduced below the remaining balance of the liquidation account
established in connection with the Conversion.
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 OCC, 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 OCC.
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The federal banking agencies, including the OCC, 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."
TRANSACTIONS WITH AFFILIATES
Generally, transactions between a national bank 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,
such as loans to an affiliate, are restricted to a percentage of the Bank's
capital. Affiliates of the Bank include any company which is under common
control with the Bank. In addition, the Bank may not acquire the securities of
most affiliates. Subsidiaries of the Bank are not deemed affiliates. However,
the Federal Reserve Board has the discretion to treat subsidiaries of national
banks as affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons
("Insiders") are also subject to conflict of interest rules enforced by the OCC.
These conflict of interest regulations and other statutes also impose
restrictions on loans to such persons and their related interests. Among other
things, as a general matter, loans to Insiders must be made on terms
substantially the same as for loans to unaffiliated individuals.
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 NOW checking accounts).
At September 30, 1998, the Bank had $580,150 in FRB stock, which was in
compliance with these reserve requirements.
National banks are authorized to borrow from the FRB "discount window,"
but Federal Reserve Board regulations require associations to exhaust other
reasonable alternative sources of funds, including FHLB borrowings, before
borrowing from the FRB.
The Bank is a member of the Federal Reserve System.
HOLDING COMPANY REGULATION
GENERAL. The Company is a bank holding company, registered with the
Federal Reserve Board. Bank holding companies are subject to comprehensive
regulation by the Federal Reserve Board under the Bank Holding Company Act of
1956, as amended (the "BHCA"), and the regulations of the Federal Reserve Board.
As a bank holding company, the Company is required to file reports with the
Federal Reserve Board and such additional information as the Federal Reserve
Board may require, and will be subject to regular examinations by the Federal
Reserve Board. The Federal Reserve Board also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including its
bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
Under Federal Reserve Board policy, a bank holding company must serve
as a source of strength for its subsidiary banks. Under this policy the Federal
Reserve Board may require, and has required in the past, a holding company to
contribute additional capital to an undercapitalized subsidiary bank.
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Under the BHCA, a bank holding company must obtain Federal Reserve
Board approval before: (i) acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve Board regulation or
order, have been identified as activities closely related to the business of
banking or managing or controlling banks. The list of activities permitted by
the Federal Reserve Board includes, among other things, operating a savings
institution, mortgage company, finance company, credit card company or factoring
company; performing certain data processing operations; providing certain
investment and financial advice; underwriting and acting as an insurance agent
for certain types of credit-related insurance; leasing property on a
full-payout, non-operating basis; selling money orders, travelers' checks and
United States Savings Bonds; real estate and personal property appraising;
providing tax planning and preparation services; and, subject to certain
limitations, providing securities brokerage services for customers.
INTERSTATE BANKING AND BRANCHING. On September 29, 1994, the
Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Act") was enacted
to ease restrictions on interstate banking. Effective September 29, 1995, the
Act allows the Federal Reserve Board to approve an application of an adequately
capitalized and adequately managed bank holding company to acquire control of,
or acquire all or substantially all of the assets of, a bank located in a state
other than such holding company's home state, without regard to whether the
transaction is prohibited by the laws of any state. The Federal Reserve Board
may not approve the acquisition of the bank that has not been in existence for
the minimum time period (not exceeding five years) specified by the statutory
law of the host state. The Act also prohibits the Federal Reserve Board from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. The Act does not
affect the authority of states to limit the percentage of total insured deposits
in the state which may be held or controlled by a bank or bank holding company
to the extent such limitation does not discriminate against out-of-state banks
or bank holding companies. Individual states may also waive the 30% state-wide
concentration limit contained in the Act.
Additionally, on June 1, 1997, the federal banking agencies became
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state of
one of the banks opted out of the Act by adopting a law after the date of
enactment of the Act and prior to June 1, 1997 which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches will be permitted only
if the law of the state in which the branch is located permits such
acquisitions. Interstate mergers and branch acquisitions will also be subject to
the nationwide and statewide insured deposit concentration amounts described
above. The State of Illinois has authorized interstate merger transactions
effective June 1, 1997.
The Act authorizes the OCC and FDIC to approve interstate branching de
novo by national and state banks, respectively, only in states which
specifically allow for such branching.
DIVIDENDS. The Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies, which expresses the
Federal Reserve Board's view that a bank
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holding company should pay cash dividends only to the extent that the holding
company's net income for the past year is sufficient to cover both the cash
dividends and a rate of earning retention that is consistent with the holding
company's capital needs, asset quality and overall financial condition. The
Federal Reserve Board also indicated that it would be inappropriate for a
company experiencing serious financial problems to borrow funds to pay
dividends. Furthermore, under the prompt corrective action regulations adopted
by the Federal Reserve Board, the Federal Reserve Board may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized". See "Regulatory Capital
Requirements -- Prompt Corrective Action."
Bank holding companies are required to give the Federal Reserve Board
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve Board may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order, or any condition imposed by, or written agreement with, the Federal
Reserve Board. This notification requirement does not apply to any company that
meets the well-capitalized standard for commercial banks, has a safety and
soundness examination rating of at least a "2" and is not subject to any
unresolved supervisory issues.
CAPITAL REQUIREMENTS. The Federal Reserve Board has established capital
requirements for bank holding companies that generally parallel the capital
requirements for national banks. For bank holding companies with consolidated
assets of less than $150 million, compliance is measured on a bank-only basis.
See "Insurance of Accounts and Regulation by the FDIC--Regulatory Capital
Requirements." At September 30, 1998, the Company satisfied the Federal Reserve
Board's capital requirements for bank holding companies.
FEDERAL HOME LOAN BANK SYSTEM
The Bank 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 which are subject to the 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, the Bank is required to purchase and maintain stock in the
FHLB of Chicago. At September 30, 1998, the Bank had $3.2 million in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past five calendar
years such dividends have averaged 6.54% and were 6.81% for calendar year 1997.
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 the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
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FEDERAL AND STATE TAXATION
FEDERAL TAXATION. In addition to the regular income tax, corporations,
including the Bank, are generally 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, such as the Bank, were 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.
The Company and its subsidiaries filed separate federal income tax
returns on a fiscal year basis using the accrual method of accounting.
Neither the Company 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, the
Company) would not result in a deficiency which could have a material adverse
effect on the financial condition of the Company on a consolidated basis.
ILLINOIS TAXATION. For Illinois income tax purposes, the Company is
taxed at an effective rate equal to 7.18% of Illinois taxable income. For these
purposes, "Illinois taxable 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 had the effect of eliminating Illinois taxable income for the
Company.
The Company's accounting activities are maintained on an in-house
computer system and its record-keeping activities are maintained on an on-line
basis with an independent service bureau.
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.
-9-
<PAGE> 12
ITEM 2. DESCRIPTION OF PROPERTIES
DFIN conducts its business at its main office and two other locations
in its market area. The following table sets forth information concerning each
of DFIN's offices as of September 30, 1998. At September 30, 1998, the total net
book value of DFIN'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, 1998
-------- -------- ------ ------------------
<S> <C> <C> <C>
Main Office:
200 West Higgins Road 1993(1) Owned $1,897,000
Schaumburg, Illinois
Full Service Branches:
5100 South Damen Avenue 1964 Owned 181,000
Chicago, Illinois
5750 West 87th Street 1991 Owned 721,000
Burbank, Illinois
</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 2,100 square feet of unoccupied
office space which the Company intends to lease to third parties.
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, 1998 was
approximately $420,000.
ITEM 3. LEGAL PROCEEDINGS
From time to time, DFIN 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 DFIN's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September 30,
1998.
-10-
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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
September 30, 1998, there were 2,957,154 shares of Damen Financial Corporation
common stock issued and outstanding and there were approximately 240 holders of
record. The table below shows the range of the common stock for each quarter of
fiscal years 1997 and 1998. These prices do not represent actual transactions
and do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW PER SHARE DIVIDEND
<S> <C> <C> <C>
December 31, 1996 $12.94 $11.75 $.06
March 31, 1997 $15.00 $12.63 $.06
June 30, 1997 $14.75 $13.88 $.06
September 30, 1997 $15.75 $13.88 $.06
December 31, 1997 $17.38 $15.63 $.10
March 31, 1998 $18.38 $16.25 $.12
June 30, 1998 $19.25 $16.13 $.12
September 30, 1998 $17.25 $12.13 $.12
</TABLE>
The stock price information set forth in the table above was provided
by the National Association of Securities Dealers, Inc. High, low and closing
prices and daily trading volume are reported in most major newspapers. For a
discussion regarding regulatory restrictions on the ability of the Company and
the Bank to pay dividends see "Insurance of Accounts and Regulation by the
FDIC," "Limitations on Dividends and Other Capital Distributions" and "Holding
Company Regulation --Dividends," sections of the Business section, above.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
At September 30, At November 30,
-------------------------------------------------------- ---------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION
DATA:
Total assets...................... $228,033 $231,109 $234,555 $232,358 $190,643
Loans receivable, net............. 109,418 97,244 91,146 87,555 88,225
Mortgage-backed securities........ 65,052 84,610 88,098 82,192 67,742
Tax-exempt securities............. 19,843 22,493 24,905 20,478 16,711
Investment securities............. 26,078 18,925 23,325 16,871 11,483
Deposits.......................... 115,699 125,746 118,973 126,632 126,210
Borrowings........................ 61,800 56,500 59,600 45,500 44,000
Total equity...................... 45,254 45,939 $52,870 55,710 17,874
</TABLE>
-11-
<PAGE> 14
<TABLE>
<CAPTION>
Ten Months Ended
Year Ended September 30, September 30,
----------------------------------------------- ----------------------
1998 1997 1996 1995 1995(1) 1994
-------- -------- -------- -------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
Total interest income ................................ $ 16,584 $ 16,494 $ 16,661 $ 14,029 $ 11,851 $ 10,555
Total interest expense ............................... 10,013 9,823 9,672 9,397 7,997 6,234
-------- -------- -------- -------- -------- ---------
Net interest income ............................... 6,571 6,671 6,989 4,632 3,854 4,321
Provision for loan losses ............................ 147 37 70 163 163 --
-------- -------- -------- -------- -------- ---------
Net interest income after provision for loan
losses............................................... 6,424 6,634 6,919 4,469 3,691 4,321
-------- -------- -------- -------- -------- ---------
Fees and service charges ............................. 165 42 109 77 69 54
Gain (loss) on sales of mortgage-backed
securities and investment securities ................ 571 140 84 (6) 3 48
Unrealized gain (loss) on mortgage-backed
securities and investment securities
held-for-sale ....................................... -- -- -- (892) -- (645)
Other non-interest income ............................ 190 85 74 82 66 83
-------- -------- -------- -------- -------- ---------
Total non-interest income ............................ 926 267 267 (739) 138 (460)
Total non-interest expense ........................... 4,995 4,816 5,243 3,610 3,032 2,583
-------- -------- -------- -------- -------- ---------
Income before taxes and change in accounting
principles .......................................... 2,355 2,085 1,943 120 797 1,278
Income tax (provision) benefit ....................... (427) (340) (163) 348 108 (277)
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)
-------- -------- -------- -------- -------- ---------
Net income ........................................... $ 1,928 $ 1,745 $ 1,780 $ 1,375 $ 1,812 $ 748
======== ======== ======== ======== ======== =========
</TABLE>
(1) During 1995, the Company changed its fiscal year end from November 30 to
September 30.
-12-
<PAGE> 15
<TABLE>
<CAPTION>
At or For Ten
Months Ended
At or For the Year Ended September 30, September 30,
----------------------------------------- -------------------
1998 1997 1996 1995 1995(1) 1994
-------- -------- --------- -------- ------- --------
<S> <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).................................. .83% .75% .76%(5) .69% .54% .52%
Return on average stockholders' equity (ratio of net
income to average retained earnings)(2)(3)................... 4.15 3.45 3.21(6) 6.75 4.83 5.27
Efficiency ratio(7)........................................... 72.12 70.84 61.11 75.35 76.02 57.94
Interest rate spread information:
Average during period........................................ 1.93 1.84 1.80 1.89 1.82 2.48
End of period................................................ 1.90 1.72 1.70 1.65 1.65 2.08
Net interest margin(4)........................................ 2.93 2.98 3.07 2.41 2.37 2.91
Ratio of operating expense to average total
assets(2).................................................... 2.15 2.07 2.23 1.82 1.81 1.69
Ratio of average interest-earning assets to
average interest-bearing liabilities ........................... 1.23x 1.26x 1.30x 1.11x 1.11x 1.10x
Per Share Information:
Book value per share outstanding............................. 15.30 14.78 14.02 14.04 14.04 N/A
Earnings per share - basic................................... .67 .54 .49 .38 .50 N/A
Earnings per share - diluted................................. .65 .53 .49 .38 .50 N/A
Dividends declared per share................................. .40 .24 .12 -- -- N/A
Quality Ratios:
Non-performing assets to total assets at end of................ .27 .12 .15 .03 .03 .06
Allowance for loan losses to non-performing loans.............. 72.20 168.56 98.42 420.71 420.71 108.13
Allowance for loan losses to loans receivable, net............. .41 .34 .38 .31 .31 .14
Capital Ratios:
Stockholders' equity to total assets at end of period.......... 19.84 19.88 22.54 23.98 23.98 9.38
Average stockholders' equity to average assets................. 20.09 21.73 23.63 10.26 11.16 9.77
Other Data:
Number of full-service offices ................................ 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 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 .97% if calculated without regard to SAIF assessment.
(6) Return would have 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.
-13-
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Damen Financial Corporation (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
the Bank's subsidiary, Dasch, Inc., unless otherwise indicated.
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 thereto contained elsewhere herein.
FINANCIAL CONDITION
SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997. Total assets
decreased $3.1 million to $228.0 million as of September 30, 1998 from $231.1
million as of September 30, 1997. Loans increased by $12.2 million to $109.4
million at September 30, 1998 or 12.55% primarily due to new mortgage loan
originations of $34.2 million because of a favorable lending environment and
management's focus on increasing the size of the loan portfolio. Investment
securities available-for-sale increased $4.5 million to $40.4 million from $35.9
due to purchases of $19.6 million partially offset by maturities and sales of
$16.1 million. The increase was due to relatively more attractive rates and
terms available during the year on government agency securities in addition to
interest thereon being exempt from state income taxes. The Company elected to
sell a part of its investment securities in order to take advantage of the
declining interest rates. These sales resulted in gains of $552,000 for 1998.
Mortgage-backed securities held to maturity decreased $11.5 million to $16.4
million from $27.9 million primarily due to repayments and the Company's
decision to reinvest the proceeds in higher yielding loans and other
investments. Mortgage-backed securities available-for-sale decreased $8.1
million to $48.6 million as of September 30, 1998, as repayments were used to
increase new loan originations.
Deposits decreased by $10.0 million to $115.7 million at September 30,
1998 from $125.7 million due to net withdrawals of $14.8 million partially
offset by interest credited of $4.8 million. The decrease was centered primarily
in certificates of deposit which decreased to $85.4 million as of the end of
fiscal 1998, or 10.21%, as declining rates paid on such instruments led to a
withdrawal of such funds. Borrowings from the Federal Home Loan Bank of Chicago
increased by $5.3 million to $61.8 million at September 30, 1998. Advances were
utilized primarily to offset savings withdrawals during the year due to
declining rates and favorable returns on many competitive investment
alternatives.
Stockholders' equity decreased by $685,000 to $45.2 million at
September 30, 1998 from $45.9 million at September 30, 1997, due primarily to
the purchase of treasury stock at a cost of $2.8 million and payment of cash
dividends of $1.1 million, partially offset by net income of $1.9 million and an
increase of $358,000 in net unrealized market gains, net of taxes, on
investments available for sale. The Company declared a quarterly cash dividend
of ten cents per share for the first quarter and twelve cents per share for the
three subsequent quarters ended September 30, 1998. At September 30, 1998 book
value per share was $15.30 compared to $14.78 at September 30, 1997.
SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996. Total assets
decreased $3.4 million to $231.1 million as of September 30, 1997. Loans
receivable increased by $6.1 million to $97.2 million at September 30, 1997 from
$91.1 million primarily due to new mortgage loan originations of $21.0 million.
Investment securities available-for-sale decreased $7.5 million to $35.9 million
from $43.4 million due to maturities and sales of $15.5 million partially offset
by purchases of $7.2 million. Mortgage-backed securities held to maturity
decreased $7.6 million to $27.9 million from $35.5 million primarily due to
repayments. Mortgage-backed securities available-for-sale increased $4.1 million
to $56.7 million as of September 30, 1997. Purchases of mortgage-backed
securities included $4.1 million of adjustable rate securities purchased to help
reduce interest rate sensitivity.
-14-
<PAGE> 17
Deposits increased by $6.8 million to $125.7 million at September 30,
1997 from $118.9 million due to net deposits of $2.3 million and interest
credited of $4.5 million. Borrowings from the Federal Home Loan Bank of Chicago
decreased by $3.1 million to $56.5 million at September 30, 1997. Advance
maturities were extended somewhat during the year to take advantage of a
relatively flat yield curve and to help reduce interest rate risk.
Stockholders' equity decreased by $6.9 million to $45.9 million at
September 30, 1997 from $52.8 million at September 30, 1996, due primarily to
the purchase of treasury stock at a cost of $9.8 million and payment of cash
dividends of $1.0 million, partially offset by net income of $1.7 million and an
increase of $1.2 million in net unrealized market gains, net of taxes, on
investments available for sale. The Company declared cash dividends of six cents
per share each quarter for the year ended September 30, 1997. At September 30,
1997 book value per share was $14.78 compared to $14.02 at September 30, 1996.
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 interest rate risk. The Bank's interest rate
monitoring efforts are focused primarily on an analysis of the difference or
"gap" between the amounts of its assets and liabilities repricing during
specific time periods and the "net portfolio value" analysis 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, the Bank 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.
The Bank attempts to manage its interest rate risk. First, a
significant portion of the Bank's mortgage-backed and related securities have
adjustable interest rates ($27.4 million at September 30, 1998) or have
anticipated average lives of five years or less at the time of purchase. Second,
the Bank has devoted a portion of its investment securities to instruments
having anticipated short or intermediate (five years or less) terms ($20.1
million at September 30, 1998). Third, the Bank has devoted a portion of its
borrowing activity to indebtedness having terms of three years or more ($26.0
million at September 30, 1998). 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 ($20.0 million
of passbook accounts and $4.1 million of certificates of deposit due after
September 30, 2001). Also, although the Bank does not currently offer
adjustable-rate loans on owner-occupied residences due to competitive factors,
the Bank's fixed-rate lending program is focused on loans with terms of 15 years
or less ($77.7 million or 72.8% of the Bank's mortgage loans).
