SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-26574
DAMEN FINANCIAL CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-4029638
-------- ----------
(State or other jurisdiction I.R.S. Employer
of incorporation or Identification
organization) Number
200 West Higgins Road, Schaumburg, Illinois 60195
- ------------------------------------------- -----
(Address of Principal executive offices) (Zip Code)
Registrant telephone number, including area code: (847) 882-5320
--------------
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
As of May 8, 1998 there were 3,123,154 shares of the Registrant's
common stock issued and outstanding.
Transitional Small Business Disclosure Format(check one): Yes [ ] No [X]
<PAGE>
DAMEN FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
March 31, 1998 (Unaudited) and September 30, 1997 ................. 4
Consolidated Statements of Earnings for the three and six
months ended March 31, 1998 and 1997 (unaudited) .................. 5
Consolidated Statements of Changes in
Stockholders' Equity for the six months
ended March 31, 1998 (unaudited) .................................. 6
Consolidated Statements of Cash Flows for the six
months ended March 31, 1998 and 1997 (unaudited) .................. 7
Notes to Unaudited Consolidated Financial Statements .............. 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...............................10-14
Part II. OTHER INFORMATION 15
Signatures ....................................................... 16
Index to Exhibits ................................................ 17
Earnings Per Share Analysis (Exhibit 11) ......................... 18
Financial Data Schedule (Exhibit 27) ............................. 19
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<PAGE>
PART I - FINANCIAL INFORMATION
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<PAGE>
DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, September 30,
1998 1997
---- ----
Assets (unaudited)
Cash and amounts due from depository
institutions ............................... $ 514,775 500,455
Interest-bearing deposits .................... 1,184,687 1,590,529
------------- -------------
Total cash and cash equivalents ........... 1,699,462 2,090,984
Investment securities (fair value:
$1,800,000 at March 31, 1998 and
$1,845,400 at September 30, 1997) .......... 1,799,982 1,845,383
Investment securities, available for
sale, at fair value ........................ 42,034,054 35,874,298
Mortgage-backed securities
(fair value: $23,079,700 at March 31, 1998
and $27,548,700 at September 30, 1997) ..... 23,200,973 27,869,570
Mortgage-backed securities, available
for sale, at fair value .................... 55,645,038 56,740,190
Loans receivable (net of allowance for
loan losses: $369,000 at March 31, 1998
and $332,000 at September 30, 1997) ........ 100,880,095 97,244,031
Foreclosed real estate ....................... 79,000 79,000
Stock in Federal Home Loan Bank and
Federal Reserve Bank of Chicago ............ 3,803,500 3,698,500
Accrued interest receivable .................. 1,678,173 1,551,284
Office properties and equipment - net ........ 3,432,682 3,473,326
Prepaid expenses and other assets ............ 255,800 642,654
------------- -------------
Total assets .............................. 234,508,759 231,109,220
============= =============
Liabilities and Stockholders' Equity
Liabilities
Deposits ..................................... 125,462,600 125,746,001
Borrowed money ............................... 59,000,000 56,500,000
Advance payments by borrowers for
taxes and insurance ........................ 899,294 722,141
Other liabilities ............................ 2,103,504 2,202,115
------------- -------------
Total liabilities ......................... 187,465,398 185,170,257
------------- -------------
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 3,123,154 shares outstanding at
March 31, 1998 and 3,109,220 shares
outstanding at September 30, 1997 .......... 39,814 39,675
Additional paid-in capital ................... 38,704,741 38,452,948
Retained earnings, substantially restricted .. 22,658,340 22,100,190
Unrealized gain on securities available
for sale, net of income taxes .............. 1,384,560 1,382,560
Treasury stock, at cost (858,280 shares at
March 31, 1998 and September 30, 1997) ..... (12,117,799) (12,117,799)
Common stock acquired by Employee Stock
Ownership Plan ............................. (2,445,000) (2,550,800)
Common stock awarded by Recognition and
Retention Plan ............................. (1,181,295) (1,367,811)
---------- ----------
Total stockholders' equity ................ 47,043,361 45,938,963
------------- -------------
Total liabilities and stockholders' equity $ 234,508,759 231,109,220
============= =============
See accompanying notes to consolidated financial statements.
