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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL PERIOD ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 0-19829
CALUMET BANCORP, INC.
DELAWARE 36-3785272
(State of incorporation) (I.R.S. Employer Identification Number)
1350 EAST SIBLEY BOULEVARD, DOLTON, ILLINOIS 60419
TELEPHONE NUMBER (708) 841-9010
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE NASDAQ
(Title of Class) (Name of each exchange on which
registered)
Indicate by check mark whether the 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of March 1, 1998 there were issued and outstanding 3,141,497 shares of the
registrant's Common Stock. The aggregate market value of the voting stock held
by non-affiliates of the registrant, based on the closing sales price of the
registrant's Common Stock as quoted on the NASDAQ/NMS on March 1, 1998 was
$117,806,138. Solely for purposes of this calculation, all directors and
executive officers of the registrant are considered non-affiliates of the
registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held on April 29, 1998 are incorporated by reference into
Part III hereof.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS (Dollar amounts in thousands, except per
share data)
THE COMPANY
Calumet Bancorp, Inc. (the "Company"), a Delaware corporation, was organized on
September 20, 1991, to acquire all of the capital stock issued by Calumet
Federal Savings and Loan Association of Chicago (the "Association") upon its
conversion from the mutual to stock form of ownership. On February 20, 1992,
the Company sold 2,357,500 shares of its common stock to depositors and
employees of the Association. Total proceeds from the conversion in the amount
of $33.9 million was recorded as common stock and additional paid-in capital.
The Company used $14.8 million of the proceeds to acquire all of the capital
stock of the Association.
The Company's principal business activity is the operation of its thrift
subsidiary, and consists of attracting deposits from the public and investing
those deposits, together with funds generated from operations and borrowings,
primarily in residential mortgage loans. The Association operates five
financial services offices -- Dolton, Lansing, Sauk Village and two in
southeastern Chicago. The Association's deposit accounts are insured to the
maximum allowable amount by the Federal Deposit Insurance Corporation (FDIC).
The Company also invests in equity securities and in various limited
partnerships which have invested in residential development, residential and
commercial rental properties, and mortgage loan servicing.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest and dividend income earned
on its loan and investment securities portfolios, and its cost of funds,
consisting of interest paid on its deposits and borrowings. The Company has
also invested in several limited partnerships at both the holding company and
subsidiary levels in order to diversify its sources of income. Through these
limited partnerships the Company has generated income from the construction and
sale of homes, rental of apartments and offices, and the servicing of mortgage
loans. In recent years these have become an important source of income.
The Company's operating results are also affected to a lesser extent by loan
and commitment fees, customer service charges, and by the sale of insurance,
mutual funds and annuities through its third tier subsidiaries. Operating
expenses of the Company are primarily employee compensation and benefits,
office occupancy and equipment costs, federal deposit insurance premiums,
advertising and promotion costs, data processing and other administrative
expenses. The Company employs a total of 135 full time equivalent employees as
of December 31, 1997, and management considers its relationship with employees
excellent.
The Company's results of operations are further affected by economic and
competitive conditions, particularly changes in market interest rates,
government policies and the actions of regulatory authorities. The Company is
facing increasing competition for retail customer business, including deposit
accounts and loan originations. Competition for deposit accounts comes
primarily from other savings institutions, commercial banks, money market
funds, mutual funds, and insurance company annuity products. Competition for
loan products comes primarily from mortgage brokers, mortgage banking
companies, other savings institutions, and commercial banks.
The Company is subject to extensive regulation, supervision and examination by
the Office of Thrift Supervision (OTS), as its chartering authority and primary
federal regulator, and by the FDIC, which insures its deposits up to applicable
limits. Such regulation and supervision establish a comprehensive framework of
activities in which the Company can engage and is designed primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities. Any change in such regulation, whether
by the OTS, the FDIC or Congress, could have a material impact on the Company
and its operations.
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ITEM 2. PROPERTIES (Dollar amounts in thousands)
The following table sets forth information regarding the Company's
administrative, main and branch offices:
Percent of Net Book
Year Total Value at
Properties: Opened Deposits 12/31/97
------------------------------
Administrative Office
1350 East Sibley Boulevard, Dolton, Illinois 60419 1976 43.42% $ 1,175
Main Office
8905 South Commercial Averue, Chicago, Illinois 60617 1910 12.38% 245
Branch Offices
3501 East 106th Street, Chicago, Illinois 60617 1979 21.39% 786
2600 Sauk Trail, Sauk Village, Illinois 60411 1978 5.59% 159
17150 South Torrence Avenue, Lansing, Illinois 60438 1985 17.22% 1,108
Other fixed assets 995
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Total 100.00% $ 4,468
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ITEM 3. LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits involving the Company
as a defendent, such as claims to enforce liens, condemnation proceedings on
properties in which the Company holds security interests, claims involving the
making and servicing of real property loans and other issues incident to the
Company's business. In the opinion of management and the Company's legal
counsel, no significant loss is expected from any of such pending claims or
lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Calumet Bancorp, Inc.'s common stock is traded on the NASDAQ National Market
System under the symbol "CBCI". As of March 1, 1998, the Company has 344
stockholders of record (not including approximately 900 persons or entities
holding stock in nominee or street name through various brokerage firms) and
3,141,497 shares of common stock outstanding.
On October 21, 1997 the Board of Directors declared a three-for-two common
stock split, in the form of a 50% common stock dividend, which was distributed
on November 17, 1997 to stockholders of record on November 3, 1997. A total of
1,055,451 shares of common stock were distributed from Treasury stock
previously purchased under the Company's share repurchase program. The Board
of Directors believes that the stock split and resulting reduction in the
market price per share of the common stock should result in the broadening of
public interest in the Company's common stock, increase in the number of
stockholders of the Company, and greater availability of shares for purchase
and sale. The improved and broadened market for Company shares should benefit
stockholders, the general investing public, and the Company. All share and
per share data presented has been adjusted for the split.
During 1997 the Company repurchased 426,597 split adjusted shares of its common
stock, at an average cost of $23.50, continuing a share repurchase program
begun in 1992. The Company has repurchased a total of 2,282,566 split adjusted
shares of its common stock for $36.5 million, or an average cost of $15.97 per
share. The repurchase of the Company's shares at a significant discount to
book value enhanced shareholder value by having the effect of increasing
earnings per share and book value per share for the remaining shares
outstanding. At December 31, 1997, the Company had 3,141,497
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shares of common stock outstanding with a book value of $25.98 per share. The
closing price of the stock on December 31, 1997, was $33.25 per share, or 128%
of book value.
The Company has never paid a cash dividend, and does not anticipate paying a
cash dividend in 1998. The following table sets forth the reported high, low
and closing prices per share (restated for the stock split) of the Company's
common stock in 1997 and 1996:
High Low Close
1997 ----------------------------
First quarter $24.83 $21.67 $23.75
Second quarter 26.50 22.83 25.33
Third quarter 31.58 24.83 30.83
Fourth quarter 34.63 31.00 33.25
1996
First quarter $19.00 $18.33 $18.50
Second quarter 19.00 18.33 18.67
Third quarter 19.17 18.50 18.92
Fourth quarter 22.67 18.83 22.17
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain summary consolidated financial data at
or for the periods indicated. This information should be read in conjunction
with the Consolidated Financial Statements and notes thereto included at Item
8. "Financial Statements and Supplementary Data."
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Five Year Financial Summary At and for the year ended December 31,
==========================================================
(Dollars in thousands, except per share data) 1997 1996 1995 1994 1993
==========================================================
Statement of Operations Data:
Interest income $ 39,000 $ 38,919 $ 38,761 $ 36,609 $ 34,750
Interest expense 21,027 21,054 20,177 16,621 15,545
----------------------------------------------------------
Net interest income 17,973 17,865 18,584 19,988 19,205
Provision for losses on loans 700 800 800 800 800
----------------------------------------------------------
Net interest income after provision
for losses on loans 17,273 17,065 17,784 19,188 18,405
Other income 4,238 2,992 972 2,593 5,821
Other expenses 9,536 12,231 9,931 10,340 10,302
Income taxes 3,988 2,427 2,860 4,022 4,892
----------------------------------------------------------
Income before cumulative effect of
change in accounting principle 7,987 5,399 5,965 7,419 9,032
Cumulative effect on prior years of
change in accounting principle - - - - 1,500
----------------------------------------------------------
Net Income $ 7,987 $ 5,399 $ 5,965 $ 7,419 $ 10,532
==========================================================
Weighted average shares outstanding (1) 3,244,500 3,748,353 4,150,560 4,276,944 4,673,813
Basic earnings per share (1) $ 2.46 $ 1.44 $ 1.44 $ 1.73 $ 2.25
Wtd. average diluted shares outstanding (1) 3,488,061 3,955,899 4,352,501 4,497,887 4,902,080
Diluted earnings per share (1) $ 2.29 $ 1.36 $ 1.37 $ 1.65 $ 2.15
OTHER DATA (2):
Return on average assets 1.61% 1.08% 1.19% 1.48% 2.24%
Return on average equity 10.20% 6.56% 7.20% 9.61% 14.02%
Average equity to average assets 15.80% 16.42% 16.60% 15.36% 15.95%
Interest rate spread (3) 3.29% 3.05% 3.21% 3.68% 3.57%
Net interest margin (4) 3.92% 3.79% 3.94% 4.21% 4.22%
Non-interest income to average assets 0.86% 0.60% 0.19% 0.52% 1.24%
Non-interest expense to average assets 1.93% 2.44% 1.98% 2.06% 2.19%
Net charge-offs to average loans 0.07% 0.01% 0.10% 0.35% 0.11%
STATEMENT OF FINANCIAL CONDITION DATA:
Total assets $ 486,626 $ 510,217 $ 509,528 $ 504,026 $ 522,040
Total loans, net 376,988 381,200 372,946 358,187 325,389
Securities available-for-sale (5) 46,967 57,362 68,153 73,491 64,448
Securities held-to-maturity 18,768 27,970 32,620 31,058 77,713
Cash and interest-bearing deposits 8,283 9,175 8,657 9,350 27,182
Investment in limited partnerships 24,645 24,458 16,226 16,911 14,020
Deposits $ 348,461 $ 357,330 $ 359,251 $ 344,160 $ 406,408
Borrowings 45,060 59,850 55,140 70,335 28,598
Stockholders' equity 81,614 81,764 84,110 78,286 77,041
Common shares outstanding 3,141,497 3,565,542 4,009,317 4,187,448 4,470,215
Book value per share $ 25.98 $ 22.93 $ 20.98 $ 18.69 $ 17.24
Allowance for losses on loans to total loans 1.54% 1.42% 1.24% 1.18% 1.42%
Nonperforming loans to total loans 1.39% 1.60% 1.46% 1.27% 1.32%
Nonperforming assets to total assets (6) 1.64% 1.57% 1.62% 1.36% 1.65%
Number ofdeposit accounts 37,424 38,206 37,567 36,763 38,615
(1) All per share data has been adjusted for 3 for 2 stock split on November
17,1997.
(2) All ratios are based on average monthly balances during the respective
periods.
(3) Computed as the difference between average yield on interest earning
assets and average cost of interest bearing funds.
(4) Net interest income divided by average interest earning assets.
(5) Accounted for at lower-of-cost-or-market prior to 1994, at fair value
since 1994.
(6) Nonperforming assets are defined as nonaccrual loans plus real estate
owned acquired through foreclosure.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Dollar amounts in thousands, except per share data.)
The following represents management's discussion and analysis of the results of
operations and financial condition of the Company as of the dates and for the
periods indicated. This discussion should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto and other
financial data appearing elsewhere in this form 10-K.
SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations and Item 1 - Description of
Business that are not historical facts are forward-looking statements subject
to the safe harbor created by the Private Securities Litigation Reform Act of
1995. The Company cautions readers of this Annual Report on Form 10-K that a
number of important factors could cause the Company's actual results in 1998
and beyond to differ materially from those expressed in any such
forward-looking statements. These factors include, without limitation, the
general economic and business conditions affecting the Company's customers;
changes in interest rates; the adequacy of the Association's allowance for loan
losses; competition from, among others, commercial banks, savings and loan
associations, mutual funds, money market funds, finance companies, credit
unions, mortgage companies,and the United States Government; limited
partnership activities; federal and state legislation, regulation and
supervision of the Association and its subsidiaries; the risk of defaults on
loans; and contractual, statutory and regulatory restrictions on the
Association's ability to pay dividends to the Company.
FINANCIAL CONDITION
As of December 31, 1997, total assets decreased $23.6 million, or 4.6%, to
$486.6 million, from $510.2 million at December 31, 1996. Net loans receivable
decreased $4.2 million, or 1.1%, to $377.0 million at December 31, 1997, from
$381.2 million at December 31, 1996. Investments in securities decreased $19.6
million, or 23.0%, to $65.7 million at December 31, 1997, from $85.3 million at
December 31, 1996, with proceeds from repayment and sales of securities used
primarily to pay net deposit withdrawals of $8.9 million and to repay $14.8
million in borrowings.
As of December 31, 1996, total assets increased $689, to $510.2 million, from
$509.5 million at December 31, 1995. An increase of $8.3 million, or 2.2%, in
net loans receivable, to $381.2 million at December 31, 1996, from $372.9
million at December 31, 1995, and an increase of $8.2 million, or 50.7% in
investment in limited partnerships, to $24.5 million at December 31, 1996, from
$16.2 million at December 31, 1995, were funded primarily through sales and
maturities of securities, which decreased $15.4 million, or 15.3%, to $85.3
million at December 31, 1996, from $100.8 million at December 31, 1995.
Deposits decreased $8.9 million, or 2.5%, to $348.5 million at December 31,
1997, from $357.3 million at December 31, 1996, while advances from the Federal
Home Loan Bank of Chicago decreased $14.8 million, or 24.7%, to $45.1 million
at December 31, 1997, from $59.9 million at December 31, 1996. The intensity
of competition for deposit funds in the south Chicago and suburban market, not
only from other depository institutions, but from insurance companies, mutual
funds and the stock market, has grown significantly during 1997, and shows no
sign of abatement in 1998. The result will be increased pressure on the cost
of funds.
Deposits decreased $1.9 million, or 0.5%, to $357.3 million at December 31,
1996, from $359.2 million at December 31, 1995, while advances from the Federal
Home Loan Bank of Chicago increased $4.7 million, or 8.5%, to $59.9 million at
December 31, 1996, from $55.1 million at December 31, 1995.
Stockholders' equity decreased $150, or 0.2%, to $81.6 million at December 31,
1997, from $81.8 million at December 31, 1996, primarily as the result of $8.0
million in earnings for 1997, reduced by $10.0 million in Treasury stock
purchases, and increased by $1.1 million of net unrealized gains on securities
available for sale. The exercise of options added $37 to stockholders' equity
and amortization and allocation of stock based benefits another $793.
Stockholders' equity decreased $2.3 million, or 2.8%, to $81.8 million at
December 31, 1996, from $84.1 million at December 31, 1995, primarily as the
result of $5.4 million in earnings for 1996, reduced by $8.7 million in
Treasury stock purchases, and reduced by $184 of net unrealized losses on
securities available for sale. The exercise of options added $351 to
stockholders' equity and amortization and allocation of stock based benefits
another $775.
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The Company's stock repurchase program in 1997 and 1996 enhanced shareholder
value by increasing earnings per share and book value per share through the
repurchase of shares at a significant discount to book value. During 1997 the
Company repurchased 426,597 split adjusted shares of its common stock at an
average cost of $23.50. The closing price of the Company's common stock on
December 31, 1997, was $33.25, or 128% of its book value of $25.98 per share.
During 1996 the Company repurchased 466,229 split adjusted shares of its common
stock at an average cost of $18.63. The closing price of the Company's common
stock on December 31, 1996, was $22.17, or 96.7% of its book value of $22.93
per share.