-15-
<PAGE> 18
The Bank measures its interest rate risk ("IRR") in calculating its
risk-based capital. The IRR component of capital is a dollar amount that
measures the sensitivity of the Bank's net portfolio value ("NPV") to changes in
interest rates. 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.
Presented below, as of September 30, 1998, 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.
NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
ASSUMED CHANGE
IN INTEREST RATES $ AMOUNT $ CHANGE % CHANGE
----------------- -------- -------- --------
(basis points) (Dollars in Thousands)
<S> <C> <C> <C>
+400 $ 42,767 $ (5,167) (11)%
+300 43,518 (4,416) (9)
+200 44,271 (3,663) (8)
+100 46,063 (1,871) (4)
0 47,934 0 0
-100 50,672 2,738 6
-200 53,833 5,899 12
-300 57,504 9,570 20
-400 61,792 13,858 29
</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 $3.7 million or 7.64%. On the
other hand, a decrease in interest rates is anticipated to cause an increase in
NPV.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are deposits and borrowings,
amortization and prepayment of loan principal and mortgage-backed securities,
maturities and sales 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 adjustable rate loans and mortgage-backed securities, general
economic conditions and competition. The Company generally manages the pricing
of its deposits to be competitive and to 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.
OCC regulations require the Bank to maintain an adequate level of
liquid assets. Liquid assets generally include cash, certain time deposits, and
investments "available-for-sale." The Company has historically maintained a
significant level of liquid assets. At September 30, 1998, the Company's liquid
assets totaled approximately $90.8 million or 39.8% of total assets.
The Company'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
Company's operating, financing and investing activities during any given period.
At September 30, 1998 and 1997, cash and cash equivalents totaled $1.8 million
and $2.1 million respectively.
Operating activities provided positive cash flows for the years ended
September 30, 1998, 1997 and 1996.
The primary investing activities of the Company are originating loans
and purchasing mortgage-backed and investment securities. During the years ended
September 30, 1998, 1997 and 1996,
-16-
<PAGE> 19
the Company's loan originations and purchases totaled $34.2 million, $23.8
million and $19.8 million, respectively. Purchases of mortgage-backed and
investment securities during the years ended September 30, 1998, 1997 and 1996
totaled $27.6 million, $19.6 million and $43.5 million, respectively. A
substantial portion of loan originations and purchases of mortgage-backed
securities and other investments were funded by loan repayments (including
prepayments), the maturity or sale of securities and borrowed money.
The primary financing activities of the Company are deposits and
borrowings. For the year ended September 30, 1998, deposits decreased $10.0
million due to net withdrawals of $14.8 million and interest credited of $4.8
million. For the year ended September 30, 1997, deposits increased $6.8 million
due to net deposits of $2.3 million and interest credited of $4.5 million. For
the year ended September 30, 1996, deposits decreased $7.6 million due to net
withdrawals of $12.8 million and interest credited of approximately $5.2
million. During the years ended September 30, 1998, 1997 and 1996, the Company's
net (proceeds less repayments) financing activity with the Federal Home Loan
Bank ("FHLB") totaled $5.3 million, $(3.1) million and $14.1 million,
respectively.
Liquidity management is both a daily and long-term responsibility of
management. The Company 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 is invested generally in interest-earning overnight deposits
and short- to intermediate-term U.S. Government and agency obligations and
mortgage-backed securities of short duration. If the Company requires funds
beyond its ability to generate them internally, it has additional borrowing
capacity with the FHLB of Chicago. The Company anticipates that it will have
sufficient funds available to meet current loan commitments. At September 30,
1998, the Company had outstanding loan commitments totaling $5.5 million and
unused home equity lines of credit of $1.5 million. See Note 10 of the Notes to
Consolidated Financial Statements for details of deposits and certificate
maturities.
The Bank is subject to various regulatory capital requirements imposed
by the OCC. At September 30, 1998, the Bank was in full compliance with all
applicable capital requirements. See Note 16 of the Notes to Consolidated
Financial Statements for a reconciliation of equity capital of the Bank to
regulatory capital.
RESULTS OF OPERATIONS
The Company'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 Company's interest-bearing liabilities, primarily deposits and borrowings.
Results of operations are also dependent upon the level of the Bank's
noninterest income, including fee income and service charges, and are affected
by the level of its noninterest 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 YEARS ENDED SEPTEMBER 30, 1998 AND 1997
GENERAL. Net income for the year ended September 30, 1998 totaled $1.9
million, an increase of $183,000 from net income of $1.7 million for the year
ended September 30, 1997. The increase was primarily due to an increase in gains
on the sale of investments available for sale of $431,000, an increase in loan
related fees of $123,000 and an increase in office rentals of $77,000 which were
partially offset by a decrease in net interest income of $101,000, an increase
in the provision for loan losses of $110,000, an increase in noninterest expense
of $178,000 and an increase in income tax expense of $87,000.
NET INTEREST INCOME. Net interest income decreased $100,000 to $6.6
million for the year ended September 30, 1998. Interest income increased $90,000
due primarily to an increase of four basis
-17-
<PAGE> 20
points in the weighted average yield to 7.41% during the year ended September
30, 1998. Interest expense increased $190,000 for the year ended September 30,
1998 to $10.0 million from $9.8 million the prior year. The increase was due to
an increase of $5.1 million in average savings and borrowings, partially offset
by a decrease of five basis points in the average cost of funds to 5.48% from
5.53%. A decrease in the net interest margin to 2.93% from 2.98% during the year
was primarily due to a decrease in the ratio of interest earning assets to
interest-bearing liabilities primarily due to an increase of $5.1 million in
average interest-bearing liabilities. The net interest spread at September 30,
1998 increased 18 basis points to 1.90% from 1.72% a year ago. See also
"Analysis of Net Interest Income," below.
INTEREST INCOME. Interest income increased $90,000 to $16.6 million for
the year ended September 30, 1998 from $16.5 million for the prior year. The
increase was primarily due to an increase of $746,000 in interest on loans due
to an increase in the average balance of $9.7 million to $102.6 million,
partially offset by a decrease of four basis points in the average loan yield to
8.18% from 8.22%. This increase was partially offset by a decrease in interest
on investments of $656,000 for the year ended September 30, 1998 due to a
decrease in the average balance of $9.5 million to $121.3 million. The decrease
in the average balance was primarily due to a decrease in the average
outstanding balance of mortgage-backed securities which declined 13.3% or $11.6
million because of accelerated prepayments.
INTEREST EXPENSE. Interest expense increased $190,000 to $10.0 million
for the year ended September 30, 1998. Interest on deposits increased $157,000
as average interest-bearing deposits increased $4.1 million to $123.5 million
partially offset by a decrease in the cost of savings to 5.13% from 5.18% due to
declining interest rates particularly with respect to savings deposits and
certificates of deposit. Interest expense on borrowed money increased $33,000
due to the increase in the average balance of borrowings from the FHLB of $1.0
million to $59.3 million which was partially offset by a decrease in the average
cost of borrowings to 6.20% from 6.25%.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased by
$110,000 to $147,000 for the year ended September 30, 1998 due primarily to an
increase in loans receivable of $12.2 million and a higher concentration in
loans other than one to four family. See also, "Delinquencies and Non-Performing
Assets," below.
OTHER INCOME. Other income increased by $659,000 to $926,000 for the
year ended September 30, 1998. The increase resulted primarily from gains on the
sale of investments available for sale of $431,000 to take advantage of market
value increases and provide funds for stock repurchases. The increase was also
due to an increase in loan related fees of $123,000 and an increase in office
rentals of $77,000 due to rental of space at the Schaumburg office.
OTHER EXPENSES. Other expenses increased $178,000 to $5.0 million for
the year ended September 30, 1998 primarily due to increases in staffing costs,
data processing costs and professional fees which were partially offset by a
decrease in advertising expense, federal insurance premiums and equipment
expense.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
$87,000 for the year ended September 30, 1998 to $427,000 from $340,000 for the
prior year. This increase was due to an increase in pre-tax income, as well as
an increase in the effective tax rate to 18.1% from 16.3%.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
GENERAL. Net income for the year ended September 30, 1997 totaled $1.7
million, a decrease of $35,000 from net income of $1.8 million for the year
ended September 30, 1996. The decrease was primarily due to a decrease in net
interest income of $318,000, an increase in noninterest expense of $433,000
(excluding the SAIF special assessment) plus an increase in income tax expense
of $177,000, partially offset by the elimination of the SAIF special assessment
of $860,000 from the prior year.
NET INTEREST INCOME. Net interest income decreased $318,000 to $6.7
million for the year ended September 30, 1997 from $7.0 million for the prior
year. Interest income decreased $167,000 due to a
-18-
<PAGE> 21
$4.0 million decrease in average interest-earning assets to $223.8 million from
$227.8 million, primarily due to the liquidation of assets for stock repurchases
of $9.8 million during the year, partially offset by an increase of six basis
points in the weighted average yield to 7.37% during the year ended September
30, 1997 from 7.31% the prior year. Interest expense increased by $151,000 for
the year ended September 30, 1997 to $9.8 million from $9.7 million the prior
year. The increase was due to an increase of $2.3 million in average savings and
borrowings in the year ended September 30, 1997 as well as an increase of two
basis points in the average cost of funds to 5.53% from 5.51%. A decrease in the
net interest margin to 2.98% from 3.07% during the year was primarily due to a
significant decrease in the ratio of interest-earning assets to interest-bearing
liabilities primarily due to treasury stock purchases of $9.8 million which
reduced the amount of interest-earning assets by 4.3%.
INTEREST INCOME. Interest income decreased $167,000 to $16.5 million
for the year ended September 30, 1997 from $16.7 million for the prior year. The
decrease was primarily due to a decrease of $487,000 in interest earned on all
categories of investments, dropping to $8.6 million from $9.1 million, due to a
reduction in average outstanding balances of $8.3 million to $127.5 million from
$135.8 million, partially offset by an increase in the average yield on
securities to 6.76% from 6.71%. The decrease in investment income was partially
offset by an increase in interest on loans of $269,000 to $7.6 million from $7.3
million which was the result of average outstanding loans of $3.6 million during
the year, partially offset by a decrease of four basis points in the average
loan yield to 8.22% from 8.26%.
INTEREST EXPENSE. Interest expense increased $151,000 to $9.8 million
for the year ended September 30, 1997 from $9.7 million for the prior year.
Interest on deposits decreased $249,000 as average interest-bearing deposits
decreased $4.1 million to $119.4 million for the year ended September 30, 1997
from $123.5 million for the prior year. The cost of savings decreased 5.18% from
5.21% primarily due to most maturing certificates renewing at lower rates.
Interest expense on borrowed money increased $400,000 as the average balance of
borrowing from the Federal Home Loan Bank of Chicago increased $6.4 million to
$58.3 million for the year ended September 30, 1997 from $51.9 million for the
prior year. The cost of borrowings remained unchanged at 6.25%.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased
$37,000 for the year ended September 30, 1997 from $70,000 for the prior year.
The provision is based on a formula which weighs loans by property type and
delinquency status. There were no significant individual loans which contributed
to the calculation of the allowance and there were no regulatory requests for
additional provisions for loan losses during the years ended September 30, 1997
and 1996.
OTHER INCOME. Other income of $267,000 for the year ended September 30,
1997 was unchanged from the prior year. A reduction of loan fees of $67,000, due
to a lower number of new loan originations and increased loan costs, (especially
for home equity and commercial loans), was partially offset by an increase of
$56,000 in gains of sales of investments.
OTHER EXPENSES. Other expenses decreased $427,000 to $4.8 million for
the year ended September 30, 1997 from $5.2 million for the prior year primarily
due to the SAIF special assessment of $860,000 in 1996 and a reduction in
regular FDIC insurance premiums of $180,000 in 1997. These decreases were
partially offset by an increase of $465,000 in compensation expenses to $2.7
million from $2.2 million primarily due to the Bank's efforts to develop a
commercial loan capability and the additional cost of the RRP benefit plan which
began in June 1996. Occupancy and equipment expenses increased $110,000 during
the year ended September 30, 1997 to $772,000 from $662,000 the prior year. The
increase was primarily due to significant repairs and maintenance at the
Schaumburg and Burbank offices and increased costs associated with an upgraded
computer system installed in the spring of 1996 and two ATM machines installed
in the fall of 1996.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
$177,000 for the year ended September 30, 1997 to $340,000 from $163,000 for the
prior year. This increase was due to an increase in state income tax due to a
reduction in exempt interest on U.S. Government obligations as well as an
increase in federal tax due to a reduction in allowable low-income housing tax
credits because of a tax loss at the Bank level for the current year created by
the SAIF special assessment.
-19-
<PAGE> 22
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.
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 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.
-20-
<PAGE> 23
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997
------------------------------- ---------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning Assets:
Loans receivable............................... $102,596 8,388 8.18 $ 92,931 7,642 8.22
Mortgage-backed securities..................... 75,583 5,247 6.94 87,169 6,061 6.95
Investment securities.......................... 21,271 1,402 6.59 18,015 1,153 6.40
Tax-exempt securities.......................... 20,786 1,303 6.27 22,236 1,405 6.32
FHLB and FRB stock............................. 3,694 244 6.61 3,452 233 6.75
-------- -------- ---- -------- ------- ----
Total interest-earning assets................. 223,930 16,584 7.41 223,803 16,494 7.37
Noninterest-earning assets...................... 8,650 -------- ---- 9,282 ------- ----
-------- --------
Total Assets.................................. $232,580 $233,085
======== ========
LIABILITIES AND EQUITY CAPITAL:
Interest-bearing Liabilities:
Savings deposits............................... $ 19,531 532 2.72 $ 20,453 608 2.97
NOW and Money Market Accounts.................. 9,695 384 3.96 10,380 414 3.99
Certificate accounts........................... 94,248 5,418 5.75 88,524 5,155 5.82
Borrowings..................................... 59,304 3,679 6.20 58,328 3,646 6.25
-------- -------- ---- -------- ------- ----
Total interest-bearing liabilities............ 182,778 10,013 5.48 177,685 9,823 5.53
Noninterest-bearing liabilities................. 3,335 -------- ---- 4,754 ------- ----
-------- --------
Total Liabilities............................ 186,113 182,439
Total Equity................................. 46,467 50,646
-------- --------
Total Liabilities and Equity............... $232,580 $233,085
======== ========
Net interest income............................. $ 6,571 $ 6,671
======== =======
Net interest rate spread(1)..................... 1.93% 1.84%
==== ====
Net interest-earning assets..................... $41,152 $ 46,118
======= ========
Net yield on average interest-earning assets.... 2.93% 2.98%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities......... 1.23x 1.26x
==== ====
<CAPTION>
1996 1995
------------------------------- ---------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------
(Dollars in Thousands)
<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 and FRB 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 Liabilities and Equity............... $234,964 $198,672
======== ========
Net interest income............................. $ 6,989 $ 4,632
======= =======
Net interest rate spread(1)..................... 1.89%
1.80% ====
====
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>
(1) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
-21-
<PAGE> 24
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 At At At
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
1998 1997 1996 1995(1)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average yield on:
Loans receivable............................. 7.59% 7.69% 7.58% 7.65%
Mortgage-backed securities................... 7.09% 7.14% 7.10% 6.97%
Tax-exempt securities........................ 6.20% 6.24% 6.27% 6.39%
Investment securities........................ 6.42% 6.62% 6.48% 6.77%
Other interest-earning assets................ 6.53% 6.63% 5.75% 6.21%
Combined weighted average yield on
interest-earning assets................... 7.19% 7.25% 7.14% 7.18%
Weighted average rate paid on:
Savings deposits............................. 2.60% 2.80% 3.05% 3.05%
NOW and Money Market accounts................ 3.45% 3.92% 3.90% 4.23%
Certificate accounts......................... 5.67% 5.86% 5.78% 5.92%
Borrowings................................... 5.95% 6.24% 6.05% 6.33%
Combined weighted average rate paid on
interest-bearing liabilities.............. 5.29% 5.53% 5.44% 5.53%
Interest rate spread.......................... 1.90% 1.72% 1.70% 1.65%
Interest rate spread based on taxable
equivalent yields for tax exempt securities... 2.09% 1.91% 1.93% 1.92%
</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 the 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.
-22-
<PAGE> 25
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1998 vs. 1997 1997 vs. 1996 1996 vs. 1995
------------------------------- --------------------------- ----------------------------
Increase Increase Increase
(Decrease) Total (Decrease) Total (Decrease) Total
Due to Increase Due to Increase Due to Increase
---------------- ------------ --------------- --------- ---------------- ----------
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
------- ------- ------------ ------- ------ --------- -------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable................ $ 786 $ (40) $ 746 $ 305 $(36) $ 269 $ 120 $ 62 $ 182
Mortgage-backed
securities....................... (805) (9) (814) (57) 36 (21) 1,014 378 1,392
Investment securities........... 214 35 249 (411) 22 (389) 1,092 (536) 556
Tax-exempt securities........... (91) (11) (102) (70) (7) (77) 362 110 472
FHLB and FRB Stock.............. 16 (5) 11 50 1 51 25 5 30
----- ----- ----- ------ ---- ------ ------ ---- -------
Total interest income......... $ 120 $ (30) $ 90 $ (183) $ 16 $ (167) $2,613 $ 19 $ 2,632
===== ===== ===== ====== ==== ====== ====== ==== =======
Interest Expense:
Savings deposits................ (26) (50) (76) (38) (64) (102) (121) 25 (96)
NOW and Money Market
accounts......................... (27) (3) (30) (31) 1 (30) (26) (7) (33)
Certificate accounts............ 327 (64) 263 (117) - (117) (59) 87 28
Borrowings...................... 62 (29) 33 400 - 400 432 (56) 376
----- ----- ----- ------ ---- ------ ------ ---- -------
Total interest expense........ $ 336 $(146) $ 190 $ 214 $(63) $ 151 $ 226 $ 49 $ 275
===== ===== ===== ====== ==== ====== ====== ==== =======
Net interest income.............. $(100) $ (318) $ 2,357
===== ====== =======
</TABLE>
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 money over time due to inflation. The primary impact of
inflation on the operations of the Company is reflected in increased 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
REPORTING COMPREHENSIVE INCOME. In June 1997, the FASB issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). This statement establishes standards for reporting and the
display of comprehensive income and its components (revenues, expenses, gains,
losses) in a full set of general-purpose financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Management does
not believe that adoption of SFAS No. 130 will have a material impact on the
Company's consolidated financial condition or results of operations.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In
June 1997, the FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") which becomes effective for fiscal years beginning after December 15,
1997. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments and requires enterprises
to report selected financial information about operating segments in interim
financial reports. Management does not believe that adoption of SFAS No. 131
will have a material impact on the Company's consolidated financial condition or
results of operations.
