1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-26574
DAMEN FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 36-4029638
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(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
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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
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As of August 9, 1996 there were 3,750,278 shares of the Registrant's
common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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DAMEN FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
June 30, 1996 (Unaudited) and September 30, 1995 4
Consolidated Statements of Earnings for the three
and nine months ended June 30, 1996 and 1995
(unaudited) 5
Consolidated Statements of Cash Flows for the nine
months ended June 30, 1996 and 1995
(unaudited) 6
Notes to Unaudited Consolidated Financial
Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-17
Part II. OTHER INFORMATION 18
Signatures 19
Index to Exhibits 20
Earnings Per Share Analysis(Exhibit 11) 21
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PART I - FINANCIAL INFORMATION
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DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, September 30,
--------- -------------
1996 1995
---- ----
Assets (unaudited)
- ------
Cash and amounts due from
depository institutions $ 286,082 425,218
Interest-bearing deposits 1,587,808 19,937,941
------------ -----------
Total cash and cash equivalents 1,873,890 20,363,159
Investment securities (market value: $1,243,100 at
June 30, 1996 and $1,089,800 at September 30, 1995) 1,243,167 1,089,775
Investment securities, available for sale, at market 46,847,454 33,689,700
Mortgage-backed securities
(market value: $36,268,600 at June 30, 1996
and $41,910,600 at September 30, 1995) 37,152,599 42,533,362
Mortgage-backed securities, available for sale,
at market 51,004,061 39,658,434
Loans receivable (net of allowance for
loan losses: $327,000 at June 30, 1996 and
$275,000 at September 30,1995) 90,787,120 87,555,261
Stock in Federal Home Loan Bank of Chicago 2,700,000 2,570,000
Accrued interest receivable 1,412,773 1,187,613
Office properties and equipment - net 3,534,381 3,332,658
Prepaid expenses and other assets 740,380 377,832
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Total assets 237,295,825 232,357,794
============ ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities
- -----------
Deposits 125,517,693 126,631,760
Borrowed money 54,000,000 45,500,000
Advance payments by borrowers for taxes
and insurance 1,669,648 2,801,314
Other liabilities 1,153,761 1,714,740
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Total liabilities 182,341,102 176,647,814
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Stockholders' Equity
- --------------------
Preferred stock, $.01 par value; authorized
100,000 shares; none outstanding - -
Common stock, $.01 par value; authorized
4,500,000 shares; issued and outstanding
3,967,500 at June 30, 1996 and September 30, 1995 39,675 39,675
Additional paid-in capital 38,337,925 38,280,338
Retained earnings, substantially restricted 21,226,845 19,777,497
Unrealized gain (loss) on securities available
for sale, net of income taxes (321) 786,470
Common stock acquired by Employee Stock Ownership Plan (2,815,300) (3,174,000)
Common stock acquired for Recognition and Retention Plan (1,834,101) -
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Total stockholders' equity 54,954,723 55,709,980
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Total liabilities and stockholders' equity $237,295,825 232,357,794
============ ===========
See accompanying notes to consolidated financial statements.
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DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Earnings
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
(unaudited) (unaudited)
Interest income:
Loans $1,806,199 1,793,037 5,372,418 5,396,219
Mortgage-backed securities 1,544,360 1,219,942 4,505,975 3,373,283
Tax-exempt securities 399,232 284,740 1,119,223 827,770
Interest and dividends on
other investments 379,720 212,325 1,190,142 556,143
Dividends on FHLB stock 44,016 38,913 132,477 108,971
---------- --------- ---------- ----------
Total interest income 4,173,527 3,548,957 12,320,235 10,262,386
---------- --------- ---------- ----------
Interest expense:
Deposits 1,612,739 1,678,825 4,862,113 4,728,658
Borrowings 794,333 759,721 2,355,807 2,098,540
---------- --------- ---------- ----------
Total interest expense 2,407,072 2,438,546 7,217,920 6,827,198
---------- --------- ---------- ----------
Net interest income before
provision for loan losses 1,766,455 1,110,411 5,102,315 3,435,188
Provision for loan losses 15,000 - 52,000 163,146
---------- --------- ---------- ----------
Net interest income after
provision for loan losses 1,751,455 1,110,411 5,050,315 3,272,042
---------- --------- ---------- ----------
Non-interest income:
Loan fees and service charges 33,092 27,153 85,809 51,824
Gain (loss) on sale of:
Mortgage-backed securities,
held for sale - - - 954
Mortgage-backed securities,
available for sale - - 7,829 (13,553)
Investment securities,
held for sale - - - (9,883)
Investment securities,
available for sale 59,823 16,820 59,823 16,820
Unrealized loss on securities
held for sale - - - (892,400)
Other income 17,102 17,800 56,115 60,993
---------- --------- ---------- ----------
Total non-interest income 110,017 61,773 209,576 (785,245)
---------- --------- ---------- ----------
Non-interest expense:
Compensation, employee benefits, and
