1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission File Number 0-19829 CALUMET BANCORP, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-3785272 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 1350 EAST SIBLEY BOULEVARD, DOLTON, ILLINOIS 60419 (Address of principal executive offices) (Zip Code) (708) 841-9010 (Registrant's telephone number, including area code) Indicate by check mark whether Registrant (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 November 12, 1998, the Company has 3,145,861 shares of $0.01 par value common stock outstanding. 2 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS PAGE NO. -------------------- -------- Consolidated Statements of Financial Condition as of September 30, 1998 and December 31, 1997 3 Consolidated Statements of Income for the three months ended September 30, 1998 and 1997 and for the nine months ended September 30, 1998 and 1997 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 5 Consolidated Statements of Stockholders' Equity and Other Comprehensive Income for the nine months ended September 30, 1998 and 1997 7 Notes to Consolidated Financial Statements 8 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS 9 ----------------------------------- PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS 17 ----------------- ITEM 2 - CHANGES IN SECURITIES 17 --------------------- ITEM 3 - DEFAULT UPON SENIOR SECURITIES 17 ------------------------------ ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17 --------------------------------------------------- ITEM 5 - OTHER INFORMATION 17 ----------------- ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17 -------------------------------- SIGNATURE PAGE 18 2 3 CALUMET BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands) (UNAUDITED) SEPTEMBER 30, DECEMBER 31, 1998 1997 -------------------------------- ASSETS: Cash $ 3,497 $ 2,932 Interest bearing deposits 17,329 5,351 ---------- --------- CASH AND CASH EQUIVALENTS 20,826 8,283 Securities available-for-sale 53,995 46,967 Securities held-to-maturity (fair value: $15,245 (1998); $18,606 (1997)) 15,336 18,768 Loans receivable, net 368,992 376,988 Investment in limited partnerships 15,224 24,645 Real estate held for sale acquired through foreclosure 2,366 2,491 Office properties and equipment, net 5,220 4,468 Accrued interest receivable and other assets 3,576 4,016 ---------- --------- TOTAL ASSETS $ 485,535 $ 486,626 ========== ========= LIABILITIES: Deposits $ 347,599 $ 348,461 Federal Home Loan Bank advances 41,310 45,060 Advance payments by borrowers for taxes and insurance 3,833 3,237 Income taxes - 1,229 Accrued interest payable and other liabilities 6,010 7,025 ---------- --------- TOTAL LIABILITIES 398,752 405,012 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 2,000,000 shares authorized - - Common stock, $.01 par value, 8,400,000 shares authorized, 3,620,454 shares issued 36 36 Additional paid-in capital 35,262 35,217 Retained earnings - substantially restricted 61,458 56,786 Accumulated other comprehensive income, net of tax 1,472 1,303 Unearned ESOP shares - (283) Treasury stock (474,593 shares) (11,445) (11,445) ---------- --------- TOTAL STOCKHOLDERS' EQUITY 86,783 81,614 ---------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 485,535 $ 486,626 ========== ========= See notes to consolidated financial statements. 3 4 CALUMET BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) (UNAUDITED) (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------------------------------- 1998 1997 1998 1997 -------------------------------------------------- INTEREST AND DIVIDEND INCOME: Loans $8,146 $ 8,582 $ 24,797 $ 25,421 Securities and deposits 1,272 1,175 3,504 3,868 -------------------------------------------------- Total interest and dividend income 9,418 9,757 28,301 29,289 INTEREST EXPENSE: Deposits 4,197 4,493 12,708 13,225 Federal Home Loan Bank advances 721 837 2,114 2,615 -------------------------------------------------- Total interest expense 4,918 5,330 14,822 15,840 -------------------------------------------------- NET INTEREST INCOME 4,500 4,427 13,479 13,449 Provision for losses on loans 118 200 342 600 -------------------------------------------------- Net interest income after provision for losses 4,382 4,227 13,137 12,849 OTHER INCOME: Gain on loans sold 34 55 126 126 Gain on sales of real estate (3) 16 145 54 Gains on sales of securities (13) (59) 12 41 Income from limited partnerships 3,925) 218 (173) 1,748 Insurance and brokerage commissions 85 69 247 153 Other 225 197 698 409 -------------------------------------------------- Total other income (3,597) 496 1,055 2,531 OTHER EXPENSES: Compensation and benefits 1,177 1,242 4,052 4,254 Office occupancy and equipment 361 331 1,013 945 Federal insurance premiums 54 55 164 174 Advertising and promotion 97 99 240 235 Data processing 184 133 451 386 Other 410 387 1,351 1,186 -------------------------------------------------- Total other expenses 2,283 2,247 7,271 7,180 -------------------------------------------------- Income before income taxes (1,498) 2,476 6,921 8,200 Income taxes (benefit) (771) 800 2,249 2,688 -------------------------------------------------- NET INCOME (LOSS) $ (727) $ 1,676 $ 4,672 $ 5,512 ================================================== BASIC EARNINGS (LOSS) PER SHARE $(0.23) $ 0.53 $ 1.49 $ 1.68 ================================================== DILUTED EARNINGS (LOSS) PER SHARE $(0.23) $ 0.49 $ 1.37 $ 1.57 ================================================== See notes to consolidated financial statements. 