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<PAGE> 26
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT
BENEFITS. In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132" ). SFAS No. 132 alters current
disclosure requirements regarding pensions and other postretirement benefits in
the financial statements of employers who sponsor such benefit plans. The
revised disclosure requirements are designed to provide additional information
to assist readers in evaluating future costs related to such plans.
Additionally, the revised disclosures are designed to provide changes in the
components of pension and benefit costs in addition to the year end components
of those factors in the resulting asset or liability related to such plans. The
statement is effective for fiscal years beginning after December 15, 1997 with
earlier application available. Management does not believe that adoption of SFAS
No. 132 will have a material impact on the Company's consolidated financial
condition or results of operations.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND FOR HEDGING ACTIVITIES. In
June 1998, the FASB issued Statement of Financial Accounting Standards No. 133
("SFAS 133" ), entitled "Accounting for Derivative Instruments and for Hedging
Activities." SFAS No. 133 provides a comprehensive and consistent standard for
the recognition and measurement of derivatives and hedging activities. The
statement requires all derivatives to be recorded on the balance sheet at fair
value and establishes special accounting for the following three different types
of hedges: hedges of changes in the fair value of assets, liabilities or firm
commitments (referred to as fair value hedges); hedges of the variable cash
flows of forecasted transactions (cash flow hedges); and hedges of foreign
currency exposures of net investments in foreign operations. Though the
accounting treatment and criteria for each of the three types of hedges is
unique, they all result in recognizing offsetting changes in value or cash flow
of both the hedge and the hedged item in earnings in the same period. Changes in
the fair value of derivatives that do not meet the criteria of one of these
three categories of hedges are included in earnings in the period of the change.
SFAS No. 133 is effective for years beginning after June 15, 1999, but companies
can early adopt as of the beginning of any fiscal quarter that begins after June
1998. Management does not believe that adoption of SFAS No. 133 will have a
material impact on the Company's consolidated financial condition or results of
operations.
ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE
SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE.
In October 1998, the FASB issued Statement of Financial Accounting Standards No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
("SFAS No. 134" ), which is effective for the first fiscal quarter after
December 15, 1998. This statement amends SFAS No. 65 "Accounting for Certain
Mortgage Banking Activities." This statement revises the accounting for retained
securities and beneficial interests. Management does not believe that adoption
of SFAS No. 134 will have a material impact on the Company's 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.
LENDING ACTIVITIES
GENERAL. With the exception of a loan from the Company to its Employee
Stock Ownership Plan, all of the Company's consolidated 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 the Bank'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," below. At September 30, 1998, the Bank's total loans receivable,
net, totaled $109.4 million.
-24-
<PAGE> 27
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.
-25-
<PAGE> 28
LOAN PORTFOLIO COMPOSITION. The following table sets forth 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,
-------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- -----------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- -------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family ................ $ 84,896 76.43% $ 79,586 80.24% $ 77,725 83.09%
Multi-family ....................... 13,601 12.24 12,237 12.34 12,239 13.08
Commercial ......................... 6,096 5.49 4,573 4.61 3,317 3.55
Construction ....................... 2,205 1.99 529 .53 -- --
---------- ------ ------- ------ ------- ------
Total real estate loans ........ 106,798 96.15% 96,925 97.72% 93,281 99.72%
---------- ------ ------- ------ ------- ------
Other Loans:
Consumer Loans:
Secured Commercial ................ 1,482 1.33 -- -- -- --
Secured lines of credit ........... 2,576 2.32 2,010 2.03 -- --
Deposit account ................... 219 .20 227 .23 260 .28
Other ............................. -- -- 24 .02 -- --
---------- ------ ------- ------ ------- ------
Total consumer loans ........... 4,277 3.85% 2,261 2.28% 260 .28%
---------- ------ ------- ------ ------- ------
Total loans .................... 111,075 100.00% 99,186 100.00% 93,541 100.00%
====== ====== ======
Less:
Loans in process ................... 239 338 466
Deferred fees and discounts ........ 969 1,272 1,584
Allowance for losses ............... 449 332 345
---------- ------- -------
Total loans receivable, net ... $ 109,418 $97,244 $91,146
========== ======= =======
<CAPTION>
September 30, November 30,
---------------------- --------------------------
1995 1994
---------------------- --------------------------
Amount Percent Amount Percent
---------- ------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family ................ $75,471 83.56% $76,736 84.71%
Multi-family ....................... 12,060 13.35 11,218 12.38
Commercial ......................... 2,598 2.88 2,473 2.73
Construction ....................... -- -- -- --
------- ----- ------- ------
Total real estate loans ........ 90,129 99.79% 90,427 99.82%
------- ----- ------- ------
Other Loans:
Consumer Loans:
Secured Commercial ................ -- -- -- --
Secured lines of credit ........... -- -- -- --
Deposit account ................... 188 .21 167 .18
Other ............................. -- -- -- --
------- ------ ------- ------
Total consumer loans ........... 188 .21% 167 .18%
------- ------ ------- ------
Total loans .................... 90,317 100.00% 90,594 100.00%
====== ======
Less:
Loans in process ................... 792 527
Deferred fees and discounts ........ 1,694 1,717
Allowance for losses ............... 275 125
------- -------
Total loans receivable, net ... $87,556 $88,225
======= =======
</TABLE>
-26-
<PAGE> 29
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,
-------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
---------- ------- ---------- -------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family ............. $ 84,752 76.30% $ 79,440 80.09% $ 77,577 82.93%
Multi-family .................... 13,601 12.24 12,237 12.34 12,239 13.08
Commercial real estate .......... 6,096 5.49 4,573 4.61 3,317 3.55
Construction .................... 2,205 1.99 529 .53 -- --
-------- ------ -------- ------ -------- ------
Total real estate loans ...... 106,654 96.02 96,779 97.57 93,133 99.56
Consumer ......................... 1,701 1.53 227 .23 260 .28
-------- ------ -------- ------ -------- ------
Total fixed-rate loans ....... 108,355 97.55 97,006 97.80 93,393 99.84
-------- ------ -------- ------ -------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family ............. 144 .13 146 .15 148 .16%
Consumer:
Secured lines of credit ...... 2,576 2.32 2,010 2.03 -- --
Other ........................ -- -- 24 .02 -- --
-------- ------ -------- ------ -------- ------
Total loans .................. 111,075 100.00% 99,186 100.00% 93,541 100.00%
====== ====== ======
Less:
Loans in process ................. 239 338 466
Deferred fees and discounts ...... 969 1,272 1,584
Allowance for loan losses......... 449 332 345
-------- -------- --------
Total loans receivable, net ... $109,418 $ 97,244 $ 91,146
======== ======== ========
<CAPTION>
September 30, November 30,
---------------------- ---------------------
1995 1994
---------------------- ---------------------
Amount Percent Amount Percent
---------- --------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family ............. $ 75,321 83.40% $ 76,509 84.45%
Multi-family .................... 12,060 13.35 11,218 12.38
Commercial real estate .......... 2,598 2.88 2,473 2.73
Construction .................... -- -- -- --
------- ------ ------- ------
Total real estate loans ...... 89,979 99.63 90,200 99.56
Consumer ......................... 188 .21 167 .18
------- ------ ------- ------
Total fixed-rate loans ....... 90,167 99.84 90,367 99.74
------- ------ ------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family ............. 150 .16 227 .26
Consumer:
Secured lines of credit ...... -- -- -- --
Other ........................ -- -- -- --
------- ------ ------- ------
Total loans .................. 90,317 100.00% 90,594 100.00%
====== ======
Less:
Loans in process.................. 792 527
Deferred fees and discounts....... 1,694 1,717
Allowance for loan losses......... 275 125
------- -------
Total loans receivable, net.... $87,556 $88,225
======= =======
</TABLE>
-27-
<PAGE> 30
The following schedule sets forth the weighted average interest rate by
contractual maturity of the Bank's loan portfolio at September 30, 1998. 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 Consumer Total
---------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Amount
-------- -------- ------ -------- -------- --------
(Dollars in Thousands)
Due During
Twelve Months
Ending September 30,
--------------------
<S> <C> <C> <C> <C> <C> <C>
1999 ............................. $ 2,573 7.74% $ 173 7.74% $ 2,746 8.99%
2000 ............................. 889 7.62 6 5.55 895 7.61
2001 and 2002 .................... 3,850 7.63 423 6.68 4,273 7.54
2003 to 2005 ..................... 9,543 7.51 1,165 7.00 10,708 7.46
2006 to 2022 ..................... 72,197 7.51 2,510 8.85 74,707 7.56
2023 and following ............... 17,746 7.61 -- -- 17,746 7.61
-------- ------ --------
$106,798 $4,277 $111,075
======== ====== ========
</TABLE>
The total amount of loans due after September 30, 1999 which have
predetermined interest rates is approximately $105.6 million, while the total
amount of loans due after such dates which have floating or adjustable interest
rates is approximately $2.7 million.
Under the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"), the aggregate amount of loans that the Bank is permitted to
make to any one borrower is generally limited to 15% of unimpaired capital and
surplus (25% if the security for such loan has a "readily ascertainable" value).
At September 30, 1998, based on the above, the Bank's loans-to-one borrower
limit was approximately $6.2 million. On that date, the Bank had no borrowers
with outstanding balances in excess of this amount.
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
and also has a limited amount of one and three year adjustable rate mortgage
loans ("ARMs"). The Bank does not presently offer ARMs on one- to four-family
owner-occupied residences. At September 30, 1998, $84.9 million or 76.43% of the
Bank's loan portfolio consisted of mortgage loans on one- to four-family
residences.
Substantially all of the one- to four-family residential loans
originated by The Bank 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 through 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 significantly higher than 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, 1998, $77.7 million or 72.8% 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.
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
-28-
<PAGE> 31
thereby limiting 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. 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 the Bank are appraised by independent appraisers. While The Bank
originates virtually all of its residential mortgage loans with loan-to-value
ratios of less than 95%, 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.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. At September 30, 1998,
the Bank had $13.6 million in multi-family loans, representing 12.24% of the
Bank's total loan portfolio, and $6.1 million in commercial real estate loans,
or 5.49% 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. Permanent multi-family and commercial real estate loans are
generally originated for a maximum term of 15 years and most have fixed rates.
Multi-family and commercial real estate loans carry a loan-to-value ratio of 80%
or less 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 Loan Committee. The Bank's
underwriting procedures require verification of the borrower's credit history,
income and financial statements and 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, 1998, the Bank had two multi-family loans totaling $280,000 and no
commercial real estate loans 90 days or more delinquent. See also "Delinquencies
and Nonperforming Assets," below.
In the future, the Bank intends to continue to emphasize multi-family
and commercial real estate lending as well as other types of commercial loans.
CONSUMER LENDING. Consumer loans consist of home equity lines of
credit, commercial lease loans and equipment loans secured by deposit accounts.
During 1998, the Bank began originating commercial loans secured by equipment
leases. At September 30, 1998, there were six such loans totaling approximately
$1.5 million or 1.33% of loans outstanding.
The Bank also offers an adjustable home equity line of credit secured
by real estate with an interest rate at prime rate or a percentage over the
prime rate, as reported in The Wall Street Journal, which is adjusted monthly.
At September 30, 1998, such loans totaled $4.0 million with $2.6 million being
drawn by borrowers which represents 2.32% of the Company's loan portfolio.
ORIGINATIONS, PURCHASES AND SALES OF LOANS AND MORTGAGE-BACKED AND
RELATED SECURITIES. In order to supplement loan originations, the Company has
acquired mortgage-backed and related securities
-29-
<PAGE> 32
which are retained, depending on the investment intent, in the
"held-to-maturity" or "available- for-sale" portfolios. During the years ended
September 30, 1998 and 1997, the Company purchased $7.8 million and $12.2
million, respectively, of mortgaged-backed and related securities. During the
same periods, the Company sold $780,000 and $1.8 million, respectively, of
mortgage-backed and related securities. In order to supplement loan production,
the Bank purchased loans from third party originators totaling $2.5 million and
$1.1 million during the years ended September 30, 1998 and 1997, respectively.
See "Investment Activities - Mortgage-Backed and Related Securities" and Notes 4
and 5 to the Notes to Consolidated Financial Statements in Item 8 hereof.
The following table shows the loan origination, purchase, sale and
repayment activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended
September 30,
----------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
(Dollars In Thousands)
<S> <C> <C> <C>
ORIGINATIONS BY TYPE:
Fixed rate:
Real estate - one- to four-family $23,336 $15,514 $15,612
- multi-family 3,048 3,594 2,137
- commercial and construction 2,754 1,703 1,528
Consumer and Other 154 145 212
Secured line of credit 2,625 2,763 --
Secured commercial 2,158 -- --
------- ------- -------
Total loans originated 34,075 23,719 19,489
------- ------- -------
PURCHASES:
Mortgage-backed securities (excluding
REMICs and CMOs) 6,822 11,215 21,828
REMICs and CMOs 996 964 1,365
------- ------- -------
Total purchased 7,818(1) 12,179 23,193
------- ------- -------
SALES AND REPAYMENTS:
Mortgage-backed security sales 779 1,816 920
------- ------- -------
Total sales 779 1,816 920
Principal repayments 49,080 33,093 31,888
------- ------- -------
Total reductions 49,859 34,909 32,808
Increase (decrease) in other items, net 582 1,621 (377)
------- ------- -------
Net increase (decrease) $(7,384) $2,610 $9,497
======= ====== ======
</TABLE>
(1) Includes no adjustable-rate mortgage-backed and related securities.
DELINQUENCIES AND NON-PERFORMING ASSETS
DELINQUENCY PROCEDURES. If a loan is contractually delinquent 90 days,
the Bank either arranges payment with the borrower or institutes appropriate
action to foreclose on the property. If foreclosed, the property is sold at
sheriff's sale and may be purchased by the Bank.
Real estate acquired by the Bank 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,
amount and percentage of type at September 30, 1998.
-30-
<PAGE> 33
<TABLE>
<CAPTION>
Loan 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 ....... 8 $286 .26% 8 $257 .23% 16 $543 .49%
Multi-family .............. -- -- -- 2 280 .25 2 280 .25
Commercial real estate .... -- -- -- -- -- -- -- -- --
Construction .............. -- -- -- -- -- -- -- -- --
Other ....................... -- -- -- 1 25 .03 1 25 .03
---- ---- ---- --- ---- ---- --- ---- ----
Total 8 $286 .26% 11 $562 .51% 19 $848 .77%
==== ==== ==== === ==== ==== === ==== ====
</TABLE>
NON-PERFORMING ASSETS. Loans are reviewed monthly and any loan the
collectibilty of which 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, 1998, the Bank had no foreclosed property. There were no
restructured loans as of September 30, 1998.
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,
--------------------------------------------- -----------
1998 1997 1996 1995 1994
-------- -------- --------- --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family............................ $ 257 $ 197 $ 99 $ 65 $ 109
Multi-family................................... 280 -- 252 -- --
Commercial real estate......................... -- -- -- -- --
Construction................................... -- -- -- -- --
Other.......................................... 25 -- -- -- 7
----- ----- ---- ---- -----
Total....................................... 562 197 351 65 116
----- ----- ---- ---- -----
Accruing loans delinquent more than 90 days:
Total....................................... -- -- -- -- --
----- ----- ---- ---- -----
Foreclosed assets:
Commercial and multi-family real estate........ -- 79 -- -- --
----- ----- ---- ---- -----
Total....................................... -- 79 -- -- --
----- ----- ---- ---- -----
Total non-performing assets...................... $ 562 $ 276 $351 $ 65 $ 116
===== ===== ==== ==== =====
Total as a percentage of total assets............ .27% .12% .15% .03% .03%
===== ===== ==== ==== =====
</TABLE>
For the years ended September 30, 1998 and 1997, gross interest income
which would have been recorded had the non-accruing loans been current in
accordance with their original terms amounted to $20,000 and $16,500,
respectively.
OTHER LOANS OF CONCERN. As of September 30, 1998, there were no loans
with respect to which known information about the possible credit problems of
the borrowers or the cash flows of the 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.
-31-
<PAGE> 34
Management has considered the Bank's non-performing and "of concern"
assets in establishing its allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES. 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
Year Ended Ended Ended
September 30, September 30, November 30,
----------------------------------------- ----------------------------
1998 1997 1996 1995 1994
------------- ----------- ------------ -------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period........... $ 332 $ 345 $ 275 $ 125 $ 125
Charge-offs:
One- to four-family.................... 30 5 -- 9 --
Multi-family........................... -- 45 -- -- --
Consumer............................... -- -- -- 4 --
----- ----- ----- ----- -----
Total............................... 30 50 -- 13 --
----- ----- ----- ----- -----
Recoveries:
Total -- -- -- -- --
----- ----- ----- ----- -----
Net charge-offs.......................... 30 50 -- 13 --
----- ----- ----- ----- -----
Additions charged to operations.......... 147 37 70 163 --
----- ----- ----- ----- -----
Balance at end of period................. $ 449 $ 332 $ 345 $ 275 $ 125
===== ===== ===== ===== =====
Ratio of net charge-offs during the
period to average loans outstanding
during the period........................ .03% .05% -- .01% --
===== ===== ===== ===== =====
Ratio of net charge-offs during the
period to average non-performing assets.. 7.96% 15.92% -- 11.21% --
===== ===== ===== ===== =====
</TABLE>
-32-
<PAGE> 35
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,
-----------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ------------------------------ -------------------------------
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
--------- -------- -------- --------- -------- -------- --------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family................. $ 233 $84,896 76.43 $198 $79,586 80.24% $201 $77,725 83.09%
Multi-family........................ 104 13,601 12.24 61 12,237 12.34 119 12,239 13.08
Commercial real estate.............. 43 6,096 5.49 35 4,573 4.61 25 3,317 3.55
Construction........................ 17 2,205 1.99 3 529 .53 -- -- --
Secured Commercial.................. 18 1,482 1.33 -- -- -- -- -- --
Secured line of credit.............. 34 2,576 2.32 15 2,010 2.03 -- -- --
Consumer............................ -- 219 .20 16 251 .25 -- 260 .28
Unallocated......................... -- -- -- 4 -- -- -- -- --
---- -------- ------ ---- ------- ------ ---- ------- ------
Total.......................... $449 $111,075 100.00% $332 $99,186 100.00% $345 $93,541 100.00%
==== ======== ====== ==== ======= ====== ==== ======= ======
<CAPTION>
September 30, November 30,
------------------------------------ --------------------------------
1995 1994
------------------------------------- --------------------------------
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>
One- to four-family....................... $196 $75,471 83.56% $ 82 $76,736 84.71%
Multi-family.............................. 57 12,060 13.35 22 11,218 12.38
Commercial real estate.................... 19 2,598 2.88 6 2,473 2.73
Construction -- -- -- -- -- --
Secured Commercial -- -- -- -- -- --
Secured line of credit -- -- -- -- -- --
Consumer.................................. -- 188 .21 1 167 .18
Unallocated............................... 3 -- -- 14 -- --
---- ------- ------ ---- ------- ------
Total................................ $275 $90,317 100.00% $125 $90,594 100.00%
==== ======= ====== ==== ======= ======
</TABLE>
-33-
<PAGE> 36
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 and leases, 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. Generally, the investment policy of DFIN is to invest funds
among categories of investments and maturities based upon the Company's
asset/liability management policies, investment quality, loan and deposit
volume, liquidity needs and performance objectives. Effective December 1, 1994,
the Company adopted SFAS 115. 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 earnings. At September 30, 1998, DFIN had no securities which
were classified as trading. Securities that DFIN 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. Available-for-sale securities are reported at
fair market value with unrealized gains and losses included, on an after-tax
basis, as a separate component of stockholders' equity. At September 30, 1998,
$40.4 million of investment securities and $48.6 million of mortgage-backed and
related securities were classified as available-for-sale.
