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 March 31, 1997
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
--------------
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, 1997 there were 3,246,720 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
March 31, 1997 (Unaudited) and September 30, 1996 4
Consolidated Statements of Earnings for the three and six
months ended March 31, 1997 and 1996
(unaudited) 5
Consolidated Statements of Cash Flows for the six
months ended March 31, 1997 and 1996
(unaudited) 6
Notes to Unaudited Consolidated Financial
Statements 7-9
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
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PART I - FINANCIAL INFORMATION
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DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, September 30,
------------ --------------
1997 1996
---- ----
Assets (unaudited)
- ------
Cash and amounts due from
depository institutions $ 514,183 170,034
Interest-bearing deposits 5,313,524 1,011,197
---------- ----------
Total cash and cash equivalents 5,827,707 1,181,231
Investment securities (fair value: $1,830,700 at
March 31, 1997 and $1,777,000 at September 30, 1996) 1,830,693 1,776,979
Investment securities, available for sale, at fair value 32,056,290 43,342,710
Mortgage-backed securities
(fair value: $31,529,900 at March 31, 1997
and $34,641,300 at September 30, 1996) 32,534,068 35,503,531
Mortgage-backed securities, available for sale,
at fair value 53,972,878 52,594,450
Loans receivable (net of allowance for
loan losses: $347,000 at March 31, 1997 and
$345,000 at September 30,1996) 91,635,785 91,145,893
Stock in Federal Home Loan Bank of Chicago
and Federal Reserve Bank of Chicago 3,738,500 3,110,500
Accrued interest receivable 1,505,632 1,661,087
Office properties and equipment - net 3,549,938 3,502,987
Prepaid expenses and other assets 748,132 736,041
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Total assets 227,399,623 234,555,409
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities
- -----------
Deposits 117,583,183 118,973,335
Borrowed money 61,500,000 59,600,000
Advance payments by borrowers for taxes
and insurance 831,687 638,768
Other liabilities 1,644,263 2,473,435
----------- -----------
Total liabilities 181,559,133 181,685,538
----------- -----------
Stockholders' Equity
- --------------------
Preferred stock, $.01 par value; authorized
100,000 shares; none outstanding - -
Common stock, $.01 par value; authorized
4,500,000 shares; 3,967,500 shares issued and
3,246,720 shares outstanding at March 31, 1997
and 3,770,117 shares outstanding at September 30, 1996 39,675 39,675
Additional paid-in capital 38,379,325 38,345,966
Retained earnings, substantially restricted 21,662,220 21,131,170
Unrealized gain on securities available for sale,
net of income taxes 102,679 167,679
Treasury stock, at cost (720,780 and 197,383 shares
at March 31, 1997 and September 30, 1996) (10,132,481) (2,311,375)
Common stock acquired by Employee Stock Ownership Plan (2,656,600) (2,762,400)
Common stock awarded by Recognition and Retention Plan (1,554,328) (1,740,844)
----------- -----------
Total stockholders' equity 45,840,490 52,869,871
----------- -----------
Total liabilities and stockholders' equity $ 227,399,623 234,555,409
=========== ===========
See accompanying notes to consolidated financial statements.