LENDING
The Company's lending activities have been concentrated primarily in
residential real property secured by first liens on such property. At December
31, 1997, approximately 58.7% of the Company's mortgage loans are secured by
one-to-four family dwellings, 12.4% by multifamily income producing properties,
and 28.9% by commercial real estate properties and land. This compares to
57.1%, 14.3%, and 28.6%, respectively, at December 31, 1996.
During 1997 the Company invested $94.9 million in the origination and purchase
of primarily mortgage loans. Loan fees and repayments of $97.9 million
exceeded originations and purchases by $3.0 million, with decreases in the
portfolio coming primarily in multifamily residential mortgage loans. During
1996 the Company invested $86.7 million in the origination and purchase of
primarily mortgage loans, which exceeded loan fees and repayments of $79.0
million by $7.7 million, with increases in the portfolio coming primarily in
commercial real estate loans.
Loans receivable decreased by $2.8 million, or 0.7%, to $392.9 million at
December 31, 1997, from $395.7 million at December 31, 1996. The decrease came
primarily in multifamily residential loans, which decreased $6.6 million, or
13.8%, to $40.9 million at December 31, 1997, from $47.5 million at December
31, 1996, and was partially offset by a $2.3 million, or 1.1% increase in
one-to-four family residential loans and a $2.1 million, or 210.8% increase in
consumer loans. The large percentage increase in consumer loans came primarily
through Calumet Financial Corporation, a new third tier subsidiary established
to expand the Company's product line and reach more customers in the local
market area.
Loans receivable increased by $1.6 million, or 0.4%, to $395.7 million at
December 31, 1996, from $394.1 million at December 31, 1995. Investment in
commercial real estate loans increased by $10.0 million, or 11.5%, to $97.1
million at December 31, 1996, from $87.1 million at December 31, 1995, while
residential mortgage loans and (primarily) residential construction loans
decreased $7.6 million, or 2.6%, to $282.6 million at December 31, 1996, from
$290.2 million at December 31, 1995. The increase in commercial real estate
loans (including commercial construction loans) was spread over several
familiar market areas, primarily $4.1 million in Illinois, $3.0 million in New
Mexico, $1.5 million in Colorado, and $1.1 million in Florida.
Commercial real estate loans improve the interest rate sensitivity of the
Company's loan portfolio because they are generally made for a shorter term
than residential mortgage loans, carry a higher yield, and reprice more
frequently. Loans secured by commercial real estate properties are generally
larger and involve a greater degree of risk than residential mortgage loans.
Because payments on loans secured by commercial real estate properties are
often dependent on the successful operation and management of the properties,
repayment of such loans may be subject to adverse conditions in the real estate
market or the economy. The Company seeks to minimize these risks by lending
primarily on existing income-producing properties, analyzes the financial
condition of the borrower and the reliability and predictability of the net
income generated by the security property in determining whether to extend
credit, and generally requires a net operating income to debt service ratio of
at least 1.20 times.
Construction loans improve the interest rate sensitivity of the Company's loan
portfolio and yield higher rates than those afforded by loans on existing
properties. The higher yields correspond to higher risks attributable to the
fact that loan funds are advanced upon the security of the project under
construction, which is of uncertain value prior to its completion. Because of
the uncertainties inherent in estimating construction costs as well as the
market value of the completed project, it is relatively difficult to evaluate
accurately the total funds required to complete a project and the related
loan-to-value ratio. As a result, construction lending often involves the
disbursement of substantial funds with repayment dependent, in part, on the
success of the completed project, rather than the ability of the borrower or
guarantor to repay the loan. The Company has attempted to address these risks
through its conservative underwriting and construction disbursement procedures,
and limits its construction lending to primarily residential properties.
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The following table sets forth the composition of the Company's loan portfolio
by type of loan at the dates indicated.
At December 31
=================================================
1997 1996 1995 1994 1993
=================================================
Mortgage loans:
One-to-four family residential (1) $209,999 $207,697 $204,970 $204,246 $202,190
Multi-family residential 40,933 47,510 54,216 49,900 47,234
Commercial real estate 97,186 97,093 87,066 84,388 66,403
Construction 27,645 27,442 31,055 21,711 16,501
Land 12,207 13,760 13,739 13,371 6,353
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Total mortgage loans 387,970 393,502 391,046 373,616 338,681
Other loans:
Commercial business 1,887 1,208 2,342 1,981 505
Consumer 3,033 976 703 631 697
-------------------------------------------------
Total other loans 4,920 2,184 3,045 2,612 1,202
-------------------------------------------------
Total loans 392,890 395,686 394,091 376,228 339,883
Lees:
Loans-in-process 7,820 6,386 13,531 10,419 6,511
Unearned discounts, premiums
and deferred loan fees, net 2,012 2,470 2,744 3,193 3,158
Allowance for losses on loans 6,070 5,630 4,870 4,429 4,825
-------------------------------------------------
Total loans, net $376,988 $381,200 $372,946 $358,187 $325,389
=================================================
FHA and VA loans included in
one-to-four family residential $ 627 $ 416 $ 597 $ 747 $ 1,004
Second mortgages included in
total mortgage loans $ 278 $ 2,698 $ 2,596 $ 113 $ 1,173
(1) Includes construction loans converted to permanent loans.
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The following table sets forth certain information at December 31, 1997
regarding the dollar amount of loans maturing in the Company's loan portfolio
based on contractual terms to maturity, but does not include scheduled payments
or potential prepayments. Demand loans, loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or less.
After one After five
One year year through years through After
or less five years ten years ten years Total
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Mortgage loans:
One-to-four family residential $ 8,087 $ 9,626 $ 11,549 $180,737 $209,999
Multi-family residential 4,613 20,995 7,156 8,169 40,933
Commercial real estate 2,382 20,280 47,184 27,340 97,186
Construction 19,953 7,692 - - 27,645
Land 2,553 9,146 309 199 12,207
Other loans:
Commercial business 833 32 1,022 - 1,887
Consumer 782 1,314 316 621 3,033
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Total loans $39,203 $ 69,085 $ 67,536 $217,066 $392,890
====================================================================
The following table sets forth the dollar amount of all loans at December 31,
1997 and due after December 31, 1998, that have fixed interest rates and those
that have floating or adjustable rates.
Floating or
Fixed Rates Adjustable Rates Total
---------------------------------------------
Mortgage loans:
One-to-four family residential $ 117,278 $ 84,634 $201,912
Multifamily residential 7,170 29,150 36,320
Commercial real estate 16,291 78,513 94,804
Construction 2,373 5,319 7,692
Land 2,726 6,928 9,654
Other loans:
Commercial business 50 1,004 1,054
Consumer 1,630 621 2,251
---------------------------------------------
Total loans $ 147,518 $ 206,169 $353,687
=============================================
At December 31, 1997, the Company's mortgage loan portfolio was geographically
diversified, with concentrations primarily in Illinois (33.1%), Colorado
(24.1%), Idaho (20.6%), and New Mexico (15.0%). Mortgage loans in Indiana and
Michigan, all within the Company's immediate lending area, represent another
4.2% of the portfolio at December 31,1997. At December 31, 1996, these
concentrations were Illinois (35.0%), Colorado (26.4%), Idaho (18.5%), New
Mexico (13.7%), and Indiana/Michigan (3.3%).
At December 31, 1997, approximately $118.6 million or 30.6% of the Company's
$388.0 million mortgage loan portfolio was secured by properties located in
mountain and ski resort areas, the economies of which may be more susceptible
to fluctuations in market and economic conditions. Furthermore, $43.7 million,
or 36.8% of these loans are secured by second homes, which may be more
susceptible to delinquencies than loans secured by primary residences; $35.7
million, or 30.1% of these loans were secured by primary residences; and $39.2
million, or 33.1% were secured by multifamily and commercial properties and
land.
At December 31, 1997, the Company's out-of-state mortgage loan portfolio
included $95.1 million in loans secured by primary residences, $66.9 million
secured by secondary residences, $21.3 million secured by multifamily, and
$76.4 million secured by commercial properties and land. The Company has not
experienced unusual losses as a result of geographic diversification or lending
in mountain and ski resort areas. The following table sets forth information
regarding the geographic distribution of the Company's mortgage loan portfolio
at December 31, 1997.
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One-to-four family
======================= Total Land and Total
Primary Secondary One-to-four Multifamily Commercial Developed Mortgage
Residential Residential family Residential Real Estate Lots Loans
=====================================================================================
Illinois $ 62,247 $ 3,491 $ 65,738 $26,968 $35,461 $ 111 $128,278
Indiana 6,542 354 6,896 860 - - 7,756
Michigan - 233 233 6,353 1,890 - 8,476
-------------------------------------------------------------------------------------
Subtotal 68,789 4,078 72,867 34,181 37,351 111 144,510
-------------------------------------------------------------------------------------
Idaho
Sun Valley area 32,374 25,474 57,848 141 8,837 8,524 75,350
Other mountain areas 293 1,023 1,316 - 2,908 321 4,545
-------------------------------------------------------------------------------------
Subtotal 32,667 26,497 59,164 141 11,745 8,845 79,895
-------------------------------------------------------------------------------------
Colorado
Denver area 22,187 2,298 24,485 9,533 16,000 46 50,064
Other urban areas - - - 1,513 3,209 - 4,722
Aspen area 1,792 9,669 11,461 1,137 5,402 47 18,047
Other mountain areas 1,241 7,525 8,766 - 11,831 99 20,696
-------------------------------------------------------------------------------------
Subtotal 25,220 19,492 44,712 12,183 36,442 192 93,529
-------------------------------------------------------------------------------------
New Mexico 26,167 14,870 41,037 762 13,251 2,969 58,019
Florida 681 3,394 4,075 542 1,102 - 5,719
Arizona 2,494 368 2,862 - - - 2,862
Other states 1,313 1,695 3,008 428 - - 3,436
-------------------------------------------------------------------------------------
Total $157,331 $70,394 $227,725 $48,237 $99,891 $12,117 $387,970
=====================================================================================
The following table sets forth information regarding nonaccrual loans and
foreclosed real estate owned by the Company at the dates indicated. The
Company does not accrue interest on loans delinquent 90 days or more. Had
nonaccrual loans been current according to their original terms, the Company
would have recorded $495 of interest income during 1997, $582 during 1996, and
$564 during 1995. Actual interest income from nonaccrual loans amounted to
S400 during 1997, $384 during 1996, and $257 during 1995.
At December 31,
======================================================
1997 1996 1995 1994 1993
======================================================
Nonaccrual loans:
One-to-four family residential $2,937 S3,959 S4,006 S4,067 S4,427
Multifamily residential 477 242 58 216 61
Commercial real estate 1,102 1,707 - - -
Construction 939 - 549 499 -
Land - 426 - - -
Commercial business - - 1,143 - -
Consumer 17 - 2 5 5
------------------------------------------------------
Total nonaccrual loans 5,472 6,334 5,758 4,787 4,493
------------------------------------------------------
Real estate owned:
One-to-four family residential 2,491 1,665 2,483 1,196 2,091
Multifamily residential - - - 20 41
Commercial real estate - - - 865 1,968
Land - - - - -
------------------------------------------------------
Total real estate owned 2,491 1,665 2,483 2,081 4,100
------------------------------------------------------
Total nonperforming assets $7,963 $7,999 $8,241 $6,868 $8,593
======================================================
Nonaccrual loans to total loans 1.39% 1.60% 1.46% 1.27% 1.32%
Nonperforming assets to total assets 1.64% 1.57% 1.62% 1.36% 1.65%
10
11
At December 31, 1997, the Company had two related loans that were considered to
be impaired with a recorded investment of $1.1 million. These loans have been
placed in nonaccrual status. One of the loans has been fully reserved in the
amount of $350, the other does not have a specific reserve. The average
recorded investment in impaired loans during the year ended December 31, 1997,
was approximately $1.1 million. For the year ended December 31, 1997, the
Company recognized interest income (using the cash basis method of income
recognition) on those impaired loans of $92. These same two loans were
considered impaired at December 31, 1996. The average recorded investment in
impaired loans during the year ended December 31, 1996, was approximately $654.
For the year ended December 31, 1996, the Company recognized interest income
(using the cash basis method of income recognition) on those impaired loans of
$98.
The following table sets forth an analysis of the Company's allowance for
losses on loans for the periods indicated. Where specific loan loss allowances
have been established, any difference between the loss allowance and the amount
of the loss realized has been charged to the allowance for losses on loans.
For the year ended December 31,
==========================================
1997 1996 1995 1994 1993
==========================================
Allowance at beginning of year $ 5,630 $4,870 $4,429 $4,825 $4,385
Provision for losses on loans 700 800 800 800 800
Charge-Offs:
Residential real estate 323 114 238 - 72
Commercial real estate - - 236 1,054 -
Construction - - - - -
Land - - - - -
Commercial business - - - 152 301
Consumer - - - - -
------------------------------------------
Total charge-offs 323 114 474 1,206 373
Recoveries 63 74 115 10 13
------------------------------------------
Net charge-offs 260 40 359 1,196 360
------------------------------------------
Allowance at end of year $ 6,070 $5,630 $4,870 $4,429 $4,825
==========================================
Allowance for losses on loans to
loans receivable at end of year 1.54% 1.42% 1.24% 1.18% 1.42%
Net change-offs to average
loans during the year 0.07% 0.01% 0.10% 0.35% 0.11%
Allowance for losses on loans to
nonaccrual loans at end of year 110.93% 88.89% 84.58% 92.52% 107.39%
11
12
The Company regards the allowance for loan losses as a general reserve which is
available to absorb losses from all loans. However, for purposes of complying
with disclosure requirements of the Securities and Exchange Commission, the
following table presents an allocation of the allowance for loan losses among
the various loan categories and sets forth the percentage of loans in each
category to gross loans. The allocation of the allowance for loan losses as
shown in the table should neither be interpreted as an indication of future
charge-offs, nor as an indication that charge-offs in future periods will
necessarily occur in these amounts or in the indicated proportions.
At December 31
====================================================================================================
1997 1996 1995 1994 1993
====================================================================================================
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
====================================================================================================
MORTGAGE LOANS:
Residential $1,217 63.86% $1,494 64.50% $1,490 65.77% $1,352 67.55% $1,504 73.39%
Commercial 2,593 24.74% 3,224 24.54% 2,351 22.09% 2,637 22.43% 2,466 19.54%
Construction - 7.04% - 6.94% - 7.88% - 5.77% - 4.85%
Land 242 3.11% 275 3.47% 275 3.49% 334 3.55% 159 1.87%
OTHER LOANS:
Commercial business 118 0.48% 50 0.30% 487 0.59% 101 0.53% 15 0.15%
Consumer 50 0.77% 13 0.25% 7 0.18% 5 0.17% 6 0.20%
Unallocated 1,850 - 574 - 260 - - - 675
----------------------------------------------------------------------------------------------------
Total $6,070 100.00% $5,630 100.00% $4,870 100.00% $4,429 100.00% $4,825 100.00%
====================================================================================================
SECURITIES
The following table sets forth securities classified as available-for-sale,
at fair value at the dates indicated.