INVESTMENT SECURITIES. The Company has used investment securities to
supplement loan volume and to provide adjustable rate and/or short and
intermediate-term assets for asset/liability management purposes. In addition to
federal agency obligations and tax-exempt municipal bonds, but to a much lesser
extent, the Company invests in FHLB stock, stock in the Federal Reserve Bank
("FRB") of Chicago, equity securities and mutual funds. At September 30, 1998
and 1997, the Company's investment securities portfolio totaled $45.9 million
and $41.4 million, respectively. At September 30, 1998, 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. See Notes 2 and 3 of the Notes to
the Consolidated Financial Statements in Item 8 hereof for additional
information regarding the Company's investment securities portfolio.
As part of DFIN'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, 1998, $20.1 million of the Company's
investment securities (excluding FHLB and FRB stock) had terms to maturity or
were likely to be called in five years or less. See "Asset/Liability
Management," above.
-34-
<PAGE> 37
The following table sets forth the carrying value of the Company's
investment securities and FHLB and FRB stock at the dates indicated. At
September 30, 1998, the market value of the Company's held-to-maturity
investment securities portfolio was $5.5 million.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------
1998 1997 1996
--------------------- ------------------- --------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
--------- --------- ------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Held-to-Maturity:
FHLB stock............................... 3,235 7.04 3,121 7.54 3,110 6.45
FRB stock................................ 580 1.26 578 1.40 --- --
Other.................................... 1,729 3.77 1,845 4.45 1,777 3.68
------- ------ ------- ------ ------- ------
Subtotal................................ 5,544 12.07 5,544 13.39 4,887 10.13
------- ------ ------- ------ ------- ------
Available-for-Sale:
Tax-Exempt securities.................... $19,843 43.21% $22,493 54.31% $24,905 51.64%
Federal Agency Obligations............... 16,440 35.80 11,051 26.68 14,785 30.66
Corporate securities..................... 4,094 8.92 2,330 5.62 3,653 7.57
------- ------ ------- ------ ------- ------
Subtotal................................ 40,377 87.93 35,874 86.61 43,343 89.87
------- ------ ------- ------ ------- ------
Total investment securities............. $45,921 100.00% $41,418 100.00% $48,230 100.00%
======= ====== ======= ====== ======= ======
Average estimated remaining life of
investment securities (excluding FHLB and
FRB stock and other equities)................ 4.4 years 9.6 years 9.4 years
Other interest-earning assets:
Interest-earning deposits with banks....... $1,245 100.00% $1,591 100.00% $1,011 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth certain information regarding the
composition and maturities of the securities portfolio, excluding FHLB and FRB
stock, equity securities and other items, at September 30, 1998. SeeNote 3 of
Notes to the Consolidated Financial Statements in Item 8 hereof 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. In addition, most of the federal agency
obligations are callable and reflect the call date if the security is "in the
money."
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------------------------------------------------------
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.......................... $ 861 $2,830 $1,763 $14,389 $19,843 $19,843
Federal agency obligations............... 7,042 9,398 -- -- 16,440 16,440
------ ------ ------ ------- ------- -------
Total investment securities
(excluding FHLB and FRB
stock, equity securities and
other items)...................... $7,903 $12,228 $1,763 $14,389 $36,283 $36,283
====== ======= ====== ======= ======= =======
Weighted average yield................... 6.32% 6.74% 6.77% 5.78% 6.09% 6.09%
</TABLE>
MORTGAGE-BACKED AND RELATED SECURITIES. As of September 30, 1998, all
of the mortgage-backed and related securities owned by the Company were issued,
insured or guaranteed either directly or indirectly by a federal agency or 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 indicatea high degree of protection
against default, such guarantee or rating does not mean that the securities will
be protected from declines in value based on changes in interest rates or
prepayment speeds.
At September 30, 1998, DFIN had $65.1 million of mortgage-backed and
related securities, representing 28.5% of total assets. On that date, the
Company had $37.6 million of Federal National Mortgage Association ("FNMA"),
FHLMC and Government National Mortgage Association ("GNMA")
-35-
<PAGE> 38
participation certificates, $4.9 million of conventional mortgage-backed
securities and $22.6 million of collateralized mortgage obligations ("CMOs") and
real estate mortgage investment conduits ("REMICs"), of which $6.6 million of
the CMOs and REMICs were issued either by FHLMC or FNMA and the remaining $16.0
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, 1998, $27.4 million or 42.1% of DFIN'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 Item 8 hereof.
At September 30, 1998, the Company had no mortgage-backed or related
securities in excess of 10% of stockholders' equity except for FNMA and GNMA
issues, amounting to $11.5 million and $28.2 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 flows and the value of CMOs and REMICs are subject to change.
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, 1998, the Company held
$22.6 million of CMOs and REMICs, including $13.2 million in fixed rate
securities, the majority of which are of short and intermediate duration (five
year or less average life), and $9.4 million in adjustable rate securities.
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. 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. National banks may generally only invest in high-risk mortgage
securities in order to reduce interest rate risk. DFIN'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, 1998, the Company held CMOs and REMICs that were
classified as "high-risk," with a carrying value of $927,000 and a market value
of $936,000. 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, neither the OCC (after the Bank
Conversion) nor the OTS (before the Bank Conversion) has required the Company to
dispose of any high-risk securities.
-36-
<PAGE> 39
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>
Book Value
----------
5 to 1 10 to 20 Over 20 Balance
Years Years Years Outstanding
---------- -------- ------- -----------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
CMOs and REMICs $-- $3,647 $18,800 $22,447
FNMA participation certificates -- 1,683 5,189 6,872
Conventional mortgage-backed securities -- 966 3,894 4,860
FHLMC participation certificates -- 411 1,801 2,212
GNMA participation certificates -- -- 27,346 27,346
--- ------ ------- -------
Total $-- $6,707 57,030 $63,737
=== ====== ======= =======
</TABLE>
The Company's holdings of mortgage-backed and related securities have
decreased in recent years as a result of management's efforts to increase loan
production, including commercial lending. 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
Item 8 hereof.
-37-
<PAGE> 40
The following table sets forth the carrying value of the Company's
mortgage-backed and related securities at the dates indicated. At September 30,
1998, the market value of the Company's mortgage-backed and related securities
portfolio was $65.1 million.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
--------- ------- --------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity:
CMOs and REMICs................................... $ 16,434 25.26% $ 27,870 32.94% $ 35,504 40.30%
-------- ------ -------- ------ -------- ------
Subtotal........................................ 16,434 25.26 27,870 32.94 35,504 40.30
-------- ------ -------- ------ -------- ------
Available-for-Sale:
CMOs and REMICs................................... $ 6,113 9.40% $ 5,742 6.79% $ 4,458 5.06%
FNMA participation certificates................... 7,080 10.88 9,332 11.03 10,928 12.40
FHLMC participation certificates.................. 2,309 3.55 3,994 4.72 5,149 5.85
GNMA participation certificates................... 28,184 43.33 30,910 36.53 24,826 28.18
Conventional mortgage-backed securities........... 4,931 7.58 6,762 7.99 7,233 8.21
-------- ------ -------- ------ -------- ------
Subtotal......................................... 48,617 74.74 56,740 67.06 52,594 59.70
-------- ------ -------- ------ -------- ------
Total mortgage-backed securities................. $ 65,051 100.00% $ 84,610 100.00% $ 88,098 100.00%
======== ======= ======== ====== ======== ======
</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. The Bank 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.
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 Item 8 hereof.
-38-
<PAGE> 41
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance................................. $ 125,746 $ 118,973 $ 126,632
Deposits........................................ 70,972 80,169 66,969
Withdrawals..................................... (85,851) (77,870) (79,781)
Interest credited............................... 4,832 4,474 5,153
--------- --------- ---------
Ending balance.................................. $ 115,699 $ 125,746 $ 118,973
========= ========= =========
Net increase (decrease)......................... $ (10,047) $ 6,773 $ (7,659)
========= ========= =========
Percent increase (decrease)..................... (7.99)% 5.69% (6.05)%
========= ========= =========
</TABLE>
Deposits in the Bank as of September 30, 1998 were made pursuant to
various types of savings programs, described below.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- ----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
TRANSACTIONS AND SAVINGS DEPOSITS:
<S> <C> <C> <C> <C> <C> <C>
Passbook Accounts 2.60% (1)............... $ 19,989 17.28% $ 19,938 15.86% $ 20,386 17.13%
NOW and Money Market Accounts
1.24 - 4.15%(1)........................... 10,349 8.94 10,737 8.53 10,764 9.05
-------- ------- --------- ------- -------- -------
Total Non-Certificates............... 30,338 26.22 30,675 24.39 31,150 26.18
-------- ------- --------- ------- -------- -------
CERTIFICATES:
4.00 - 5.99%............................ 65,931 56.99 62,938 50.05 63,143 53.07
6.00 - 7.99%............................ 19,170 16.57 30,997 24.65 23,390 19.66
8.00 - 9.99%............................ 260 .22 1,136 .91 1,290 1.09
-------- ------- --------- ------- -------- -------
Total Certificates................... 85,361 73.78 95,071 75.61 87,823 73.82
-------- ------- --------- ------- -------- -------
Total Deposits....................... $115,699 100.00% $ 125,746 100.00% $118,973 100.00%
======== ======= ========= ======= ======== =======
</TABLE>
(1) Rates in effect at September 30, 1998.
-39-
<PAGE> 42
The following table shows rate and maturity information for the Bank's
certificates of deposit as of September 30, 1998.
<TABLE>
<CAPTION>
4.00- 5.00- 6.00- 7.00- 8.00- 9.00- Percent
4.99% 5.99% 6.99% 7.99% 8.99% 9.99% Total of Total
------ -------- ------- ------ ---- ----- ------- --------
Certificate accounts maturing in
quarter ending:
<S> <C> <C> <C> <C> <S> <C> <C> <C>
December 31, 1998............... $ 803 $ 19,753 $ 2,641 $ 86 $ -- $ 109 $23,392 27.40%
March 31, 1999.................. 1,371 16,156 1,394 8 -- 98 19,027 22.29
June 30, 1999................... 63 8,477 3,943 -- -- 53 12,536 14.69
September 30, 1999.............. -- 8,697 3,642 -- -- -- 12,339 14.46
December 31, 1999............... -- 1,873 880 941 -- -- 3,694 4.33
March 31, 2000.................. -- 2,263 558 465 -- -- 3,286 3.85
June 30, 2000................... -- 585 791 -- -- -- 1,376 1.61
September 30, 2000.............. -- 1,075 1,079 9 -- -- 2,163 2.53
December 31, 2000............... -- 543 297 -- -- -- 840 0.98
March 31, 2001.................. -- 848 0 -- -- -- 848 0.99
June 30, 2001................... -- 273 490 -- -- -- 763 .89
September 30, 2001.............. -- 264 706 -- -- -- 970 1.14
Thereafter...................... -- 2,887 1,240 -- -- -- 4,127 4.84
------ -------- ------- ------ ---- ----- ------- ------
Total........................ $2,237 $ 63,694 $17,661 $1,509 $ 0 $ 260 $85,361 100.00%
====== ======== ======= ====== ==== ===== ======= ======
Percent of total............. 2.62% 74.62% 20.69% 1.77% 0.00% .30%
====== ======== ======= ====== ==== =====
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of September 30, 1998.
<TABLE>
<CAPTION>
Maturity
----------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000............. $3,321 $11,722 $19,119 $12,799 $46,961
Certificates of deposit of $100,000 or more
(excluding Public Funds)............................... 12,422 6,179 5,656 5,268 29,525
Public funds(1)........................................ 7,649 1,126 100 -- 8,875
------- ------- ------- ------- -------
Total certificates of deposit.......................... $23,392 $19,027 $24,875 $18,067 $85,361
======= ======= ======= ======= =======
</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
Item 8 hereof.
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, 1998, the Bank
had
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<PAGE> 43
$61.8 million of FHLB advances outstanding with a weighted average interest rate
of 5.95%. See Note 11 of the Notes to the Consolidated Financial Statements in
Item 8 hereof.
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>
Year Ended
September 30,
---------------------------------
1998 1997 1996
-------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
MAXIMUM BALANCE:
FHLB advances ................ $64,300 $59,800 $61,800
AVERAGE BALANCE:
FHLB advances ................ $59,304 $58,323 $51,950
</TABLE>
The following table sets forth certain information as to the Bank's
FHLB advances at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------
1998 1997 1996
----------- ------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances ................................. $61,800 $ 56,500 $59,600
------- -------- -------
Total borrowings ............................ $61,800 $ 56,500 $59,600
======= ======== =======
Weighted average interest rate of FHLB advances 5.95% 6.24% 6.05%
</TABLE>
YEAR 2000 READINESS DISCLOSURE
INTRODUCTION
Notice is hereby given that the Year 2000 statement set forth below is
being designated a Year 2000 Readiness Disclosure in accordance with Section
7(b) of the Year 2000 Information and Readiness Disclosure Act.
For more than a year, the Company has been engaged in the process of
addressing a potential problem that is facing all users of automated information
systems, including personal computers, that is generally referred to as the Year
2000 Issue. The problem is the result of computer systems processing
transactions based upon 2 digits representing the year of the transaction rather
than 4 full digits (e.g., 97 for 1997). These computer systems may not operate
properly when the last two digits become "00," as will occur on January 1, 2000.
In some cases, this could result in a system failure, miscalculations causing
disruptions of operations, temporary inability to process transactions, send
invoices or engage in similar normal business activities. The problem could
affect a wide variety of automated information systems such as main frame
computer applications, personal computers, communication systems, including
telephone systems, and other information systems utilized not only by the
Company, but also by its vendors and customers.
The most significant of the Company's automated information systems
affected by the Year 2000 issue is the data processing system used to process
transactions and information for loan and deposit customers. The Company
currently purchases the services for this system from a nationally recognized
data processing vendor. Other programs and applications used in the Company's
operations that will be affected by the Year 2000 issue include building and
security system equipment, ATM modems, loan
-41-
<PAGE> 44
document processing systems, investment accounting programs, and computer
software and hardware. All software and hardware has been purchased from outside
vendors. The Company has not developed any in-house computer applications or
equipment. All data processing is done off-site. The Company has maintenance
agreements with vendors on the majority of its equipment and systems.
STATE OF READINESS
The Company's Year 2000 plan process began in the summer of 1997. At
that time, a Year 2000 plan coordinator was appointed and assessment of mission
critical systems began. The Company upgraded much of its computer hardware and
software during1998, in large part to meet the system requirements when it
converted to a new data processing company in July 1998.
The Company anticipates that Year 2000 compliance will be achieved for
substantially all mission critical applications by the end of 1998. Further
renovation and testing is expected to occur during the first quarter of 1999,
with the timing dictated by external vendors. The Company's vendors have been
providing updates regarding their progress in assessment, renovation and testing
on a regular basis, and the Year 2000 coordinator is continuing to monitor the
progress. The Year 2000 Coordinator periodically presents updates regarding Year
2000 issues to the Board of Directors.
RISKS FROM YEAR 2000 ISSUES
The predominant risk associated with the Year 2000 issue for the
Company rests with the functionality of the data processing system. In order to
offset the inherent risk with its main data processing system, the Company is
researching sites and services offered by vendors which specialize in
establishing operations on an emergency basis, as well as preparing other
contingency plans.
The Company has not identified any customers who present potential risk
relative to their compliance with Year 2000 within their own organizations. Loan
officers are aware of the Year 2000 issue, and the issue is being addressed with
new commercial customers.
The Company has a large investment portfolio which carries a potential
liquidity risk should the companies handling the investments experience a Year
2000 issue. These companies appear to be well advanced in renovating and testing
their systems.
The Company outsources its item processing operations to a nationally
recognized data processing company. That company appears to be well advanced
with year 2000 compliance efforts.
Other vendors also appear to be progressing in their Year 2000 efforts.
The most difficult risks for the Company to assess are the risks associated with
the utilities offered by gas, electric and telephone companies. Those are risks
shared by everyone and cannot be accurately quantified at this time.
CONTINGENCY PLANS
As indicated above, the Company is researching "hot-site" options to
establish emergency operations if necessary because of a Year 2000 failure. The
Company has generally identified critical requirements for minimum levels of
outputs and services and established recovery plans to implement those
requirements. The Company is considering increasing its liquidity levels during
the last quarter of 1999 in preparation for possible extreme customer reaction
to the Year 2000 issue.
COSTS TO ADDRESS YEAR 2000 ISSUES
The Company has planned for the Year 2000 with its officers and staff.
It does not intend to use outside consultants. Because the Company relies
predominantly on outsourced vendors for its core
-42-
<PAGE> 45
applications, it does not expect significant costs related to Year 2000
renovation. Expenses incurred to date which are directly related to the Year
2000 issue total approximately $40,000.
Based on the Year 2000 plan as currently being executed and the best
available information, the Company does not anticipate that the cost to address
the Year 2000 issues will have a material adverse impact on its financial
condition, results of operation or liquidity.