4 5 CALUMET BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------- 1998 1997 ------------------------------------- OPERATING ACTIVITIES: Net income $ 4,672 $ 5,512 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses on loans 342 600 Provision for depreciation 316 259 Amortization of deferred loan and commitment fees (611) (638) Amortization and accretion of premiums and discounts 142 157 Amortization and allocation of stock based benefits 283 528 Gain on sales of securities available-for-sale (12) (41) Equity (income) loss from limited partnerships 173 (1,748) Net gain on sale of real estate (145) (54) Originations of loans held for sale (9,052) (5,363) Gain on loans sold (126) (126) Proceeds from loans sold 9,178 5,489 Change in operating assets and liabilities: Decrease in accrued interest receivable and other assets 440 64 Increase (decrease) in income taxes (1,207) 145 Decrease in accrued interest payable and other liabilities (1,015) (194) -------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 3,378 4,590 INVESTING ACTIVITIES: Securities available-for-sale: Purchases (28,018) (40,733) Proceeds from sale 9,572 48,892 Repayments and maturities 11,604 2,693 Securities held-to-maturity: Purchases (151) (10) Repayments and maturities 3,428 7,688 Principal and fees collected on loans 86,483 68,463 Loans originated (78,119) (67,081) Loans purchased (260) (1,642) Investments in limited partnerships (2,742) (3,732) Return of investment in limited partnerships 11,990 3,246 Proceeds from sales of real estate 431 372 Purchases of office property and equipment (1,068) (169) -------------------------------------- NET CASH PROVIDED BY INVESTING ACTIVITIES 13,150 17,987 See notes to consolidated financial statements. 5 6 CALUMET BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Dollars in thousands) (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1998 1997 ---------------------------- FINANCING ACTIVITIES: Net increase (decrease) in demand and passbook accounts $ 2,037 $ (3,896) Net decrease in certificates of deposit (2,899) (7,865) Proceeds of Federal Home Loan Bank advances 29,235 58,385 Repayment of Federal Home Loan Bank advances (32,985) (65,075) Net increase (decrease) in advance payments by borrowers for taxes and insurance 596 (1,016) Net proceeds from exercise of stock options 31 15 Purchase of treasury stock - (9,236) ---------------------------- NET CASH USED IN FINANCING ACTIVITIES (3,985) (28,688) ---------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,543 (6,111) Cash and cash equivalents at beginning of year 8,283 9,175 ---------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 20,826 $ 3,064 ============================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest on deposits $ 13,271 $ 13,268 Cash paid during the year for interest on notes payable 2,115 2,643 ---------------------------- $ 15,386 $ 15,911 ============================ Cash paid during the year for income taxes $ 3,677 $ 2,147 ============================ Noncash transactions: Loans transferred to real estate owned $ 2,059 $ 88 Loans to facilitate sale of real estate owned 1,898 1,378 See notes to consolidated financial statements. 6 7 CALUMET BANCORP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME (Dollars in thousands) (UNAUDITED) COMPREHENSIVE INCOME STOCKHOLDERS' EQUITY NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------------------------------------- 1998 1997 1998 1997 --------------------------------------------------------- Common stock: Beginning and end of period $ 36 $ 36 ------------------------- Additional paid-in capital: Beginning of period 35,217 35,090 Proceeds of option stock exercised 31 15 Tax benefits of MRP and option deductions 14 84 ------------------------- End of period 35,262 35,189 ------------------------- Retained earnings: Beginning of period 56,786 73,817 Common stock split from treasury stock - (25,013) NET INCOME $ 4,672 $ 5,512 4,672 5,512 ------------------------- End of period 61,458 54,316 ------------------------- Accumulated other comprehensive income: Beginning of period unrealized gains on securities, net of income taxes 1,303 239 Unrealized holding gains (losses) on securities arising during period, net of income taxes 113 583 Reclassification adjustment for gains on securities included in net income, net of income taxes (8) (28) Effect of tax rate adjustment on unrealized gains 64 (32) -------------------------- Other comprehensive income 169 523 169 523 -------------------------------------------------------- End of period accumulated other comprehensive income 1,472 762 ------------------------- COMPREHENSIVE INCOME $ 4,841 $ 6,035 ========================== Less unearned ESOP shares: Beginning of period (283) (849) Shares to be released 283 425 ------------------------- End of period - (424) ------------------------- Less stock held for MRP: Beginning of period - (137) Amortization - 103 ------------------------- End of period - (34) ------------------------- Less treasury stock: Beginning of period (11,445) (26,432) Common stock split from treasury stock - 25,013 Purchases - (9,236) ------------------------- End of period (11,445) (10,655) ------------------------- Total stockholders' equity $ 86,783 $79,190 ========================= See notes to consolidated financial statements. 