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DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Earnings
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ -----------------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited)
Interest income:
Loans $ 1,861,564 1,777,668 3,735,641 3,566,219
Mortgage-backed securities 1,555,562 1,524,774 3,075,077 2,961,615
Tax-exempt securities 362,726 373,210 752,494 719,991
Interest and dividends on
other investments 319,466 385,932 638,121 810,422
Dividends on FHLB and FRB stock 54,915 42,896 109,646 88,461
--------- --------- --------- ---------
Total interest income 4,154,233 4,104,480 8,310,979 8,146,708
--------- --------- --------- ---------
Interest expense:
Deposits 1,502,993 1,609,463 3,034,163 3,249,374
Borrowings 898,611 793,790 1,809,740 1,561,474
--------- --------- --------- ---------
Total interest expense 2,401,604 2,403,253 4,843,903 4,810,848
--------- --------- --------- ---------
Net interest income before
provision for loan losses 1,752,629 1,701,227 3,467,076 3,335,860
Provision for loan losses 2,000 22,000 6,618 37,000
--------- --------- --------- ---------
Net interest income after
provision for loan losses 1,750,629 1,679,227 3,460,458 3,298,860
--------- --------- --------- ---------
Non-interest income:
Loan fees and service charges 11,709 31,544 30,380 52,717
Gain (loss) on sale of:
Mortgage-backed securities,
available for sale (17,365) 7,829 (17,365) 7,829
Investment securities,
available for sale 157,083 - 157,083 -
Other income 18,342 18,047 36,838 39,013
--------- --------- --------- ---------
Total non-interest income 169,769 57,420 206,936 99,559
--------- --------- --------- ---------
Non-interest expense:
Compensation, employee benefits, and
related expenses 636,246 485,220 1,364,072 1,063,331
Advertising and promotion 136,095 98,780 219,859 212,921
Occupancy and equipment expense 199,638 168,568 395,671 325,658
Data processing 33,426 25,519 62,716 50,332
Insurance expense 17,313 17,016 34,626 34,032
Federal insurance premiums 19,381 74,463 76,442 150,445
Legal, audit, and examination services 63,315 61,568 152,037 114,300
Other operating expenses 87,571 87,252 179,337 168,347
--------- --------- --------- ---------
Total non-interest expense 1,192,985 1,018,386 2,484,760 2,119,366
--------- --------- --------- ---------
Net income before income taxes 727,413 718,261 1,182,634 1,279,053
Provision for federal and state
income taxes 169,121 127,000 232,001 216,600
--------- --------- --------- ---------
Net income $ 558,292 591,261 950,633 1,062,453
========= ========= ========= =========
Earnings per share - primary $ .16 .16 .27 .29
--- --- --- ---
Earnings per share - fully diluted .16 .16 .27 .29
--- --- --- ---
Dividends declared per common share $ .06 .00 .12 .00
--- --- --- ---
See accompanying notes to consolidated financial statements.
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DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended
March 31,
-----------------------
1997 1996
---- ----
(unaudited)
Cash flows from operating activities:
Net income $ 950,633 1,062,453
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation 100,229 85,177
Amortization of cost of stock benefit plans 325,675 354,743
Provision for loan losses 6,618 37,000
Decrease in deferred loan income (125,716) (29,622)
(Increase) decrease in prepaid and deferred federal
and state income taxes (66,274) 146,613
(Gain) loss on sale of mortgage-backed securities,
available for sale 17,365 (7,829)
Gain on sale of investment securities,
available for sale (157,083) -
(Increase) decrease in accrued interest receivable 155,455 (320,324)
Increase (decrease) in accrued interest payable 19,000 (329,800)
(Increase) decrease in other assets 45,952 (7,751)
Decrease in other liabilities (780,733) (481,767)
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Net cash provided by operating activities 491,121 508,893
---------- ----------
Cash flows from investing activities:
Purchase of investment securities,
available for sale (1,993,697) (17,708,246)
Purchase of investment securities (97,492) (97,953)
Purchase of mortgage-backed securities, available for sale (7,161,782) (15,381,878)
Purchase of mortgage-backed securities - (229,361)
Proceeds from sales of investment securities, available for sale 9,472,341 -
Proceeds from sales of mortgage-backed securities,
available for sale 1,816,256 726,777
Proceeds from maturities of investment
securities, available for sale 3,919,859 4,527,520
Proceeds from maturities of investment securities 43,778 37,282
Proceeds from maturities of mortgage-backed
securities, available for sale 3,884,312 4,313,650
Proceeds from maturities of mortgage-backed securities 2,969,463 3,976,908
Proceeds from redemption of Federal Home Loan Bank stock - 130,000
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock (628,000) (125,000)
Disbursements for loans (8,566,205) (9,094,064)
Loan repayments 8,195,411 7,619,927
Property and equipment expenditures (147,180) (76,796)
---------- ----------
Net cash provided by (for) investing activities 11,707,064 (21,381,234)
---------- ----------
Cash flows from financing activities:
Deposit receipts 36,471,711 34,105,814
Deposit withdrawals (40,069,872) (38,096,391)
Interest credited to deposit accounts 2,208,009 2,796,502
Proceeds from borrowed money 91,100,000 79,600,000
Repayment of borrowed money (89,200,000) (73,800,000)
Increase (decrease) in advance payments by borrowers
for taxes and insurance 192,919 (1,977,292)
Purchase of treasury stock (7,821,106) -
Dividends paid on common stock (433,370) -
---------- ----------
Net cash provided by (for) financing activities (7,551,709) 2,628,633
---------- ----------
Increase (decrease) in cash and cash equivalents 4,646,476 (18,243,708)
Cash and cash equivalents at beginning of period 1,181,231 20,363,159
---------- ----------
Cash and cash equivalents at end of period $ 5,827,707 2,119,451
========== ==========
Cash paid during the period for:
Interest $ 4,824,903 5,140,648
Income taxes 279,000 71,229
========== =========
See accompanying notes to consolidated financial statements.