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<PAGE>
DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Earnings
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ---------------------
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
Interest income:
<S> <C> <C> <C> <C>
Loans $ 2,067,464 1,861,564 4,113,487 3,735,641
Mortgage-backed securities 1,386,650 1,555,562 2,811,219 3,075,077
Tax-exempt securities 340,367 362,726 672,904 752,494
Interest and dividends on
other investments 372,841 319,466 650,301 638,121
Dividends on FHLB and FRB stock 60,354 54,915 124,082 109,646
--------- --------- --------- ---------
Total interest income 4,227,676 4,154,233 8,371,993 8,310,979
--------- --------- --------- ---------
Interest expense:
Deposits 1,604,654 1,502,993 3,254,957 3,034,163
Borrowings 930,174 898,611 1,826,284 1,809,740
--------- --------- --------- ---------
Total interest expense 2,534,828 2,401,604 5,081,241 4,843,903
--------- --------- --------- ---------
Net interest income before
provision for loan losses 1,692,848 1,752,629 3,290,752 3,467,076
Provision for loan losses 18,170 2,000 39,170 6,618
--------- --------- --------- ---------
Net interest income after
provision for loan losses 1,674,678 1,750,629 3,251,582 3,460,458
--------- --------- --------- ---------
Non-interest income:
Loan fees and service charges 66,551 11,709 79,598 30,380
Gain (loss) on sale of:
Mortgage-backed securities,
available for sale -- (17,365) -- (17,365)
Investment securities,
available for sale 143,398 157,083 274,635 157,083
Other income 43,686 18,342 75,864 36,838
--------- --------- --------- ---------
Total non-interest income 253,635 169,769 430,097 206,936
--------- --------- --------- ---------
Non-interest expense:
Compensation, employee benefits, and
related expenses 693,050 636,246 1,354,906 1,364,072
Advertising and promotion 39,280 136,095 182,706 219,859
Occupancy and equipment expense 169,499 199,638 355,458 395,671
Data processing 33,324 33,426 65,622 62,716
Insurance expense 18,288 17,313 36,526 34,626
Federal insurance premiums 19,721 19,381 38,836 76,442
Legal, audit, and examination services 148,046 63,315 210,238 152,037
Other operating expenses 102,626 87,571 176,790 179,337
--------- --------- --------- ---------
Total non-interest expense 1,223,834 1,192,985 2,421,082 2,484,760
--------- --------- --------- ---------
Net income before income taxes 704,479 727,413 1,260,597 1,182,634
Provision for federal and state
income taxes 146,534 169,121 243,862 232,001
--------- --------- --------- ---------
Net income $ 557,945 558,292 1,016,735 950,633
========= ========= ========= =========
Earnings per share - basic $ .19 .16 .35 .27
--- --- --- ---
Earnings per share - diluted .19 .16 .34 .27
--- --- --- ---
Dividends declared per common share $ .10 .06 .16 .12
--- --- --- ---
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
Gain on Common Common
Additional Securities Stock Stock
Common Paid-In Retained Available Treasury Acquired Awarded
Stock Capital Earnings For Sale Stock by ESOP by RRP Total
----- ------- -------- -------- ----- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 $ 39,675 38,452,948 22,100,190 1,382,560 (12,117,799) (2,550,800) (1,367,811) 45,938,963
Additions (deductions) for the
period ended March 31, 1998:
Net income 1,016,735 1,016,735
Adjustment of
securities to fair value,
net of tax effect 2,000 2,000
Tax benefit related to
employee stock plans 18,630 18,630
Exercise of stock
options (13,934 shares) 139 161,844 161,983
Amortization of award
of RRP stock 186,516 186,516
Contribution to fund ESOP loan 71,319 105,800 177,119
Dividends declared on
common stock (458,585) (458,585)
------ ---------- ---------- --------- ---------- --------- --------- ----------
Balance at March 31, 1998 $ 39,814 38,704,741 22,658,340 1,384,560 (12,117,799) (2,445,000) (1,181,295) 47,043,361