related expenses 503,138 442,032 1,566,469 1,295,884
Advertising and promotion 130,645 144,410 343,566 288,697
Occupancy and equipment expense 167,779 151,808 493,437 474,038
Data processing 23,590 22,821 73,922 68,793
Insurance premiums 90,843 89,664 275,320 268,588
Legal, audit, and examination services 95,480 22,559 209,780 98,889
Loss on sale of real estate owned - net - - - 10,705
Other operating expenses 95,652 47,810 263,999 183,092
---------- --------- ---------- ----------
Total non-interest expense 1,107,127 921,104 3,226,493 2,688,686
---------- --------- ---------- ----------
Net income (loss) before income taxes
and change in accounting principle 754,345 251,080 2,033,398 (201,889)
Provision for federal and state
income taxes (benefit) 129,400 (87,388) 346,000 (366,681)
---------- --------- ---------- ----------
Net income before change in
accounting principle 624,945 338,468 1,687,398 164,792
Cumulative effect of change in
accounting for securities available
for sale, net of tax effect - - - 907,180
---------- --------- ---------- ----------
Net income $ 624,945 338,468 1,687,398 1,071,972
========== ========= ========== ==========
Earnings per share - primary $ .17 N/A .46 N/A
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Earnings per share - fully diluted .17 N/A .46 N/A
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Dividends declared per common share .06 N/A .06 N/A
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See accompanying notes to consolidated financial statements.
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DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended
June 30,
-----------------------
1996 1995
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(unaudited)
Cash flows from operating activities:
Net income $ 1,687,398 1,071,972
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 130,966 131,347
Amortization of cost of stock benefit plans 447,373 -
Decrease in deferred loan income (63,991) (13,002)
Decrease in prepaid and deferred federal
and state income taxes 218,091 750,419
(Gain) loss on sale of mortgage-backed
securities, available for sale (7,829) 13,553
Gain on sale of mortgage-backed securities,
held for sale - (954)
Loss on sale of investment securities,
held for sale - 9,883
Gain on sale of investment securities, available for sale (59,823) (16,820)
Loss on sale of real estate owned - 10,705
Increase in accrued interest receivable (225,160) (125,324)
Increase (decrease) in accrued interest payable (302,000) 185,600
(Increase) decrease in other assets (175,634) 1,341
Increase (decrease) in other liabilities (344,823) 2,091
Federal Home Loan Bank stock dividend - (34,300)
Unrealized gain on securities, held for sale - (644,600)
Provision for loan losses 52,000 163,146
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Net cash provided by operating activities 1,356,568 1,505,057
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Cash flows from investing activities:
Purchase of investment securities,
available for sale (18,553,246) (6,513,116)
Purchase of investment securities (220,785) (512,808)
Purchase of mortgage-backed securities, held for sale - (3,668,200)
Purchase of mortgage-backed securities, available for sale (19,643,260) (10,978,148)
Purchase of mortgage-backed securities (229,361) (1,983,906)
Proceeds from sales of investment securities, held for sale - 507,266
Proceeds from sales of investment securities, available for sale 363,500 515,000
Proceeds from sales of mortgage-backed securities,
available for sale 726,777 1,288,365
Proceeds from sales of mortgage-backed securities, held for sale - 1,184,306
Proceeds from maturities of investment
securities, available for sale 4,526,813 -
Proceeds from maturities of investment securities 67,393 104,127
Proceeds from maturities of mortgage-backed
securities, held for sale - 273,843
Proceeds from maturities of mortgage-backed
securities, available for sale 6,799,685 1,349,986
Proceeds from maturities of mortgage-backed securities 5,610,124 6,806,709
Proceeds from redemption of Federal Home Loan Bank stock 130,000 -
Purchase of Federal Home Loan Bank stock (260,000) (305,700)
Disbursements for loans (15,327,348) (10,455,451)
Loan repayments 12,107,480 11,264,430
Property and equipment expenditures (332,689) (69,940)
Proceeds from sale of real estate owned - 19,964
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Net cash provided for investing activities (24,234,917) (11,173,273)
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Cash flows from financing activities:
Purchase of RRP stock (1,865,187) -
Deposit receipts 51,611,394 58,538,843
Deposit withdrawals (56,734,996) (58,941,097)
Interest credited to deposit accounts 4,009,535 3,569,360
Proceeds from borrowed money 114,200,000 94,100,000
Repayment of borrowed money (105,700,000) (87,800,000)
Increase (decrease) in advance payments by borrowers
for taxes and insurance (1,131,666) 491,756
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Net cash provided by financing activities 4,389,080 9,958,862
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Increase (decrease) in cash and cash equivalents (18,489,269) 290,646
Cash and cash equivalents at beginning of period 20,363,159 396,255
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Cash and cash equivalents at end of period $ 1,873,890 686,901
============= ===========
Cash paid during the period for:
Interest $ 7,519,920 6,641,598
Income taxes 210,229 20,000
Non-cash investing activities:
Transfer of loans to foreclosed real estate $ - 12,506
============= ===========
See accompanying notes to consolidated financial statements.