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DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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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, 1997, the results of operations for the three and six
months ended March 31, 1997 and 1996 and cash flows for the six months ended
March 31, 1997 and 1996. 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, 1997 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. Modified Dutch Auction Tender Offer
- --------------------------------------
Damen Financial Corporation purchased 523,397 common shares at a total cost
of approximately $7,818,000 in a Modified Dutch Auction Tender Offer which was
effective on March 31, 1997, and settled on April 3, 1997. The number of
shares purchased by the Company represented approximately 13.9% of the shares
outstanding prior to the transaction.
4. Earnings Per Share
- ---------------------
Earnings per share for the three and six month periods ended March 31, 1997
and 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.
5. Charter Conversion
- ---------------------
Damen Federal Bank for Savings received approval from the Office of the
Comptroller of the Currency to convert its charter from a federal savings bank
to a national bank. Effective February 27, 1997, the Bank converted to a
national bank and changed its name to Damen National Bank.
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6. Impact of New Accounting Standards
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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. The Company
has adopted SFAS 121 effective October 1, 1996, resulting in no material impact
on its consolidated financial condition or results of operations.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS. In May 1995, the FASB issued
Statement of Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting
for Mortgage Servicing Rights." This statement amends Statement of Financial
Accounting Standards No. 65 ("SFAS 65"), "Accounting for Certain Mortgage
Banking Activities," to require that a mortgage banking enterprise recognize as
separate assets rights to service mortgage loans for others, however those
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. The Company has adopted SFAS 122
effective October 1, 1996, resulting in no material impact on its consolidated
financial condition or results of operations.
ACCOUNTING FOR STOCK-BASED COMPENSATION. In October 1995, the FASB issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation." This statement establishes a value-based method
of accounting for stock options which encourages employers to account for stock
compensation awards based on their fair value at the date the awards are
granted. The resulting compensation award would be shown as an expense on the
income statement.
SFAS 123 also permits entities to continue to use the intrinsic value
method, allowing them to continue to apply current accounting requirements,
which generally result in no compensation cost for most fixed stock-option
plans. If the intrinsic value method is retained, SFAS 123 requires
significantly expanded disclosures, including disclosure of the pro forma
amount of net income and earnings per share as if the fair value-based method
were used to account for stock based compensation. SFAS 123 is effective for
fiscal years beginning after December 15, 1995, however, employers will be
required to include in that year's financial statements, information about
options granted in 1995. The Company has determined that it will apply the APB
Opinion No. 25 method in preparing its consolidated financial statements.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. In June 1996, the FASB issued SFAS No. 125
("SFAS 125"), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This statement, among other things, applies a
"financial-components approach" that focuses on control, whereby an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred, derecognizes assets when control has been surrendered, and
derecognizes liabilities when extinguished. SFAS 125 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996. The Company has adopted SFAS 125 effective January 1,
1997, resulting in no material impact on its consolidated financial condition
or results of operations.