====== ========== ========== ========= ========== ========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended
March 31,
----------------------------
1998 1997
---- ----
(unaudited)
Cash flows from operating activities:
Net income ................................... $ 1,016,735 950,633
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation .............................. 118,825 100,229
Amortization of cost of stock
benefit plans ........................... 363,635 325,675
Provision for loan losses ................. 39,170 6,618
Decrease in deferred loan income .......... (181,149) (125,716)
(Increase) decrease in prepaid and
deferred federal and state income taxes . 349,012 (66,274)
Loss on sale of mortgage-backed securities,
available for sale ....................... -- 17,365
Gain on sale of investment securities,
available for sale ....................... (274,635) (157,083)
(Increase) decrease in accrued interest
receivable ............................. (126,889) 155,455
Increase in accrued interest payable ...... 30,900 19,000
Decrease in other assets .................. 5,211 45,952
Decrease in other liabilities ............. (100,187) (780,733)
------------ ------------
Net cash provided by operating activities ...... 1,240,628 491,121
------------ ------------
Cash flows from investing activities:
Purchase of investment securities,
available for sale ...................... (9,844,976) (1,993,697)
Purchase of investment securities ......... (46,203) (97,492)
Purchase of mortgage-backed securities,
available for sale ...................... (6,043,208) (7,161,782)
Proceeds from sales of investment
securities, available for sale .......... 674,622 9,472,341
Proceeds from sales of mortgage-backed
securities, available for sale .......... -- 1,816,256
Proceeds from maturities of investment
securities, available for sale ........... 3,292,233 3,919,859
Proceeds from maturities of investment
securities ............................... 91,604 43,778
Proceeds from maturities of mortgage-backed
securities, available for sale ........... 7,134,349 3,884,312
Proceeds from maturities of mortgage-backed
securities ............................... 4,668,597 2,969,463
Purchase of Federal Home Loan Bank and
Federal Reserve Bank stock ............... (105,000) (628,000)
Disbursements for loans ................... (12,831,391) (8,566,205)
Loan repayments ........................... 9,337,306 8,195,411
Property and equipment expenditures ....... (78,181) (147,180)
------------ ------------
Net cash provided by (for) investing activities (3,750,248) 11,707,064
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options ... 161,983 --
Deposit receipts .......................... 35,771,078 36,471,711
Deposit withdrawals ....................... (38,289,269) (40,069,872)
Interest credited to deposit accounts ..... 2,234,790 2,208,009
Proceeds from borrowed money .............. 30,800,000 91,100,000
Repayment of borrowed money ............... (28,300,000) (89,200,000)
Increase in advance payments by borrowers
for taxes and insurance .................. 177,153 192,919
Purchase of treasury stock ................ -- (7,821,106)
Dividends paid on common stock ............ (437,637) (433,370)
------------ ------------
Net cash provided by (for) financing activities 2,118,098 (7,551,709)
------------ ------------
Increase (decrease) in cash and cash equivalents (391,522) 4,646,476
Cash and cash equivalents at beginning of period 2,090,984 1,181,231
------------ ------------
Cash and cash equivalents at end of period ..... $ 1,699,462 5,827,707
============ ============
Cash paid during the period for:
Interest .................................. $ 5,050,341 4,824,903
Income taxes .............................. 62,388 279,000
============ ============
See accompanying notes to consolidated financial statements.