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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 June 30, 1996, the results of operations for the three and nine
months ended June 30, 1996 and 1995 and cash flows for the nine months ended
June 30, 1996 and 1995. 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 Federal Bank for Savings (the"Bank") and Dasch Inc. The results of
operations for the three and nine month periods ended June 30, 1996 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 nine month periods ended June 30,
1996 were determined by dividing net income for the periods by the weighted
average number of both primary and fully diluted shares of common stock and
common stock equivalents outstanding (see Exhibit 11 attached). Stock options
are regarded as common stock equivalents and are therefore considered in both
primary and fully diluted earnings per share calculations. Common stock
equivalents are computed using the treasury stock method. Earnings per share
information for the prior year periods is not meaningful because the Company
was not a public company until September 29, 1995.
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4. Impact of New Accounting Standards
INVESTMENT AND MORTGAGE-BACKED SECURITIES. In November of 1995, the
Financial Accounting Standards Board issued a special report, "A Guide to
Implementation of SFAS 115 on Accounting for Certain Investments in Debt and
Equity Securities," to aid entities in understanding and implementing the
provisions of SFAS 115. The special report provides an opportunity for a one
time reassessment of the classification of securities as of a single
measurement date without tainting the classification of the remaining
held-to-maturity debt securities. The one time reclassification of securities
based on this reassessment must have occurred between November 15, 1995 and
December 31, 1995. The Company reclassified certain mortgage-backed securities
totaling approximately $735,000 to the available for sale portfolio from the
held to maturity portfolio effective December 29, 1995.
ACCOUNTING FOR IMPAIRMENT OF LOANS. In 1993, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 114 ("SFAS 114") entitled "Accounting
by Creditors for Impairment of a Loan." The purpose of SFAS 114 is to eliminate
inconsistencies in the accounting among different types of creditors for loans
with similar collection problems by requiring a single method of measuring
impaired loans. 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. The Company will measure certain impaired loans pursuant to SFAS
114 at a discounted amount on the balance sheet based on the present value
amount of the expected future cash flows using the loan's effective interest
rate. A valuation reserve should be recorded if the present value of the
expected cash flows is less than the recorded amount of the loan. Formally
restructured loans and loans evaluated as groups or pools of homogeneous loans
(e.g., single family residence) are excluded from SFAS 114. In October 1994,
the FASB issued SFAS No. 118 ("SFAS 118"), entitled "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." SFAS 118 amends
the disclosure requirements in SFAS 114 to require information about the
recorded investment in certain impaired loans and about how a creditor
recognizes interest income related to those impaired loans. The effective date
of SFAS 114 and 118 is for fiscal years beginning after December 31, 1994. The
Company has adopted SFAS 114 and SFAS 118 effective October 1, 1995, resulting
in no material impact on earnings or financial condition.
DERIVATIVE FINANCIAL INSTRUMENTS. In October 1994, the FASB issued
Statement of Financial Accounting Standards No. 119 ("SFAS 119"), "Disclosure
about Derivative Financial Instruments and Fair Value of Financial
Instruments." SFAS 119 requires disclosures about derivative financial
instruments, which include futures, forward, swap and option contracts, and
other financial instruments with similar characteristics. It amends Statement
of Financial Accounting Standards No. 105 ("SFAS 105"), "Disclosures of
Information about Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations of Credit Risk" and Statement of
Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures about Fair
Value of Financial Instruments." It is effective for financial statements
issued for fiscal years ending after December 15, 1994, except for entities
with less than $150 million in total assets. For those entities it is
effective one year later. SFAS 119 requires disclosures about the amount,
nature, and terms of derivative financial instruments that are not subject to
SFAS 105 because they do not result in off-balance sheet risk of accounting
loss. The reporting enterprise is required to make a distinction between
financial instruments held or issued for trading purposes and those held or
issued for purposes other than trading. The Company is currently not involved
in any derivative financial instruments which would require these additional
disclosures.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of," is
effective for fiscal years beginning after December 15, 1995. The statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss is recognized if the sum of the expected
future cash flows is less than the carrying amount of the asset. Management
does not expect the implementation of SFAS 121 to have a material impact on the
Company's consolidated financial position or results of operations.