AT DECEMBER 31,
===========================================================================
1997 1996 1995
===========================================================================
FAIR PERCENT OF FAIR PERCENT OF FAIR PERCENT OF
VALUE PORTFOLIO VALUE PORTFOLIO VALUE PORTFOLIO
===========================================================================
U.S. Government and
agency securities $29,972 63.82% $10,986 19.15% $13,107 19.23%
Government securities fund (1) 6,957 14.81% 16,411 28.61% 15,871 23.29%
Money market fund 3,697 7.87% 888 1.55% 6,596 9.68%
ARM securities fund - - 5,187 9.04% 10,694 15.69%
CMO/REMIC securities - - 11,520 20.08% 13,265 19.46%
Municipal bonds - - 861 1.50% - -
Preferred stock 3,715 7.91% 9,387 16.37% 6,779 9.95%
Common stock 2,626 5.59% 2,122 3.70% 1,841 2.70%
---------------------------------------------------------------------------
Total fair value $46,967 100.00% $57,362 100.00% $68,153 100.00%
===========================================================================
(1) The Government securities fund is a diversified bond fund which invests
in U.S. Treasury and Federal Agency securities with remaining maturities of
five years or less, which are permissible under applicable federal law for
federal savings associations, national banks, and federal credit unions. At
December 31, 1997, it was deterrmined that the decline in fair value incurred
by this fiend was other than temporary, and a $241 write-down to fair value
was charged to earnings.
12
13
The following table sets forth the maturities and weighted average yields of
the securities in the Company's available-for-sale portfolio at December 31,
1997. Mutual funds and equity securities have no stated maturity and are
included in the total column only.
After one year After five years
Within one year through five years through ten years After ten years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
==============================================================================================
U S. Government and
agency securities $3,106 5.60% $16,613 6.50% $7,197 6.52% $3,056 7.09% $29,972 6.47%
Government securities fund - - - - - - - - 6,957 6.00%
Money market Fund - - - - - - - - 3,697 5.11%
Preferred stock - - - - - - - - 3,715 6.88%
Common stock (1) - - - - - - - - 2,626 7.70%
----------------------------------------------------------------------------------------------
Total fair value $3,106 5.60% $16,613 6.50% $7,197 6.52% $3,056 7.09% $46,967 6.36%
==============================================================================================
(1) Yield for common stocks based on current dividends paid, if any.
The following table sets forth securities classified as held-to-maturity, at
amortized cost at the dates indicated.
AT DECEMBER 31,
================================================================================
1997 1996 1995
================================================================================
AMORTIZED PERCENT OF AMORTIZED PERCENT OF AMORTIZED PERCENT OF
COST PORTFOLIO COST PORTFOLIO COST PORTFOLIO
================================================================================
U.S. Government and
agency securities $ - - $ 5,000 17.88% $ 5,000 15.32%
FHLMC/FNMA mortgage-
backed pass-through securities 13,795 73.50% 17,209 61.52% 20,820 63.83%
CMO/REMIC securities 1,709 9.10% 2,406 8.60% 3,012 9.23%
Municipal bonds 140 0.75% 145 0.52% 149 0.46%
Federal Home Loan Bank stock 3,124 16.65% 3,210 11.48% 3,639 11.16%
--------------------------------------------------------------------------------
Totala mortized cost $18,768 100.00% $27,970 100.00% $32,620 100.00%
================================================================================
Total fair value $18 606 $27,375 $32,278
======== ======= =======
The following table sets forth the maturities and weighted average yields of
the securities in the Company's held-to-maturity portfolio at December 31,
1997. Federal Home Loan Bank stock has no stated maturity and is included in
the total column only.
AFTER FIVE YEARS
THROUGH TEN YEARS AFTER TEN YEARS TOTAL
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
=================================================================
FHLMC/FNMA mortgage-
backed pass-through securities $573 7.33% $13,222 6.20% $13,795 6.25%
CMO/REMIC securities - - 1,709 6.53% 1,709 6.53%
Municipal bonds - - 140 6.40% 140 6.40%
Federal Home Loan Bank stock - - - - 3,124 7.00%
-----------------------------------------------------------------
Total amortized cost $573 7.33% $15,071 6.24% $18,768 6.41%
=================================================================
13
14
LIMITED PARTNERSHIPS
The following table sets forth the Company's investment in limited partnerships
by type of investment at December 31, 1997 and 1996, and the related net income
(before income taxes) for the three years ended December 31, 1997:
December 31,
----------------------
1997 1996
----------------------
Investment in:
Residential construction and sale $ 6,003 $ 6,679
Residential investment (rental) property 2,118 2,377
Commercial investment (rental) property 1,167 1,065
Mortgage loan servicing 15,357 14,337
----------------------
Total $24,645 $24,458
======================
For the year ended December 31,
---------------------------------
1997 1996 1995
---------------------------------
Income from:
Residential construction and sale $ 821 $ 1,223 $ 133
Residential investment (rental) property (351) (470) (1,086)
Commercial investment (rental) property 1,538 231 145
Mortgage loan servicing 1,377 655 683
---------------------------------
Total $3,385 $ 1,639 $ (125)
=================================
The Company invests in limited partnerships through both its holding company
and its subsidiaries. These limited partnerships engage in single family
residential development, rental of apartment and office buildings, condominium
conversion and sale, and mortgage loan servicing.
The Company's investment in limited partnerships increased $187, or 0.8%, to
$24.6 million at December 31, 1997, from $24.5 million at December 31, 1996.
The Company invested $2.4 million in an existing residential construction and
sale partnership, $544 in existing residential rental property partnerships,
and $900 in a commercial rental property partnership. The $2.4 million
investment added 121 single family home sites to 132 single family homesites
being developed in a project in Naperville, Illinois, which was started in
1996. The construction and sale of single family homes in the suburban Chicago
market was in partnership with a nationally known builder with whom the Company
has completed several previous projects. The $544 included $344 used to fund a
commitment to low income housing which is generating significant tax credits
for the Company, and $200 to fund improvements to an existing multifamily
rental property. (Also see "Subsidiary Activities.")
During 1997 the Company received distributions from two limited partnerships
representing the Company's share of gains on the sale of the underlying rental
properties. An apartment complex located near Denver, Colorado was sold at a
gain of $317 during the first quarter, and during the fourth quarter an office
complex, also located near Denver, was sold at a gain of $1.3 million.
At December 31, 1997, the Company owned a $1.8 million, 90% limited partnership
interest in a 288 unit apartment complex in Fort Lauderdale, Florida. The
partnership was organized in 1993 to purchase the apartment complex and convert
it to condominium units for sale. Various problems with the conversion resulted
in a decision to resell the property instead of converting it. The Company
originally invested $4.3 million in the partnership. The property has a
positive cash flow, but depreciation and conversion cost write-offs have
resulted in annual losses to the Company amounting to $1.9 million over five
years. The Company's investment balance was also reduced by partnership
distributons in the amount of $615. Sale of the property was held up by
litigation with a potential buyer, which was settled in 1996, and in 1997 the
partnership entered into a contract for sale, which was scheduled to close
during the fourth quarter. That contract failed to close, and the partnership
entered into a new contract for sale which closed in the first quarter of 1998.
The sale of the property resulted in full recovery of the prior period
losses, and additional income of $1.7 million.
14
15
The Company's investment in mortgage loan servicing, through a limited
partnership, has been a steady source of income during 1997. However, as
interest rates fall, mortgage prepayments tend to escalate, eroding the value
of mortgage servicing rights, especially with respect to higher rate loans.
The Company reviews appraisals of the mortgage servicing rights prepared
quarterly for lenders to the partnership for indications of impairment. The
various portfolios of serviced loans have weighted average coupons of 7.50% or
less, are very seasoned, and typically comprised of low balance loans. As of
December 31, 1997, there were no indications of impairment of the related
servicing rights.
The Company's investment in limited partnerships increased $8.2 million, or
50.7%, to $24.5 million at December 31, 1996, from $16.2 million at December
31, 1995. The increased investment came primarily from the investment in
construction and sale of single family homes located in Illinois, which
increased $3.9 million, to $6.7 million at December 31, 1996, from $2.8 million
at December 31, 1995, and in mortgage loan servicing, which increased $5.1
million, to $14.3 million at December 31, 1996, from $9.2 million at December
31, 1995.
During 1996 the Company invested in three (two new) single family construction
projects located in Illinois. One new project will build and sell 166 single
family homes in Lake Villa, Illinois, with homes priced in the $220 to $250
range. At December 31, 1996, 25 homes have been delivered. Sellout of the
project is projected to be three years. The Company invested $2.1 million in
this project. The other new project will build and sell 132 single family
homes in Naperville, Illinois, with homes priced in the $330 to $370 range.
Sellout of the project is projected to be two years. The Company invested $3.2
million in this project. The Company also invested $1.0 million in a new phase
of an existing single family project, which will add 83 homes to 820 homes in
prior phases. At December 31, 1996, 733 of the 903 homes had been delivered.
(Also see "Subsidiary Activities".)
During 1996 the Company purchased a $5.0 million limited partnership interest
in a mortgage servicing partnership which represents the fourth such investment
by the Company using this investment vehicle. The servicing rights purchased
by these partnerships are considered by management to be both a source of
stable income and a hedge against the adverse effects of rising interest rates
on the Company's interest earning assets.
DEPOSITS
Total deposits at December 31, 1997, were $348.5 million, a decrease of $8.8
million, or 2.5%, from $357.3 million at December 31, 1996. The Company is
constructing a new ATM site at its East Side (Chicago) office, scheduled to
open in the first quarter of 1998, to improve convenience for its customers.
The Company's ATM program has proven successful in providing additional fee
income and helping to retain deposits. However, increased competition for
depositor funds from the stock market, mutual funds, and annuity programs, as
well as traditional competitors like banks and other thrifts, has made it
difficult to retain deposits without overpaying.
Total deposits at December 31, 1996, were $357.3 million, a decrease of $2.0
million, or 0.6%, from $359.3 million at December 31, 1995. The Company
promoted various certificate of deposit programs to maintain its market share,
which was a significant factor in the increase in its cost of funds. (See "Net
Interest Income".) During 1996 a new cash dispensing ATM was installed at a
Mobile gas station in Hammond, Indiana.
The following table sets forth the average balance of deposit categories and
the average rates paid for each of the periods indicated.
For the year ended December 31,
=============================================================
1997 1996 1995
=============================================================
Balance Rate Balance Rate Balance Rate
=============================================================
Non interest bearing demand $ 5,251 - $ 5,073 - $ 5,017 -
Interest bearing demand 25,965 3.07% 25,369 3.02% 26,558 3.17%
Passbook acounts 62,830 2.75% 64,919 2.72% 65,771 2.79%
Certificates of deposit 259,300 5.83% 268,599 5.89% 258,662 5.54%
-------------------------------------------------------------
Total $353,346 4.99% $363,960 5.04% $356,008 4.78%
=============================================================
15
16
The following table sets forth the maturities of certificates of deposit of
$100,000 or more at December 31, 1997:
Three months or less $ 4,241
Over three months through six months 3,306
Over six months through twelve months 7,863
Over twelve months 3,858
-------
Total $19,268
=======
SHORT TERM BORROWINGS
Substantially all of the Company's borrowing needs are satisfied through
advances from the Federal Home Loan Bank which are available on terms with
maturities from daily to ten years. At December 31, 1997, the Company had no
daily advances, $19.0 million in term advances maturing in 1998 and $26.1
million in term advances maturing in 1999 through 2003. The following table
sets forth certain information regarding Federal Home Loan Bank (FHLB) advances
for the dates indicated.
For the year ended December 31,
=================================
1997 1996 1995
=================================
Average balance outstanding $ 53,677 $ 45,136 $ 51,591
Maximum amount outstanding at any month end 61,850 59,850 65,335
Balance outstanding at end of year 45,060 59,850 55,140
Weighted average interest rate during year 6.19% 6.00% 6.14%
Weighted average interest rate at end of year 6.10% 6.14% 5.95%
RESULTS OF OPERATIONS
Net income for the year ended December 31, 1997 was $8.0 million, compared
to $5.4 million for the year ended December 31, 1996. The primary reason for
the increase in earnings for 1997 was that in 1996 the Company made a payment
of $2.3 million for the FDIC special assessment to recapitalize the SAIF
pursuant to legislation signed by President Clinton on September 30, 1996. Net
income for 1997 also benefited by a $570 reduction in the FDIC premium for
insurance of accounts. Income from limited partnerships increased by $1.8
million, to $3.4 million in 1997, from $1.6 million in 1996, primarily because
of gains on the sale of two rental properties in the amount of $317 (first
quarter) and $1.3 million (fourth quarter), respectively. Basic earnings per
share increased to $2.46 for the year ended December 31, 1997, compared to
$1.44 for 1996, while diluted earnings per share increased to $2.29 for 1997,
from $1.36 for 1996. The FDIC special assessment, net of income taxes, reduced
earnings per share by $0.43 ($0.40 diluted) for the year ended December 31,
1996. The FDIC premium for insurance of accounts decreased from 23 cents per
$100 of deposits in 1996 to approximately 6.4 cents per $100 of deposits in
1997.
Return on average assets (ROA) increased to 1.61% for the year ended December
31, 1997, from 1.08% in 1996. ROA would have been 1.37% for 1996 without the
FDIC special assessment. Return on average stockholders' equity (ROE) for 1997
was 10.20%, compared to 6.56% in 1996. ROE would have been 8.35% for 1996
without the FDIC special assessment.
Net income for the year ended December 31, 1996 was $5.4 million, compared to
$6.0 million for the year ended December 31, 1995. The primary reason for the
decrease in earnings for 1996 was the $2.3 million FDIC special assessment.
The reduction in earnings due to the FDIC special assessment was partially
offset by a $1.8 million change in income from limited partnership investments,
from a $125 loss in 1995 to a $1.6 million profit for the year ended December
31, 1996. Basic earnings per share remained at $1.44 for the years ended
December 31, 1996 and 1995, while diluted earnings per share decreased to $1.36
for 1996, compared to $1.37 for 1995. The FDIC special assessment, net of
income taxes, reduced basic earnings per share by $0.43 ($0.40 diluted) for the
year ended December 31, 1996.
Return on average assets decreased to 1.08% for the year ended December 31,
1996, from 1.19% in 1995. ROA would have been 1.37% without the FDIC special
assessment. Return on average stockholders' equity for 1996 was 6.56%,
compared to 7.20% in 1995. ROE would have been 8.35% without the FDIC special
assessment.
16
17
NET INTEREST INCOME
Net interest income increased by $108, to $18.0 million for the year ended
December 31, 1997, from $17.9 million for 1996. The average yield on interest
earning assets increased to 8.51% during 1997, compared to 8.26% during 1996,
while the average cost of funds increased to 5.22% in 1997, from 5.21% in 1996,
resulting in an increase in the rate spread to 3.29% in 1997, compared to
3.05% in 1996.
Net interest income decreased by $719, or 3.9%, to $17.9 million for the year
ended December 31, 1996, compared to $18.6 million for the year ended December
31, 1995. The Company's net interest margin decreased to 3.79% of average
interest earning assets during 1996, compared to 3.94% during 1995. The average
yield on interest earning assets increased to 8.26% during 1996, from 8.22% in
1995, while the average cost of funds increased to 5.21% during 1996, from
5.01% during 1995, resulting in a decrease in the rate spread to 3.05% in 1996,
from 3.21% in 1995.