7 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. The results of operations for the three months and for the nine months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. Certain 1997 amounts have been reclassified to conform to 1998 presentation. For further information, refer to the consolidated financial statements and notes thereto included in the Calumet Bancorp, Inc. (the "Company") Annual Report on Form 10-K for the year ended December 31, 1997. NOTE B - EARNINGS PER SHARE In 1997, the FASB issued SFAS No. 128, Earnings per Share. SFAS No. 128 is effective for the quarter ending December 31, 1997, and all prior earnings per share amounts have been restated to be comparable. All earnings per share data prior to the Company's November 17, 1997 three-for-two stock split have been restated to be comparable. Basic earnings per share of common stock has been determined by dividing net income for each period by the weighted average number of shares of common stock outstanding. Diluted earnings per share has been determined by dividing net income for the period by the weighted average number of shares of common stock outstanding and additional shares issuable under stock options. Common stock issuable under stock options assumes the exercise of stock options and the use of proceeds to purchase treasury stock at the average market price for the period. Shares of common stock purchased by the Company's Employee Stock Ownership Plan ("ESOP") prior to December 31, 1992, are included in shares outstanding for purposes of calculating earnings per share. Shares committed to be released to the ESOP during the year are expensed during the year based on original cost. The ESOP did not purchase any shares subsequent to December 31, 1992, which would be subject to AICPA Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans." The average number of uncommitted (unearned) shares held for the Company's Employee Stock Ownership Plan ("ESOP") and included in the weighted average shares outstanding for the three months ended September 30, 1998 and 1997 were none and 74,261, respectively, and for the nine months then ended were 14,145 and 95,479, respectively. The ESOP was terminated as of July 31, 1998. The following table presents a reconciliation of the denominators used to compute basic earnings per share and diluted earnings per share for the three months and the nine months ended September 30, 1998 and 1997. Three months ended Nine months ended September 30, September 30, ----------------------------------------------------------- (Dollars in thousands, except per share data) 1998 1997 1998 1997 ----------------------------------------------------------- Weighted average shares of common stock outstanding 3,145,453 3,166,196 3,143,127 3,271,757 Dilutive effects of assumed stock option exercises 249,833 251,048 254,991 240,372 ----------------------------------------------------------- Weighted average shares of common stock and common stock equivalents 3,395,286 3,417,244 3,398,118 3,512,129 =========================================================== EARNINGS PER SHARE: Net income available to common shareholders $ (727) $ 1,676 $ 4,672 $ 5,512 Basic earnings per share $ (0.23) $ 0.53 $ 1.49 $ 1.68 EARNINGS PER SHARE ASSUMING DILUTION: Net income available to common shareholders $ (727) $ 1,676 $ 4,672 $ 5,512 Diluted earnings per share $ (0.23) $ 0.49 $ 1.37 $ 1.57 9 NOTE C - COMPREHENSIVE INCOME During the first quarter of 1998 the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Specifically, the Company has reported the change in unrealized gains on securities as an addition to net income to arrive at comprehensive income of $4.8 million for the first nine months of 1998, compared to $6.0 million for the first nine months of 1997. NOTE D - COMMITMENTS AND CONTINGENCIES At September 30, 1998, the Company had approved loan commitments totalling $13.8 million to originate loans, $3.4 million to sell loans, $5.6 million in undisbursed loans-in-process, $13.7 million in unused lines of credit, and $9.0 million in credit enhancement arrangements. Commitments to fund loans and those under credit enhancement arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company's normal credit policies. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Calumet Bancorp, Inc. (the "Company") completed its initial public offering of Common Stock on February 20, 1992. It owns all of the outstanding Common Stock of Calumet Federal Savings and Loan Association of Chicago (the "Association"), a federally chartered stock savings and loan association which operates five financial services offices in the Chicago area -- in Dolton, Lansing, Sauk Village, and two in southeastern Chicago. The Association owns two first tier subsidiaries, Calumet Savings Service Corporation and Calumet Residential Corporation, both wholly owned. Calumet Residential Corporation owns 51% of a second tier subsidiary, Calumet United Limited Liability Company. Calumet Savings Service Corporation owns two second tier subsidiaries, Calumet Mortgage Corporation of Idaho and Calumet Financial Corporation, both wholly owned. The Company's business activities currently consist of investment in equity securities, participation as a limited partner in real estate investment and loan servicing partnerships, and operation of the Association. The Association's principal business consists of attracting deposits from the public and investing these deposits, together with funds generated from operations and borrowings, primarily in residential mortgage loans. The Association's deposit accounts are insured to the maximum allowable by the FDIC. The Association's results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on its loan and securities portfolios and its cost of funds, consisting of interest paid on its deposits and borrowings. The Association's operating results are also affected by the sale of insurance, annuities and real estate through its second tier subsidiaries, and to a lesser extent, loan commitment fees, customer service charges and other income. Operating expenses of the Association are primarily employee compensation and benefits, equipment and occupancy costs, federal deposit insurance premiums, advertising, data processing, and other administrative expenses. The Association's results of operations are further affected by economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. On September 9, 1998, the Company announced that a definitive agreement had been signed pursuant to which FBOP Corporation will acquire, for cash, all of the outstanding stock of the Company in a transaction valued at approximately $111.6 million, or $32.00 per fully diluted share, after deducting the Company's merger-related expenses. The transaction is expected to be completed during the first quarter of 1999, and is subject to the approvals of regulatory agencies and the Company's shareholders, and to the satisfaction of certain contractual closing conditions. 9 10 FBOP Corporation is a closely held bank holding company headquartered in Oak Park, Illinois. As of September 30, 1998, FBOP reported consolidated total assets of $3.3 billion and total deposits of $2.7 billion. Upon completion of the merger, FBOP will operate 19 banking offices in Illinois, 17 in California, and 3 in Texas, with consolidated total assets of approximately $3.8 billion. FINANCIAL CONDITION Total assets decreased $1.1 million, or less than 1.0%, to $485.5 million at September 30, 1998, from $486.6 million at December 31, 1997. Net loans receivable decreased $8.0 million, or 2.1%, to $369.0 million at September 30, 1998, from $377.0 million at December 31, 1997, with originations and purchases of $78.4 million, and repayments of $86.5 million, during the first nine months of 1998. The Company's lending activities have been concentrated primarily in residential real estate secured by first liens. At September 30, 1998, approximately 60.2% of the Company's mortgage loans were secured by one-to-four family residential properties, 11.8% by multifamily income producing properties, and 28.0% by commercial properties and land. At December 31, 1997, these concentrations were 58.7%, 12.4%, and 28.9%, respectively. At September 30, 1998, the Company's mortgage loan portfolio was geographically distributed primarily in Illinois (35.6%), Colorado (18.1%), Idaho (21.6%), and New Mexico (15.9%). At December 31, 1997, these distributions were 33.1%, 24.1%, 20.6%, and 15.0%, respectively. Deposits decreased $862,000, or less than 1.0%, to $347.6 million at September 30, 1998, from $348.5 million at December 31, 1997. Federal Home Loan Bank advances were reduced by $3.8 million, or 8.3%, to $41.3 million at September 30, 1998, from $45.1 million at December 31, 1997. Stockholders' equity increased $5.2 million, or 6.3%, to $86.8 million at September 30, 1998, from $81.6 million at December 31, 1997, primarily as the result of $4.7 million in net income. The Company has 3,145,861 shares of common stock outstanding on September 30, 1998, with a book value of $27.59 per share. ASSET QUALITY The allowance for losses on loans remained at 1.54% of loans receivable at September 30, 1998, the same as it was at December 31, 1997. Nonperforming loans to loans receivable decreased to 0.93% at September 30, 1998, from 1.39% at December 31, 1997, primarily due to foreclosed loans transferred to real estate acquired through foreclosure. Nonperforming assets to total assets decreased to 1.22% at September 30, 1998, from 1.64% at December 31, 1997, primarily due to the subsequent sale of property acquired through the foreclosures. The allowance for losses on loans amounted to 166% of nonperforming loans at September 30, 1998, increased from 111% at December 31, 1997. RESULTS OF OPERATIONS The Company reported a net loss of $727,000 for the third quarter of 1998, compared to $1.7 million net income for the third quarter of 1997. Diluted earnings (loss) per share decreased to ($0.23) for the third quarter of 1998, compared to $0.49 for the third quarter of 1997. The primary reason for the decrease was a $4.1 million decrease in income from limited partnerships, which included a $4.3 million valuation allowance for mortgage servicing rights