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<PAGE>
DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Statement of Information Furnished
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and Article 10 of Regulation
S-X, and in the opinion of management contains all adjustments (all of which are
normal and recurring in nature) necessary to present fairly the financial
position as of March 31, 1998, the results of operations for the three and six
months ended March 31, 1998 and 1997 and cash flows for the six months ended
March 31, 1998 and 1997. These results have been determined on the basis of
generally accepted accounting principles. 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 disclosures 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 attached consolidated statements are those of Damen Financial
Corporation (the "Holding Company") and its consolidated subsidiaries Damen
National Bank (the"Bank") and Dasch Inc. The results of operations for the three
and six month periods ended March 31, 1998 are not necessarily indicative of the
results to be expected for the full year.
2. Mutual to Stock Conversion
In April 1995, the Bank's Board of Directors approved a Plan of
Conversion (the "Conversion"), providing for the Bank's conversion from a
federally chartered mutual bank for savings to a federally chartered stock bank
for savings with the concurrent formation of a holding company. The Holding
Company issued 3,967,500 shares of $.01 par value common stock at $10.00 per
share, for an aggregate purchase price of $39,675,000. The Conversion and sale
of 3,967,500 shares of common stock of the Holding Company was completed on
September 29, 1995. Net proceeds to the Company, after conversion expenses,
totaled approximately $38,320,000.
3. Earnings Per Share
Earnings per share for the three and six month periods ended March 31,
1998 and 1997 were determined by dividing net income for the periods by the
weighted average number of both basic and diluted shares of common stock and
common stock equivalents outstanding (see Exhibit 11 attached). Stock options
are regarded as common stock equivalents and are considered in diluted earnings
per share calculations. Common stock equivalents are computed using the treasury
stock method. ESOP shares not committed to be released to participants are not
considered outstanding for purposes of computing earnings per share amounts.
Earnings per share data for the three and six month periods ended March 31, 1997
have been restated for comparative purposes to reflect the implementation of
Statement of Financial Accounting Standards No. 128.
-8-
<PAGE>
4. Impact of New Accounting Standards
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In December 1996, the FASB issued Statement of
Financial Accounting Standards No. 127 ("SFAS No. 127"), "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125". The statement
delays for one year the implementation of SFAS No. 125, as it relates to (1)
secured borrowings and collateral, and (2) for the transfers of financial assets
that are part of repurchase agreements, dollar-rolls, securities lending and
similar transactions. The Company has adopted portions of SFAS No. 125 (those
not deferred by SFAS No. 127) effective January 1, 1997. Adoption of these
portions did not have a significant effect on the Company's financial condition
or results of operations. Based on its review of SFAS No. 125, management does
not believe that adoption of the portions of SFAS No. 125 which have been
deferred by SFAS No. 127 will have a material effect on the Company.
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. The Company has
not yet determined the impact of adopting this statement.
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 information about operating segments in interim financial
reports. The Company has not yet determined the impact of adopting this
statement.
Employers' Disclosures about Pension and Other Employee 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. The
Company has not yet determined the impact of adopting this statement.
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.
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<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
FINANCIAL CONDITION
March 31, 1998 compared to September 30, 1997
Total assets increased $3.4 million to $234.5 million as of March 31, 1998 from
$231.1 million as of September 30, 1997. Interest-bearing deposits decreased
$406,000 to $1.2 million as of March 31, 1998 as compared to $1.6 million at
September 30, 1997. Investment securities available-for-sale increased $6.1
million to $42.0 million at March 31, 1998 from $35.9 million at September 30,
1997 due primarily to purchases of $9.8 million exceeding sales and maturities
of $3.7 million. Purchases were primarily callable government agency notes.
