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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
Commission file number 0-25484
DAMEN FINANCIAL CORPORATION
(Exact Name of Issuer as Specified in its Charter)
Delaware 36-4029638
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 West Higgins Road, Schaumburg, Illinois 60195
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (847) 882-5320
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
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the Issuer was required to file such reports), and (2)
has been subject to such requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of Issuer'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 December 12, 1997, there were issued and outstanding 3,119,187
shares of the Issuer's Common Stock. The aggregate market value of the voting
stock held by non-affiliates of the Issuer, computed by reference to the closing
price of such stock on the Nasdaq National Market as of December 12, 1997 was
approximately $43,447,422. (The exclusion from such amount of the market value
of the shares owned by any person shall not be deemed an admission by the Issuer
that such person is an affiliate of the Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
PART II of Form 10-K--Annual Report to Stockholders for the fiscal year ended
September 30, 1997.
PART III of Form 10-K--Proxy Statement for the Annual Meeting of Stockholders to
be held in 1998 for the fiscal year ended September 30, 1997.
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PART I
Item 1. Business
General
Damen Financial Corporation, a Delaware corporation ("DFC" or the
"Company"), was formed in 1995 at the direction of Damen Federal Savings Bank
(the "Savings Bank") for the purpose of becoming a savings and loan holding
company and owning all of the outstanding stock of the Savings Bank issued on
September 29, 1995 in connection with the Savings Bank's conversion from the
mutual to stock form of organization (the "Conversion"). The Company issued
3,967,500 shares of Common Stock at $10.00 per share in the Conversion. On
February 27, 1997, the Savings Bank converted from a federal savings association
to a national bank (the "Bank Conversion"), and in connection therewith changed
its name to Damen National Bank ("Damen" or the "Bank"). Upon consummation of
the Bank Conversion, the Company de- registered as a savings and loan holding
company and registered as a bank holding company.
At September 30, 1997, the Company had total assets of $231.1 million,
deposits of $125.7 million and stockholders' equity of $45.9 million. The
Company's Common Stock is quoted on the Nasdaq National Market System under the
symbol "DFIN." Unless the context otherwise requires, all references herein to
the Bank or the Company include the Company and the Bank on a consolidated
basis.
The Bank was originally chartered in 1916 to service a primarily Slovak
community on Chicago's South Side and became a federal savings bank in 1990. The
Company serves the financial needs of communities in its market area through its
main office located in Schaumburg, Illinois and two branch offices located in
Chicago and Burbank, Illinois.
The Company's business involves attracting deposits from the general
public and using such deposits, together with other funds, to originate one- to
four-family residential mortgage loans and, to a much lesser extent,
multi-family, commercial real estate and consumer loans primarily in its market
area. See " - Lending Activities." At September 30, 1997, $79.6 million, or
80.24% of the Damen's total loan portfolio consisted of residential one- to
four-family mortgage loans.
The Company also invests in mortgage-backed and related securities and
investment securities and other permissible investments. See " - Investment
Securities" and " - Mortgage- Backed and Related Securities."
The executive offices of the Company and the Bank are located at 200
West Higgins Road, Schaumburg, Illinois 60195-3788, and the telephone number at
that address is (847) 882-5320.
2
Forward-Looking Statements
When used in this Form 10-K and in future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, and in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including, among other things, changes in economic conditions in the Company's
market area, changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in the Company's market area and competition,
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advise readers that
the factors listed above could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any
current statements.
The Company does not undertake--and specifically declines any
obligation--to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Lending Activities
General. With the exception of a loan from the Company to its Employee
Stock Ownership Plan, all of the Company's consolidated lending activities are
conducted through the Bank. The principal lending activity of the Bank is
originating for its portfolio primarily fixed-rate mortgage loans secured by
one- to four-family residences located primarily in Damen's market area. In
addition, in order to provide more comprehensive financial services in its
market area, the Bank also originates a limited amount of multi-family,
commercial real estate and consumer loans, primarily in its market area. See " -
Originations, Purchases and Sales of Loans and Mortgage-Backed and Related
Securities." At September 30, 1997, the Bank's total loans receivable, net,
totaled $97.2 million.