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4. Impact of New Accounting Standards (continued)
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS. In May 1995, the FASB issued
Statement of Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting
for Mortgage Servicing Rights." This statement amends Statement of Financial
Accounting Standards No. 65 ("SFAS 65"), "Accounting for Certain Mortgage
Banking Activities," to require that a mortgage banking enterprise recognize as
separate assets rights to service mortgage loans for others, however those
services rights are acquired. SFAS 122 requires that a mortgage banking
enterprise assess its capitalized mortgage servicing rights for impairment
based on the fair value of those rights. SFAS 122 is effective for fiscal
years beginning after December 15, 1995. Management does not believe the
adoption of SFAS 122 will have a material effect on the Company's consolidated
financial position or results of operations.
DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES. In April 1995,
the FASB issued SOP 94-6, "Disclosure of Certain Significant Risks and
Uncertainties." This SOP applies to financial statements prepared in
conformity with generally accepted accounting principles by all nongovernmental
entities. The disclosure requirements in SOP 94-6 focus primarily on risks and
uncertainties that could significantly affect the amounts reported in the
financial statements in the near-term functioning of the reporting entity. The
risks and uncertainties discussed in SOP 94-6 stem from the nature of the
entity's operations, from the necessary use of estimates in the preparation of
the entity's financial statements, and from significant concentrations in
certain aspects of the entity's operations. SOP 94-6 is effective for
financial statements issued for fiscal years ending after December 15, 1995 and
is not expected to have any impact on the Company's operations.
ACCOUNTING FOR STOCK-BASED COMPENSATION. In October, 1995 the FASB issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation." This statement establishes a value-based method
of accounting for stock options which encourages employers to account for stock
compensation awards based on their fair value at the date the awards are
granted. The resulting compensation award would be shown as an expense on the
income statement.
SFAS 123 also permits entities to continue to use the intrinsic value
method, allowing them to continue to apply current accounting requirements,
which generally result in no compensation cost for most fixed stock-option
plans. If the intrinsic value method is retained, SFAS 123 requires
significantly expanded disclosures, including disclosure of the pro forma
amount of net income and earnings per share as if the fair value-based method
were used to account for stock based compensation. SFAS 123 is effective for
fiscal years beginning after December 15, 1995, however, employers will be
required to include in that year's financial statements, information about
options granted in 1995. Management has yet to determine the impact that the
adoption of this accounting standard will have on the Company's consolidated
financial position or results of operations.
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Bank 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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5. Disparity in Insurance and Special Assessment
Federal law requires that the Federal Deposit Insurance Corporation
("FDIC") maintain the reserve level of each of the Savings Association
Insurance Fund ("SAIF") and the Bank Insurance Fund ("BIF") at 1.25% of insured
deposits. Reserves are funded through payments by insured institutions of
insurance premiums. On November 14, 1995, due to the BIF reaching the required
reserve level, the FDIC reduced the insurance premiums for members of BIF to a
range of between 0.00% and 0.27% of deposits, subject to the statutory
requirement that all institutions pay at least $2,000 annually for FDIC
insurance, while maintaining the current range of between 0.23% and 0.31% of
deposits for members of SAIF. The FDIC is required to set insurance premiums
independently for members of BIF and SAIF.
A disparity in insurance premiums between those required for SAIF members,
such as the Bank, and BIF members could allow BIF members to attract and retain
deposits at a lower effective cost than that of SAIF members. In the event BIF
members in the Bank's market area, as a result of the reduction in insurance
premiums, increase the interest rates paid on deposits, this could put
competitive pressure on the Bank to raise the interest rates paid on deposits
thus increasing its cost of funds and possibly reducing net interest income.
An increase in interest expense would also impair the Bank's ability to
maintain low operating costs. The resultant competitive disadvantage could
result in the Bank losing deposits to BIF members who have a lower cost of
funds and are therefore able to pay higher rates of interest on deposits.