Mortgage-backed securities held to maturity decreased $4.7 million to $23.2
million at March 31, 1998 from $27.9 million at September 30, 1997 due primarily
to repayments. Mortgage-backed securities available-for-sale decreased $1.1
million to $55.6 million at March 31, 1998 from $56.7 million at September 30,
1997 due primarily to purchases of $6.0 million exceeded by repayments of $7.1
million. Loans receivable increased $3.6 million to $100.9 million at March 31,
1998 from $97.2 million at September 30, 1997 due primarily to new loan
originations of $12.1 million and loan purchases of $700,000 exceeding
repayments of $9.3 million.
Total deposits decreased $283,000 to $125.5 million at March 31, 1998 from
$125.7 million at September 30, 1997 due to savers seeking higher returns in
alternative investments. Federal Home Loan Bank advances increased $2.5 million
to $59.0 million at March 31, 1998 from $56.5 million at September 30, 1997. The
additional advances were used primarily to fund loan growth.
Stockholders' equity increased $1.1 million to $47.0 million at March 31, 1998
from $45.9 million at September 30, 1997 due primarily to net income of $1.0
million, proceeds of exercised stock options of $162,000 and reductions in stock
acquired by the RRP and ESOP plans of $364,000, partially offset by cash
dividends paid totaling $459,000. At March 31, 1998 book value per share was
$15.06, an increase of $.28 from $14.78 at September 30, 1997. The Company had
paid a cash dividend of $.06 per share each quarter starting with the quarter
ended September 30, 1996 and increased the dividend to $.10 per share for the
quarter ended December 31, 1997. At March 31, 1998, there were 3,123,154 shares
of common stock outstanding.
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. 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. Results of operations are also dependent upon the level of the
Company's non-interest income, including fee income and service charges, and
affected by the level of its non-interest expenses, including its general and
administrative expenses.
Comparison of Operating Results for the
Quarters Ended March 31, 1998 and 1997
Net Income. The Company's net income for the three months ended March 31, 1998
was $558,000 as compared to $559,000 for the same period in 1997, a decrease of
$1,000.
Interest Income. Total interest income for the quarter ended March 31, 1998
increased $74,000 to $4.2 million from $4.1 million a year ago due to an
increase in the yield on average interest-earning assets to 7.46% from 7.31%,
partially offset by a decrease in average interest-earning assets of $776,000 to
$226.6 million from $227.3 million.
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<PAGE>
Interest Expense. The Company's interest expense for the quarter ended March 31,
1998 increased by $133,000 to $2.5 million compared to $2.4 million a year ago
due to an increase in average interest-bearing liabilities to $185.5 million at
March 31, 1998 from $177.3 million a year ago and an increase in the average
rate to 5.47% from 5.42%. The increase in rates was primarily the result of
certificates of deposits and borrowings being renewed at higher rates. The
increase in average interest-bearing liabilities resulted from an increase in
the average balance of borrowed money of $1.9 million and an increase in the
average balance of savings deposits of $6.4 million.
Provision 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 deemed
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 estimation losses. Such
other factors considered by management include growth and composition of the
loan portfolio, the relationship of the allowance for losses to outstanding
loans, and economic conditions.
The Company's provision for loan losses was $18,000 for the quarter ended March
31, 1998 compared to $2,000 for the same quarter the prior year. Non-performing
loans decreased to $184,000 from $275,000 at December 31, 1997, however,
mortgage loans on commercial properties increased $1.2 million and secured lines
of credit increased $600,000.
The Company will continue to monitor its allowance for loan losses and make
future additions to the allowance through the provisions for loan losses in
light of its level of loans and as economic conditions dictate. There can be no
assurance that the Company will not make future provisions in an amount equal to
or greater than the amount provided during recent periods, or that future losses
will not exceed estimated amounts.
Non-Interest Income. The Company's non-interest income was $254,000 for the
quarter ended March 31, 1998 compared to $170,000 for the same quarter a year
ago. The increase of $84,000 was due primarily to an increase of $55,000 in loan
fees due to increased lending activity and increased prepayments as well as an
increase in other non-interest income of $25,000 due primarily to increased
rental income from previously vacant office space.