resulting from a sharp drop in mortgage interest rates and increased prepayment expectations for mortgage loans. Diluted earnings per share before the $4.3 million allowance was $0.56 for the third quarter of 1998. Net income for the nine months ended September 30, 1998, decreased to $4.7 million, compared to $5.5 million for the nine months ended September 30, 1997. Diluted earnings per share for the first nine months of 1998 was $1.37, compared to $1.57 for the first nine months of 1997. The primary reason for the decrease was a $1.9 million decrease in income from limited partnerships, which included a $5.7 million valuation allowance for mortgage servicing rights, offset in part by a $3.6 million gain on the sale of a limited partnership investment property during 10 11 the first quarter of 1998. The $5.7 million allowance reduced diluted earnings per share by $1.04, while the $3.6 million gain increased diluted earnings per share by $0.69 for the nine months ended September 30, 1998. Return on average assets for the third quarter of 1998 decreased to (0.59%), compared to 1.36% for the third quarter last year. Return on average stockholders' equity for the third quarter of 1998 decreased to (3.36%), compared to 8.66% for the third quarter last year. Return on average assets was 1.56% for the third quarter of 1998, and return on average equity was 8.78%, before the $4.3 million loss allowance for loan servicing rights. Return on average assets for the first nine months of 1998 was 1.27%, compared to 1.48% for the same period last year. Return on average stockholders' equity for the first nine months of 1998 was 7.35%, compared to 9.44% for the same period last year. NET INTEREST INCOME Net interest income increased $73,000, to $4.5 million for the third quarter of 1998, compared to $4.4 million for the third quarter of 1997. The average yield on interest earning assets decreased to 8.19% during the third quarter of 1998, from 8.58% during the third quarter of 1997, while the average cost of funds decreased to 5.06%, from 5.30% for these same periods, resulting in a decrease in the rate spread to 3.13% in 1998, from 3.28% in 1997. The net interest margin increased to 3.91% for the third quarter of 1998, compared to 3.89% for the third quarter of 1997. Net interest income increased $30,000, to $13.5 million for the first nine months of 1998, compared to $13.4 million for the first nine months of 1997. The average yield on interest earning assets decreased to 8.29% during the first nine months of 1998, from 8.47% during the first nine months of 1997, while the average cost of funds decreased to 5.09%, from 5.20% for these same periods, resulting in a decrease in the rate spread to 3.20% in 1998, from 3.27% in 1997. The net interest margin increased to 3.95% for the first nine months of 1998, compared to 3.89% for the first nine months of 1997. PROVISION FOR LOAN LOSSES The allowance for losses on loans is established through a provision for losses on loans based on management's evaluation of the risk inherent in its loan portfolio and general economic conditions. Management's evaluation includes a review of all loans on which full collectibility may not be reasonably assured, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience and the Company's internal credit review process. The Company's provision for losses on loans was reduced to $342,000 for the first nine months of 1998, from $600,000 for the first nine months of 1997. Net chargeoffs to the allowance for losses on loans were $526,000 during the first nine months of 1998, compared to $255,000 during the first nine months of 1997. The reduction of the provision is the result of management's evaluation of the adequacy of the allowance for losses on loans. The allowance for losses on loans stayed at 1.54% of loans receivable at September 30, 1998, the same as it was at December 31, 1997. Nonperforming loans to loans receivable decreased to 0.93% at September 30, 1998, from 1.39% at December 31, 1997, primarily due to foreclosed loans transferred to real estate acquired through foreclosure. The allowance for losses on loans amounted to 166% of nonperforming loans at September 30, 1998, increased from 111% at December 31, 1997. OTHER INCOME Other income decreased $4.1 million, to a loss of $3.6 million for the third quarter of 1998, compared to income of $496,000 for the third quarter of 1997, primarily due to the $4.1 million decrease in income from limited partnerships, which included the $4.3 million valuation allowance for mortgage servicing rights described above.. Other income decreased $1.5 million, to $1.1 million during the first nine months of 1998, from $2.5 million during the first nine months of 1997, primarily due to the $5.7 million valuation allowance for mortgage servicing rights, which was partially offset by increased sales of single family homes by Illinois real estate development partnerships and the $3.6 million gain on sale of a partnership investment in an apartment complex located in Florida. 