Although the Bank has other sources of funds, these other sources may have
higher costs than those of deposits, resulting in lower net yields on loans
originated using such funds. However, because of possible regulatory or policy
changes, there can be no assurance that upon SAIF reaching its required reserve
level that deposit insurance premiums for SAIF members will be reduced or, if
reduced, to what extent such premiums will be reduced.
Several alternatives to mitigate the effect of the BIF/SAIF insurance
premium disparity are currently under consideration by the U.S. Congress. One
plan that has gained the support of several sponsors would require all SAIF
member institutions, including the Bank, to pay a one-time fee of approximately
0.80% to 0.90% of insured deposits ($0.80 to $0.90 for every $100 of deposits)
on the amount of deposits held by the member institution to recapitalize the
SAIF. If this proposal is enacted by Congress, the effect would be to
immediately reduce the capital of SAIF-member institutions by the amount of the
fee, and such amount would be immediately charged to earnings, unless the
institutions are permitted to, and chose to, amortize the expense of the fee
over a period of years. If an 80 basis point (0.80%) assessment was effected,
based on deposits as of March 31, 1995 (as proposed), the Bank's pro rata share
would amount to approximately $1.0 million, before taxes. If the Bank is
required to pay the proposed special assessment, future deposit insurance
premiums may be reduced from 0.23% to approximately 0.00% (subject to the
statutory requirement that all institutions pay at least $2,000 annually for
FDIC insurance). Based upon the Bank's deposits as of June 30, 1996, the
Bank's annual deposit insurance expense would decrease by approximately
$180,000 per year after taxes. Management of the Bank is unable to predict
whether this proposal or any similar proposal will be enacted or whether
ongoing SAIF premiums will be reduced to a level comparable to that of BIF
premiums.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
JUNE 30, 1996 COMPARED TO SEPTEMBER 30, 1995.
Total assets increased $4.9 million to $237.3 million as of June 30, 1996 from
$232.4 million as of September 30, 1995. Interest-bearing deposits decreased
$18.3 million to $1.6 million as of June 30, 1996 as compared to $19.9 million
at September 30, 1995 due to stock conversion proceeds being deployed during
the period. Investment securities available for sale increased $13.1 million
to $46.8 million at June 30, 1996 from $33.7 million at September 30, 1995 due
primarily to purchases of $18.5 million (including $4.5 million of tax-exempt
securities) less a market value decrease of $553,000 and maturities of $4.5
million. Mortgage-backed securities held to maturity decreased $5.4 million to
$37.1 million at June 30, 1996 from $42.5 million at September 30, 1995 due
primarily to repayments. Mortgage-backed securities available for sale
increased $11.3 million to $51.0 million at June 30, 1996 from $39.7 million at
September 30, 1995 due primarily to purchases of $19.6 million less a market
value decrease of $746,000, repayments of $6.8 million, and sales of $720,000.
Loans receivable increased $3.2 million to $90.8 million at June 30, 1996 from
$87.6 million at September 30, 1995 due to new loan originations of $15.3
million exceeding repayments of $12.1 million.
Total deposits decreased $1.1 million to $125.5 million at June 30, 1996 from
$126.6 million at September 30, 1995. The decrease was due to savers seeking
higher returns in alternative investments. FHLB advances increased $8.5
million to $54.0 million at June 30, 1996 from $45.5 million at September 30,
1995. The additional advances were used to offset net savings withdrawals of
$5.1 million and net disbursements from escrow accounts of $1.1 million.
Stockholders' equity decreased $755,000 to $54.9 million at June 30, 1996 from
$55.7 million at September 30, 1995 due primarily to net income for the nine
months of $1.7 million and an ESOP loan reduction of $359,000, offset by an
increase in net unrealized losses, net of taxes, on investments
available-for-sale of $787,000, the purchase of stock for the Recognition and
Retention Plan at a cost of $1.9 million, and the declaration of a cash
dividend of $238,000.
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 borrowing. 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 JUNE 30, 1996 AND 1995.
NET INCOME. The Company's net income for the three months ended June 30, 1996
was $625,000 as compared to $338,000 for the same period in 1995 or an increase
of $287,000. This increase was due primarily to an increase in net interest
income of $656,000 and an increase in gains on investment sales of $43,000
which were partially offset by an increase in non-interest expense of $186,000
and an increase in income taxes of $216,000.
INTEREST INCOME. Total interest income for the quarter ended June 30, 1996
increased $625,000 to $4.2 million from $3.5 million a year ago due primarily
to an increase in average interest-earning assets of $34.4 million primarily as
a result of net proceeds of $38.3 million from the Conversion on September 29,
1995. The yield on average interest-earning assets decreased to 7.34% from
7.36% due primarily to a decrease in the yield on the mortgage loan portfolio.