FORWARD-LOOKING STATEMENTS
The preceding "Business," "Legal Proceedings" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
sections of this Form 10-K contain various "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which represents
Damen Financial Corporation's expectations and beliefs concerning future events
including, without limitation, the following: the Company's efforts in retaining
and expanding its customer base and differentiating it from its competition;
future FDIC insurance premium assessments; the impact of conversion to a
National Bank and its plan of restructuring on its financial performance and
future growth; the impact of interest rates on its net interest income as a
result of its balance sheet structure; the impact of its policy guidelines and
strategies on its net interest income based on future interest rate projections;
the ability to provide funding sources for both the Bank and the Parent Company;
and Management's assessment of its provision and allowance for loan loss levels
based upon future changes in the composition of its loan portfolio, loan losses,
collateral value and economic conditions; and Management's assessment of the
impact of the Year 2000 on the financial condition, results of operations and
liquidity of the Company.
The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those set forth in the forward looking statements due to market, economic and
other business related risks and uncertainties effecting the realization of such
statements. Certain of these risks and uncertainties included in such forward
looking statements include, without limitations, the following: dynamics of the
market served in terms of competition from traditional and nontraditional
financial service providers can effect both the funding capabilities of the
Company in terms of deposit garnering as well as asset generation capabilities;
future legislation to combine the BIF and the SAIF, as well as future financial
losses in the bank and savings and loan industries and actions by the Federal
Reserve Board may result in the imposition of costs and constraints on the
Company through higher FDIC insurance premiums; significant fluctuations in
market interest rates and operational limitations; deviations from the
assumptions used to evaluate the appropriate level of the allowance for loan
losses as well as future purchases and sales of loans may affect the appropriate
level of the allowance for loan losses and thereby affect the future levels of
provisioning; and the steps necessary to address the Year 2000 Issue include
ensuring that not only the Company's automated systems, but also those of
vendors and customers, can become Year 2000 compliant.
Accordingly, results actually achieved may differ materially from
expected results in these statements. Damen Financial Corporation does not
undertake, and specifically disclaims, any obligation to update any forward
looking statements to reflect events or circumstances occurring after the date
of such statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's interest rate risk position is discussed under the
heading "Asset/Liability Management" on pages 15 and 16. Other types of market
risk, such as foreign currency exchange risk and commodity price risk, do not
arise in the normal course of the Company's business activities.
-43-
<PAGE> 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DAMEN FINANCIAL CORPORATION
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30,
-----------------------------------
1998 1997
---- ----
<S> <C> <C>
Assets
Cash and amounts due from depository institutions $ 541,682 500,455
Interest-bearing deposits 1,245,446 1,590,529
------------- -----------
Total cash and cash equivalents 1,787,128 2,090,984
Investment securities held to maturity
(fair value: 1998 - $1,728,900; 1997 - $1,845,400) (note 2) 1,728,931 1,845,383
Investment securities, available for sale, at fair value (note 3) 40,377,371 35,874,298
Mortgage-backed securities held to maturity
(fair value: 1998 - $16,478,500; 1997 - $27,548,700) (note 4) 16,434,332 27,869,570
Mortgage-backed securities, available for sale, at fair value (note 5) 48,617,275 56,740,190
Loans receivable (net of allowance for loan losses:
1998 - $449,000; 1997 - $332,000) (note 6) 109,417,586 97,244,031
Foreclosed real estate - 79,000
Stock in Federal Home Loan Bank and
Federal Reserve Bank of Chicago 3,815,150 3,698,500
Accrued interest receivable (note 7) 1,755,466 1,551,284
Office properties and equipment - net (note 8) 3,530,443 3,473,326
Prepaid expenses and other assets (note 9) 569,040 642,654
------------- -----------
Total assets 228,032,722 231,109,220
============= ===========
Liabilities and Stockholders' Equity
Liabilities
Deposits (note 10) 115,698,518 125,746,001
Borrowed money (note 11) 61,800,000 56,500,000
Advance payments by borrowers for taxes and insurance 2,598,991 722,141
Other liabilities (note 12) 2,681,029 2,202,115
------------- -----------
Total liabilities 182,778,538 185,170,257
------------- -----------
Stockholders' Equity
Preferred stock, $.01 par value; authorized
100,000 shares; none outstanding - -
Common stock, $.01 par value; authorized 4,500,000 shares;
3,981,434 shares issued and 2,957,154 shares outstanding
at September 30, 1998 and 3,967,500 shares issued and
3,109,220 shares outstanding at September 30, 1997 39,814 39,675
Additional paid-in capital 38,837,468 38,452,948
Retained earnings, substantially restricted 22,882,928 22,100,190
Unrealized gain on securities available for sale, net of income taxes 1,740,980 1,382,560
Treasury stock, at cost (1,024,280 and 858,280 shares
at September 30, 1998 and 1997) (14,913,027) (12,117,799)
Common stock acquired by Employee Stock Ownership Plan (2,339,200) (2,550,800)
Common stock awarded by Recognition and Retention Plan (994,779) (1,367,811)
-------------- ------------
Total stockholders' equity (notes 16 and 17) 45,254,184 45,938,963
-------------- ------------
Commitments and contingencies (notes 18 and 19)
Total liabilities and stockholders' equity $ 228,032,722 231,109,220
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-44-
<PAGE> 47
DAMEN FINANCIAL CORPORATION
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans $ 8,387,749 7,641,587 7,372,382
Mortgage-backed securities 5,246,711 6,061,307 6,081,879
Tax-exempt securities 1,303,499 1,404,976 1,482,104
Interest and dividends on other investments 1,401,629 1,153,274 1,541,742
Dividends on FHLB and FRB stock 244,165 232,721 182,342
----------- ------------ -----------
Total interest income 16,583,753 16,493,865 16,660,449
----------- ------------ -----------
Interest expense:
Deposits 6,333,665 6,176,720 6,426,006
Borrowings 3,679,593 3,646,005 3,245,920
----------- ------------- -----------
Total interest expense 10,013,258 9,822,725 9,671,926
----------- ------------ -----------
Net interest income before provision for
loan losses 6,570,495 6,671,140 6,988,523
Provision for loan losses 146,876 36,618 70,000
----------- ------------ -----------
Net interest income after provision for
loan losses 6,423,619 6,634,522 6,918,523
----------- ------------ -----------
Non-interest income:
Loan fees and service charges 164,950 42,491 108,797
Gain (loss) on sale of:
Mortgage-backed securities, available for sale 18,557 (17,365) 4,064
Investment securities, available for sale 552,007 157,083 79,509
Rental income 97,926 20,634 9,149
Other income 92,422 64,232 65,022
----------- ------------ -----------
Total non-interest income 925,862 267,075 266,541
----------- ------------ -----------
Non-interest expense:
Compensation, employee benefits, and
related expenses (notes 13 and 14) 2,763,474 2,655,881 2,190,681
Advertising and promotion 330,494 462,815 457,918
Occupancy and equipment expense (note 8) 704,449 772,045 661,776
Data processing 246,975 122,488 100,862
Insurance expense 80,733 72,727 73,058
Federal deposit insurance premiums 77,682 114,674 295,265
SAIF special assessment - - 860,000
Legal, audit, and examination services 440,558 272,702 264,659
Other operating expenses 350,181 343,019 338,543
----------- ------------ -----------
Total non-interest expense 4,994,546 4,816,351 5,242,762
----------- ------------ -----------
Net income before income taxes 2,354,935 2,085,246 1,942,302
Provision for federal and state
income taxes (note 15) 427,200 339,799 162,460
----------- ------------ -----------
Net income $ 1,927,735 1,745,447 1,779,842
=========== ============ ===========
Earnings per share - basic $ .67 .54 .49
=========== ============ ===========
Earnings per share - diluted .65 .53 .49
=========== ============ ===========
Dividends declared per common share $ .40 .24 .12
=========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-45-
<PAGE> 48
DAMEN FINANCIAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Additional Securities
Common Paid-In Retained Available
Stock Capital Earnings For Sale
----------- ---------- ---------- --------------
<C> <C> <C> <C> <C>
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
Additions (deductions) for the year ended September 30, 1997:
Net income 1,745,447
Adjustment of securities to fair value, net of tax effect 1,214,881
Tax benefit related to employee stock plans 27,800
Purchase of treasury stock (660,897 shares)
Amortization of award of RRP stock
Contribution to fund ESOP loan 79,182
Dividends declared on common stock (776,427)
---------- ---------- ---------- ---------
Balance at September 30, 1997 39,675 38,452,948 22,100,190 1,382,560
Additions (deductions) for the year ended September 30, 1998:
Net income 1,927,735
Options exercised (13,934 shares) 139 161,843
Adjustment of securities to fair value, net of tax effect 358,420
Tax benefit related to employee stock plans 83,730
Purchase of treasury stock (166,000 shares)
Amortization of award of RRP stock
Contribution to fund ESOP loan 138,947
Dividends declared on common stock (1,144,997)
----------- ---------- ---------- ---------
Balance at September 30, 1998 $ 39,814 38,837,468 22,882,928 1,740,980
=========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
Common Common
Stock Stock
Treasury Acquired Awarded
Stock By ESOP By RRP Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at September 30, 1995 - (3,174,000) - 55,709,980
Additions (deductions) for the year ended September 30, 1996:
Net income
Adjustment of securities to fair value, net of tax effect 1,779,842
Purchase of treasury stock (197,383 shares) (618,791)
Purchase of stock for RRP (2,311,375) (2,311,375)
Amortization of award of RRP stock (1,865,187) (1,865,187)
Contribution to fund ESOP loan 124,343 124,343
Dividends declared on common stock 411,600 477,228
(426,169)
----------- ---------- ---------- ----------
(2,311,375) (2,762,400) (1,740,844) 52,869,871
Balance at September 30, 1996
Additions (deductions) for the year ended September 30, 1997:
1,745,447
Net income 1,214,881
Adjustment of securities to fair value, net of tax effect 27,800
Tax benefit related to employee stock plans (9,806,424) (9,806,424)
Purchase of treasury stock (660,897 shares) 373,033 373,033
Amortization of award of RRP stock 211,600 290,782
Contribution to fund ESOP loan (776,427)
----------- ---------- ---------- ----------
Dividends declared on common stock (12,117,799) (2,550,800) (1,367,811) 45,938,963
Balance at September 30, 1997
Additions (deductions) for the year ended September 30, 1998:
Net income 1,927,735
Options exercised (13,934 shares) 161,982
Adjustment of securities to fair value, net of tax effect 358,420
Tax benefit related to employee stock plans 83,730
Purchase of treasury stock (166,000 shares) (2,795,228) (2,795,228)
Amortization of award of RRP stock 373,032 373,032
Contribution to fund ESOP loan 211,600 350,547
Dividends declared on common stock (1,144,997)
----------- ---------- -------- ----------
Balance at September 30, 1998 (14,913,027) (2,339,200) (994,779) 45,254,184
=========== ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-46-
<PAGE> 49
DAMEN FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Cash Flows from operating activities:
Net income $1,927,735 1,745,447 1,779,842
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 246,145 196,102 177,333
Amortization of cost of stock benefit plans 723,579 663,815 601,572
Provision for loan losses 146,876 36,618 70,000
Decrease in deferred loan income (302,392) (312,174) (110,405)
(Increase) decrease in prepaid and deferred federal and state income taxes 250,350 (156,187) 18,602
(Gain) loss on sale of mortgage-backed securities, available for sale (18,557) 17,365 (4,064)
Gain on sale of investment securities, available for sale (552,007) (157,083) (79,509)
(Increase) decrease in accrued interest receivable (204,182) 109,803 (473,474)
Increase (decrease) in accrued interest payable 41,599 (16,900) (286,500)
(Increase) decrease in other assets (49,599) 15,462 (22,055)
Increase (decrease) in other liabilities 116,279 (725,622) 900,543
------------- ------------- -----------
Net cash provided by operating activities 2,325,826 1,416,646 2,571,885
------------- ------------ ----------
Cash flows from investing activities:
Purchase of investment securities, available for sale (19,640,201) (7,221,615) (19,553,246)
Purchase of investment securities (108,247) (216,326) (785,126)
Purchase of mortgage-backed securities, available for sale (7,817,794) (12,178,505) (22,963,828)
Purchase of mortgage-backed securities - - (229,361)
Proceeds from sales of investment securities, available for sale 6,573,109 9,472,341 3,133,750
Proceeds from sales of mortgage-backed securities, available for sale 778,649 1,816,256 919,975
Proceeds from maturities of investment securities, available for sale 9,493,026 6,195,769 6,547,993
Proceeds from maturities of investment securities 224,699 147,922 97,922
Proceeds from maturities of mortgage-backed securities, available for sale 15,409,606 7,435,734 8,364,322
Proceeds from maturities of mortgage-backed securities 11,435,238 7,633,961 7,259,192
Proceeds from redemption of Federal Home Loan Bank stock 305,000 55,500 130,000
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock (421,650) (643,500) (670,500)
Disbursements for loans (34,173,752) (23,846,339) (19,814,855)
Loan repayments 22,234,713 18,023,757 16,264,628
Property and equipment expenditures (303,262) (166,441) (347,662)
------------- ----------- ----------
Net cash provided by (for) investing activities 3,989,134 6,508,514 (21,646,796)
------------- ----------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options 161,982 - -
Deposit receipts 70,971,720 80,168,443 66,969,226
Deposit withdrawals (85,851,421) (77,870,072) (79,780,537)
Interest credited to deposit accounts 4,832,218 4,474,295 5,152,886
Proceeds from borrowed money 55,900,000 179,400,000 181,100,000
Repayment of borrowed money (50,600,000)(182,500,000) (167,000,000)
Increase (decrease) in advance payments by borrowers for taxes and insurance 1,876,850 83,373 (2,162,546)
Purchase of RRP stock - - (1,865,187)
Purchase of treasury stock (2,795,228) (9,806,424) (2,311,375)
Dividends paid on common stock (1,114,937) (965,022) (209,484)
Net cash provided for financing activities (6,618,816) (7,015,407) (107,017)
------------- ----------- ------------
Increase (decrease) in cash and cash equivalents (303,856) 909,753 (19,181,928)
Cash and cash equivalents at beginning of period 2,090,984 1,181,231 20,363,159
------------- ----------- ----------
Cash and cash equivalents at end of period $ 1,787,128 2,090,984 1,181,231
============= =========== ===========
Cash paid during the period for:
Interest $ 9,971,659 9,839,625 9,958,426
Income taxes 302,388 350,142 232,229
Non-cash investing activities:
Transfer of loans to foreclosed real estate $ - 79,000 -
============= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-47-
<PAGE> 50
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, 1998 and 1997,
and the related consolidated statements of earnings, changes in stockholders'
equity, and cash flows for each of the three years in the period ending
September 30, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ending September 30, 1998 in conformity with generally accepted
accounting principles.
/S/ COBITZ, VANDENBERG & FENNESSY
- - - ---------------------------------
November 6, 1998
Palos Hills, Illinois
-48-
<PAGE> 51
DAMEN FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
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. 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"). During the prior fiscal year, Damen Federal
Bank for Savings applied for and received approval from the Office of the
Comptroller of the Currency to convert its charter from a federal savings
bank to a national bank. Effective February 27, 1997, the Bank converted to
a national bank and changed its name to Damen National Bank (the "Bank"),
and the Company ceased to be a savings and loan holding company and became
a bank holding company.
The accounting and reporting policies of the Company and its subsidiaries
conform to generally accepted accounting principles and to general practice
within the financial institution 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 National Bank 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 account, which is included, net of income taxes, as a separate
component of stockholders' equity. 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.
-49-
<PAGE> 52
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.
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 over the contractual life of the loan.
The Company has 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". 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.
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, 1998 and
no loans to be evaluated for impairment at September 30, 1998.
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 loan 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.
-50-
<PAGE> 53
Foreclosed Real Estate
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 computed utilizing
the straight- line method over the estimated lives of the various 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.
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
The Company computes its earnings per share (EPS) in accordance with
SFAS No. 128, "Earnings per Share". This statement simplifies the standards
for computing EPS previously found in Accounting Principles Board Opinion
No. 5, "Earnings per Share" and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation
of basic EPS and fully diluted EPS with diluted EPS.
Basic EPS, unlike primary EPS, excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity.
-51-
<PAGE> 54
The following presentation illustrates basic and diluted EPS in
accordance with the provisions of SFAS 128:
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average number of
common shares outstanding used
in basic EPS calculation 2,849,784 3,230,217 3,633,784
Add common stock equivalents
for shares issuable under
Stock Option Plans 114,678 59,928 -
--------- --------- ---------
Weighted average number of shares
outstanding adjusted for common
stock equivalents 2,964,462 3,290,145 3,633,784
========= ========= =========
Net income 1,927,735 1,745,447 1,779,842
Basic earnings per share .67 .54 .49
Diluted earnings per share $ .65 .53 .49
</TABLE>
EPS for prior periods has been restated to comply with the provisions
of SFAS 128.
2) Investment Securities, Held to Maturity
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, 1998
Debt securities (a) $ 895,738 - 38 895,700
Investment in limited partnerships (b) 833,193 7 - 833,200
--------- ------- ------- ---------
$1,728,931 7 38 1,728,900
========= ======= ======= =========
September 30, 1997
Debt securities (a) $ 940,190 10 - 940,200
Investment in limited partnerships (b) 905,193 7 - 905,200
--------- ------- ------- ---------
$1,845,383 17 - 1,845,400
========= ======= ======= =========
</TABLE>
(a) Investment in notes secured by mortgages originated by the Community
Investment Corporation and the National Housing Service; the weighted
average yield on these notes was 7.61% and 7.65% at September 30, 1998 and
1997, 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.
-52-
<PAGE> 55
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, 1998
- - - ------------------
United States Government
and agency securities $ 16,084,875 355,348 348 16,439,875
Tax-exempt securities (a) 18,324,274 1,518,772 - 19,843,046
Corporate securities 3,999,222 95,228 - 4,094,450
------------ --------- ---------- ----------
$ 38,408,371 1,969,348 348 40,377,371
============ ========= ========== ==========
September 30, 1997
- - - ------------------
United States Government
and agency securities $ 11,040,166 35,202 24,202 11,051,166
Tax-exempt securities 21,095,241 1,397,994 - 22,493,235
Corporate securities 2,146,891 183,006 - 2,329,897
------------ --------- ---------- ----------
$ 34,282,298 1,616,202 24,202 35,874,298
============ ========= ========== ==========
</TABLE>
(a) Consists of obligations of school, city and park districts and general
obligations of various cities and municipalities. All securities carry at
least an AA rating due to financial strength or because of insurance
enhancements. At September 30, 1998, there were 56 tax-exempt securities
with an average balance of approximately $333,000. The largest
concentration (approximately $7,880,000) of securities are located within
the State of Illinois with the remainder spread throughout the country.