For the year ended December 31,
===========================================================================================
1997 1996 1995
===========================================================================================
Interest Average Interest Average Interest Average
Average and Yield/ Average and Yield/ Average and Yield/
Balance (3) Dividends Cost Balance(3) Dividends Cost Balance(3) Dividends Cost
===========================================================================================
INTEREST EARNING ASSETS:
Mortgageloans (1) $380,092 $33,612 8.84% $372,231 $32,507 8.73% $362,663 $31,743 8.75%
Consumer loans (1) 1,242 174 14.01% 832 63 7.57% 716 48 6.70%
Commercial loans (1) 1,431 227 15.86% 1,866 240 12.86% 2,381 164 6.89%
-------------------------------------------------------------------------------------------
Total loans 382,765 34,013 8.89% 374,929 32,810 8.75% 365,760 31,955 8.74%
-------------------------------------------------------------------------------------------
Mortgage-backed securities (2) 23,783 1,453 6.11% 34,111 2,098 6.15% 40,716 2,588 6.36%
Other securities (2) 46,623 3,274 7.02% 56,944 3,844 6.75% 57,818 3,875 6.70%
Daily interest-bearing deposits 4,877 260 5.33% 5,276 167 3.17% 7,381 343 4.65%
-------------------------------------------------------------------------------------------
Total investments 75,283 4,987 6.62% 96,331 6,109 6.34% 105,915 6,806 6.43%
-------------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 458,048 39,000 8.51% 471,260 38,919 8.26% 471,675 38,761 8.22%
Office properties and equipment 4,244 4,170 4,272
Real estate 2,316 2,069 2,084
Other assets 30,737 23,647 21,182
--------- -------- --------
TOTAL ASSETS $495,345 $501,146 $499,213
========= ======== ========
INTEREST BEARING LIABILITIES:
Passbook accounts $ 62,830 $ 1,728 2.75% $ 64,919 $ 1,767 2.72% $ 65,771 $ 1,833 2.79%
NOW accounts 18,232 535 2.93% 18,515 551 2.98% 18,385 553 3.01%
Money market accounts 7,733 262 3.39% 6,854 215 3.14% 8,173 289 3.54%
Certificates of deposit 259,300 15,116 5.83% 268,599 15,815 5.89% 258,662 14,332 5.54%
-------------------------------------------------------------------------------------------
Total deposits 348,095 17,641 5.07% 358,887 18,348 5.11% 350,991 17,007 4.85%
Borrowings 54,365 3,386 6.23% 45,136 2,706 6.00% 51,591 3,170 6.14%
-------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 402,460 21,027 5.22% 404,023 21,054 5.21% 402,582 20,177 5.01%
Non-interest-bearing deposits 5,251 5,073 5,017
Other liabilities 9,351 9,758 8,731
--------- -------- --------
TOTAL LIABILITIES 417,062 418,854 416,330
Stockholders' equity 78,283 82,292 82,883
--------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $495,345 $501,146 $499,213
========= ------- ======== ------- ======== -------
Net interest income $17,973 $17,865 $18,584
======= ======= =======
Interest rate spread 3.29% 3.05% 3.21%
Net interest margin 3.92% 3.79% 3.94%
Ratio of average interest-earning
assets to average interest-bearing
liabilities 113.81% 116.64% 117.16%
(1) Includes nonaccrual loans.
(2) Includes securities available-for-sale at amortized cost.
(3) Based on monthly average balances.
17
18
RATE/VOLUME ANALYSIS
The table below presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume), and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
For the year ended December 31,
====================================================
1997 vs. 1996 1996 vs. 1995
====================================================
Increase (Decrease) Increase (Decrease)
====================================================
Due to Due to Due to Due to
Rate Volume Net Rate Volume Net
----------------------------------------------------
INTEREST EARNING ASSETS:
Mortgage loans $ 413 $ 692 $ 1,105 $ (71) $ 835 $ 764
Consumer loans 70 41 111 7 8 15
Commercial loans 49 (62) (13) 118 (42) 76
----------------------------------------------------
Total loan interest 532 671 1,203 54 801 855
----------------------------------------------------
Mortgage-backed securities (14) (631) (645) (81) (409) (490)
Other securities 150 (720) (570) 27 (58) (31)
Daily interest-bearing deposits 106 (13) 93 (93) (83) (176)
----------------------------------------------------
Total investment interest 242 (1,364) (1,122) (147) (550) (697)
----------------------------------------------------
Total interest income 774 (693) 81 (93) 251 158
----------------------------------------------------
INTEREST BEARING LIABILITIES:
Interest-bearing deposits (127) (580) (707) 843 498 1,341
Borrowings 109 571 680 (75) (389) (464)
----------------------------------------------------
Total interest expense (18) (9) (27) 768 109 877
----------------------------------------------------
Net interest income $ 792 $ (684) $ 108 $(861) $ 142 $ (719)
====================================================
ASSET/LIABILITY MANAGEMENT
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest
earning assets anticipated, based upon certain assumptions, to mature or
reprice within a specific time period and the amount of interest bearing
liabilities anticipated, based upon certain assumptions, to mature or reprice
within that time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities, and negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a positive gap would tend to result
in an increase in net interest income, while a negative gap would tend to
adversely affect net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to adversely affect net interest
income.
At December 31, 1997, total interest earning assets maturing or repricing
within one year exceeded total interest bearing liabilities maturing or
repricing within one year by $5.9 million, representing a positive one year gap
ratio of 1.22%. If interest rates continue to fall in 1998, as they have in
1997, the positive gap would indicate decreased net interest income in 1998.
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At December 31,
===============================================
Within Over 1-3 Over 3-5 Over
1 year years years 5 years Total
===============================================
INTEREST EARNING ASSETS:
Loans receivable $208,256 $ 92,697 $ 33,358 $ 50,759 $385,070
Mortgage-backed securities 2,268 3,744 2,781 5,994 14,787
Other securities 45,004 - - 3,264 48,268
Interest earning deposits 5,351 - - - 5,351
-----------------------------------------------
Total interest earning assets 260,879 96,441 36,139 60,017 453,476
-----------------------------------------------
INTEREST BEARING LIABILITIES:
NOW accounts 4,641 6,092 3,427 4,405 18,565
Money market accounts 2,042 2,781 1,567 2,046 8,436
Passbook accounts 15,178 19,922 11,206 14,408 60,714
Certificates of deposit 214,075 36,639 6,266 - 256,980
FHLB advances 19,000 19,985 4,900 1,175 45,060
-----------------------------------------------
Total interest bearing liabilities 254,936 85,419 27,366 22,034 389,755
-----------------------------------------------
INTEREST SENSITIVITY GAP $ 5,943 $ 11,022 $ 8,773 $ 37,983 $ 63,721
===============================================
$ 5,943 $ 16,965 $ 25,738 $ 63,721
=====================================
CUMULATIVE INTEREST SENSITIVITY GAP
Cumulative gap as a percentage
of total assets 1.22% 3.49% 5.29% 13.09%
Cumulative interest earning assets as a
percentage of interest bearing liabilities 102.33% 104.98% 107.00% 116.35%
The above table sets forth the amount of interest earning assets and interest
bearing liabilities outstanding at December 31, 1997, which are expected to
reprice or mature in each of the future time periods shown, based on certain
assumptions. Except as stated, the amounts of assets and liabilities shown
which reprice or mature during a particular period were determined in
accordance with the earlier of term to repricing or the contractual terms of
the asset or liability. Equity securities and mutual fund investments held as
available-for-sale are included in the "within 1 year" column; FHLB stock is
included in "over 5 years". Fixed rate loans with short maturities are assumed
to prepay at the rate of 17%; those with longer maturities are assumed to
prepay at rates of 8% to 22%, dependent upon the interest rate of the loan.
Adjustable rate loans are assumed to prepay at 9% to 34%, dependent upon the
repricing frequency. Multifamily and commercial real estate loans are assumed
to prepay at 12% for fixed rate and 15% for adjustable rate loans. The Company
has assumed transaction accounts reprice at the rate of 25% in year one, 58%
(cumulatively) by year three, 76% by year five, and 94% by year ten. Fixed
rate/maturity accounts reprice at maturity. (Also see Item 7a. "Quantitative
and Qualitative Disclosures About Market Risk.")
PROVISION FOR LOAN LOSSES
The allowance for losses on loans is established through a provision for loan
losses based on management's evaluation of the risk inherent in its loan
portfolio and the general economy. 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, review of larger and known problem loans, and
the Company's internal credit review process.
The Company reduced its annual provision for losses on loans to $700 for the
year ended December 31, 1997, from $800 for the four years ended December 31,
1996. Average net charge-offs during this five year period were $443, or 56.8%
of the provision, although individual year's charge-offs were highly variable,
from a high of $1.2 million in 1994, to a low of $40 in 1996. This variability
is due primarily to the Company's commercial real estate lending, where
individual loans can have a significant impact in any one year.
Charge-offs of $323 were partially offset by recoveries of $63 during the year
ended December 31, 1997, compared to charge-offs of $114 and recoveries of $74
for 1996. The allowance for losses on loans increased to 1.54% of loans
receivable at December 31, 1997, from 1.42% at December 31, 1996.
Non-performing loans to loans receivable decreased
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to 1.39% at December 31, 1997, from 1.60% at December 31, 1996, while
non-performing assets to total assets increased to 1.64% at December 31, 1997,
from 1.57% at December 31, 1996. The allowance for losses on loans amounted to
110.93% of non-performing loans at December 31, 1997, increased from 88.89% at
December 31, 1996.
Charge-offs of $114 were partially offset by recoveries of $74 during the year
ended December 31, 1996, compared to charge-offs of $474 and recoveries of $115
for 1995. Non-performing loans to loans receivable increased to 1.60% at
December 31, 1996, from 1.46% at December 31, 1995, and non-performing assets
to total assets decreased to 1.57% at December 31, 1996, from 1.62% at December
31, 1995. The allowance for losses amounted to 88.89% of non-performing loans
at December 31, 1996, increased from 84.58% at December 31, 1995. The allowance
for losses on loans increased to 1.42% of loans receivable at December 31,
1996, compared to 1.24% at December 31, 1995.
OTHER INCOME
Other income increased to $4.2 million for the year ended December 31, 1997,
from $3.0 million for the year ended December 31, 1996, primarily due to the
$1.8 million increase in income from limited partnerships, partially offset by
the $283 change from gains to losses on the sale of securities. The increase
in income from limited partnerships came primarily from gains recorded on the
sale of partnership rental properties. A $317 gain was distributed during the
first quarter of 1997, and a $1.3 million gain was distributed during the
fourth quarter of 1997.
Gains on loans sold decreased $53, to $167 for the year ended December 31,
1997, from $220 in 1996, primarily due to a decrease in loans sold in the
secondary market (more were retained for portfolio), and also to a more
competitive fee structure. Checking account and ATM fees increased $93 in
1997, to $570, from $477 in 1996. A $250 one time release fee recorded in the
third quarter of 1996 was the primary reason for the decrease of $198 in
miscellaneous other income in 1997.
Other income increased to $3.0 million for the year ended December 31, 1996,
from $972 for the year ended December 31, 1995, primarily due to the $1.8
million increase in income from limited partnerships, a $175 decrease in losses
on sales of real estate acquired through foreclosure, and a $136 change from
losses to gains on sales of securities. The significant improvement in income
from limited partnerships came primarily from the Company's investments in
single family development projects located in Illinois, although there was an
improvement in the performance of its Colorado investments, as well as
consistent income from loan servicing investments.
Gains on loans sold decreased $171, to $220 for the year ended December 31,
1996, from $391 in 1995, primarily due to a decrease in loans sold in the
secondary market, and also to a more competitive fee structure. Miscellaneous
other income included a $250 increase in losses on the operation of real estate
acquired through foreclosure, to $292 for the year ended December 31, 1996,
compared to $42 for 1995, which was partially offset by a $250 one-time release
fee recorded in the third quarter of 1996. Checking account and ATM fees
increased $87 in 1996, to $477, from $390 in 1995.
The following table presents additional detail on miscellaneous other income
for the years indicated:
For the year ended December 31,
=================================
1997 1996 1995
=================================
Miscellaneous other income:
Rental income $ 144 $ 170 $ 170
Income from real estate owned, net (257) (292) (42)
Checking account fees 375 325 295
ATM fees 195 152 95
Credit enhancement fees 78 67 84
Investment commissions 46 125 110
Other miscellaneous 78 310 17
---------------------------------
Total miscellaneous other income $ 659 $ 857 $ 729
=================================
OPERATING EXPENSES
Operating expenses decreased $2.7 million, to $9.5 million for the year ended
December 31, 1997, from $12.2 million in 1996, primarily due to the $2.3
million FDIC special assessment paid in 1996. The FDIC premium for insurance
of
20
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accounts decreased $570, to $231 in 1997, from $801 in 1996, due to a
reduction in the assessment rate. Compensation expense increased $214, or
4.0%, to $5.5 million in 1997, from $5.3 million in 1996. Professional fees
decreased $124, to $348 for 1997, from $472 in 1996, primarily due to a $130
decrease in legal fees. Operating expenses as a percent of average assets
decreased to 1.93% in 1997, from 1.98% (before the special assessment) in 1996.
The Company's efficiency ratio was 44.3% in 1997, compared to 49.4% (before
the special assessment) in 1996.
Operating expenses increased $2.3 million for the year ended December 31, 1996
to $12.2 million, from $9.9 million in 1995, primarily due to the $2.3 million
FDIC special assessment. Compensation and benefit expense increased $149, to
$5.3 million in 1996, from $5.1 million in 1995, due to normal salary and wage
increases, while professional fees decreased $209, to $472 in 1996, from $681
in 1995, due primarily to reductions in legal and audit fees. Operating
expenses as a percent of average assets increased to 2.44% in 1996, but were
1.98% before the special assessment, compared to 1.98% in 1995. The Company's
efficiency ratio improved to 49.4% (before the FDIC special assessment) in
1996, compared to 52.9% in 1995.
The following table provides additional detail on miscellaneous other expenses
for the years indicated:
For the year ended December 31,
=================================
1997 1996 1995
=================================
Miscellaneous other expense:
Stationery and supplies $ 213 $ 214 $ 189
Telephone and postage 249 222 212
Loan expense 132 121 89
Insurance 111 133 146
Security 89 77 78
Audit and examination fees 186 193 198
Legal fees 99 229 384
Consulting fees 11 18 56
Benefit plan administration fees 52 32 43
Due and subscriptions 40 65 34
Checking account and ATM expenses 38 28 62
Minority interest 41 28 27
Other 376 342 367
---------------------------------
Total miscellaneous other expense $1,637 $1,702 $1,885
=================================
INCOME TAXES
During 1997 the Company accrued low income housing tax credits in the amount of
$222, and applied a dividends received deduction in the amount of $427, which
reduced the Company's effective income tax rate to 33.3 % for 1997. During
1996 the Company accrued low income housing tax credits in the amount of $218,
and applied a dividends received deduction in the amount of $519, which reduced
the Company's effective income tax rate to 31.0 % for 1996. During 1995 the
Company revised its estimates of current and deferred income tax liabilities,
which resulted in a $367 credit to income tax expense and reduced the effective
income tax rate to 32.4%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, proceeds from principal
and interest payments on loans, securities, including mortgage-backed
securities, and Federal Home Loan Bank advances. While maturities and
scheduled amortization of loans and mortgage-backed securities are predictable
sources of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates, economic conditions, and competition. The Company's
liquidity, represented by cash equivalents, is a product of its operating,
investing and financing activities. These activities for the years ended
December 31, 1997, 1996, and 1995 are summarized in the following table.
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Year ended December 31,
==============================
1997 1996 1995
==============================
Operating activities:
Net income $ 7,987 $5,399 $5,965
Adjustments to reconcile net income to net cash
provided by (used in) operating activities (2,465) 85 4,903
Net cash provided by (used in) investing activities 27,144 701 (7,967)
Net cash used in financing activities (33,558) (5,667) (3,594)
------------------------------
Net increase (decrease) in cash and cash equivalents (892) 518 (693)
Cash and cash equivalents at beginning of year 9,175 8,657 9,350
------------------------------
Cash and cash equivalents at end of year $ 8,283 $9,175 $8,657
==============================
The primary investing activity of the Company is the origination and purchase
of mortgage loans for its own portfolio. The Company originated or purchased
$94.9 million, $86.7 million, and $83.5 million in loans for the years ended
December 31, 1997, 1996, and 1995, respectively.