-11-
12
INTEREST EXPENSE. The Company's interest expense decreased $31,000 to $2.4
million for the quarter ended June 30, 1996 from $2.4 million a year ago. The
decrease was due to a decrease in average interest-bearing liabilities of $1.8
million to $174.3 million at June 30, 1996 from $176.1 million a year ago and a
decrease in the average rate to 5.52% from 5.54%. The decrease in rates was
primarily the result of certificates of deposits being renewed at lower rates
in the 1996 quarter. The decrease in average interest-bearing liabilities
resulted from an increase in the average balance of borrowed money of $2.3
million offset by a decrease in the average balance of savings deposits of $4.1
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 $15,000 for the quarter ended June
30, 1996 compared to $-0- for the same quarter the prior year. The current
quarter provision was due to an increase in total mortgage loans and to an
increase in non-performing loans from the prior quarter. Non-performing loans
increased to $470,000 from $337,000 at March 31, 1996 due primarily to two
additional delinquent residential first-mortgage loans with aggregate unpaid
balances of $145,000.
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 $110,000 for the
quarter ended June 30, 1996 compared to $62,000 for the same quarter a year
ago. The increase was due to an increase in gains on investment sales of
$43,000.
NON-INTEREST EXPENSE. The Company's non-interest expense increased $186,000
for the quarter ended June 30, 1996 to $1.1 million from $921,000 for the same
quarter of 1995 due primarily to an increase of $61,000 in compensation and
related expenses. In addition, legal and accounting expenses increased $72,000
as a result of operating as a public company. Other operating expenses
increased $48,000 due primarily to asset growth, increased prices and operating
as a public company.
The deposits of savings associations such as the Bank are presently insured by
the Savings Association Insurance Fund (the "SAIF"), which, along with the Bank
Insurance Fund (the "BIF"), is one of the two insurance funds administered by
the FDIC. Financial institutions which are members of the BIF has achieved its
required level of reserves while the SAIF has not yet achieved its required
reserves. In November 1995, the FDIC further revised the premium schedule for
BIF-insured banks to provide for a range of 0% to 0.27% of deposits (as
compared to the current range of 0.23% to 0.31% of deposits of SAIF-insured
institutions) with an annual statutory minimum payment of $2,000. The revised
premium schedule took effect in January 1996.
A recapitalization plan for the SAIF under consideration by Congress reportedly
provides for a special assessment of 0.80% to 0.90% of deposits to be imposed
on all SAIF-insured institutions to enable the SAIF to achieve its required
level of reserves. If the proposed assessment of 0.80% to 0.90% was effected
based on deposits as of March 31, 1995 (the date currently contemplated by the
proposed legislation), the Bank's special assessment would amount to
approximately $1.0 million before taxes. Accordingly, this special assessment
would significantly increase non-interest expense and adversely affect the
Company's results of operations. Conversely, depending upon the Bank's capital
level and supervisory rating and assuming the insurance premiums levels for BIF
and SAIF members are again equalized, future deposit insurance premiums could
decrease to as low as $2,000 from the 0.23% of deposits currently being paid by
the Bank, which would reduce non-interest expense for future periods.
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13
PROVISION FOR INCOME TAXES. Tax expense for the quarter ended June 30, 1996
was $129,000 compared to a benefit of $87,000 for the comparable quarter in
1995 resulting in an increase of $216,000 in income tax expense relating to the
increase in pretax income of $503,000.
COMPARISON OF OPERATING RESULTS FOR THE
NINE MONTHS ENDED JUNE 30, 1996 AND 1995.
NET INCOME. The Company's net income for the nine months ended June 30, 1996
was $1.7 million as compared to $1.1 million for the same period in 1995 or an
increase of $615,000. An increase in net interest income of $1.7 million and a
reduction in the loan loss provision of $111,000 was partially offset by an
increase in non-interest expense of $537,000 and an increase in income taxes of
$713,000. There was a one time credit of $907,000 in the period ended June 30,
1995 for the cumulative effect, net of taxes, of the change in accounting for
securities available-for-sale, due to the adoption of Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" effective December 1, 1994, which was partially offset by an
unrealized loss on securities held-for-sale of $892,000.
INTEREST INCOME. Total interest income for the nine months ended June 30, 1996
increased $2.0 million to $12.3 million from $10.3 million a year ago due
primarily to an increase in average interest-earning assets of $38.2 million,
primarily as a result of net proceeds of $38.3 million from the Conversion of
September 29, 1995. The yield on average interest-earning assets decreased to
7.23% from 7.24%.