Tax-exempt securities with a cost basis of $5,224,000 and a fair value
of approximately $5,695,000 are pledged as collateral to secure the
uninsured portions of various municipalities' certificates of deposit at
the Bank.
During the year ended September 30, 1998, the Company sold securities
realizing gross proceeds of $6,573,109 and gross gains of $552,632 and gross
losses of $625. Proceeds from the sale of investment securities totaled
$9,472,341 for the year ended September 30, 1997, and $3,133,750 for the year
ended September 30, 1996. Gross gains of $321,434 and $104,824 and gross losses
of $164,351 and $25,315 were realized for the years ended September 30, 1997 and
1996, respectively. In addition, during the current period, the increase in net
unrealized gains of $377,000, net of the tax effect of $154,570, resulted in a
$222,430 credit to stockholders' equity.
The contractual maturity of these investments are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
----------------------- -----------------------
Amortized Fair Amortized Fair
Term to Maturity Cost Value Cost Value
- - - ---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ 3,046,205 3,057,559 2,096,897 2,128,479
Due after one year
through five years 6,943,727 7,240,916 10,641,030 10,972,237
Due after five years
through ten years 12,447,542 12,903,605 6,947,655 7,174,873
Due after ten years 15,970,897 17,175,291 14,596,716 15,598,709
----------- ---------- ---------- ----------
$38,408,371 40,377,371 34,282,298 35,874,298
=========== ========== ========== ==========
</TABLE>
-53-
<PAGE> 56
4) Mortgage-Backed Securities, Held to Maturity
The investment in mortgage-backed securities held to maturity consists
of collaterized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs)", and is summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
September 30, 1998
CMOs and REMICs:
FHLMC - fixed rate (a) $ 1,146,016 10,584 - 1,156,600
FNMA - fixed rate 2,340,483 12,376 9,859 2,343,000
Privately issued
- fixed rate (a) 5,679,241 50,342 4,983 5,724,600
- adjustable rate (a) 7,268,592 37,152 51,444 7,254,300
----------- ------- -------- ----------
$16,434,332 110,454 66,286 16,478,500
=========== ======= ======== ==========
Weighted average interest rate 6.87%
====
September 30, 1997
CMOs and REMICs:
FHLMC - fixed rate $ 3,334,844 783 11,527 3,324,100
FNMA - fixed rate 5,454,152 8,348 69,200 5,393,300
Privately issued
- fixed rate 9,752,405 59,630 87,435 9,724,600
- adjustable rate 9,328,169 7,737 229,206 9,106,700
----------- ------- ------- ----------
$27,869,570 76,498 397,368 27,548,700
=========== ======= ======= ==========
Weighted average interest rate 6.85%
====
</TABLE>
(a) Mortgage-backed securities with a cost basis of $1,525,532 and a fair
value of approximately $1,528,100 are pledged as collateral to secure
advances from the Federal Home Loan Bank of Chicago.
-54-
<PAGE> 57
5) Mortgage-Backed Securities, Available for Sale
Mortgage-backed securities available for sale are recorded at fair value
in accordance with SFAS 115. This portfolio is summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- --------- -------- ----------
<S> <C> <C> <C> <C>
September 30, 1998
------------------
FHLMC participation certificates
- adjustable rate (a)(b) $ 1,695,176 87,364 186 1,782,354
- fixed rate 511,783 14,919 - 526,702
FNMA participation certificates
- adjustable rate (a)(b) 6,255,174 185,203 - 6,440,377
- fixed rate (a) 624,305 15,721 - 640,026
GNMA participation certificates
- adjustable rate (b) 4,825,379 84,546 137 4,909,788
- fixed rate (a)(b) 22,819,147 459,837 5,061 23,273,923
Conventional participation certificates
- adjustable rate 4,872,553 83,215 24,421 4,931,347
CMOs and REMICs
FHLMC - fixed rate 973,221 9,930 - 983,151
FNMA - adjustable rate (b) 2,088,944 15,007 - 2,103,951
Privately issued
- fixed rate 2,969,593 56,063 - 3,025,656
---------- --------- -------- ----------
$47,635,275 1,011,805 29,805 48,617,275
========== ========= ======== ==========
Weighted average interest rate 7.17%
==========
September 30, 1997
------------------
FHLMC participation certificates
- adjustable rate $ 3,059,204 171,131 2,487 3,227,848
- fixed rate 741,428 25,010 - 766,438
FNMA participation certificates
- adjustable rate 8,549,198 175,493 15,296 8,709,395
- fixed rate 637,108 1,884 16,029 622,963
GNMA participation certificates
- adjustable rate 7,259,175 136,536 1,506 7,394,205
- fixed rate 23,275,018 279,452 39,091 23,515,379
Conventional participation certificates
- adjustable rate 6,658,548 123,256 20,341 6,761,463
CMOs and REMICs
FNMA - fixed rate 742,757 3,767 - 746,524
- adjustable rate 2,101,887 1,630 18,450 2,085,067
Privately issued
- fixed rate 2,962,856 - 51,948 2,910,908
---------- --------- -------- ----------
$ 55,987,17 918,159 165,148 56,740,190
========== ========= ======== ==========
Weighted average interest rate 7.28%
==========
</TABLE>
(a) Mortgage-backed securities with a cost basis of $6,541,661 and a fair
value of approximately $6,696,500 are pledged as collateral to secure the
uninsured portions of various municipalities' certificates of deposit at
the Bank.
(b) Mortgage-backed securities with a cost basis of $13,753,909 and a fair
value of approximately $14,056,800 are pledged as collateral to secure
advances from the Federal Home Loan Bank of Chicago.
During the year ended September 30, 1998, the Company sold mortgage-backed
securities available for sale, realizing gross proceeds of $778,649, and profits
of $18,557. During the year ended September 30, 1997, the Company sold
mortgage-backed securities available for
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<PAGE> 58
sale, realizing gross proceeds of $1,816,256, and losses of $17,365.
Proceeds from the sale of mortgage-backed securities totaled $919,975 for
the year ended September 30, 1996, resulting in profits of $7,829 and
losses of $3,765. In addition, during the current period, the increase in
net unrealized gains of $228,989, net of the tax effect of $92,999,
resulted in a $135,990 credit to stockholders' equity.
6) Loans Receivable
Loans receivable consist of the following:
<TABLE>
<CAPTION>
September 30,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Mortgage loans:
One-to-four family $ 84,896,288 79,586,001
Multi-family 13,601,285 12,237,282
Non-residential 6,096,360 4,573,444
Construction 2,204,739 528,909
----------- ----------
Total mortgage loans 106,798,672 96,925,636
----------- ----------
Other loans:
Secured commercial loans 1,481,606 -
Secured lines of credit 2,576,128 2,009,733
Loans on deposits 218,954 226,550
Other - 24,400
----------- ----------
Total other loans 4,276,688 2,260,683
----------- ----------
Total loans receivable 111,075,360 99,186,319
----------- ----------
Less:
Loans in process 239,470 338,592
Deferred loan fees 969,304 1,271,696
Allowance for loan losses 449,000 332,000
----------- ----------
Loans receivable, net $ 109,417,586 97,244,031
=========== ==========
Weighted average interest rate 7.59% 7.69%
=========== ==========
</TABLE>
There were eleven loans delinquent three months or more and non-accruing
totaling $562,146, or .5% of total loans in force as of September 30, 1998.
Comparable figures at September 30, 1997 were seven loans totaling
$196,966, or .2% of total loans. The Bank has established an allowance for
loan losses of $449,000 at September 30, 1998 as required by its internal
policies.
For the years ended September 30, 1998, 1997 and 1996, gross interest
income which would have been recorded had the non-accruing loans been
current in accordance with their original terms amounted to approximately
$20,000, $16,500 and $8,900, respectively.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of period $ 332,000 345,000 275,000
Provision for loan losses 146,876 36,618 70,000
Charge-offs (29,876) (49,618) -
--------- ------- -------
Balance, end of period $ 449,000 332,000 345,000
======== ======= =======
</TABLE>
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, 1998 and 1997, 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
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<PAGE> 59
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.
7) Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
September 30,
-------------------
1998 1997
---- ----
<S> <C> <C>
U.S. Government and agency securities $ 309,918 208,801
Mortgage-backed securities 410,233 529,709
Tax-exempt securities 349,855 391,420
Loans receivable 600,381 369,875
Allowance for uncollected interest on loans (19,977) (20,436)
Interest collected in advance on loans (10,866) -
Other investments 115,922 71,915
--------- ---------
$1,755,466 1,551,284
========= =========
</TABLE>
8) Office Properties and Equipment
Depreciation, computed by the straight line method, amounted to
$246,145, $196,102 and $177,333 for the years ended September 30, 1998,
1997 and 1996. Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
September 30,
-------------------
1998 1997
---- ----
<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 1,855,311 1,821,818
Parking lot improvements 47,394 47,394
Furniture, fixtures, and equipment 1,834,404 1,564,635
Automobiles 32,880 32,880
---------- ---------
6,005,286 5,702,024
---------- ---------
Less accumulated depreciation:
Office building - Chicago 349,113 349,113
Office building - Burbank 144,142 125,318
Office building - Schaumburg 332,642 249,033
Parking lot improvements 47,394 47,394
Furniture, fixtures, and equipment 1,115,812 977,740
Automobiles 19,740 14,100
---------- ---------
2,008,843 1,762,698
---------- ---------
Less valuation allowance:
Office building - Schaumburg 466,000 466,000
---------- ---------
$3,530,443 3,473,326
========== =========
</TABLE>
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<PAGE> 60
9) Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
<TABLE>
<CAPTION>
September 30,
-----------------------
1998 1997
-----------------------
<S> <C> <C>
Current federal and state income
tax overpayment - net $ 375,537 498,750
Prepaid examination fees 16,195 15,860
Prepaid federal deposit insurance premiums 17,919 19,115
Other prepaid insurance 75,900 29,229
Other prepaid expenses 77,086 78,174
Accounts receivable 6,403 1,526
--------- ---------
$ 569,040 642,654
========= =========
</TABLE>
10) Deposits
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------
1998 1997
-----------------------
<S> <C> <C>
Passbook accounts $ 19,989,091 19,938,383
Certificates 85,360,945 95,071,195
NOW and money market accounts 10,348,482 10,736,423
----------- -----------
Total $115,698,518 125,746,001
=========== ===========
</TABLE>
The composition of deposit accounts by interest rates is as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------
1998 1997
-----------------------
<S> <C> <C>
Non-interest bearing $ 277,196 87,231
1.00 - 3.99% 25,838,614 21,668,240
4.00 - 4.99 6,459,022 9,610,160
5.00 - 5.99 63,693,707 62,247,299
6.00 - 6.99 17,660,557 29,466,580
7.00 - 7.99 1,509,162 1,530,587
8.00 - 8.99 - 433,888
9.00 - 9.99 260,260 702,016
----------- -----------
Total $115,698,518 125,746,001
=========== ===========
Weighted average interest rate 4.94% 5.21%
=========== ===========
</TABLE>
A summary of certificates of deposits by maturity is as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------
1998 1997
-----------------------
<S> <C> <C>
Within 12 months $67,294,068 60,259,565
12 months to 24 months 10,518,810 23,928,672
24 months to 36 months 3,420,461 5,961,203
36 months to 48 months 2,801,320 2,650,080
Over 48 months 1,326,286 2,271,675
---------- ----------
Total $85,360,945 95,071,195
========== ==========
</TABLE>
-58-
<PAGE> 61
10) Deposits (continued)
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Passbook accounts $ 532,164 607,646 709,803
Certificates 5,418,113 5,154,822 5,271,871
NOW and money
market accounts 383,388 414,252 444,332
------------ --------- ---------
Total $ 6,333,665 6,176,720 6,426,006
============ ========= =========
</TABLE>
The aggregate amount of deposit accounts with a balance of $100,000 or
greater was approximately $35,500,000 and $33,400,000 at September 30, 1998
and 1997, respectively. Deposits in excess of $100,000 are not insured by
the Federal Deposit Insurance Corporation.
11) Borrowed Money
Borrowed money consists of the following:
<TABLE>
<CAPTION>
September 30,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Federal Home Loan Bank of Chicago Advances-
Due date and current rates:
Period ended within 12 months
Weighted average fixed rate
of 6.20% at September 30, 1998 $11,000,000 11,500,000
Weighted average adjustable rate
of 6.10% at September 30, 1998 800,000 7,000,000
Period from 12 months to 24 months
Weighted average fixed rate
of 5.90% at September 30, 1998 14,000,000 9,000,000
Period from 24 months to 36 months
Weighted average fixed rate
of 6.72% at September 30, 1998 10,000,000 11,000,000
Period from 36 months to 48 months
Weighted average fixed rate
of 6.18% at September 30, 1998 8,000,000 9,000,000
Period from 48 months and thereafter
Weighted average fixed rate
of 5.31% at September 30, 1998 16,000,000 9,000,000
Weighted average adjustable rate
of 5.15% at September 30, 1998 2,000,000 -
-------------------------
$61,800,000 56,500,000
========== ==========
Weighted average interest rate 5.95% 6.24%
========== =====
</TABLE>
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 $3,679,593, $3,646,005 and
$3,245,920 for the years ended September 30, 1998, 1997 and 1996.
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
-59-
<PAGE> 62
committed to make contributions to the ESOP sufficient to allow the ESOP
to fund the debt service requirements of the loan.
12) Other Liabilities
Other liabilities consist of the following:
<TABLE>
<CAPTION>
September 30,
------------------------
1998 1997
---- ----
<S> <C> <C>
Deferred federal and state income tax
liability - net (a) $1,032,513 741,537
Accrued interest on borrowed money 311,600 293,700
Accrued interest on deposits 274,699 251,000
Accrued real estate taxes 197,000 169,000
Amount due on settlement of securities 500,000 -
Promissory note for capital contribution
due Kedzie Limited Partnership 112,500 497,045
Other accrued expenses 152,644 123,984
Accounts payable and other items 100,073 125,849
---------- ---------
$2,681,029 2,202,115
========== =========
</TABLE>
(a) The approximate tax effect of temporary differences that give rise
to the Company's net deferred tax liability at September 30, 1998
and 1997 under SFAS 109 is as follows:
<TABLE>
<CAPTION>
Assets Liabilities Net
------ ----------- ---
September 30, 1998
------------------
<S> <C> <C> <C>
Loan fees deferred for financial
reporting purposes $ 275,833 - 275,833
Bad debt reserves established
for financial reporting purposes 184,090 - 184,090
Increases to tax bad debt
reserves since January 1, 1988 - (384,701) (384,701)
Accelerated depreciation
for tax purposes - (157,768) (157,768)
Valuation allowance on office building 191,060 - 191,060
Unrealized gain on securities
available for sale - (1,210,018) (1,210,018)
Nondeductible incentive plan expense 81,600 - 81,600
Other items - (12,609) (12,609)
--------- ---------- ----------
$ 732,583 (1,765,096) (1,032,513)
========= ========== ==========
September 30, 1997
------------------
Loan fees deferred for financial
reporting purposes $ 365,007 - 365,007
Bad debt reserves established for
financial reporting purposes 136,120 - 136,120
Increases to tax bad debt reserves
since January 1, 1988 - (384,701) (384,701)
Accelerated depreciation
for tax purposes - (132,697) (132,697)
Valuation allowance on
office building 191,060 - 191,060
Unrealized gain on securities
available for sale - (962,449) (962,449)
Nondeductible incentive
plan expense 70,200 - 70,200
Other items - (24,077) (24,077)
--------- ---------- ----------
$ 762,387 (1,503,924) (741,537)
========= ========== ==========
</TABLE>
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. No
contributions were made for the years ended September 30, 1998, 1997 or
1996.
-60-
<PAGE> 63
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, reserving 396,750 options on common shares for issuance to directors,
officers and key employees. The Plan provides that option prices will not
be less than the fair market value at the grant date. Options issued are
generally exercisable at a rate of 20% per year. The options expire no
later than ten years from the date of grant. The following is an analysis
of the stock option activity for each of the years in the three year period
ended September 30, 1998 and the stock options outstanding at the end of
the respective periods.
<TABLE>
<CAPTION>
Exercise Price
---------------------------
Number
of Shares Per Share Total
--------- ------------ -----------
<S> <C> <C> <C>
Options
Outstanding at September 30, 1995 0
Granted 376,909 $ 11.63 $ 4,383,452
Exercised 0
Forfeited 0
--------- ------------ -----------
Outstanding at September 30, 1996 376,909 11.63 4,383,452
Granted 19,837 14.56 288,827
Exercised 0
Forfeited 0
--------- ------------ -----------
Outstanding at September 30, 1997 396,746 11.63-14.56 4,672,279
Granted 0
Exercised (13,934) 11.63 (161,982)
Forfeited 0
--------- ------------ -----------
Outstanding at September 30, 1998 382,812 $11.63-14.56 $ 4,501,297
========= ============ ===========
Exercisable at September 30, 1998 137,355 $11.63-14.56 $ 1,609,062
========= ============ ===========
Options available for future
grants at September 30, 1998 4
=========
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company implemented SFAS No. 123 "Accounting for Stock-Based Compensation"
during the year ended September 30, 1997. The Company will retain its current
accounting method for its stock-based compensation plans. This statement will
only result in additional disclosures for the Company, and as such, its adoption
did not, nor is it expected to have, a material impact on the Company's
financial condition or its results of operations.
The following summarizes the pro forma net income as if the fair value method of
accounting for stock-based compensation plans had been utilized:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (as reported) $ 1,927,735 1,745,447 1,779,842
Pro forma net income 1,846,062 1,664,987 1,753,022
Earnings per diluted share (as reported) $ .65 .53 .49
Pro forma earnings per share .62 .51 .48
</TABLE>
-61-
<PAGE> 64
The pro forma results presented on the previous page may not be
representative of the effects reported in pro forma net income for future
years.
The fair value of the option grants for the years ended September 30, 1998,
1997 and 1996 was estimated using the Black Scholes option value model,
using the following assumptions: dividend yield of approximately 2.0%,
expected volatility of 10%, risk free interest rate of 6.25%, and an
expected life of approximately 10 years during all periods.
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
$377,938, $392,158 and $609,808 for the years ended September 30, 1998,
1997 and 1996, respectively.