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 127"), "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125". The statement delays
for one year the implementation of SFAS 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 125 (those not deferred
by SFAS 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 125, management does not believe that
adoption of the portions of SFAS 125 which have been deferred by SFAS 127 will
have a material effect on the Company.
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6. Impact of New Accounting Standards (continued)
- -------------------------------------------------
ACCOUNTING FOR EARNINGS PER SHARE. In February 1997, the FASB issued SFAS
No. 128 ("SFAS 128"), "Earnings Per Share". This statement is intended to
simplify the computation of earnings per share ("EPS") by replacing the
presentation of primary EPS with a presentation of basic EPS. Basic EPS does
not include potential dilution and is computed by dividing income available to
common stockholders by the average number of common shares outstanding.
Diluted EPS reflects the potential dilution of securities that could share
in the earnings of a company, similar to the fully diluted EPS currently used.
The statement requires dual presentation of basic and diluted EPS by companies
with complex capital structures. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, and will require
restatement of all prior-period EPS data presented. The Company does not
anticipate that this statement will have a material impact on its diluted
earnings per share.
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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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
-------------------
MARCH 31, 1997 COMPARED TO SEPTEMBER 30, 1996.
Total assets decreased $7.2 million to $227.4 million as of March 31, 1997 from
$234.6 million as of September 30, 1996. Interest-bearing deposits increased
$4.3 million to $5.3 million as of March 31, 1997 as compared to $1.0 million
at September 30, 1996. Investment securities available-for-sale decreased
$11.3 million to $32.1 million at March 31, 1997 from $43.3 million at
September 30, 1996 due primarily to sales and maturities of $13.4 million and a
market value decrease of $158,000 exceeding purchases of $2.0 million.
Investment sales were primarily completed in March, 1997 to provide funding for
the Modified Dutch Auction Tender completed at the end of March, 1997.
Mortgage-backed securities held to maturity decreased $3.0 million to $32.5
million at March 31, 1997 from $35.5 million at September 30, 1996 due
primarily to repayments. Mortgage-backed securities available-for-sale
increased $1.4 million to $54.0 million at March 31, 1997 from $52.6 million at
September 30, 1996 due primarily to purchases of $7.2 million less a market
value decrease of $148,000, repayments of $3.9 million, and sales of $1.8
million. Loans receivable increased $490,000 to $91.6 million at March 31,
1997 from $91.1 million at September 30, 1996 due primarily to new loan
originations of $8.6 million exceeding repayments of $8.2 million.
Total deposits decreased $1.4 million to $117.6 million at March 31, 1997 from
$119.0 million at September 30, 1996 due to savers seeking higher returns in
alternative investments. FHLB advances increased $1.9 million to $61.5 million
at March 31, 1997 from $59.6 million at September 30, 1996. The additional
advances were used to offset net savings withdrawals.
Stockholders' equity decreased $7.0 million to $45.9 million at March 31, 1997
from $52.9 million at September 30, 1996 due primarily to the repurchase of
523,397 shares of the Company's stock at a cost of $7.8 million under a
recently completed "Modified Dutch Auction Tender" and the payment of cash
dividends totaling approximately $452,000, which were partially offset by net
income of $951,000 for the six months ended March 31, 1997. At March 31, 1997,
there were 3,246,720 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 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 MARCH 31, 1997 AND 1996.
-------------------
NET INCOME. The Company's net income for the three months ended March 31, 1997
was $559,000 as compared to $591,000 for the same period in 1996, a decrease of
$32,000. This decrease was due primarily to an increase in non-interest expense
of $175,000, and an increase in income taxes of $42,000 partially offset by
increases in net interest income of $51,000 and gains on the sales of
investments available-for-sale of $132,000 during the quarter.
INTEREST INCOME. Total interest income for the quarter ended March 31, 1997
increased $49,000 to $4.2 million from $4.1 million a year ago due to an
increase in the yield on average interest-earning assets to 7.31% from 7.14%,
partially offset by a decrease in average interest-earning assets of $2.5
million to $227.3 million from $229.8 million.