Non-Interest Expense. The Company's non-interest expense increased $31,000 for
the quarter ended March 31, 1998 to $1.2 million due primarily to an increase of
$85,000 in professional fees, an increase of $57,000 in compensation and
benefits and an increase in other operating expenses of $15,000, partially
offset by a decrease in advertising and promotions of $97,000 and occupancy and
equipment expense of $30,000.
Provision for Income Taxes. Tax expense for the quarter ended March 31, 1998 was
$147,000 compared to $169,000 for the same quarter in 1997. The decrease of
$22,000 was due primarily to a lower effective tax rate caused by an increase in
low-income housing tax credits and state income tax-exempt securities.
Comparison of Operation Results for the
Six Months Ended March 31, 1998 and 1997
Net Income. The Company's net income for the six months ended March 31, 1998 was
$1,017,000 as compared to $951,000 for the same period in 1997, or an increase
of $66,000. An increase in net gains on the sale of investments
available-for-sale of $135,000, and an increase of $88,000 in loan fees and
other income as well as a decrease in non-interest expense of $63,000, was
partially offset by a decrease in net interest income of $176,000, an increase
in the provision for loan losses of $33,000 and an increase in income taxes of
$12,000.
Interest Income. Total interest income for the six months ended March 31, 1998
increased $61,000 to $8.4 million from $8.3 million a year ago due to an
increase in the yield on average interest-earning assets of .12% to 7.46% from
7.32% partially offset by a decrease in average interest-earning assets of $2.6
million.
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<PAGE>
Interest Expense. The Company's interest expense increased $237,000 to $5.1
million for the six months ended March 31, 1998 from $4.8 million a year ago.
The increase was due to an increase in average interest-bearing liabilities of
$6.8 million to $183.6 million at March 31, 1998 from $176.8 million a year ago
and an increase in the average rate to 5.53% from 5.48% The increase in rates
was primarily the result of certificates of deposits and borrowed money being
renewed at higher rates. The increase in average interest-bearing liabilities
resulted from an increase in the average balance of savings deposits of $6.8
million.
Provision 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 deemed
adequate to provide for losses through charges to operating expense. The
allowance is based upon past loss experience and other factors which, in
management's judgement, deserve current recognition in estimating losses. Such
other factors considered by management include growth and composition of the
loan portfolio, the relationship of the allowance for losses to outstanding
loans, and economic conditions.
The Company's provision for loan losses was $39,000 for the six months ended
March 31, 1998 compared to $7,000 for the same period in the prior year. This
year's provision was due primarily to an increase in mortgage loans, home equity
line of credit loans and commercial loans.
The Company will continue to monitor its allowance for loan losses and make
future additions to the allowance through the provisions for loan losses in
light of its level of loans and as economic conditions dictate. There can be no
assurance that the Company will not make future provisions in an amount equal to
or greater than the amount provided during recent periods, or that future losses
will not exceed estimated amounts.
Non-Interest Income. The Company's non-interest income increased $223,000 for
the six months ended March 31, 1998 to $430,000 from $207,000 for the same
period one year ago. The increase was due primarily to an increase of $135,000
in net gains on the sale of investments available-for-sale, an increase of
$49,000 in loan fees and an increase of $39,000 in other income due primarily to
rental income from previously vacant office space.
Non-Interest Expense. The Company's non-interest expense decreased $65,000 for
the six months ended March 31, 1998 to $2.4 million from $2.5 million for the
same period one year ago. The decrease resulted primarily from decreases of
$9,000 in compensation and benefits, $37,000 from advertising and promotions,
$40,000 from occupancy and equipment and $37,000 from Federal insurance
premiums, partially offset by an increase of $58,000 in professional fees.