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 years ended September 30, 1998, 1997 and 1996, additional compensation
expense of $138,947, $79,182 and $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 September 30, 1998, 154,731 shares were awarded, and are
vesting at a rate of 20% per year, while 3,969 shares are 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
years ended September 30, 1998, 1997 and 1996, $373,032, $373,033 and
$124,343 had been amortized to expense. The unamortized cost, which is
comparable to deferred compensation, is reflected as a reduction of
stockholders' equity.
15) Income Taxes
The Company has adopted SFAS No. 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.
-62-
<PAGE> 65
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, 1998 includes approximately $3,994,000
for which no deferred federal income tax liability has been recognized.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended September 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current (benefit) $ 383,793 (136,703) 438,031
Deferred (benefit) 43,407 476,502 (275,571)
------- ------- -------
$ 427,200 339,799 162,460
======= ======= =======
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes 4.2 4.6 3.1
Tax-exempt interest income (17.6) (22.9) (22.8)
Tax credits (3.5) - (5.4)
Other 1.0 0.6 (0.5)
------- ------ -------
Effective income tax rate 18.1% 16.3% 8.4%
===== ===== =======
</TABLE>
Deferred income tax expense (benefit) consists of the following tax effects
of timing differences:
<TABLE>
<CAPTION>
Years Ended September 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Loan fees $ 89,174 89,348 136,026
Book provision for loan losses less
than (in excess of) tax deduction (47,970) 5,330 (28,700)
Depreciation 25,071 40,855 24,737
Compensation related expenses (11,400) (19,219) (50,981)
SAIF special assessment - 352,600 (352,600)
Other, net (11,468) 7,588 (4,053)
------- ------- -------
$ 43,407 476,502 (275,571)
======= ======= ========
</TABLE>
16) Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum total requirements
can initiate certain mandatory and possible additional discretionary
actions by regulators that, if undertaken, could have a direct material
effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt correction action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to quantitative
judgments by the regulators about components, risk weightings, and other
factors.
-63-
<PAGE> 66
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios, set forth in the
table below, of the total risk-based and core capital, as defined in the
regulations. Management believes, as of September 30, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
The Bank, according to federal regulatory standards, is well-capitalized
under the regulatory framework for prompt corrective action. To be
categorized as adequately capitalized, the Bank must maintain minimum total
risk-based, and core ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
At September 30, 1998 and 1997, the Bank's regulatory equity capital was as
follows:
<TABLE>
<CAPTION>
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1998
Risk-based $39,856,535 43.36% $ 7,354,000 8.00% $ 9,192,000 10.00%
Core 39,407,535 17.54 6,742,000 3.00 11,237,000 5.00
September 30, 1997
Risk-based $39,673,781 43.35% $ 6,998,000 8.00% $ 8,748,000 10.00%
Core 39,341,781 17.55 6,724,000 3.00 11,207,000 5.00
</TABLE>
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.
In addition, the Bank may not declare or pay cash dividends on or
repurchase any of its shares of common stock if the effect thereof would
cause stockholders' equity to be reduced below applicable regulatory
capital maintenance requirements or if such declaration and payment would
otherwise violate regulatory requirements.
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.
18) 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 or purchase loans. These financial instruments
carry varying degrees of credit and interest-rate risk in excess of amounts
recorded in the consolidated financial statements.
-64-
<PAGE> 67
Commitments to originate mortgage loans totaling $5,468,000 at September
30, 1998 represent amounts which the Bank plans to fund within the normal
commitment period of 60 to 90 days. Of this amount, $4,888,000 are in fixed
rate commitments with rates ranging from 6.55% to 8.25%, and $580,000 are
in adjustable rate commitments. 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. 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.
The Bank has approved, but unused, equity lines of credit of approximately
$1,455,000 at September 30, 1998. Approval of lines of credit is based upon
underwriting standards and limitations similar to conventional lending.
At September 30, 1998, the Bank was committed to fund an additional
investment of $693,000, through the year 2000, in notes secured by
adjustable rate mortgage loans, issued by the Community Investment
Corporation. The notes have an average maturity date of approximately
twenty years.
19) 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.
20) Subsequent Event
At the October 20, 1998 Board of Directors' meeting, the Company declared a
quarterly dividend of $.12 per share, totaling $342,738, payable November
16, 1998 to shareholders of record as of November 2, 1998.
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.
-65-
<PAGE> 68
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 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>
September 30, 1998
----------------------------
Carrying Fair
Amount Value
------------ -----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 1,787,128 1,787,128
Investment securities, held to maturity 1,728,931 1,728,900
Investment securities, available for sale 40,377,371 40,377,371
Mortgage-backed securities, held to maturity 16,434,332 16,478,500
Mortgage-backed securities, available for sale 48,617,275 48,617,275
Loans receivable, gross 111,075,360 117,009,500
Financial liabilities:
Deposits 115,698,518 116,872,400
Borrowed money 61,800,000 64,455,000
September 30, 1998
----------------------------
Carrying Fair
Amount Value
------------ -----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,090,984 2,090,984
Investment securities, held to maturity 1,845,383 1,845,400
Investment securities, available for sale 35,874,298 35,874,298
Mortgage-backed securities, held to maturity 27,869,570 27,548,700
Mortgage-backed securities, available for sale 56,740,190 56,740,190
Loans receivable, gross 99,186,319 99,702,100
Financial liabilities:
Deposits 125,746,001 126,401,100
Borrowed money 56,500,000 55,817,800
</TABLE>
-66-
<PAGE> 69
22) Condensed Parent Company Only Financial Statements
The following condensed statements of financial condition, as of September
30, 1998 and 1997, and condensed statements of earnings and cash flows for
the years ended September 30, 1998, 1997 and 1996 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,
-----------------------------
1998 1997
--------- --------
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,614,205 983,285
Securities available for sale - 1,808,310
Loans receivable 2,339,200 2,550,800
Equity investment in subsidiaries 41,462,978 41,747,771
Prepaid expenses and other assets 213,482 63,112
----------- ----------
45,629,865 47,153,278
=========== ==========
Liabilities and Stockholders' Equity
Accounts payable 61,218 96,885
Common stock 39,814 39,675
Additional paid-in capital 38,553,711 38,308,138
Retained earnings 22,882,928 22,100,190
Unrealized gain on securities
available for sale, net of taxes - 94,000
Treasury stock (14,913,027) (12,117,799)
Common stock awarded by
Recognition and Retention Plan (994,779) (1,367,811)
----------- ----------
$45,629,865 47,153,278
=========== ==========
</TABLE>
Statements of Earnings
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Equity in earnings of subsidiaries $2,015,207 1,522,955 1,287,312
Interest and dividend income 304,849 676,491 1,085,013
Gain on sale of investment
securities, available for sale 292,566 139,718 84,550
Non-interest expense (683,657) (467,994) (449,733)
Provision for federal and state
income taxes (1,230) (125,723) (227,300)
---------- --------- ---------
Net income $1,927,735 1,745,447 1,779,842
========== ========= =========
</TABLE>
-67-
<PAGE> 70
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 1,927,735 1,745,447 1,779,842
Equity in earnings of subsidiaries (2,015,207) (1,522,955) (1,287,312)
Gain on sale of investment
securities, available for sale (292,566) (139,718) (84,550)
(Increase) decrease in accrued
interest receivable 10,558 171,762 (182,320)
Change in other
assets and liabilities (75,925) (82,224) (61,737)
Amortization of cost of
stock benefit plans 373,032 373,033 124,343
----------- ----------- -----------
Net cash provided by (for)
operating activities (72,373) 545,345 288,266
----------- ----------- -----------
Investing activities:
Loan repayments 211,600 211,600 411,600
Purchase of securities
available for sale (1,749,688) (2,007,981) (15,581,411)
Proceeds from maturities of
investment securities
available for sale 1,236,919 596,753 1,637,563
Proceeds from sales of investment
securities available for sale 2,452,645 11,288,597 2,643,438
----------- ----------- -----------
Net cash provided by (for)
investing activities 2,151,476 10,088,969 (10,888,810)
----------- ----------- -----------
Financing activities:
Proceeds from exercise of
stock options 161,982 - -
Dividends received from
subsidiary 2,300,000 - -
Dividends paid on common stock (1,114,937) (965,022) (209,484)
Purchase of treasury stock (2,795,228) (9,806,424) (2,311,375)
Purchase of RRP stock - - (1,865,187)
----------- ------------ -----------
Net cash provided for
financing activities (1,448,183) (10,771,446) (4,386,046)
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents 630,920 (137,132) (14,986,590)
Cash and cash equivalents at
beginning of period 983,285 1,120,417 16,107,007
----------- ----------- -----------
Cash and cash equivalents
at end of period $ 1,614,205 983,285 1,120,417
=========== =========== ===========
</TABLE>
-68-
<PAGE> 71
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers who are
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 1999, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Information concerning the executive officers of the Registrant who are
not also directors of the Registrant is contained in Item 1 of Part I of this
Form 10-K under the caption "Executive Officers Who Are Not Directors."
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 1999, 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 1999, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
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 1999, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
-69-
<PAGE> 72
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following exhibits, financial statements and financial statement
schedules are filed as part of this report:
FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition - September 30, 1998 and
1997
Consolidated Statements of Earnings - Years ended September 30, 1998,
1997 and 1996
Consolidated Statements of Changes In Stockholders' Equity - Years ended
September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended September 30, 1998,
1997 and 1996
Independent Auditor's Report
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted from this Annual
Report because the required information is presented in the consolidated
financial statements or in the notes thereto, the amounts involved are not
significant, or the required information subject matter is not applicable.
<TABLE>
<CAPTION>
EXHIBITS
REFERENCE TO PRIOR
REGULATION FILING OR EXHIBIT
S-K EXHIBIT NUMBER
NUMBER DOCUMENT ATTACHED HERETO
----------- -------- -----------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3(a) Articles of Incorporation *
3(b) By-Laws *
4 Instruments defining the rights of security holders, *
including debentures
9 Voting Trust Agreement None
10 Material contracts
Profit Sharing Plan and Trust *
Money Purchase Plan and Trust *
Form of 1995 Stock Option and Incentive Plan *
Employment Agreements of Mary Beth Poronsky *
Stull, Janine M. Poronsky, Gerald J. Gartner and
Kenneth D. Vanek
Form of Recognition and Retention Plan **
Employee Severance Compensation Plan **
11 Statement regarding computation of per share earnings None
13 Annual Report to Security Holders None
16 Letter regarding change in certifying accountants None
18 Letter regarding change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote None
of security holders
23 Consents of Experts 23
24 Power of Attorney None
27 Financial Data Schedule 27
99 Additional Exhibits None
</TABLE>
-70-
<PAGE> 73
* 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. Amended By-Laws filed as an exhibit to the
Company's Form 10-Q for the quarter ending June 30, 1998. 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.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiary information is incorporated herein by reference to Part I -
Subsidiaries.
EXHIBIT 23
CONSENT OF EXPERTS
Cobitz, VandenBerg & Fennessy consents to the incorporation by reference in
the Registration Statement on Form S-8 of Damen Financial Corporation of
our report dated November 6, 1998 relating to the consolidated statements
of financial condition of Damen Financial Corporation and subsidiaries as
of September 30, 1998 and 1997 and the related consolidated statements of
earnings, changes in stockholders' equity and cash flows for the years
ended September 30, 1998, 1997 and 1996 [which report is included in Damen
Financial Corporation's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998].
b) REPORTS ON FORM 8-K
During the quarter ended September 30, 1998, the Company filed no Current
Reports on Form 8-K.
-71-
<PAGE> 74
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/ Mary Beth Poronsky Stull /s/ Janine M. Poronsky
- - - ----------------------------------------- ----------------------------------
Mary Beth Poronsky Stull, Chairman of the Janine M. Poronsky, Vice President,
Board, President and Chief Executive Corporate Secretary and Director
Officer
(Principal Executive and Operating Officer)
Date: December 15, 1998 Date: December 15, 1998
/s/ Gerald J. Gartner /s/ Nicholas J. Raino
- - - ----------------------------------------- -----------------------------------
Gerald J. Gartner, Treasurer and Nicholas J. Raino, Director
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: December 15, 1998 Date: December 15, 1998
/s/ Charles J. Caputo /s/ Edward R. Tybor
- - - ----------------------------------------- -----------------------------------
Charles J. Caputo, Director Edward R. Tybor, Director
Date: December 15, 1998 Date: December 15, 1998
/s/ Carol A. Diver /s/ Albert C. Baldermann
- - - ----------------------------------------- -----------------------------------
Carol A. Diver, Director Albert C. Baldermann, Director
Date: December 15, 1998 Date: December 15, 1998
-72-
<PAGE> 75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DAMEN FINANCIAL CORPORATION
By:
-----------------------------------------
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.
- - - ----------------------------------------- -----------------------------------
Mary Beth Poronsky Stull, Chairman of the Janine M. Poronsky, Vice President,
Board, President and Chief Executive Corporate Secretary and Director
Officer
(Principal Executive and Operating Officer)
Date: December 15, 1998 Date: December 15, 1998
- - - ----------------------------------------- -----------------------------------
Gerald J. Gartner, Treasurer and Nicholas J. Raino, Director
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: December 15, 1998 Date: December 15, 1998
- - - ----------------------------------------- -----------------------------------
Charles J. Caputo, Director Edward R. Tybor, Director
Date: December 15, 1998 Date: December 15, 1998
- - - ----------------------------------------- -----------------------------------
Carol A. Diver, Director Albert C. Baldermann, Director
Date: December 15, 1998 Date: December 15, 1998
-73-
<PAGE> 1
EXHIBIT 13
OUR COMMITMENT
Commitment to community, customers, employees and shareholders. This is
what drives the success of Damen Financial Corporation.
Our commitment to the community and our customers can be found in the
many bungalows, six-flats, small businesses and families that surround our three
offices. Although the neighborhoods we serve continue to evolve, our commitment
to provide our neighbors with quality financial services has remained steadfast.
We are proud that this commitment fuels both our success and that of the people
we serve.
Our commitment to employees has created a partnership without which we
could not achieve our goals. We continue to work together to find new ways to
meet customer needs and operate more efficiently.
Our commitment to our shareholders underlies all that we do. We are
constantly looking for new opportunities to enhance the value of each
shareholder's investment. While we have been profitable in almost every year of
operation since 1916, we continue to seek new ways to improve our performance.
We will not waiver from our commitments.
MARY BETH PORONSKY STULL
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Mary Beth Poronsky Stull has served the Bank since 1965 in a variety of
capacities culminating in her current leadership role in the Bank and the
Company. Under her guidance, the Bank has continued to be profitable even as it
has undergone many changes, including the conversion from a mutual institution
to a publicly-held corporation, and from a thrift to a national bank. Her
extensive experience and clear vision has enabled the Bank and the Company to
make these transitions successfully and be well-positioned for the future.
1
<PAGE> 2
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
-------------------------------------------
1998 1997 1996
--------- ----------- ---------
(dollars in thousands, except per share data)
<S> <C> <C> <C>
Total Assets $ 228,033 $ 231,109 $ 234,555
Total Loans 109,418 97,244 91,146
Mortgage-Backed and Other Securities 110,973 126,028 136,328
Deposits 115,699 125,746 118,973
Borrowings 61,800 56,500 59,600
Net Income 1,928 1,745 1,780
Stockholders' Equity 45,254 45,939 52,870
Earnings Per Share .65 .53 .49
Dividends Per Share .40 .24 .12
Stockholders' Equity as a Percent of Assets 19.84% 19.88% 22.54%
Return on Assets .83% .75% .76%
</TABLE>
EARNINGS PER SHARE
[CHART]
BOOK VALUE PER SHARE
[CHART]
CORPORATE PROFILE
Damen Financial Corporation was incorporated in 1995 and ended fiscal
year 1998 with assets of $228 million. Damen Financial is the holding company of
Damen National Bank, its principal subsidiary, which serves customers from three
offices in the Chicagoland area. Damen Financial Corporation is headquartered in
Schaumburg, Illinois. The Company's common stock is traded on the NASDAQ Stock
Market under the symbol "DFIN".
2
<PAGE> 3
TO OUR
SHAREHOLDERS
We are proud to report that most of the key measures of success were up
for Damen Financial at the close of fiscal year 1998. Net income was up; return
on assets was up; earnings per share was up; book value per share was up; and
the difference between interest income and interest expense was up. In short,
profitability, the fuel that drives the engine of success and increases
shareholder value, was up!
We are confident that our transformation from a thrift-based financial
institution to that of a commercial bank will continue to provide results that
prove we are on the right track.
FINANCIAL HIGHLIGHTS
Earnings per share for the fiscal year increased $.12 from $.53 to
$.65, a 23% increase. Our return on assets (ROA) grew from .75% to .83%, an
increase of 11%. The average interest rate spread for the fiscal year increased
from 1.84% to 1.93%. This all occurred in a period of declining interest rates
which was coupled with a flat yield curve. And book value per share increased
from $14.78 to $15.30, partly due to our stock repurchase program.
These figures represent significant progress, but we still want to do
more. The new income-producing products and services that we have put into place
have the potential to keep us moving in the right direction.
NET INCOME
[CHART]
ALBERT C. BALDERMANN
Albert C. Baldermann was welcomed to the Boards of Directors of the
Bank and the Company in January, 1998. Prior to joining Damen, Mr. Baldermann
served as Chairman, Chief Executive Officer and Director of Southwest Financial
Bank & Trust Company and before that as President of Standard Bank of Hickory
Hills, Illinois. In both cases, operating income increased substantially during
Mr. Baldermann's tenure. His forward-looking and "get-it-done" approach is a
great asset to the Boards and the Strategic Planning Committee which he chairs.
3
<PAGE> 4
WE ARE CONFIDENT THAT OUR TRANSFORMATION FROM A THRIFT-BASED FINANCIAL
INSTITUTION TO THAT OF A COMMERCIAL BANK WILL CONTINUE TO PROVIDE RESULTS THAT
PROVE WE ARE ON THE RIGHT TRACK.
Among the products introduced during the last fiscal year was a more
diversified line of checking accounts, for individuals as well as businesses.
Customers responded enthusiastically, and we increased the number of existing
accounts substantially. We will continue to emphasize these accounts along with
our home equity, business, commercial and multi-family lending programs. The
lower interest paid on checking accounts, which helps reduce our cost of funds,
coupled with the higher return on our broadened lending programs, should help
increase our net interest income.
In an effort to respond to changing consumer needs and financial
investment strategies, we introduced INVEST(R) Financial Services. Through this
full-service brokerage service, Damen National Bank can now provide customers
with a convenient outlet to acquire personal financial plans as well as stocks,
bonds, annuities and mutual funds. The introduction of this new service is
consistent with our strategy of looking for non-interest sources of income to
offset the squeeze on net interest margins.