11 12 Purchased mortgage loan servicing rights represent the right to collect servicing fees and ancillary income from a portfolios of mortgage loans owned by third party investors. The value of this right to receive future income is periodically reevaluated based on changes in the characteristics of the underlying loan portfolios, including weighted average coupons, weighted average maturities, scheduled loan payments, and unscheduled loan payments (or prepayments). During the first nine months of 1998, prepayments significantly exceeded expectations, resulting in an estimated $5.7 million impairment of the asset at September 30, 1998. The Company, through its partnerships, actively manages for retention of mortgages that would have otherwise paid off, significantly improving the value of the servicing asset. However, further reductions in mortgage loan interest rates could result in continued high levels of prepayments, and would result in additional impairment to the servicing asset. At September 30, 1998, the Company had a remaining investment of $9.5 million in three mortgage servicing limited partnerships. The following table provides additional detail for miscellaneous other income: Three months ended Nine months ended September 30, September 30, ------------------------------------------------------ 1998 1997 1998 1997 ------------------------------------------------------ Miscellaneous other income: Rental income $ 34 $ 26 $ 103 $ 108 Income from real estate owned, net (47) (49) (104) (240) Checking account fees 126 99 320 273 ATM/debit card fees 64 51 174 144 Credit enhancement fees 28 31 90 51 Other miscellaneous 20 39 115 73 ------------------------------------------------------ Total miscellaneous other income $ 225 $ 197 $ 698 $ 409 ====================================================== OPERATING EXPENSES Operating expenses increased $36,000, to $2.3 million for the third quarter of 1998, compared to $2.2 million for the third quarter of 1997. Operating expenses as a percent of average assets increased to 1.86% in the third quarter of 1998, from 1.82% in the third quarter of 1997. Operating expenses increased $91,000, to $7.3 million for the first nine months of 1998, compared to $7.2 million for the first nine months of 1997. Compensation expense decreased $202,000, to $4.1 million in 1998, from $4.3 million in 1997, offsetting an increase of $88,000 in professional fees. Data processing and occupancy (equipment) expenses increased $133,000 in 1998, primarily as the result of Year 2000 preparations. Operating expenses as a percent of average assets increased to 1.98% in 1998, from 1.92% in 1997. The following table provides additional information on miscellaneous other expenses: 12 13 Three months ended Nine months ended September 30, September 30, ------------------------------------------------------- 1998 1997 1998 1997 ------------------------------------------------------- Miscellaneous other expense: Stationery and supplies $ 51 $ 55 $ 167 $ 170 Telephone and postage 69 51 204 184 Loan expense 3 7 18 17 Insurance 26 28 72 83 Security 25 21 77 64 Audit and examination fees 46 51 147 150 Legal fees 18 28 128 54 Consulting fees 2 - 42 11 Benefit plan administration fees 8 9 25 39 Dues and subscriptions 5 1 32 20 Checking account expenses 6 5 19 15 ATM/debit card expenses 62 29 152 89 Minority interest 14 12 38 28 Other 75 90 230 262 ------------------------------------------------------- Total miscellaneous other expense $ 410 $ 387 $ 1,351 $ 1,186 ======================================================= INCOME TAXES The Company's effective income tax rate for the first nine months of 1998 was 32.50% compared to 32.78% for the first nine months of 1997. The effective tax rate for both years is reduced from statutory rates by the dividends received deduction and by low income housing tax credits. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds include deposits and Federal Home Loan Bank advances, principal and interest payments on loans and securities, maturing investment securities, and sales of securities from the available-for-sale portfolio. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by interest rates, general economic conditions, and competition. The primary investing activity of the Company is the origination and purchase of mortgage loans and the purchase of securities. During the first nine months of 1998 and 1997, the Company originated and purchased mortgage loans in the amounts of $78.4 million and $68.7 million, respectively. Loan repayments for these same two periods were $86.5 million and $68.5 million, respectively. Much of the increase in lending activity during the first nine months of 1998 was due to refinances, and is reflected in the significant increase in prepayments for the same period. During the first nine months of 1998 the Company's deposits decreased by $862,000. The Company repaid a net $3.8 million in borrowings from the FHLB during the first nine months of 1998. Federal regulations require a savings institution to maintain an average daily balance of liquid assets equal to at least 4% of the average daily balance of its net withdrawable deposits and short term borrowings. Management has consistently maintained levels in excess of the regulatory requirement. The Association's average liquidity ratios for the first nine months of 1998 and 1997 were 14.0% and 8.5%, respectively. The Association is also required to maintain specific amounts of capital pursuant to federal regulations. As of September 30, 1998, the