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INTEREST EXPENSE. The Company's interest expense remained unchanged at $2.4
million for the quarter ended March 31, 1997 compared to a year ago. The
increase in average interest-bearing liabilities to $177.3 million at March 31,
1997 from $174.9 million a year ago was offset by a decrease in the average
rate to 5.42% from 5.50%. The decrease in rates was primarily the result of
certificates of deposits and borrowings being renewed at lower rates in the
1997 quarter. The increase in average interest bearing liabilities resulted
from an increase in the average balance of borrowed money of $8.4 million
partially offset by a decrease in the average balance of savings deposits of
$6.0 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 $2,000 for the quarter ended March
31, 1997 compared to $22,000 for the same quarter in the prior year.
Non-performing loans increased to $451,000 from $363,000 at December 31, 1996.
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 $170,000 for the
quarter ended March 31, 1997 compared to $57,000 for the same quarter a year
ago. The increase was due primarily to an increase of $132,000 in net realized
gains on securities available-for-sale partially offset by a decrease in loan
fees of $20,000 due to a reduction in loan fees charged and an increase in loan
expenses primarily related to new home equity line of credit loans.
NON-INTEREST EXPENSE. The Company's non-interest expense increased $175,000
for the quarter ended March 31, 1997 to $1.2 million from $1.0 million for the
same quarter of 1996 due primarily to an increase of $151,000 in compensation
and related expenses due to the introduction of the Recognition and Retention
Plan in June, 1996 as well as increases in salaries and other benefits. In
addition, advertising costs increased $37,000, and occupancy and equipment
expense increased $31,000, partially offset by a decrease in Federal insurance
premiums of $55,000 during the quarter.
PROVISION FOR INCOME TAXES. Tax expense for the quarter ended March 31, 1997
was $169,000 compared to $127,000 for the same quarter in 1996 due to a higher
effective tax rate caused by a reduction in tax exempt securities.
COMPARISON OF OPERATION RESULTS FOR THE
SIX MONTHS ENDED MARCH 31, 1997 AND 1996.
--------------------
NET INCOME. The Company's net income for the six months ended March 31,1997
was $951,000 as compared to $1.1 million for the same period in 1996, or a
decrease of $112,000. An increase in net interest income of $131,000, a
reduction in the loan loss provision of $30,000 and an increase in net gains on
the sale of investments available-for-sale of $132,000 was more than offset by
an increase in non-interest expense of $365,000, a decrease in loan fees of
$22,000 and an increase in income taxes of $15,000.
INTEREST INCOME. Total interest income for the six months ended March 31, 1997
increased $164,000 to $8.3 million from $8.1 million a year ago due primarily
to an increase in the yield on average interest-earning assets of .16% to 7.32%
from 7.16%.
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INTEREST EXPENSE. The Company's interest expense increased $33,000 to $4.84
million for the six months ended March 31, 1997 from $4.81 million a year ago.
The increase was due to an increase in average interest-bearing liabilities of
$3.1 million to $176.8 million at March 31, 1997 from $173.7 million a year
ago, partially offset by a decrease in the average rate to 5.48% from 5.54%.
The decrease in rates was primarily the result of certificates of deposits and
borrowed money being renewed at lower rates. The increase in average
interest-bearing liabilities resulted from an increase in the average balance
of borrowed money of $9.4 million partially offset by a decrease in the average
balance of savings deposits of $6.3 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 $7,000 for the six months ended
March 31, 1997 compared to $37,000 for the same period in the prior year. The
prior year's six month provision was greater due to an increase in mortgage
loan balances and an increase in non-performing loans from $65,000 to $337,000.
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 increased $107,000 for
the six months ended March 31, 1997 to $207,000 from $100,000 for the same
period one year ago. The increase was due primarily to an increase of $132,000
in net realized gains on the sale of investments available-for-sale which was
partially offset by a decrease of $22,000 in loan fees and service charges.