EXPANDING OUR LOAN PORTFOLIO
Lower interest rates spurred the purchase of homes, the refinancing of
existing mortgages and the expansion of many local businesses
CHARLES J. CAPUTO
As the founder and former owner of Caputo Southwest Cement, Charles J.
Caputo has guided the Bank and Company with his proven business acumen since
becoming a Director of the Bank in 1976 and of the Company in 1995. Mr. Caputo's
business expertise and knowledge of all aspects of the Bank's operations are
valuable assets in his role as Chairman of the Audit Committee and Secretary of
DASCH, Inc., a subsidiary of the Bank.
4
<PAGE> 5
during the year. As a result, our loan portfolio, including home equity and
commercial loans, increased from $97.2 million to $109.4 million, or 12.6%.
Asset quality has always been one of Damen National Bank's financial strengths.
As of September 30, 1998, non-performing loans equalled only 0.27% of total
assets. This important ratio remained well below the national average for
financial institutions our size.
We look forward to continued growth in our loan portfolio in the coming
year. We are proud that part of this growth will come from the valuable markets
that exist in our own backyard. Many in our neighborhoods have low to moderate
income levels. This hard-working population, from diverse ethnic backgrounds,
has been largely overlooked by many of our competitors. We will continue to seek
ways to further tap this market. It is important to focus on the markets we know
best, our local communities and our valued customers.
As we make the transition from a thrift to a national bank and enhance
our profitability, we have shifted our emphasis from longer-term,
owner-occupied, 1-4 family home loans to shorter-term, higher yielding business
and commercial loans. Our efforts to
LOAN PORTFOLIO
[CHART]
CAROL A. DIVER
Backed by a career that includes her current position as Secretary of
the Chicago Park District, long-term membership in the Democratic State Central
Committee and membership in many community groups, Carol Diver has become an
invaluable member of the Bank's Board since 1983 and the Company's Board since
1995. She also managed a legal firm that specialized in real estate and savings
and loan law. Her long-term administrative experience coupled with her knowledge
of Chicago and the many markets served by the Bank gives her insight as a member
of our Strategic Planning and Audit Committees.
5
<PAGE> 6
OUR ABILITY TO SERVE LOCAL BUSINESS AND COMMERCIAL REAL ESTATE INVESTORS HAS
BEEN ENHANCED BY OUR KNOWLEDGE OF LOCAL MARKETS AND NEEDS.
restructure our loan portfolio have begun to bear fruit. Our ability to serve
local business and commercial real estate investors has been enhanced by our
knowledge of local markets and needs. More small businesses are turning to us
for the money and services they need.
CAPITAL MANAGEMENT AND INVESTMENT VALUE
Our capital totaled $45.3 million and remained well above federal
requirements. A sound capital management plan will continue to be a necessary
component of future growth. As a part of that plan, we were actively engaged in
a stock repurchase program at the end of our fiscal year. Stock repurchase
programs tend to enhance the value of shares, and when appropriate, future
repurchase programs will be considered. This, along with our present dividend
policy, will have the effect of gradually reducing our excess capital while
still maintaining a strong capital position.
In an effort to further improve shareholder value, during fiscal 1998,
we repurchased 166,000 shares of common stock on the open market at an average
cost of $16.84, or a total of $2.8 million. Further, our quarterly dividends
were increased during fiscal 1998 from $.06 per share to $.12 per share, a 100%
increase. There was a total dividend payout of $.40 per share during the
JANINE M. PORONSKY
Janine M. Poronsky brings to the Bank and the Company a breadth of
experience and knowledge. Prior to joining the Bank in 1991, Ms. Poronsky was an
attorney with the IRS, Chief Counsel's Chicago District office. Ms. Poronsky's
background has proven to be invaluable in her current position as Vice President
in charge of compliance, human resources and operations. Ms. Poronsky was
elected to the Company and the Bank Board in 1995. She also serves as Corporate
Secretary and is a member of the Strategic Planning Committee.
6
<PAGE> 7
fiscal year, or 62% of earnings per diluted share - well above the average
dividend payout ratio of 34% for our peers nationwide.
STOCK MARKET EFFECT
The stock market, after reaching record highs, turned around during the
last quarter of our fiscal year. The downturn affected most financial
institution stocks adversely, and we were no exception. Our stock price closed
at $14.50 on September 30, 1998, a drop of 7.9% from $15.75 for the previous
fiscal year close. While the decrease is disappointing, it is comparable to the
7.5% average decrease experienced by publicly-traded banks and thrifts of our
size in the Midwest.
THE COMING YEAR
Although we have little control over the stock market, we look forward
to the coming year with confidence. Damen Financial Corporation has positioned
itself to meet the challenges presented by an anticipated low interest rate
environment. Capital management will continue to be at the forefront of our
strategic planning. We will remain a strong community bank that consistently
seeks new ways to better serve the customers who support us. We also feel that
the new products and services we have available will be a significant factor in
our future growth.
NICHOLAS J. RAINO
In April, 1997, Nicholas J. Raino was appointed to the Boards of
Directors of the Bank and the Company. Mr. Raino is the former owner, President
and Chief Executive Officer of Dale, Smith and Associates, a firm that
specializes in financial marketing and communications. Mr. Raino previously
served on the Board of Directors and Executive Committee of American Savings
where he was a major stockholder. He also served on the Board of Directors of
Riverside Savings and Cragin Federal Bank for Savings. His insights from more
than 25 years of financial institution experience have been particularly
valuable to the Strategic Planning Committee of which he is a member.
RETURN ON ASSETS
[CHART]
7
<PAGE> 8
Once again, it has been a rewarding year for Damen Financial and Damen
National Bank. We will not rest on our laurels as we seek opportunities to
enhance the value of our shareholders' investment. Prudent management, a strong
strategic focus and our continuing emphasis on quality in every area of
operation will help fulfill our commitment to you, our shareholders, and your
investment. Our forward-thinking directors, our management team and our
hard-working staff dedicate themselves to getting the job done in the coming
year. We thank you for your continuing confidence and support.
Sincerely,
Mary Beth Poronsky Stull
Chairman, President and Chief Executive Officer
WE WILL NOT REST ON OUR LAURELS AS WE SEEK OPPORTUNITIES TO ENHANCE THE VALUE
OF OUR SHAREHOLDERS' INVESTMENT.
PRUDENT MANAGEMENT, A STRONG STRATEGIC FOCUS AND OUR CONTINUING EMPHASIS ON
QUALITY IN EVERY AREA OF OPERATION WILL HELP FULFILL OUR COMMITMENT TO OUR
SHAREHOLDERS.
EDWARD R. TYBOR
Edward R. Tybor has served as Chairman of the Bank's Board of Directors
since 1967 and as a Director of the Company since 1995. Mr. Tybor is the owner
of Kubina-Tybor Funeral Directors located in the same area as one of the Bank's
key markets. His extensive knowledge of this market, and the operation of the
Bank overall, has been instrumental in the Bank's consistent profitability
during his tenure. Mr. Tybor also serves as Chairman of the Compensation
Committee and as a member of the Audit and ALCO Committees.
8
<PAGE> 9
DAMEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30
- - - --------------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 541,682 500,455
Interest-bearing deposits 1,245,446 1,590,529
------------- -----------
Total cash and cash equivalents 1,787,128 2,090,984
Investment securities held to maturity
(fair value: 1998 - $1,728,900; 1997 - $1,845,400) 1,728,931 1,845,383
Investment securities, available for sale, at fair
value 40,377,371 35,874,298
Mortgage-backed securities held to maturity
(fair value: 1998 - $16,478,500; 1997 - $27,548,700) 16,434,332 27,869,570
Mortgage-backed securities, available for sale, at fair
value 48,617,275 56,740,190
Loans receivable
(net of allowance for loan losses: 1998 - $449,000; 1997 - $332,000) 109,417,586 97,244,031
Foreclosed real estate
- 79,000
Stock in Federal Home Loan Bank and Federal Reserve Bank of Chicago 3,815,150 3,698,500
Accrued interest receivable 1,755,466 1,551,284
Office properties and equipment - net 3,530,443 3,473,326
Prepaid expenses and other assets 569,040 642,654
------------- -----------
Total assets $ 228,032,722 231,109,220
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 115,698,518 125,746,001
Borrowed money 61,800,000 56,500,000
Advance payments by borrowers for taxes and
insurance 2,598,991 722,141
Other liabilities 2,681,029 2,202,115
------------- -----------
Total liabilities 182,778,538 185,170,257
============= ===========
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 100,000 shares; none
outstanding - -
Common stock, $.01 par value; authorized
4,500,000 shares; 3,981,434 shares issued and 2,957,154 shares outstanding at
September 30, 1998 and 3,967,500 shares issued and 3,109,220 shares
outstanding at September 30, 1997 39,814 39,675
Additional paid-in capital 38,837,468 38,452,948
Retained earnings, substantially restricted 22,882,928 22,100,190
Unrealized gain on securities available for sale,
net of income taxes 1,740,980 1,382,560
Treasury stock, at cost (1,024,280 and 858,280 shares
at September 30, 1998 and 1997) (14,913,027) (12,117,799)
Common stock acquired by Employee Stock Ownership Plan (2,339,200) (2,550,800)
Common stock awarded by Recognition and Retention Plan (994,779) (1,367,811)
------------- -----------
Total stockholders' equity 45,254,184 45,938,963
------------- -----------
Total liabilities and stockholders' equity $ 228,032,722 231,109,220
============= ===========
</TABLE>
9
<PAGE> 10
DAMEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
- - - -----------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Interest income:
Loans $ 8,387,749 7,641,587 7,372,382
Mortgage-backed securities 5,246,711 6,061,307 6,081,879
Tax-exempt securities 1,303,499 1,404,976 1,482,104
Interest and dividends on other investments 1,401,629 1,153,274 1,541,742
Dividends on FHLB and FRB stock 244,165 232,721 182,342
----------- --------- ---------
Total interest income 16,583,753 16,493,865 16,660,449
----------- --------- ---------
Interest expense:
Deposits 6,333,665 6,176,720 6,426,006
Borrowings 3,679,593 3,646,005 3,245,920
----------- --------- ---------
Total interest expense 10,013,258 9,822,725 9,671,926
----------- --------- ---------
Net interest income before provision for
loan losses 6,570,495 6,671,140 6,988,523
Provision for loan losses 146,876 36,618 70,000
----------- --------- ---------
Net interest income after provision for loan losses 6,423,619 6,634,522 6,918,523
----------- --------- ---------
Non-interest income:
Loan fees and service charges 164,950 42,491 108,797
Gain (loss) on sale of:
Mortgage-backed securities, available for sale 18,557 (17,365) 4,064
Investment securities, available for sale 552,007 157,083 79,509
Rental income 97,926 20,634 9,149
Other income 92,422 64,232 65,022
----------- --------- ---------
Total non-interest income 925,862 267,075 266,541
----------- --------- ---------
Non-interest expense:
Compensation, employee benefits,
and related expenses 2,763,474 2,655,881 2,190,681
Advertising and promotion 330,494 462,815 457,918
Occupancy and equipment expense 704,449 772,045 661,776
Data processing 246,975 122,488 100,862
Insurance expense 80,733 72,727 73,058
Federal deposit insurance premiums 77,682 114,674 295,265
SAIF special assessment - - 860,000
Legal, audit, and examination services 440,558 272,702 264,659
Other operating expenses 350,181 343,019 338,543
----------- --------- ---------
Total non-interest expense 4,994,546 4,816,351 5,242,762
----------- --------- ---------
Net income before income taxes 2,354,935 2,085,246 1,942,302
Provision for federal and state income taxes 427,200 339,799 162,460
----------- --------- ---------
Net income $ 1,927,735 1,745,447 1,779,842
=========== ========= =========
Earnings per share - basic $ .67 .54 .49
=========== ========= =========
Earnings per share - diluted .65 .53 .49
=========== ========= =========
Dividends declared per common share $ .40 .24 .12
=========== ========= =========
</TABLE>
10
<PAGE> 11
DAMEN FINANCIAL CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULES
(dollars in thousands)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30
- - - -------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $ 45,939 52,870 55,710
Net income 1,928 1,745 1,780
Cash dividends (1,145) (776) (426)
Issuance of common shares 162 - -
Change in unrealized gains (loss) on securities
available-for-sale, net of tax 358 1,215 (619)
RRP & ESOP adjustments 807 692 (1,264)
Common shares repurchased (2,795) (9,806) (2,311)
-------- ------ ------
Balance at end of year $ 45,254 45,939 52,870
</TABLE>
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES YEARS ENDED SEPTEMBER 30
- - - --------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $ 332 345 275
Provision for loan losses 147 37 70
Loan charge-offs (30) (50) -
Loan recoveries - - -
-------- ------ ------
Balance at end of year $ 449 332 345
Net charge-offs (recoveries) to average loans .03% .05 -
Allowance for loan losses to loans .40% .33 .37
</TABLE>
<TABLE>
<CAPTION>
NONPERFORMING ASSETS YEARS ENDED SEPTEMBER 30
- - - ------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Loans past due ninety days or more
and nonaccruing $ 562 197 351
Real estate owned - 79 -
-------- ------ ------
Total nonperforming assets $ 562 276 351
Nonperforming loans to total loans .51% .20 .38
Nonperforming assets to total assets .27% .12 .15
</TABLE>
11
<PAGE> 12
INDEPENDENT
AUDITORS' REPORT
To the Board of Directors and Stockholders
of Damen Financial Corporation
We have audited, in accordance with generally accepted auditing
standards, the consolidated statements of financial condition of Damen Financial
Corporation (the "Company") and subsidiaries as of September 30, 1998 and 1997,
and the related consolidated statements of earnings, changes in stockholders'
equity (not presented herein) and cash flows (not presented herein) for each of
the three years in the period ending September 30, 1998, appearing as Item 8 to
Form 10-K of the Company (not presented herein). In our report dated November 6,
1998, also appearing in that Form 10-K, we expressed an unqualified opinion on
those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated statements of financial condition as of September 30, 1998 and 1997
and the related condensed consolidated statements of earnings for each of the
three years in the period ending September 30, 1998, is fairly stated, in all
material respects, in relation to the consolidated financial statements from
which it has been derived.
November 6, 1998
Palos Hills, Illinois
12
<PAGE> 13
SHAREHOLDER
INFORMATION
CORPORATE OFFICE
200 West Higgins Road
Schaumburg, Illinois 60195
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 60195. The Annual Report on Form 10-K is
also available on the Internet at various sites (e.g. freeedgar.com, sec.gov,
nasdaq.com and others).
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
9944 South Roberts Road
Suite 202
Palos Hills, Illinois 60465
GENERAL COUNSEL
Wheeler, Wheeler & Wheeler
Suite 300
6301 South Cass Avenue
Westmont, Illinois 60559
SPECIAL COUNSEL
Hinshaw & Culbertson
222 North LaSalle Street
Suite 300
Chicago, Illinois 60601
DIVIDENDS
During the year ended September 30, 1998 the Company paid a total
dividend of $.40 per share. The dividend for the quarter ended September 30,
1998 was $.12 per share and was paid on November 16, 1998 to shareholders of
record on November 2, 1998.
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
September 30, 1998 there were 2,957,154 shares of Damen Financial Corporation
common stock issued and outstanding and there were approximately 240 holders of
record. The table below shows the range of the common stock for each quarter of
fiscal years 1997 and 1998. These prices do not represent actual transactions
and do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
PER SHARE
FOR QUARTER ENDED HIGH LOW DIVIDEND
<S> <C> <C> <C>
December 31, 1996 $12.94 $11.75 $.06
March 31, 1997 $15.00 $12.63 $.06
June 30, 1997 $14.75 $13.88 $.06
September 30, 1997 $15.75 $13.88 $.06
December 31, 1997 $17.38 $15.63 $.10
March 31, 1998 $18.38 $16.25 $.12
June 30, 1998 $19.25 $16.13 $.12
September 30, 1998 $17.25 $12.13 $.12
</TABLE>
The stock price information set forth in the table above was provided
by the National Association of Securities Dealers, Inc. High, low and closing
prices and daily trading volume are reported in most major newspapers.
MAJOR MARKET MAKERS
ABN AMRO
Ernst & Company
Everen Securities, Inc.
Friedman Billings Ramsey & Co.
Herzog, Heine, Geduld, Inc.
Robert W. Baird & Co., Inc.
Sandler O'Neill & Partners
Tucker Anthony, Inc.
13
<PAGE> 1
EXHIBIT 23
[COBITZ, VANDENBERG & FENNESSY LETTERHEAD]
The Board of Directors
Damen Financial Corporation
We consent to the incorporation by reference in the Registration Statement on
Form S-8 of Damen Financial Corporation of our report dated November 6, 1998
relating to the consolidated statements of financial condition of Damen
Financial Corporation and subsidiaries as of September 30, 1998 and 1997 and
the related consolidated statements of earnings, changes in stockholders'
equity and cash flows for the years ended September 30, 1998, 1997 and 1996,
which report is included in Damen Financial Corporation's Annual Report and
Form 10-K for the fiscal year ended September 30, 1998.
/s/ COBITZ, VANDENBERG & FENNESSY
December 15, 1998
Palos Hills, Illinois
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 541,682
<INT-BEARING-DEPOSITS> 1,245,446
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 88,994,646
<INVESTMENTS-CARRYING> 18,163,263
<INVESTMENTS-MARKET> 18,207,400
<LOANS> 109,417,586
<ALLOWANCE> (449,000)
<TOTAL-ASSETS> 228,032,722
<DEPOSITS> 115,698,518
<SHORT-TERM> 11,800,000
<LIABILITIES-OTHER> 2,681,029
<LONG-TERM> 50,000,000
39,814
0
<COMMON> 0
<OTHER-SE> 45,214,370
<TOTAL-LIABILITIES-AND-EQUITY> 228,032,722
<INTEREST-LOAN> 8,387,749
<INTEREST-INVEST> 8,196,004
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 16,583,753
<INTEREST-DEPOSIT> 6,333,665
<INTEREST-EXPENSE> 10,013,258
<INTEREST-INCOME-NET> 6,570,495
<LOAN-LOSSES> 146,876
<SECURITIES-GAINS> 570,564
<EXPENSE-OTHER> 4,994,546
<INCOME-PRETAX> 2,354,935
<INCOME-PRE-EXTRAORDINARY> 1,927,735
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,927,735
<EPS-PRIMARY> .67
<EPS-DILUTED> .65
<YIELD-ACTUAL> 2.93
<LOANS-NON> 562,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 332,000
<CHARGE-OFFS> 30
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 449,000
<ALLOWANCE-DOMESTIC> 449,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