The Company also made significant investments in both debt and equity
securities, and in mortgage-backed securities. The company invested $45.1
million, $30.8 million, and $32.5 million in these securities for the years
ended December 31, 1997, 1996, and 1995, respectively. However, proceeds from
sales, repayments and maturities of $65.9 million, $45.8 million, and $39.9
million for these same periods was also used to fund increases in the loan
portfolio and investments in limited partnerships.
Financing activities during 1997 included a $14.8 million decrease in Federal
Home Loan Bank advances, a $8.9 million decrease in deposits and the repurchase
of 426,597 shares of Treasury stock for $10.0 million, at an average cost of
$23.50 per share.
Financing activities during 1996 included a $4.7 million increase in Federal
Home Loan Bank advances, offset by a $1.9 million decrease in deposits and the
repurchase of 466,229 shares of Treasury stock for $8.7 million, at an average
cost of $18.63 per share.
Financing activities during 1995 included a $15.1 million increase in deposits,
offset by $15.2 million decrease in Federal Home Loan Bank advances and the
repurchase of 186,450 shares of Treasury stock for $3.4 million, at average
cost $18.19 per share.
At December 31, 1997, the Company had approved mortgage loan commitments
totalling $8.2 million, $7.8 million of undisbursed loans-in-process, a $1.3
million commitment to invest in low income housing, $9.2 million in credit
enhancement arrangements (secured by securities and a letter of credit from the
Federal Home Loan Bank), $10.7 million in unused lines of credit, primarily to
mortgage brokers, and $1.5 million in letters of credit to builders.
Federal regulations require a savings institution to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least 5%
of the average daily balance of its net withdrawable deposits and short term
borrowings. In addition, short term liquid assets currently must constitute 1%
of the sum of net withdrawable deposits and short term borrowings. Management
has consistently maintained liquidity levels in excess of these regulatory
requirements. The Association's average liquidity ratios were 8.8%, 7.9%, and
8.3% during 1997, 1996, and 1995, respectively. The Association's average
short term liquidity ratios were 2.9%, 2.2%, and 2.7% for these same years.
The Association is also required to maintain specific amounts of capital
pursuant to federal regulations. As of December 31, 1997, the Association was
in compliance with all regulatory capital requirements with tangible and core
capital of 10.7%, and risk-based capital of 17.4%, well above the requirements
of 1.5%, 3.0%, and 8.0%, respectively.
SUBSIDIARY ACTIVITIES
Calumet Residential Corporation (CRC) is a second tier subsidiary of the
Company, formed for the purpose of investing in real estate development and
sale. CRC is currently invested as a limited partner in three Illinois single
family home developments in Algonquin, Lake Villa and Naperville Illinois.
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As of December 31, 1997, the Algonquin development has completed and closed 793
of 903 single family homes, with 50 homes under contract and 60 homesites
remaining to be sold. During 1997 the project generated $328 income to CRC on
closings of 60 units, and $2.7 million to date. CRC has a remaining investment
of $1.0 million in the project at December 31, 1997.
As of December 31, 1997, the Lake Villa development has completed and closed 84
of 166 single family homes, with 25 homes under contract and 57 homesites
remaining to be sold. During 1997 the project generated $254 income to CRC on
closings of 59 units, and $460 to date. CRC has a remaining investment of $903
in the project at December 31, 1997.
During 1997 CRC increased its investment in the Naperville development by $2.2
million, to $5.4 million, adding 121 homesites, and increasing the total number
of homesites to 253. As of December 31, 1997, the Naperville development has
74 homes under contract and has delivered 24 lots to other builders. During
1997 CRC recognized $234 income from this project and has a remaining
investment of $3.9 million in the project at December 31, 1997.
CRC also participates as a limited partner in an office building rental
property in a suburb of Denver, Colorado. During 1997 the investment generated
$42 income, and at December 31, 1997 had a remaining investment balance of
$136.
Calumet Savings Service Corporation (CSSC) is a second tier subsidiary of the
Company and is engaged in the sale of insurance, annuity and investment
products through its independent insurance agency and through its franchise
arrangement with Investor Services. Calumet Financial Corporation (CFC) is a
wholly owned subsidiary of CSSC, formed in 1997 to make consumer loans and
small business loans.
Calumet Mortgage Corporation of Idaho (CMCID) was formed as a subsidiary of
CSSC in January, 1995, to incorporate the existing loan origination office of
the Association located in Ketchum, Idaho. This office originates and sells
mortgage loans, primarily in Sun Valley and the surrounding areas. The Company
increased its portfolio of Idaho mortgage loans by $7.1 million, or 10.0%, to
$79.9 million at December 31, 1997, from $72.8 million at December 31, 1996,
primarily through this subsidiary. CMCID originated $35.4 million in mortgage
loans in 1997, compared to $33.3 million in 1996.
THE YEAR 2000
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 is utilizing both internal and external resources to identify,
correct and test the systems for the year 2000 compliance. It is anticipated
that all reprogramming efforts (primarily those of the Company's outside
service bureaus) will be complete by December 31, 1998, allowing adequate time
for testing. To date, confirmations have been received from the Company's
primary processing vendors that plans have been deveolped to address processing
of transactions in the year 2000. During 1998 the Company will convert its
current teller and platform systems to a personal computer based system
utilizing hardware and software that is certified year 2000 compliant. It is
estimated that the systems change will cost between $700 and $900 for both
hardware and software licensing, and will be amortized over three to five
years. This systems change was anticipated before the year 2000 issue became
an issue, and would have been required in any case to bring old systems up to
date.
ITEM 7A. QUANTITATIVE AND QUALITATIVE 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.
Interest rate risk results when the maturity or repricing intervals and
interest rate indices of the interest-earning assets,
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interest-bearing liabilities, and off-balance sheet financial instruments are
different, creating a risk that changes in the level of market interest rates
will result in disproportionate changes in the value of, and the net earnings
generated from, the Association's interest-earning assets, interest-bearing
liabilities, and off-balance sheet financial instruments. The Association's
exposure to interest rate risk is managed primarily through the Association's
strategy of selecting the types of terms of interest-earning assets and
interest-bearing liabilities which generate favorable earnings, while limiting
the potential negative effect of changes in market interest rates. Since the
Association's primary source of interest-bearing liabilities is customer
deposits, the Association's ability to manage the types and terms of such
deposits may be somewhat limited by customer preferences in the market areas in
which the Association operates. Borrowings, which include FHLB advances, both
short-term borrowings, and long-term borrowings, are generally structured with
specific terms which in management's judgment, when aggregated with the terms
for outstanding deposits and matched with interest-earning assets, mitigate the
Association's exposure to interest rate risk. The rates, terms and interest
rate indices of the Association's interest-earning assets result primarily from
the Association's strategy of investing in loans and securities (a substantial
portion of which have adjustable-rate terms) which permit the Association to
limit its exposure to interest rate risk, together with credit risk, while at
the same time achieving a positive interest rate spread from the difference
between the income earned on interest-earning assets and the cost of
interest-bearing liabilities (see "Asset/ Liability Management" for a further
discussion of rate sensitive assets, rate sensitive liabilities and net
interest spread).
SIGNIFICANT ASSUMPTIONS UTILIZED IN MANAGING INTEREST RATE RISK
Managing the Association's exposure to interest rate risk involves significant
assumptions about the exercise of imbedded options and the relationship of
various interest rate indices of certain financial instruments.
IMBEDDED OPTIONS: A substantial portion of the Association's loans and
mortgage-backed securities are residential mortgage loans containing
significant imbedded options which permit the borrower to prepay the principal
balance of the loan prior to maturity ("prepayments") without penalty. A
loan's propensity for prepayment is dependent upon a number of factors,
including, the current interest rate and interest rate index (if any) on the
loan, the financial ability of the borrower to refinance, the economic benefit
to be obtained from refinancing, availability of refinancing at attractive
terms as well as economic and other factors in specific geographic areas which
affect the sales and price levels of residential property. In a changing
interest rate environment, prepayments may increase or decrease on fixed- and
adjustable-rate loans depending on the current relative levels and expectations
of future short- and long-term interest rates. Since a significant portion of
the Association's loans are ARM loans, prepayments on such loans generally
increase when long-term interest rates fall or are at historically low levels
relative to short-term interest rates, making fixed-rate loans more desirable.
Securities, other than those with early call provisions, generally do not have
significant imbedded options and repay pursuant to specific terms until
maturity. While savings and checking deposits generally may be withdrawn upon
the customer's request without prior notice, a continuing relationship with
customers resulting in future deposits and withdrawals is generally predictable
resulting in a dependable and uninterrupted source of funds. Time deposits
generally have early withdrawal penalties, while term FHLB advances have
prepayment penalties, which discourage customer withdrawal of time deposits and
prepayment of FHLB advances prior to maturity.
INTEREST RATE INDICES: The Association's ARM loans are primarily indexed to
the One Year Constant Maturity Treasury Index. When such loans are funded by
interest-bearing liabilities which are determined by other indices, primarily
deposits and FHLB advances, a changing interest rate environment may result in
different levels of change in the different indices leading to disproportionate
changes in the value of, and the net earnings generated from, the Association's
financial instruments. Each index is unique and is influenced by different
external factors, therefore, the historical relationships in various indices
may not necessarily be indicative of the actual change which may result in the
changing interest rate environment.
INTEREST RATE RISK MEASUREMENT
In addition to periodic gap reports (see "Asset/Liability Management")
comparing the repricing periods of interest-earning assets and interest-bearing
liabilities, management also 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
24
25
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.
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 September 30,
1997, at current interest rates and at hypothetical higher and lower interest
rates of one and two percent.
Present Value at September 30, 1997
================================================
Down 2% Down 1% Current Up 1% Up 2%
================================================
INTEREST-EARNING ASSETS:
Mortgage loans, including mortgage
backed securities:
Adjustable rate $241,242 $238,437 $235,570 $232,399 $228,668
Fixed rate 167,525 164,409 159,521 153,203 146,525
Commercial and consumer loans 9,827 9,804 9,779 9,757 9,734
Securities 44,045 42,663 41,238 39,672 38,017
------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 462,639 455,313 446,108 435,031 422,944
Other assets 22,364 22,506 22,671 22,839 22,995
------------------------------------------------
Total assets $485,003 $477,819 $468,779 $457,870 $445,939
================================================
INTEREST BEARING LIABILITIES:
Passbook accounts $ 61,485 $ 60,821 $ 58,830 $ 56,777 $ 54,872
NOW accounts 20,200 19,721 19,163 18,637 18,148
Money market accounts 8,020 7,925 7,823 7,723 7,625
Certificates of deposit 262,614 260,419 258,276 256,163 254,101
------------------------------------------------
TOTAL DEPOSITS 352,319 348,886 344,092 339,300 334,746
Borrowings 54 222 53 622 53,036 52,463 51,902
------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 406,541 402,508 397,128 391,763 386,648
Other liabilities 7,959 7,958 7,957 7,956 7,955
------------------------------------------------
Total liabilities $414,500 $410,466 $ 405,085 $399,719 $394,603
================================================
Loan commitments $ 407 $ 321 $ 180 $ (25) $ (262)
================================================
The calculations of present value have certain shortcomings. The discount
rates utilized for loans and mortgage-backed securities are based on estimated
market interest rate levels for similar loans and securities nationwide, with
prepayment levels generally assumed based on global statistics. The unique
characteristics of the Association's loans and mortgage-backed securities may
not necessarily parallel those assumed in the model, and therefore, would
likely result in different discount rates, prepayment experiences, and present
values. The discount rates utilized for deposits and borrowings are based upon
available alternative types and sources of funds which are not necessarily
indicative of the present value of deposits and FHLB advances since such
deposits and advances are unique to, and have certain price and customer
relationship advantages for, depository institutions. The present values are
determined based on the discounted cash flows over the remaining estimated
lives of the financial instruments and assumes that the resulting cash flows
are reinvested in financial instruments with virtually identical terms. The
total measurement of the Association's exposure to interest rate risk as
presented in the above table may not be representative of the actual values
which might result from a higher or lower interest rate environment. A higher
or lower interest rate environment will most likely result in different
investment and borrowing strategies by the Association designed to further
mitigate the effect on the value of, and the net earnings generated from, the
Association's net assets from any change in interest rates.
NET PORTFOLIO VALUE: The OTS adopted a final rule in August of 1993
incorporating an interest rate risk ("IRR") component into the risk-based
capital rules. The IRR component is a dollar amount that is deducted from
total capital for the purpose of calculating an institution's risk-based
capital requirement and is measured in terms of the sensitivity of its net
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26
portfolio value ("NPV") to changes in interest rates. An institution's NPV is
calculated as the net discounted cash flows from assets, liabilities, and
off-balance sheet contracts. An institution's IRR component is measured as the
change in the ratio of NPV to the net present value of total assets as a result
of a hypothetical 200 basis point change in market interest rates. A resulting
decline in this ratio of more than 2% of the estimated present value of an
institution's total assets prior to the hypothetical 200 basis point change
will require the institution to deduct from its regulatory capital 50% of that
excess decline. Implementation of the rule has been postponed indefinitely.
The following table presents the Association's ratio of NPV to the present
value of total assets as of September 30, 1997, as calculated by the OTS, based
on information provided to the OTS by the Association.
Change in interest Net Present Present Value Ratio of NPV Percentage
rates (basis points) Value of Total Assets to PV of TA Change
- -----------------------------------------------------------------------------------------------
+200 $ 51,074 $ 445,939 11.45% -2.17%
+100 58,126 457,870 12.69% -0.93%
Static 63,874 468,779 13.63% --
-100 67,674 477,819 14.16% 0.54%
-200 70,910 485,003 14.62% 0.99%
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certin types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate mortgage loans,
have features that restrict changes in interest rates on a short-term basis and
over the life of the loan. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels could deviate significantly from those
assumed in calculating the tables. Finally, the ability of many borrowers to
service their debt may decrease in the event of a significant interest rate
increase.
In addition, the previous table does not necessarily indicate the impact of
general interest rate movements on the Association's net interest income
because the repricing of certain categories of assets and liabilities are
subject to competitive and other pressures beyond the Association's control.
As a result, certain assets and liabilities indicated as maturing or otherwise
repricing within a stated period may in fact mature or reprice at different
times and at different volumes.
26
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Calumet Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Calumet Bancorp, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The accompanying consolidated
statements of income, stockholders' equity and cash flows of the Company for
the year ended December 31, 1995 were audited by other auditors whose report
dated February 5, 1996, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 1997 and 1996 financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Calumet Bancorp, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 27, 1998
27
28
CALUMET BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
AT DECEMBER 31,
1997 1996
ASSETS:
Cash $ 2,932 $ 3 021
Interest bearing deposits 5,351 6,154
--------------------
CASH AND CASH EQUIVALENTS 8,283 9,175
Securities available-for-sale 46,967 57,362
Securities held-to-maturity
(fair value: $18,606 (1997); $27,375 (1996)) 18,768 27,970
Loans receivable, net 376,988 381,200
Investment in limited partnerships 24,645 24,458
Real estate held for sale acquired
through foreclosure 2,491 1,665
Office properties and equipment, net 4,468 4,320
Accrued interest receivable and other assets 4,016 4,067
--------------------
TOTAL ASSETS $486,626 $510,217
====================
LIABILITIES:
Deposits $348,461 $357,330
Federal Home Loan Bank advances 45,060 59,850
Advance payments by borrowers for
taxes and insurance 3,237 3,124
Income taxes 1,229 742
Accrued interest payable and other liabilities 7,025 7,407
--------------------
TOTAL LIABILITIES 405,012 428,453
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 shares authorized - -
Common stock, $.01 par value, 4,200,000 shares authorized
3,616,090 (1997) and 3,614,341 (1996) shares issued 36 36
Additional paid-in capital 35,217 35,090
Unrealized gains on securities available for sale,
net of income tax expense of $767 and $149 1,303 239
Retained earnings - substantially restricted 56,786 73,817
Unearned ESOP shares (283) (849)
Stock held FOR management recognition plan - (137)
Treasury stock (474,593 shares (1997); 1,237,313 shares (1996)) (11,445) (26,432)
--------------------
TOTAL STOCKHOLDER'S EQUITY 81,614 81,764
--------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $486,626 $510,217
====================
See notes to consolidated financial statements.