Provision for Income Taxes. Tax expense for the six months ended March 31, 1998
increased $12,000 to $244,000 compared to $232,000 for the comparable period in
1997. The increased expense was due to an increase in pre-tax income.
-12-
<PAGE>
Liquidity and Capital Resources
The Company's principal sources of funds are deposits and borrowings,
amortization and prepayments of loan principal and mortgage-backed securities,
maturities of investment securities and income from operations. While scheduled
loan repayments and maturing investments are relatively predictable, deposit
flows and early loan repayments are more influenced by interest rates, floors
and caps on loan rates, general economic conditions and competition. The Company
generally manages the pricing of its deposits to be competitive and to increase
core deposit relationships, where practicable.
The Company's most liquid assets are cash and cash equivalents, which consist of
interest bearing deposits and short term highly liquid investments with original
maturities of less than three months that are readily convertible to known
amounts of cash. The level of these assets is dependent on the Company's
operating, financing and investing activities during any given period. At March
31, 1998 and September 30, 1997, cash and cash equivalents totaled $1.7 million
and $2.1 million respectively.
The primary financing activities of the Company are deposits and borrowings. For
the six months ended March 31, 1998, deposits decreased $283,000 and the Bank's
net (proceeds less repayments) financing activity with the FHLB increased $2.5
million.
The Company anticipates that it will have sufficient funds available to meet
current commitments. At March 31, 1998 the Company has outstanding loan
commitments totaling $1,616,000, and unused lines of credit granted totaling
$1,179,000.
The Bank is subject to the capital regulations of the Office of the Comptroller
of the Currency ("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.
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
requirement if adopted as proposed.
At March 31, 1998, the Bank had Tier 1 capital of $40.5 million or 17.3% of
adjusted total assets and Tier 2 capital of $40.9 million or 46.8% of total
risk-weighted assets.
-13-
<PAGE>
Non-Performing Assets
The following table sets forth the amounts and categories of non-performing
assets in the Company's portfolio. Loans are reviewed monthly and any loan whose
collectibility is doubtful is placed on non-accrual status. Loans are placed on
non-accrual status when principal and interest is 90 days or more past due,
unless, in the judgement of management, the loan is well collaterized 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 restructuring (which involved forgiving
a portion of interest or principal on any loans or making loans at a rate
materially less than the market rate).
March 31, September 30,
1998 1997
------------ ------------
(Dollars in Thousands)
Non-accruing loans:
One-to-four family.......................... $ 99 $ 197
Multi-family................................ 85 --
Commercial real estate. .................... -- --
Consumer.................................... -- --
---- ---
Total..................................... 184 197
---- ----
Foreclosed assets:
Commercial and multi-family real estate..... 79 79
---- ----
Total non-performing assets.................. $ 263 $ 276
==== ====
Total as a percentage of total assets........ .11% .12%
=== ===
For the six months ended March 31, 1998, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $7,400.
In addition to the non-performing assets set forth in the table above, as of
March 31, 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
security properties have caused management to have concerns as to the ability of
the borrowers to comply with present loan repayment terms and which may result
in the future inclusion of such items in the non-performing asset categories.
Management has considered the Company's non-performing and "of concern" assets
in establishing its allowance for loan losses.
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.
Recent Developments
On April 21, 1998 the Board of Directors approved a cash dividend of $.12 per
share to be payable May 15, 1998 to shareholders of record on May 1, 1998.
-14-
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders (the "Meeting") of Damen Financial
Corporation was held January 27, 1998 at 10:30 AM at the Holiday Inn
located at 3405 Algonquin Road, Rolling Meadows, Illinois.
(b) Proxies for the meeting were solicited pursuant to Section 14 of the
Securities and Exchange Act; there was no solicitation in opposition
and all nominees were elected.