NON-INTEREST EXPENSE. The Company's non-interest expense increased $365,000
for the six months ended March 31, 1997 to $2.5 million from $2.1 million for
the same period one year ago due primarily to an increase of $301,000 in
compensation and related expenses, primarily as a result of the introduction of
the Company's Recognition and Retention Plan in June of 1996. In addition,
occupancy and equipment costs increased $69,000 and legal and accounting
expenses increased $38,000. These additional expenses were partially offset by
a reduction of $74,000 in Federal insurance premiums.
PROVISION FOR INCOME TAXES. Tax expense for the six months ended March 31,
1997 increased $15,000 to $232,000 compared to $217,000 for the comparable
period in 1996. The increased expense was due to a higher effective tax rate
due to a reduction of tax exempt securities from the year ago period.
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13
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.
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, 1997 and September 30, 1996, cash and cash equivalents totaled $5.8
million and $1.2 million respectively.
The primary financing activities of the Company are deposits and borrowings.
For the six months ended March 31, 1997, deposits decreased $1.4 million and
the Bank's net (proceeds less repayments) financing activity with the FHLB
increased $1.9 million.
The Company anticipates that it will have sufficient funds available to meet
current commitments. At March 31, 1997 the Company has outstanding loan
commitments totaling $1,014,000, and unused lines of credit granted totaling
$823,000.
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, 1997, the Bank had Tier 1 capital of $37.5 million or 16.9% of
adjusted total assets and Tier 2 capital of $37.8 million or 49.3% of total
risk-weighted assets.
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14
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). At
March 31, 1997, the Company had no restructured loans or foreclosed assets.
March 31, September 30,
1997 1996
------------ -------------
(Dollars in Thousands)
Non-accruing loans:
One- to four- family........................ $ 184 $ 99
Multi-family................................ 267 252
Commercial real estate. .................... --- ---
Consumer.................................... --- ---
---- ----
Total..................................... 451 351
---- ----
Total non-performing assets.................. $ 451 $ 351
==== ====
Total as a percentage of total assets........ .20% .15%
=== ===
For the six months ended March 31, 1997, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $11,000.
In addition to the non-performing assets set forth in the table above, as of
March 31, 1997, 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 1, 1997, Damen Financial Corporation announced the appointment of
Nicholas J. Raino to its Board of Directors effective April 1, 1997. Mr. Raino
has been appointed to fill the unexpired term of Dr. Mark Guinan who retired
from the Board.
In addition, on April 21, 1997 the Board of Directors approved a cash dividend
of $.06 per share to be payable May 15, 1997 to shareholders of record on April
30, 1997.
In February 1997, the Bank hired Mr. David M. Wattenberg as Vice President -
Commercial Lending in anticipation of establishing a commercial lending and
commercial checking program. Mr. Wattenberg has over twenty-five years of
commercial lending experience.
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15
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 February 21, 1997 at 10:30 AM
at the Schaumburg Golf Club located at 401 N. Rosell Road,
Schaumburg, 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
--- -------- --------
Mary Beth Poronsky Stull 3,412,320 82,895 0
Janine M. Poronsky 3,412,520 82,695 0
The continuing Directors are:
Expiration
of Term as
Director
----------
Carol A. Diver 1998
Nicholas J. Raino 1998
Edward R. Tybor 1999
Charles J. Caputo 1999
(ii) The ratification of the appointment of Cobitz, VandenBerg &
Fennessy as auditor for the Company for the fiscal year ended
September 30, 1997:
Votes For: 3,455,083
---------
Votes Against: 34,747
---------
Abstentions: 5,385
---------
Broker Non-Votes: -0-
---------
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) The Company filed an 8-K dated January 22, 1997 attaching (I) its
press release announcing regulatory approval for the charter
conversion of its subsidiary thrift to a national bank and (ii)
attaching its press release announcing the Company's earnings
for the quarter ended December 31, 1996.
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16
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, 1997
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)
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17
INDEX TO EXHIBITS
Exhibit No.
- -----------
11 Statement regarding Computation of Earnings Per Share
27 Financial Data Schedule
-17-