28
29
CALUMET BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------------------------------
Interest and Dividend Income:
Loans $34,013 $32,810 $31,955
Securities and deposits 4,987 6,109 6,806
-------------------------------
Total interest and dividend income 39,000 38,919 38,761
Interest Expense:
Deposits 17,641 18,348 17,007
Federal Home Loan Bank advances 3,386 2,706 3,170
-------------------------------
Total interest expense 21,027 21,054 20,177
-------------------------------
NET INTEREST INCOME 17,973 17,865 18,584
Provision for losses on loans 700 800 800
-------------------------------
Net interest income provision for losses 17,273 17,065 17,784
OTHER INCOME:
Gain on loans sold 167 220 391
Cain (loss) on sales of real estate 70 (4) (179)
Gain (loss) on sales of securities (230) 53 (83)
Income (loss) from limited partnerships 3,385 1,639 (125)
Insurance commissions 187 227 239
Other 659 857 729
-------------------------------
Total other income 4,238 2,992 972
OTHER EXPENSES:
Compensation and benefits 5,505 5,291 5,142
Office occupancy end equipment 1,295 1,302 1,340
Federal insurance premiums 231 801 818
FDIC special assessment for SAIF - 2,316
Advertising and promotion 343 375 357
Data processing 525 444 389
Other 1,637 1,702 1,885
-------------------------------
Total OTHER EXPENSES 9,536 12,231 9,931
-------------------------------
Income before income taxes 11,975 7,826 8,825
Income TAXES 3,988 2,427 2,860
-------------------------------
NET INCOME $ 7,987 $ 5,399 $ 5,965
===============================
BASIC EARNINGS PER SHARE $ 2.46 $ 1.44 $ 1.44
===============================
DILUTED EARNINGS PER SHARE $ 2.29 $ 1.36 $ 1.37
===============================
See notes to consolidated financial statements.
29
30
CALUMET BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Net Unrealized
Gains (Losses) Total
Additional on Securities Unearned Stock Stock-
Common Paid-in Available Retained ESOP Held for Treasury holders'
Stock Capital for Sale Earnings Shares MRP Stock Equity
-------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 $ 36 $34,494 $ (1,953) $62,453 $(1,980) $(410) $(14,354) $78,286
Change in unrealized losses on
securities available-for-sale net of
income tax expense of $1,486 - - 2,376 - - - - 2,376
Proceeds from conversion
litigation settlement - 52 - - - - - 52
Proceeds from exercise of stock
options - 5,546 shares - 74 - - - - - 74
Amortization of purchase price
of MRP stock - 45 - - - 137 - 182
Allocation of shares to ESOP
participants - - - - 566 - - 566
Repurchase of 124,300 shares
of treasury stock - - - - - - (3,391) (3,391)
Net income - - - 5,965 - - - 5,965
-------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 36 34,665 423 68,418 (1,414) (273) (17,745) 84,110
Change in unrealized losses on
securities available-for-sale net of
income tax benefit of $68 - - (184) - - - - (184)
Proceeds from exercise of stock
options - 14,969 shares - 351 - - - - - 351
Amortization of purchase price
of MRP stock - 74 - - - 136 - 210
Allocation of shares to ESOP
participants - - - - 565 - - 565
Repurchase of 310,819 shares
of treasury stock - - - - - - (8,687) (8,687)
Net income - - - 5,399 - - - 5,399
-------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 36 35,090 239 73,817 (849) (137) (26,432) 81,764
Change in unrealized losses on
securities available-for-sale net of
income tax expense of $618 - - 1,064 - - - - 1,064
Proceeds from exercise of stock
options- 1,749 shares - 37 - - - - - 37
Amortization of PURCHASE PRICE
of MRP stock - 90 - - - 137 - 227
Allocation of shares to ESOP
participants - - - - 566 - - 566
Repurchase of 292,731 shares
of treasury stock - - - - - - (10.027) (10,027)
Transfer 1,055,451 shares in three
for-two stock split - - - (25,018) - - 25,014 (4)
Net income - - - 7,987 - - - 7,987
-------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 36 $35,217 $ 1,303 $ 56,786 $ (283) $ - $(11,445) $81,614
See notes to consolidated financial statements.
30
31
CALUMET BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------------------------------
OPERATING ACTIVITIES:
Net income $ 7,987 $ 5,399 $ 5,965
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on loans 700 800 800
Provision for depreciation 357 361 337
Amortization of deferred loan and commitment fees (851) (939) (893)
Amortization and accretion of premiums and discounts 205 233 224
Amortization and allocation of stock based benefits 703 701 703
Loss (gain) on sales of securities available-for-sale 230 (53) 83
Equity in loss (income) from limited partnerships (3,385) (1,639) 388
Net loss (gain) on sale of real estate (70) 4 179
Originations of loans held for sale (6,503) (5,945) (10,355)
Gain on loans sold (167) (220) (391)
Proceeds from loans sold 6,670 6,165 1O,746
Change in operating assets and liabilities:
Decrease in accrued interest receivable and other assets 51 178 2,707
Increase (decrease) in income taxes (23) 473 (156)
(Decrease) increase in accrued interest payable and other liabilities (382) (34) 531
----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,522 5,484 10,868
INVESTING ACTIVITIES:
Securities available-for-sale:
Purchases (45,063) (30,238) (27,486)
Proceeds from sale 53,883 35,075 15,452
Repayments and maturities 3,036 5,755 21,128
Securities held-to-maturity:
Purchases (10) (557) (5,055)
Repayments end maturities 8,998 4,974 3,292
Principal and fees collected on loans 97,898 79,034 68,460
Loans originated (89,035) (83,116) (76,920)
Loans purchased (5,844) (3,567) (6,577)
Investments in limited partnerships (3,882) (11,563) (4,664)
Return of investment in limited partnerships 7,080 4,970 3,761
Proceeds from sales of real estate 588 348 730
Purchases of office property and equipment (505) (414) (88)
----------------------------
NET CASH PROVIDED BY(USED IN) INVESTING ACTIVITIES 27,144 701 (7,967)
See notes to consolidated financial statements.
31
32
CALUMET BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in demand and passbook accounts $ (1,539) $ 1,602 $ (9,894)
Net increase (decrease) in certificates of deposit (7,330) (3,523) 24,985
Proceeds of Federal Home Loan Bank advances 77,285 100,675 60,290
Repayment of Federal Home Loan Bank advances (92,075) (95,965) (75,485)
Net increase (decrease) in advance payments by
borrowers for taxes and insurance 113 66 (208)
Net proceeds from exercise of stock options 15 165 57
Proceeds from conversion litigation settlement - - 52
Purchase oftreasury stock (10,027) (8,687) (3,391)
------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (33,558) (5,667) (3,594)
------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (892) 518 (693)
Cash and cash equivalents at beginning of year 9,175 8,657 9,350
------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,283 $ 9,175 $ 8,657
====================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest on deposits $ 17,568 $ 18,371 $ 15,844
Cash paid during the year for interest on notes payable 3,451 2,663 3,240
------------------------------------
$ 21,019 $ 21,034 $ 19,084
====================================
Cash paid during the year for income taxes $ 3,788 $ 2,382 $ 3,328
====================================
Noncash transactions:
Loans to facilitate sales of real estate owned $ 88 $ 935 $ 973
Loans transferred to real estate owned 1,432 553 1,257
Investment in limited partnership
transferred to real estate owned - - 1,200
See notes to consolidated financial statements.
32
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Company's principal business activity is the operation of its thrift
subsidiary, and consists of attracting deposits from the public and investing
those deposits, together with funds generated from operations and borrowings,
primarily in residential mortgage loans. The Association operates five
financial services offices -- Dolton, Lansing, Sauk Village and two in
southeastern Chicago. The Association's deposit accounts are insured to the
maximum allowable amount by the FDIC. The Company also invests in equity
securities and in various limited partnerships which have invested in
residential development, residential and commercial rental properties, and
mortgage loan servicing.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on its loan
and investment securities portfolios, and its cost of funds, consisting of
interest paid on its deposits and borrowings. The Company's operating results
are also affected to a lesser extent by loan and commitment fees, customer
service charges, and by the sale of real estate, insurance and annuities
through its third tier subsidiaries. Operating expenses of the Company are
primarily employee compensation and benefits, office occupancy and equipment
costs, federal deposit insurance premiums, advertising and promotion costs,
data processing and other administrative expenses.
The accounting policies of Calumet Bancorp, Inc. (the Company) and subsidiaries
which significantly affect the determination of consolidated financial position
and results of operations are described below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and results of
operations of the Company, and its wholly owned subsidiary, Calumet Federal
Savings and Loan Association of Chicago (the Association) and the Association's
two first-tier subsidiaries: wholly owned Calumet Residential Corporation,
which owns 51% of Calumet United Limited Liability Company (Wyoming); and
wholly owned Calumet Savings Service Corporation, which wholly owns Calumet
Financial Corporation, Calumet Mortgage Corporation of Idaho and Calumet
Mortgage Corporation of New Mexico. Calumet Mortgage Corporation of New Mexico
was dissolved August 1, 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent highly liquid investments with maturities
of 90 days or less at the time of purchase and include cash and
interest-bearing deposits.
SECURITIES
Securities classified as held-to-maturity are carried at amortized cost if
management has the positive intent and ability to hold the securities to
maturity. Securities not classified as held-to-maturity are designated
securities available-for-sale and carried at fair value with unrealized gains
and losses reflected net of deferred income taxes in stockholders' equity.
The carrying value of securities reflects amortization of premiums and
accretion of discounts over the estimated lives of the securities using the
level yield method. Such amortization is included in interest income.
Interest and dividends are included in interest income from securities as
earned. Realized gains and losses on all securities are computed using the
specific identification method. Securities are written down to fair value when
a decline in fair value is not temporary.
LOANS RECEIVABLE
Loans receivable are stated at outstanding unpaid principal balances net of any
deferred fees or costs on originated loans or unamortized premiums or discounts
on purchased loans.
33
34
Premiums paid and discounts received in connection with mortgage loans
purchased are deferred and amortized to income over the estimated life of the
loans using the level-yield method. Loan origination fees and certain direct
origination costs related to processing successful loan applications are
deferred and the net amount amortized to income over the contractual life of
the loans as an adjustment to interest income using the level yield method.
Costs associated with processing unsuccessful loan applications are charged to
expense as incurred.
ALLOWANCE FOR LOSSES ON LOANS
The Company provides for losses on loans based on evaluations of the loan
portfolio, past credit loss experience, current economic conditions, the amount
and timing of future cash flows expected to be received on impaired loans, and
other pertinent factors which form a basis for determining the adequacy of the
allowance for losses. Management believes that the allowance for losses on
loans is adequate to absorb probable losses in the portfolio; however, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
losses on loans. Such agencies may require the Company to recognize additions
to the allowance based on their judgments of information available to them at
the time of their examination.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of
similar nature such as residential mortgage and consumer loans, and on an
individual basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported net, at the present value
of estimated future cash flows, using the loan's existing rate, or at the fair
value of collateral if repayment is expected solely from the collateral. Loans
are evaluated for impairment when payments are delayed, typically 90 days or
more, or when it is probable that all principal and interest amounts will not
be collected according to the original terms of the loan.
INTEREST ON LOANS
Interest on loans is recorded when earned. The Company places loans (including
impaired loans) on nonaccrual status when they have been delinquent 90 or more
days. When a loan is placed on nonaccrual status, previously accrued but
uncollected interest is fully reserved.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate which has been acquired through, or in lieu of, foreclosure is
carried at the lower of fair value, less estimated selling costs, or the
related loan balance at the date of foreclosure. Valuations are periodically
performed by management and the carrying value is reduced by a charge to
operations if the carrying value of a property exceeds its estimated fair value
less estimated selling costs determined by management on valuation dates
subsequent to foreclosure. A loan is classified as real estate-owned when the
Company has taken possession of the collateral even though foreclosure
proceedings may not have been completed.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost, less accumulated
depreciation. Provisions for depreciation are computed using the straight-line
method over the estimated useful lives of the assets. Useful lives for office
buildings are 30 to 40 years and for furniture, fixtures and equipment, 3 to 10
years.
INVESTMENT IN LIMITED PARTNERSHIPS
The Company invests in limited partnerships engaged in real estate development
and sale and in loan servicing. As a limited partner without a controlling
interest, the Company accounts for these investments using the equity method.
The Company periodically reviews these investments for impairment based on
review of independent appraisals, financial statements, and other relevant
operating data. At December 31, 1997, one of the properties held by a real
estate limited partnership was held for sale. A sale may result in proceeds
exceeding the Company's investment by a significant amount.
34
35
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return.
Deferred income taxes are provided for all significant items of income and
expense that are recognized in different periods for financial reporting
purposes and income tax reporting purposes. The asset and liability approach
is used for the financial accounting and reporting of income taxes. This
approach requires companies to take into account changes in income tax rates
when valuing the deferred income tax accounts recorded on the balance sheet.
In addition, it provides that a deferred income tax liability or asset shall be
recognized for the estimated future tax effects attributable to "temporary
differences" and loss and tax credit carryforwards. Temporary differences
include differences between financial statement income and tax return income
which are expected to reverse in future periods as well as differences between
tax bases of assets and liabilities and their amounts for financial reporting
purposes which are also expected to be settled in future periods. To the
extent a deferred tax asset is established which, more likely than not, is not
expected to be realized, a valuation allowance shall be established against
such account.
DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument includes futures, forwards, interest rate
swaps, options and other financial instruments with similar characteristics.
The Company currently does not enter into futures, forwards, swaps or options.
However, the Company is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. The financial instruments include commitments to make loans and
standby letters of credit, which involve to varying degrees elements of credit
risk and interest rate risk in excess of amounts recognized on the balance
sheet. Commitments to make loans are agreements to lend to a customer as long
as there is no violation of any contract condition. Commitments generally have
fixed expiration dates and may require collateral if deemed necessary. Standby
letters of credit are conditional commitments issued by the company to
guarantee the performance of a customer to a third party up to a stipulated
amount and with specific terms and conditions. Commitments to make loans and
standby letters of credit are not recorded as an asset or liability by the
Company until the instrument is exercised.
NEW ACCOUNTING PRONOUNCEMENTS
In 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." It revises the
accounting for transfers of financial assets, such as loans and securities, and
for distinguishing between sales and secured borrowings. SFAS No. 125, as
amended by SFAS No. 127, is effective on a prospective basis for some
transactions in 1997 and others in 1998. Adoption of SFAS No. 125 in 1997 did
not have a material effect on the Company's financial position or results of
operations. The provisions of the statement effective in 1998 are not expected
to have a material effect on the Company's financial position or results of
operations.
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."
35
36
The following table presents a reconciliation of the denominators used to
compute basic earnings per share and diluted earnings per share for the three
years ended December 31, 1997.
For the year ended December 31,
===================================================
1997 1996 1995
===================================================
Weighted average shares of common stock outstanding 3,244,500 3,748,353 4,150,560
Dilutive effects of assumed stock option exercises 243,561 207,546 201,941
Weighted average shares of common stock and
common stock equivalents 3,488,061 3,955,899 4,352,501
EARNINGS PER SHARE:
Net income available to common shareholders $ 7,987 $ 5,399 $ 5,965
Basic earnings per share $ 2.46 $ 1.44 $ 1.44
EARNINGS PER SHARE ASSUMING DILUTION:
Net income available to common shareholders $ 7,987 $ 5,399 $ 5,965
Diluted earnings per share $2.29 $ 1.36 $ 1.37
RECLASSIFICATION
Certain items in the 1995 and 1996 financial statements have been reclassified
to conform to the 1997 presentation.