Association was in compliance with all regulatory capital requirements, with tangible and core capital of 12.26%, risk-based capital of 20.13%, and tier one capital of 18.87%, well above the requirements for 13 14 capital adequacy of 1.5%, 3.0%, 8.0%, and 4.0%, respectively. The minimum requirement for well capitalized institutions under the prompt corrective action regulations are 10.0% risk-based capital and 6.0% tier one capital. DISCLOSURES ABOUT MARKET RISK The business of the Company and the composition of its balance sheet consists of investments in interest-earning assets (primarily loans, mortgage-backed securities, and other securities) which are primarily funded by interest-bearing liabilities (deposits and borrowings). Such financial instruments have varying levels of sensitivity to changes in market interest rates resulting in market risk. All of the financial instruments of the Company are for other than trading purposes. Approximately 95% of the Company's financial assets and 100% of its financial liabilities are held and managed by the Association. The following discussion pertains primarily to the financial instruments held by the Association. In order to measure the market risk inherent in the Association's financial assets and liabilities, management utilizes a quarterly report ("model") prepared for the Association by the Office of Thrift Supervision ("OTS") based on information provided by the Association which measures the Association's exposure to interest rate risk. The model calculates the present value of assets, liabilities, off-balance sheet financial instruments, and equity at current interest rates, and at hypothetical higher and lower interest rates at one percent intervals. The present value of each major category of financial instrument is calculated by the model using estimated cash flows based on weighted average contractual rates and terms at discount rates representing the estimated current market interest rate for similar financial instruments. The resulting present value of longer term fixed-rate financial instruments are more sensitive to change in a higher or lower market interest rate scenario, while adjustable-rate financial instruments largely reflect only a change in present value representing the difference between the contractual and discounted rates until the next interest rate repricing date. For further information regarding the underlying assumptions of the model, as well as its shortcomings, refer to management's discussion and analysis included in the Calumet Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 1997. The following table reflects the estimated present value of interest-earning assets, interest-bearing liabilities, and off-balance sheet financial instruments as calculated by the OTS for the Association as of June 30, 1998, at then current interest rates and at hypothetical higher and lower interest rates of one and two percent. (Because of the time needed by OTS to prepare their reports, September 30, 1998 values are not yet available.) 14 15 Present Value at June 30, 1998 ----------------------------------------------------------------------------- Down 2% Down 1% Current Up 1% Up 2% ----------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Mortgage loans, including mortgage- backed securities: Adjustable rate $ 189,354 $ 187,345 $ 185,387 $ 183,289 $180,822 Fixed rate 201,473 197,434 192,100 184,817 176,798 Commercial and consumer loans 16,875 16,801 16,730 16,661 16,593 Securities 55,056 53,821 52,589 51,331 50,064 ----------------------------------------------------------------------------- TOTAL INTEREST-EARNING ASSETS 462,758 455,401 446,806 436,098 424,277 Other assets 20,408 21,167 22,932 26,151 29,135 ----------------------------------------------------------------------------- Total assets $ 483,166 $ 476,568 $ 469,738 $ 462,249 $453,412 ============================================================================= INTEREST BEARING LIABILITIES: Passbook accounts 61,811 61,811 61,811 61,811 61,811 NOW accounts 25,502 25,502 25,502 25,502 25,502 Money market accounts 9,272 9,272 9,272 9,272 9,272 Certificates of deposit 256,963 255,215 253,511 251,841 250,209 ----------------------------------------------------------------------------- TOTAL DEPOSITS 353,548 351,800 350,096 348,426 346,794 Borrowings 46,141 45,631 45,135 44,653 44,185 ----------------------------------------------------------------------------- TOTAL INTEREST-BEARING LIABILITIES 399,689 397,431 395,231 393,079 390,979 Other liabilities 8,707 8,704 8,702 8,699 8,697 ----------------------------------------------------------------------------- Total liabilities $ 408,396 $ 406,135 $ 403,933 $ 401,778 $ 399,676 ============================================================================= Loan commitments $ 540 $ 425 $ 260 $ 33 $ (250) ============================================================================= NET PORTFOLIO VALUE (NPV) $ 75,310 $ 70,858 $ 66,065 $ 60,504 $ 53,486 ============================================================================= RATIO OF NPV TO PV OF TOTAL ASSETS 15.59% 14.87% 14.06% 13.09% 11.80% ============================================================================= YEAR 2000 PREPARATIONS The Company is aware of the issues associated with the