INTEREST EXPENSE. The Company's interest expense increased $391,000 to $7.2
million for the nine months ended June 30, 1996 from $6.8 million a year ago.
The increase was due an increase in the average rate to 5.60% from 5.29%, while
average interest-bearing liabilities remained constant. The increase in rates
was primarily the result of certificates of deposit being renewed at higher
rates and due to a larger proportion of more costly borrowed money. The
constant amount of average interest-bearing liabilities resulted from an
increase in the average balance of borrowed money of $3.1 million offset by a
decrease in the average balance of savings deposits of $3.2 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 in 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 $52,000 for the nine months ended
June 30, 1996 compared to $163,000 for the same period in the prior year. The
current nine month provision was due to an increase in mortgage loan balances
and an increase in non-performing loans from $65,000 at September 30, 1995 to
$470,000 at June 30, 1996. Included in non-performing loans is a loan secured
by a ten-unit apartment building with an unpaid balance of $141,000, which has
experienced several fire losses recently. In July of 1996, a demolition order
was entered by the City of Chicago. Management expects to be reimbursed by
insurance proceeds, but the ultimate disposition is uncertain at this time.
Another delinquent loan is secured by a nine-unit apartment building, of which
six units are currently vacant, with an unpaid balance of $108,000. The
provision for loan losses for the nine month period ended June 30, 1995 of
$163,000 was primarily due to an increase in the Bank's multi-family lending,
an increase in loans on non-owner occupied properties, and an overall
evaluation of the Bank's loan portfolio.
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.
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14
NON-INTEREST INCOME. The Company's non- interest income was $142,000 for the
nine months ended June 30, 1996 compared to $113,000 for the year ago period
excluding gains and losses on securities. This increase was primarily the
result of an increase in loan related fees of $34,000. For the nine months
ended June 30, 1995 the Company recorded an unrealized loss of $892,000 on
securities held-for-sale. Effective December 1, 1995 the Company adopted FASB
115 and subsequently, all unrealized gains and losses, net of income taxes, are
being credited or charged directly to Stockholders' Equity.
NON-INTEREST EXPENSE. The Company's non-interest expense increased $538,000
for the nine months ended June 30, 1996 to $3.2 million from $2.7 million for
the same period of 1995 due primarily to an increase of $270,000 in
compensation and related expenses primarily as a result of the establishment of
the ESOP and RRP plans in fiscal 1996, and increases in officers' salaries. In
addition, advertising costs increased $55,000 due to increased local community
marketing efforts, and legal and accounting expenses increased $111,000 as a
result of operating as a public company. Other operating expenses increased
$81,000 primarily due to asset growth, general price increases, and operating
as a public company.
PROVISION FOR INCOME TAXES. Tax expense for the nine months ended June 30,
1996 was $346,000 compared to a benefit of $367,000 for the comparable period
in 1995, resulting in an increase of $713,000 in income tax expense relating to
the increase in pretax income of $2.2 million.
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15
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, but has from time to time decided not
to pay deposit rates that are as high as those of its competitors and, when
necessary, to supplement deposits with longer term and/or less expensive
alternative sources of funds.
Federal regulations require the Bank to maintain minimum levels of liquid
assets. The required percentage has varied from time to time based upon
economic conditions and savings flows and is currently 5% of net withdrawable
savings deposits and borrowings payable on demand or in one year or less during
the preceding calendar month. Liquid assets for purposes of this ratio include
cash, certain time deposits, U.S. Government, government agency and corporate
securities and other obligations generally having remaining maturities of less
than five years. The Bank has historically maintained its liquidity ratio for
regulatory purposes at levels in excess of those required. At June 30, 1996,
the Bank's liquidity ratio for regulatory purposes was 10.06%.
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 June
30, 1996 and September 30, 1995, cash and cash equivalents totaled $1.9 million
and $20.4 million respectively.
The primary financing activities of the Company are deposits and borrowings.
For the nine months ended June 30, 1996, deposits decreased $1.1 million and
the Bank's net (proceeds less repayments) financing activity with the FHLB
increased $8.5 million.
The Company anticipates that it will have sufficient funds available to meet
current commitments. At June 30, 1996 the Company has outstanding loan
commitments totaling $1,136,000 and outstanding commitments to purchase
investment securities of $1.0 million.