2. SECURITIES
Securities at December 31, 1997 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
=================================================================================
AVAILABLE-FOR-SALE
U.S. Government and agency securities $29,504 $ 468 $ - $29,972
U.S. Government securities fund 6,957 - - 6,957
Money market fund 3,697 - - 3,697
Equity securities 4,739 1,604 2 6,341
---------------------------------------------------------------------------------
Total $44,897 $ 2,072 $ 2 $46,967
=================================================================================
HELD-TO-MATURITY
FHLMC/FNMA mortgage securities $13,795 $ 44 $ 199 $13,640
CMO securities 1,709 - 7 1,702
Municipal bonds 140 - - 140
Federal Home Loan Bank stock 3,124 - - 3,124
---------------------------------------------------------------------------------
Total $18,768 $ 44 206 $18,606
=================================================================================
36
37
Securities at December 31, 1996 are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
=================================================================================
AVAILABLE-FOR-SALE
U.S. Government and agency securities $10,962 $ 83 $ 59 $10,986
U.S. Government securities fund 16,975 - 564 16,411
Money market fund 888 - - 888
ARM securities fund 5,222 - 35 5,187
REMIC securities 11,628 - 108 11,520
Municipal bonds 861 - - 861
Equity securities 10,438 1,109 38 11,509
---------------------------------------------------------------------------------
Total $56,974 $ 1,192 $ 804 $57,362
=================================================================================
HELD-TO-MATURITY
U.S. Government and agency securities $ 5,000 $ - $ 3 $ 4,997
FHLMC/FNMA mortgage securities 17,209 45 627 16,627
CMO securities 2,406 - 10 2,396
Municipal bonds 145 - - 145
Federal Home Loan Bank stock 3,210 - - 3,210
---------------------------------------------------------------------------------
Total $27,970 $ 45 $ 640 $27,375
=================================================================================
Securities with carrying amounts of $6.0 million and $7.3 million at December
31, 1997 and 1996, respectively, are pledged under credit enhancement
agreements.
The amortized cost and fair value of debt securities available-for-sale and
held-to-maturity at December 31, 1997, by contractual maturity are shown below.
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Fair
Cost Value
==============================
AVAILABLE-FOR-SALE
Due in one year or less $ 3,106 $ 3,106
Due after one year through five years 16,504 16,613
Due after five years through ten years 6,932 7,197
Due after ten years 2,962 3,056
------------------------------
29,504 29,972
Equity securities 4,739 6,341
Mutual funds 10,654 10,654
------------------------------
Total $44,897 $46,967
==============================
HELD-TO-MATURITY
Due after five years through ten years $ 573 $ 584
Due after ten years 15,071 14,898
------------------------------
15,644 15,482
Federal Home Loan Bank stock 3,124 3,124
------------------------------
$18,768 $18,606
==============================
37
38
The table below provides information concerning sales of securities
available-for-sale.
For the year ended December 31,
=============================================
1997 1996 1995
=============================================
Gross proceeds from sales $53,883 $35,075 $15,572
Gross realized gains 484 68 137
Gross realized losses (including impairment) 714 15 220
Income tax expense (credit) arising from net gains (losses) (78) 19 (29)
3. LOANS RECEIVABLE
Loans receivable consisted of the following:
At December 31,
===========================
1997 1996
===========================
Mortgage loans: $209,999 $207,697
One-to-four family residential 40,933 47,510
Multifamily residential 97,186 97,093
Commercial real estate 27,645 27,442
Construction loans 12,207 13,760
Land loans 387,970 393,502
Total mortgage loans 4,920 2,184
Other loans 392,890 395,686
Total loans receivable 7,820 6,386
Less: Undisbursed portion of loan proceeds 2,012 2,470
Unearned income 6,070 5,630
Allowance for losses on loans $376,988 $381,200
Net loans receivable
The Company has pledged residential mortgage loans as collateral to borrowings
from the Federal Home Loan Bank of Chicago in an amount not less than 170% of
outstanding advances and letters of credit.
The Company's lending activities have been concentrated primarily in
residential real property secured by first liens on such property. The Company
requires collateral on all loans and generally maintains loan-to-value ratios
of no greater than 80% on mortgage loans. At December 31, 1997, the Company's
mortgage loan portfolio was geographically diversified, with concentrations
primarily in Illinois (33%), Colorado (24%), Idaho (21%), and New Mexico (15%).
Mortgage loans in Indiana and Michigan, all within the company's immediate
lending area, represent another 4% of the portfolio at December 31, 1997. At
December 31, 1996, these concentrations were: Illinois (35%); Colorado (26%);
Idaho (19%); New Mexico (14%); and Indiana/Michigan (3%).
4. ALLOWANCE FOR LOSSES ON LOANS
Changes in the allowance for losses on loans are as follows:
For the year ended December 31,
=======================================
1997 1996 1995
=======================================
Balance at beginning of year $5,630 $4,870 $4,870
Provision for losses 700 800 800
Charge-offs (323) (114) (474)
Recoveries 63 74 115
---------------------------------------
Balance at end of year $6,070 $5,630 $4,870
=======================================
38
39
At December 31, 1997, the Company had two related loans that were considered
impaired with a recorded investment of $1.1 million. These loans have been
placed in nonaccrual status. One of the loans has been fully reserved in the
amount of $350, the other does not have a specific reserve. The average
recorded investment in impaired loans during the year ended December 31, 1997,
was approximately $1.1 million. For the year ended December 31, 1997, the
Company recognized interest income (using the cash basis method of income
recognition) on those impaired loans of $92. These same two loans were
considered impaired at December 31, 1996. The average recorded investment in
impaired loans during the year ended December 31, 1996, was approximately $654.
For the year ended December 31, 1996, the Company recognized interest income
on those impaired loans of $98.
5. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows: At December 31,
===========================
1997 1996
===========================
Land $939 $936
Buildings 4,485 4,190
Furniture and equipment 3,364 3,218
---------------------------
8,788 8,344
Less accumulated depreciation 4,320 4,024
---------------------------
Office properties and equipment, net $4,468 $4,320
===========================
6. DEPOSITS
Deposits are summarized as follows: At December 31,
=============================
1997 1996
=============================
Non-interest-bearing deposits $ 3,766 $ 2,495
N.O.W. accounts 18,565 18,297
Money market accounts 8,436 7,551
Passbook savings 60,714 64,677
Certificates of deposit 256,980 264,310
-----------------------------
$348,461 $357,330
=============================
Deposit accounts with balances in excess of $100,000 $ 23,112 $ 24,452
=============================
Scheduled maturities of certificates of deposit at December 31, 1997 are as
follows:
Maturity dates
--------------
1998 $214,050
1999 23,739
2000 12,925
2001 2,218
2002 3,172
After 2002 876
--------
Total $256,980
========
Substantially all of the Association's depositors are residents of the State of
Illinois.
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7. FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances consist of the following:
At December 31,
====================
Maturity Dates 1997 1996
-------------- ====================
1997 $ - $30,675
1998 19,000 16,000
1999 19,985 12,000
2002 4,900 -
2003 1,175 1,175
--------------------
Total $45,060 $59,850
====================
Federal Home Loan Bank advances all have fixed rates of interest at December
31, 1997. At December 31, 1997, the interest rates on fixed rate advances
ranged from 5.90% to 6.51%, with a weighted average rate of 6.10%. At December
31, 1996, the interest rates on fixed rate advances ranged from 5.25% to 8.14%,
with a weighted average rate of 6.14%. The Company also borrowed $4.0 million
of overnight advances at December 31, 1996, which have a daily floating rate.
The Company is required to maintain qualifying loans in its portfolio of at
least 170% of outstanding advances and letters of credit as collateral to notes
payable to the Federal Home Loan Bank of Chicago (FHLB). FHLB stock is also
pledged as collateral.
8. INCOME TAXES
The provision for income taxes consists of the following:
For the year ended December 31
===========================================
1997 1996 1995
===========================================
Current expense:
Federal $3,101 $2,771 $1,954
State 325 264 303
Deferred expense (benefit) 562 (608) 603
-------------------------------------------
Total income tax expense $3,988 $2,427 $2,860
===========================================
Reconciliations of the income tax expense included in the consolidated
financial statements and amounts computed by applying the statutory federal
income tax rate are as follows:
For the year ended December 31
===========================================
1997 1996 1995
===========================================
Federal income taxes at the statutory
rate $4,072 $2,661 $3,001
Items affecting federal income tax
rate:
State income taxes 365 152 206
Dividends received deduction (142) (176) (137)
Low income housing tax credits (222) (218) -
Other, net (85) 8 (210)
-------------------------------------------
Total $3,988 $2,427 $2,860
===========================================
40
41
Significant components of the deferred tax assets and liabilities are as
follows:
At December 31,
===========================
1997 1996
===========================
Deferred tax assets:
Loan fees $ - $ 49
Allowance for losses on loans 1,866 1,846
---------------------------
1,866 1,895
---------------------------
Deferred tax liabilities:
Depreciation 346 378
Stock dividends on FHLB stock 91 104
Loan fees 144 556
Tax effect of tax bad debt reserves in excess of base year 419 -
Net unrealized gains on securities available-for-sale 767 149
Income from limited partnerships 871 296
Other, net 12 16
---------------------------
2,650 1,499
---------------------------
Net deferred tax asset (liability) $(784) $ 396
===========================
The net deferred tax (liability) asset is included in (income taxes payable)
other assets on the Consolidated Statements of Financial Condition in 1997 and
1996, respectively. Retained earnings at December 31, 1997 includes
approximately $6.7 million for which no provision for federal income taxes has
been recognized. Tax legislation passed in August 1996 now requires all thrift
institutions to deduct a provision for bad debts for tax purposes based on
actual loss experience and recapture the excess bad debt reserve accumulated in
the tax years after 1986. The Company recaptured $254 in 1997 and will
recapture a like amount for the next five years.
9. REGULATORY MATTERS
The Association is subject to regulatory capital requirements administered by
federal regulatory agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
41
42
At December 31, actual capital levels and minimum required levels of the
Association were:
Minimum Required To
Be Well Capitalized
Minimum Required for Under Prompt
Actual Capital Adequacy Corrective Action
==================================================================================
Amount Ratio Amount Ratio Amount Ratio
==================================================================================
1997
- --------------------
Total capital (to risk-weighted assets) $ 52,176 17.4% $ 24,022 8.0% $ 30,027 10.0%
Tier 1 (core) capital (to risk-weighted assets) $ 48,399 16.1% $ 12,011 4.0% $ 18,016 6.0%
Tier 1 (core) capital (to average assets) $ 48,399 10.5% $ 18,463 4.0% $ 23,079 5.0%
Tier 1 (core) capital (to adjusted total assets) $ 48,399 10.7% $ 13,583 3.0% N/A
Tangible capital (to adjusted total assets) $ 48,399 10.7% $ 6,792 1.5% N/A
1996
- --------------------
Total capital (to risk-weighted assets) $ 51,365 16.6% $ 24,765 8.0% $ 30,956 10.0%
Tier 1 (core) capital (to risk-weighted assets) $ 47,481 15.3% $ 12,382 4.0% $ 18,573 6.0%
Tier 1 (core) capital (to average assets) $ 47,481 9.9% $ 19,110 4.0% $ 23,888 5.0%
Tier 1 (core) capital (to adjusted total assets) $ 47,481 9.9% $ 14,325 3.0% N/A
Tangible capital (to adjusted total assets) $ 47,481 9.9% $ 7,162 1.5% N/A
Dividends paid during the year by the Association to the Company are restricted
to one half of excess capital as of the end of the prior year plus current
earnings. At December 31, 1997, this restriction limited the potential dividend
to $11.1 million. The Association paid $6.0 million , $9.0 million, and $6.0
million in dividends to the Company during 1997, 1996, and 1995, respectively.
As of December 31, 1997, the most recent notification from the Office of Thrift
Supervision categorized the association as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
Association's category.
The Association meets the Qualified Thrift Lender test, which requires at least
65% of assets to be housing-related or other specified assets. A failure to
meet the QTL test places limits on growth, branching, new investment, FHLB
advances and dividends.
10. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) profit-sharing plan which covers all employees
with one year of service who are at least 21 years of age. Contributions to
the 401(k) profit-sharing plan are made at the discretion of the Board of
Directors. There were no contributions to the plan in 1997, 1996 or 1995.
The Company sponsors an employee stock ownership plan (ESOP) that covers all
employees with one year of service who are at least 21 years of age. The ESOP
is funded by discretionary contributions made by the Association. At December
31, 1997, there were 84,870 (split adjusted) shares committed to be released
for 1997, and 42,435 (split adjusted) unallocated shares. The fair value of
unallocated ESOP shares at December 31, 1997, was $1.4 million. The
Association recorded $566, $565 and $566 of compensation expense during 1997,
1996 and 1995, respectively, based on the cost of shares released for those
years. Unearned ESOP shares are considered to be outstanding for purposes of
computing earnings per share. The average (split adjusted) unearned ESOP
shares outstanding during 1997, 1996, and 1995 were 84,870, 169,740 and
257,262, respectively.
In connection with the conversion to stock ownership, the Company adopted a
Management Recognition and Retention Plan (MRP). The Association contributed
$1.4 million allowing the MRP to acquire 187,425 (split adjusted) shares of
common stock of the Company, at an average cost of $7.55 per share. Under the
MRP, 133,074 (split adjusted) shares of common stock were awarded to key
employees in 1992. One third of these shares vested in 1992, 1993, and 1994 at
an amortized cost of $335 each year. The remaining 54,351 (split adjusted)
shares were awarded in 1995 and vested in 1995, 1996, and 1997. The amortized
cost of the vested shares was $137, $136 and $137 in 1997, 1996 and 1995,
respectively.
42
43
The Company has a stock option plan under the terms of which 530,438 (split
adjusted) shares of the Company's common stock were reserved for issuance. The
options become exercisable on a cumulative basis in equal installments over a
five year period from the date of grant. The options expire ten years from the
date of grant.
A summary of the status of the Company's stock option plan as of December 31,
1997, 1996, and 1995, and changes during the years then ended is presented
below. Share and per share data has been adjusted for the 1997 three-for-two
split:
Weighted- Weighted- Weighted-
average average average
1997 Exercise 1996 Exercise 1995 Exercise
Shares Price Shares Price Shares Price
========================================================================
Outstanding at beginning of year 412,146 $7.61 434,600 $ 7.59 395,166 $ 6.67
Granted - - 48,813 14.92
Exercised (2,624) 7.33 (22,454) 7.35 (8,319) 6.77
Forfeited - - - - (1,060) -
------------------------------------------------------------------------
Outstanding at end of year 409,522 $7.61 412,146 $7.61 434,600 $ 7.59
========================================================================
Options exercisable at end of year 390,741 $7.25 383,976 $7.07 301,028 $ 6.93
Weighted-average fair value
of options granted during year - - - - 48,813 $ 7.14
Of the outstanding options at December 31, 1997, 362,891 relate to options
granted in 1992 at an exercise price of $6.67 and having a remaining life of
4.1 years before expiration. All of these options are fully vested and
exercisable. The remaining 46,631 options outstanding at December 31, 1997,
relate to those granted in 1995 at an exercise price of $14.92 and have a
remaining life of 7.1 years before expiration. These options vest in equal
installments over a five year period from the date of grant and were 60% vested
at December 31, 1997. Of these options, 27,850 were exercisable at December
31, 1997. The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has
been recognized at the date of grant. If the stock options granted in 1995 had
been valued under SFAS No. 123 "Accounting for Stock-Based Compensation," at
their fair value at the date of grant, those options would have been valued at
$7.14 per share and resulted in an annual cost of $70 for 1995 through 1999.