programming code in existing computer systems as the year 2000 approaches. The Year 2000 problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company has been working on the Y2K issues since early 1997. Of primary concern are the mission critical functions that are essential to the Company performing as a quality financial services provider for all the customers the Company serves. The Company has identified those items to include the teller and platform systems that process the financial transactions for all deposit and mortgage loan customers including general ledger processing, the mortgage loan department's loan origination system, the automated teller machines and their related network, and the processing systems associated with Calumet Financial Corporation, Calumet Savings Service Corporation, and Calumet Mortgage Corporation of Idaho. Calumet Financial Corporation has identified its consumer loan system as mission critical. Calumet Savings Service Corporation has identified its local area network, which processes its accounting and insurance applications, as mission critical. Calumet Mortgage Corporation of Idaho has determined its loan origination system to be mission critical. 15 16 The Company has spent approximately $800,000 to date to upgrade and install new systems. The total cost to render all systems, including non-mission critical systems, Y2K compliant is estimated to be between $800,000 and $900,000. These costs will be amortized over a three to five year period. The hardware to process all teller, platform and general ledger systems was installed and in service this quarter. The system includes a network of pentium PCs that have been certified and tested for Y2K compliance. The outside service bureau utilized by the Company to process in this environment has completed their programming changes and has established dates for all clients to begin testing during the fourth quarter of 1998. The mortgage loan origination software and hardware located at the Company's headquarters has been certified and tested to be Y2K compliant. These tests were performed this quarter. The Company's ATM network will require minimal hardware upgrades to be Y2K compliant The testing of the ATM network switch interface with the Company's service bureau was completed successfully during the third quarter of 1998. Calumet Savings Service Corporation has installed the necessary hardware to render its accounting and insurance systems Y2K compliant. New software has been obtained and will be installed and tested in the fourth quarter of 1998. Calumet Financial Corporation utilizes the same service bureau as the Company for processing their consumer loans. CFC will begin testing in the fourth quarter of 1998. In addition, CFC utilizes a loan origination package that will be upgraded to a new Y2K compliant version in the fourth quarter of 1998. Calumet Mortgage Corporation of Idaho utilizes software that has been certified by their vendor as Y2K compliant. Tests of their mortgage origination system will take place the fourth quarter of 1998. The Company has queried certain large commercial mortgage loan borrowers as to their Y2K compliance. As of this date, the Company has not identified any that pose a credit risk as a result of Y2K issues. The Company presently believes that with the modifications, upgrades and new software and hardware currently in place, or soon to be installed and tested, the Y2K issue will not pose significant operational problems for the Company's computer systems or business operations. However, there can be no assurance that unforseen problems in the Company's computer systems, or the systems of third parties on which the Company's computers rely, will not have a material adverse effect on the Company's systems or operations. 16 17 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Holding Company and the Association are not engaged in any legal proceedings of a material nature at the present time. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULT UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K On September 17, 1998, the Registrant filed on Form 8-K a copy of the Agreement and Plan of Merger among Calumet Bancorp, Inc., FBOP Corporation and FBOP Acquisition Corp. dated as of September 9, 1998, and a copy of the related Press Release issued September 9, 1998 announcing the signing of the agreement. Under the terms of the merger FBOP Acquisition Corp., a wholly owned subsidiary of FBOP Corporation, will acquire for cash all of the outstanding stock of Registrant for a purchase price of approximately $111.6 million less Registrant's merger related expenses, or $32.00 per fully diluted share. The transaction is expected to be completed during the first quarter of 1999 and is subject to the approval of the regulatory agencies and the Registrant's shareholders and to the satisfaction of certain contractual closing conditions under the Merger Agreement. 17 18 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. CALUMET BANCORP, INC. DATE: NOVEMBER 12, 1998 /S/ THADDEUS WALCZAK ------------------------------ THADDEUS WALCZAK, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER DATE: NOVEMBER 12, 1998 /S/ JOHN GARLANGER ------------------------------ JOHN GARLANGER, CHIEF FINANCIAL OFFICER 18