Federally insured savings associations, such as the Bank, are required to
maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable
to such savings associations. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS
is also authorized to impose capital requirements in excess of these standards
on individual associations on a case-by-case basis.
At June 30, 1996, the Bank had tangible capital of $37.0 million, or 16.62% of
adjusted total assets, which was approximately $33.7 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date. The Bank
had core capital equal to $37.0 million, or 16.62% of adjusted total assets at
June 30, 1996, which was $30.3 million above the minimum leverage ratio
requirement of 3% in effect on that date. The Bank had total capital of $37.3
million (including $37.0 million in core capital and $327,000 in qualifying
supplementary capital) and risk-weighted assets of $76.5 million (including no
converted off-balance sheet assets); or total risk-based capital of 48.79% of
risk-weighted assets at June 30, 1996. This amount was $31.2 million above the
8% requirement in effect on that date.
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16
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
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
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). At
June 30, 1996, the Company had no restructured loans or foreclosed assets.
June 30, September 30,
1996 1995
-------- -------------
(Dollars in Thousands)
Non-accruing loans:
One- to four- family........................... $ 220 $ 65
Multi-family................................... 250 ---
Commercial real estate......................... --- ---
Consumer....................................... --- ---
----- ------
Total........................................ 470 65
----- -----
Total non-performing assets..................... $ 470 $ 65
===== =====
Total as a percentage of total assets........... .20% .03%
===== =====
For the quarter ended June 30, 1996, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $7,000.
In addition to the non-performing assets set forth in the table above, as of
June 30, 1996, there were no loans with respect to which known information
about the possible credit problems of the borrowers or the cash flows of the
security properties have caused management to have concerns as to the ability
of the borrowers to comply with present loan repayment terms and which may
result in the future inclusion of such items in the non-performing asset
categories.
Management has considered the 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.
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17
RECENT DEVELOPMENTS
On May 9, 1996, the stockholders of the Company approved the Damen Financial
Corporation 1996 Stock Option and Incentive Plan. This is an incentive stock
option plan for the benefit of the directors, officers and employees of the
Company and its affiliates. The number of shares authorized under the Plan is
396,750, equal to 10.0% of the total number of shares issued in the Conversion.
As of June 13, 1996, 376,909 options were granted at $11.63 per share,
exercisable at a rate of 20% per year, and expiring ten years from the date of
grant. 19,841 options are reserved for future grants. No options had been
exercised as of June 30, 1996.
On May 9, 1996, the stockholders of the Company approved the Damen Financial
Corporation 1996 Recognition and Retention Plan. This plan was established to
award shares to directors and to employees in key management positions in order
to provide them with a proprietary interest in the Company in a manner designed
to encourage such employees to remain with the Company. The number of shares
authorized under the Plan is 158,700, equal to 4.0% of the total number of
shares issued in the Conversion. These shares were purchased in the open
market during the quarter ended June 30, 1996 at a total cost of $1,865,187.
As of June 13, 1996, 138,861 shares were awarded, and will vest at a rate of
20% per year. 19,839 shares are reserved for future awards.
-17-
18
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) A Special Meeting of Stockholders (the "Meeting") of Damen
Financial Corporation was held May 9, 1996 at 10:30 AM at
the William Rainey Harper College located at 1200 West
Algonquin Road, Building H, Room 108, Palatine, Illinois.
(b) Proxies for the meeting were solicited pursuant to Section
14 of the Securities and Exchange Act; there was no
solicitation in opposition.
(c) The following are the results of each matter voted upon at
the Meeting:
(i) The ratification of the adoption of the 1996 Stock
Option and Incentive Plan:
Votes For: 2,327,656
---------
Votes Against: 420,024
---------
Abstentions: 181,816
---------
Broker Non-Votes: 82,357
---------
(ii) The ratification of the adoption of the 1996
Recognition and Retention Plan:
Votes For: 2,278,827
---------
Votes Against: 552,272
---------
Abstentions: 180,754
---------
Broker Non-Votes: -0-
---------
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) Computation of earnings per share (Exhibit 11 filed herewith)
(2) Financial Data Schedule (Exhibit 27 filed herewith)
(b) The Company filed a Form 8-K on April 24, 1996 to report quarterly
earnings. In addition, the Company filed Form 8-K on May 7, 1996,
May 9, 1996 and June 14, 1996 to report the issuance of press
releases.
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19
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: August 9, 1996
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)
DATE: August 9, 1996
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20
INDEX TO EXHIBITS
Exhibit No. Page No.
- ----------- --------
11 State re: Computation of Per Share Earnings 21
27 Financial Data Schedule 22
-20-