Had compensation cost been determined based on the fair value at the grant
dates for awards under the stock option plan in 1995, the Company's net income
and earnings per share would have been reduced to the proforma amounts in the
table below. For purposes of proforma disclosure, the estimated fair value of
the stock options awarded is amortized to expense over their respective vesting
periods.
For the year ended December 31,
==============================================
1997 1996 1995
==============================================
Proforma net income $7,940 $5,349 $5,915
Proforma basic earnings per share $ 2.45 $ 1.43 $ 1.43
Proforma diluted earnings per share $ 2.27 $ 1.35 $ 1.36
The fair value of options granted in 1995 was estimated at the date of grant
using a Black-Scholes option pricing model using the following assumptions:
dividend yield of 0%; expected volatility factor of the expected market price
of the Company's common stock of 0.22; risk-free interest rate of 7.98%; and
expected option term of 7 years.
The Black-Scholes option pricing valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily
43
44
provide a reliable single measure of the fair value of its employee stock
options. The current year proforma amounts may not be indicative of future
amounts if additional stock options are granted.
11. COMMITMENTS AND CONTINGENCIES
The Company had outstanding commitments as follows:
At December 31,
=============================
1997 1996
=============================
Residential property loans $7,682 $4,088
Nonresidential property loans 491 1,634
Credit enhancements 9,225 6,279
Lines of credit 10,669 19,447
Letters of credit 1,491 1,425
Residential property investment 1,349 1,693
At December 31, 1997, the Company's residential property loan commitments
included approximately $5.3 million of adjustable rate mortgages and $2.9
million of fixed rate mortgages. Interest rates on the fixed rate commitments
ranged from 6.75% to 9.50%. The Company's residential loan commitments include
$97 of commitments as a result of its mortgage banking activities. These loans
will be sold to third-party investors under existing investor commitments to
purchase. The nonresidential property loan commitments included $383 of
adjustable rate mortgages and $108 of fixed rate mortgages. The fixed rate
commitments ranged from 9.50% to 10.00%.
The Company has entered into two credit enhancement agreements with local
municipalities to guarantee the repayment of an aggregate of $6.1 million of
municipal revenue bonds which are secured by first mortgages on an apartment
and on a commercial office building project. To secure its guaranty of the
bonds, the Company has agreed to pledge and deposit with the designated
trustees certain securities or has provided an irrevocable standby letter of
credit from the FHLB as security. In the event of default on the bonds, the
Company's maximum liability is the amount of the credit guaranty. Fees for
providing these credit enhancements were $78, $67, and $84 for the years ended
December 31, 1997, 1996 and 1995, respectively.
The Company has committed to invest $2.0 million in low income housing projects
located in the Chicago area. The investment is being made through a limited
partnership and will be funded over a ten year period. At December 31, 1997,
the Company has funded $651 of the $2.0 million commitment. The projects
qualify for the low income housing income tax credit.
The Company and its subsidiaries are involved in litigation arising in the
ordinary course of business. The resolution of these matters is not expected,
either individually or in the aggregate, to have a material effect on the
Company's financial condition or results of operations.
12. STOCKHOLDERS' EQUITY
In connection with its conversion to stock ownership, the Company established a
liquidation account in the amount of $36.6 million for the benefit of eligible
account holders who continue to maintain their accounts at the Company after
the conversion. The liquidation account is reduced annually to the extent that
eligible account holders have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each account
holder would be entitled to receive a distribution from the liquidation account
in an amount proportionate to the current adjusted qualifying balances for
accounts then held.
The Company may not declare or pay cash dividends on or repurchase any of its
shares of common stock if the effect thereof would cause stockholders' equity
to be reduced below the balance of the liquidation account or if such
declaration would otherwise violate regulatory requirements.
On October 21, 1997, the Board of Directors of the Company declared a
three-for-two common stock split in the form of a 50% common stock dividend to
stockholders of record on November 3, 1997. The share amounts shown in the
consolidated statements of stockholders' equity reflect actual share amounts
for each period. A total of 1,055,451
44
45
previously acquired treasury shares were used in the distribution. During
1997, the Company repurchased 426,597 (split adjusted) shares of its common
stock at an average cost of $23.50 per share. During 1996, the Company
repurchased 466,229 (split adjusted) shares of its common stock at an average
cost of $18.63 per share. The Company has 3,141,497 shares of common stock
outstanding at December 31, 1997, with a book value of $25.98 per share.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosures about Fair Values of Financial Instruments" requires
disclosures of information about the fair value of financial instruments for
which it is practicable to estimate a value, whether or not such value is
recognized in the consolidated statements of financial condition.
The carrying value and the estimated fair value of financial instruments are as
follows:
At December 31, 1997 At December 31, 1996
==================================================================
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
==================================================================
Assets
Cash and cash equivalents $ 8,283 $ 8,283 $ 9,175 $ 9,175
Securities available-for-sale 46,967 46,967 57,362 57,362
Securities held-to-maturity 18,768 18,606 27,970 27,375
Loans receivable 376,988 385,847 381,200 384,757
Liabilities
Demand, NOW and savings deposits $ 91,481 $ 91,481 $ 93,020 $ 93,020
Certificates of deposit (time deposits) 256,980 258,988 264,310 265,761
FHLB advances 45,060 45,032 59,850 59,760
Whenever possible, quoted market prices are used to develop fair values. Where
quoted market prices are not available, market prices of similar instruments
are used for reference and to develop indices of estimated fair value. In
other cases, it is necessary to use present values or other valuation
techniques. Fair values derived can be significantly affected by the
assumptions used, including the similarity of other instruments, discount
rates, and estimates of future cash flows. Therefore, in many cases, the
estimated fair values may not be realized in an immediate sale of the
instrument. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Therefore, the
aggregate of the estimated fair value amounts is not intended to represent the
underlying market value of the Company.
General methods utilized to estimate fair values are summarized below:
Cash and cash equivalents: The carrying amounts shown approximate fair value.
Securities: Quoted market values were used to estimate fair values. FHLB
stock is carried at its redemption value.
Loans receivable: The fair value of fixed rate mortgage loans was estimated by
discounting projected cash flows at market interest rates. The fair value of
adjustable rate mortgage loans was estimated by using carrying amounts for
loans repricing within one year and by discounting projected cash flows at
market interest rates for loans repricing beyond one year. The fair value of
commercial and consumer loans was estimated by discounting projected cash flows
at market interest rates.
Demand, NOW, and savings deposits. All such account balances are withdrawable
on demand without penalty; therefore, for purposes of SFAS No. 107, the
carrying amount is deemed to be fair value.
Certificates of deposit (time deposits): The fair value of time deposit
accounts which have fixed rates of interest was estimated using a discounted
cash flow calculation and current interest rates for similar accounts with the
same remaining term to maturity. The Company does not have any material,
variable rate time deposits
FHLB advances: The fair value of fixed rate FHLB advances was estimated using
a discounted cash flow calculation and current interest rates for advances with
the same remaining term to maturity. The carrying amounts of variable rate
advances and accrued interest on advances approximates fair value.
45
46
Commitments: The fair value of commitments to extend credit and standby
letters of credit is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed rate loan
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of these commitments is
not material.
14. CONDENSED PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed statements of financial condition, income, and cash flows for Calumet
Bancorp, Inc. (parent company only) are presented below and should be read in
connection with the consolidated financial statements and notes thereto.
AT DECEMBER 31,
=====================
1997 1996
STATEMENTS OF FINANCIAL CONDITION =====================
ASSETS
Cash and cash equivalents $ 29 $ 138
Securities available-for-sale 10,038 9,367
Loan receivable from ESOP 283 849
Loan receivable from Association - 2,000
Equity in net assets of Association 54,082 52,682
Investment in limited partnerships 18,390 17,393
Real estate held for sale - 147
Other assets 354 89
---------------------
TOTAL ASSETS $83,176 $82,665
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities $ 1,562 $ 901
Common Stock 36 36
Additional paid-in-capital 35,217 35,090
Net unrealized gains on securities available-for-sale,
including unrealized losses of the Association of
$297 in 1997 and $414 in 1996 1,303 239
Retained earnings 56,786 73,817
Unearned ESOP shares (283) (849)
Stock held for management recognition plan - (137)
Treasury stock (11,445) (26,432)
---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $83,176 $82,665
=====================
FOR THE YEAR ENDED DECEMBER 31,
=========================================
1997 1996 1995
STATEMENTS OF INCOME =========================================
Dividends received from the Association $6,000 $9,000 $ -
Interest and dividend income 621 886 1,083
Interest expense (58) - -
Gain on sale of real estate 19 70 -
Gain on sale of securities available-for-sale 454 68 137
Income (loss) from limited partnerships 2,638 613 (207)
Equity in undistributed (overdistributed) earnings
of Association (33) (4,358) 5,675
-----------------------------------------
Total income 9,641 6,279 6,688
General and administrative expenses 635 612 701
-----------------------------------------
Income before income taxes 9,006 5,667 5,987
Income tax expense 1,019 268 22
-----------------------------------------
NET INCOME $7,987 $5,399 $5,965
=========================================
46
47
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
STATEMENTS OF CASH FLOWS 1997 1996 1995
--------------------------------
OPERATING ACTIVITIES:
Net income $ 7,987 $ 5,399 $ 5,965
Equity in (undistributed) overdistributed
earnings of Association 33 4,358 (5,675)
Gain on sale of real estate (19) (70) -
Gain on sales of securities (454) (68) (137)
Equity (income) loss from limited partnerships (2,638) (613) 207
Decrease (increase) in other assets (265) 269 (306)
Increase (decrease) in other liabilities 540 (12) 595
--------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,184 9,263 649
INVESTING ACTIVITIES:
Purchase of securities (21,951) (23,883) (7,086)
Proceeds of sales and maturities of securities 22,296 27,076 12,046
Loans originated - (7,000) -
Principal payments on loans receivable 2,566 5,565 566
Investments in limited partnerships (1,250) (5,000) (3,100)
Return of investment in limited partnerships 2,891 1,288 357
Proceeds from sale of real estate 166 1,123 -
--------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 4,718 (831) 2,783
FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 16 165 57
Proceeds from conversion litigation settlement - - 52
Purchase of treasury stock (10,027) (8,687) (3,391)
--------------------------------
NET CASH USED IN FINANCING ACTIVITIES (10,011) (8,522) (3,282)
--------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (109) (90) 150
Cash and cash equivalents at beginning of year 138 228 78
--------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 29 $ 138 $ 228
================================
47
48
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
For the year ended December 31 1997 For the year ended December 31, 1996
------------------------------------------------------------------------------------------------
Three months ended Three months ended
-----------------------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-----------------------------------------------------------------------------------------------
Interest income $9,756 $9,776 $9,757 $9,711 $9,917 $9,717 $9,616 $9,669
Interest expense 5,231 5,279 5,330 5,187 5,259 5,218 5,227 5,350
-----------------------------------------------------------------------------------------------
Net interest income 4,525 4,497 4,427 4,524 4,658 4,499 4,389 4,319
Provision for losses
on loans 200 200 200 100 200 200 200 200
-----------------------------------------------------------------------------------------------
Net interest income
after provision for
losses on loans 4,325 4,297 4,227 4,424 4,458 4,299 4,189 4,119
Gains (losses) on
sales of securities 31 69 (59) (271) 20 - (15) 48
Other income (1) 984 951 555 1,978 814 816 656 653
SAIF assessment(2) - - - - - - 2,316 -
Other expenses 2,748 2,185 2,247 2,356 2,854 2,351 2,356 2,354
-----------------------------------------------------------------------------------------------
Income before income
taxes 2,592 3,132 2,476 3,775 2,438 2,764 158 2,466
Income taxes 821 1,067 800 1,300 849 850 (49) 777
-----------------------------------------------------------------------------------------------
Net income $1,771 $2,065 $1,676 $2,475 $1,589 $1,914 $ 207 $1,689
===============================================================================================
Basic earnings per share $ 0.52 $ 0.64 $ 0.53 $ 0.78 $ 0.40 $ 0.50 $0.06 $ 0.47
===============================================================================================
Diluted earnings per share $ 0.48 $ 0.60 $ 0.49 $ 0.72 $ 0.38 $ 0.47 $ 0.05 $ 0.45
===============================================================================================
Reported stock prices
High $24.83 $26.50 $31.58 $34.63 $19.00 $19.00 $19.17 $22.67
Low 21.67 22.83 24.83 31.00 18.33 18.33 18.50 18.83
Close 23.75 25.33 30.83 33.25 18.50 18.67 18.92 22.17
Stock prices and per share data have been restated for the November 17,
1997, three-for-two stock split.
(1) Other income for the fourth quarter of 1997 includes a gain of $1.2
million for the sale of a limited partnership investment.
(2) On September 30, 1996, President Clinton signed legislation which
provided for a special assessment by the FDIC to recapitalize the
SAIF. The Company paid a $2.3 million special assessment as a result
of this legislation.
48
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The information contained on pages 4 through 7 of Calumet Bancorp, Inc.'s Proxy
Statement dated March 26, 1998 with respect to directors and executive officers
of the Registrant is incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained on pages 7 through 13 of Calumet Bancorp, Inc.'s
Proxy Statement dated March 26, 1998 with respect to executive compensation is
incorporated herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on pages 3 through 5 of Calumet Bancorp, Inc.'s Proxy
Statement dated March 26, 1998 with respect to security ownership of certain
beneficial owners and management is incorporated herein by reference in
response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on page 16 of Calumet Bancorp, Inc.'s Proxy Statement
dated March 26, 1998 with respect to certain relationships and related
transactions is incorporated herein by reference in response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) Financial Statements
The following consolidated financial statements of the registrant and its
subsidiaries are filed as a part of this document under Item 8. Financial
Statements and Supplementary Data.
Consolidated Statements of Financial Condition at December 31, 1997 and
1996
Consolidated Statements of Income for the years ended December 31, 1997,
1996,and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995
Notes to Consolidated Financial Statements
Report of Independent Auditor at December 31, 1997, and for the two years
then ended
(a)(2) All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or the required information has been
included elsewhere herein, and therefore have been ommitted.
(a)(3) Listing of Exhibits
(3)(i) and (ii) The registrant hereby incorporates by reference its Articles of
Incorporation and By-Laws as exhibits to its registration statement on form
S-1, which was filed with the Securities and Exchange Commission.
(21) Subsidiaries of the Registrant
(23) Consent of Independent Auditors
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50
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized.
CALUMET BANCORP, INC.
Date: March 26, 1998 By: /s/ Thaddeus Walczak
--------------------------------------
Thaddeus Walczak
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Carole J. Lewis By: /s/ Thaddeus Walczak
-------------------------- -------------------------------
Carole J. Lewis Thaddeus Walczak
President, Chief Operating Chairman of the Board and
Officer and Director Chief Executive Officer
Date: March 26, 1998 Date: March 26, 1998
By: /s/ John L. Garlanger By: /s/ William A. McCann
-------------------------- -------------------------------
John L. Garlanger William A. McCann
Senior Vice President and Director
Treasurer Date: March 26, 1998
(Principal Financial and
Accounting Officer)
Date: March 26, 1998
By: /s/ Dr. Henry J. Urban By: /s/ Tytus R. Bulicz
-------------------------- -------------------------------
Dr. Henry J. Urban Tytus R. Bulicz
Director Director
Date: March 26, 1998 Date: March 26, 1998
By: /s/ Louise Czarobski By: /s/ Darryl Erlandson
-------------------------- -------------------------------
Louise Czarobski Darryl Erlandson
Director Director
Date: March 26, 1998 Date: March 26, 1998
50