(c) The following are the results of each matter voted upon at the
Meeting:
(i) The election of Directors:
Broker
For Withheld Non-Vote
--- -------- --------
Carol A. Diver 2,163,727 762,596 0
Nicholas J. Raino 2,160,178 766,145 0
The continuing Directors are:
Expiration
of Term as
Director
--------
Edward R. Tybor 1999
Charles J. Caputo 1999
Janine M. Poronsky 1999
Mary Beth Poronsky Stull 2000
Albert C. Baldermann 2000
(ii) The ratification of the appointment of Cobitz, VandenBerg &
Fennessy as auditor for the Company for the fiscal year ended
September 30, 1998:
Votes For: 2,820,280
---------
Votes Against: 75,693
---------
Abstentions: 30,350
---------
(iii) A proposal by a stockholder of the Company recommending that the
Board of Directors of Damen Financial Corporation engage the
services of a leading banking firm specializing in financial
institutions to make recommendations to the Board of Directors as
to specific actions to be taken to enhance shareholder value.
Votes For: 1,129,217
---------
Votes Against: 1,167,103
---------
Abstentions: 42,198
---------
Non-Votes: 587,805
---------
-15-
<PAGE>
PART II - OTHER INFORMATION
(continued)
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Computation of earnings per share (Exhibit 11 filed herewith)
(b) No reports on Form 8-K were filed during the quarter ended March
31, 1998.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
and 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
Registrant
DATE: May 8, 1998
BY: /s/ Mary Beth Poronsky Stull
-----------------------------------
Mary Beth Poronsky Stull
President, Chief Executive Officer and Director
(Duly Authorized Representative)
BY: /s/ Gerald J. Gartner
- ---------------------------------------
Gerald J. Gartner
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
-17-
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Page
- ----------- ----
11 Statement regarding Computation of Earnings Per Share 19
27 Financial Data Schedule 20
-18-
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, 1998 March 31, 1998
-------------- --------------
<S> <C> <C>
Net Income $ 557,945 1,016,735
========= =========
Weighted average shares outstanding 3,122,845 3,117,116
Reduction for common shares not yet
released by Employee Stock Ownership Plan (249,790) (252,435)
--------- ---------
Total weighted average common shares
outstanding for basic computation 2,873,055 2,864,681
========= =========
Basic earnings per share $ .19 .35
==== ====
Total weighted average common shares
outstanding for basic computation 2,873,055 2,864,681
Common stock equivalents due to dilutive
effect of stock options 123,346 122,997
--------- ---------
Total weighted average common shares and
equivalents outstanding for diluted
computation 2,996,401 2,987,678
========= =========
Diluted earnings per share $ .19 .34
==== ===
</TABLE>
-19-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 514,775
<INT-BEARING-DEPOSITS> 1,184,687
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 97,679,092
<INVESTMENTS-CARRYING> 25,000,955
<INVESTMENTS-MARKET> 24,879,700
<LOANS> 100,880,095
<ALLOWANCE> (369,000)
<TOTAL-ASSETS> 234,508,759
<DEPOSITS> 125,462,600
<SHORT-TERM> 12,000,000
<LIABILITIES-OTHER> 2,103,504
<LONG-TERM> 47,000,000
0
0
<COMMON> 39,814
<OTHER-SE> 47,003,547
<TOTAL-LIABILITIES-AND-EQUITY> 234,508,759
<INTEREST-LOAN> 4,113,487
<INTEREST-INVEST> 4,258,506
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,371,993
<INTEREST-DEPOSIT> 3,254,957
<INTEREST-EXPENSE> 5,081,241
<INTEREST-INCOME-NET> 3,290,752
<LOAN-LOSSES> 39,170
<SECURITIES-GAINS> 274,635
<EXPENSE-OTHER> 2,421,082
<INCOME-PRETAX> 1,260,597
<INCOME-PRE-EXTRAORDINARY> 1,016,735
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,016,735
<EPS-PRIMARY> .35
<EPS-DILUTED> .34
<YIELD-ACTUAL> 2.93
<LOANS-NON> 184,313
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 332,000
<CHARGE-OFFS> 2,170
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 369,000
<ALLOWANCE-DOMESTIC> 369,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