Damen's President and Senior Vice President have the authority to
approve owner occupied, one- to four-family residential mortgage loans which
satisfy the following criteria: (i) the applicant and the property fall within
Damen's loan underwriting guidelines; (ii) the borrower is salaried; (iii) the
mortgage's loan-to-value ratio does not exceed 80%; and (iv) the mortgage amount
does not exceed $200,000. All other loan applications are considered by Damen's
Loan Committee and those loans which satisfy the Bank's lending policies are
submitted to the Bank's Board of Directors for ratification.
Under Damen's loan policy, the loan officer processing an application
is responsible for ensuring that all documentation is obtained prior to the
submission of the application to the Loan
3
Committee. In addition, the loan officer verifies that the application meets the
underwriting guidelines described below.
All of the Bank's lending is subject to its written underwriting
standards and to loan origination procedures. Decisions on loan applications are
made on the basis of detailed applications and property valuations (consistent
with the Bank's appraisal policy). The loan applications are designed primarily
to determine the borrower's ability to repay and the more significant items on
the application are verified through use of credit reports, financial
statements, tax returns or confirmations.
The Bank requires title insurance on its mortgage loans as well as fire
and extended coverage casualty insurance in amounts at least equal to the
principal amount of the loan or the value of improvements on the property,
depending on the type of loan. The Bank also requires flood insurance to protect
the property securing its interest when the property is located in a flood
plain.
4
Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Bank's loan portfolios in dollar amounts and
in percentages (before deductions for loans in process, deferred fees and
discounts and allowances for losses) as of the dates indicated.
September 30,
---------------------------------------------------------------------------------
1997 1996 1995
--------------------- -------------------------- --------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family........... $79,586 80.24% $77,725 83.09% $75,471 83.56%
Multi-family.................. 12,237 12.34 12,239 13.08 12,060 13.35
Commercial.................... 4,573 4.61 3,317 3.55 2,598 2.88
Construction.................. 529 .53 --- --- --- ---
-------- -------- ---------- -------- -------- --------
Total real estate loans...... 96,925 97.72% 93,281 99.72% 90,129 99.79%
------- ------ -------- ------ ------- ------
Other Loans:
Consumer Loans:
Secured lines of credit...... 2,010 2.03 --- --- --- ---
Deposit account.............. 227 .23 260 .28 188 .21
Other........................ 24 .02 --- --- --- ---
--------- ------- ---------- -------- -------- -------
Total consumer loans......... 2,261 2.28% 260 .28% 188 .21%
-------- ------- -------- ------- ------- ------
Total loans.................. 99,186 100.00% 93,541 100.00% 90,317 100.00%
====== ====== ======
Less:
Loans in process.............. 338 466 792
Deferred fees and discounts... 1,272 1,584 1,694
Allowance for losses.......... 332 345 275
--------- -------- -------
Total loans receivable, net.. $97,244 $91,146 $87,556
======= ======= =======
November 30,
----------------------------------------------
1994 1993
---------------------- ----------------------
Amount Percent Amount Percent
(Dollars in Thousands)
Real Estate Loans:
One- to four-family........... $76,736 84.71% $77,460 86.41%
Multi-family.................. 11,218 12.38 10,171 11.34
Commercial.................... 2,473 2.73 1,802 2.01
Construction.................. --- --- --- ---
-------- ------- --------- -------
Total real estate loans...... 90,427 99.82% 89,433 99.76%
------- ----- ------- -----
Other Loans:
Consumer Loans:
Secured lines of credit...... --- --- --- ---
Deposit account.............. 167 .18 219 .24
Other........................ --- --- --- ---
-------- -------- --------- --------
Total consumer loans......... 167 .18% 219 .24%
-------- ------- -------- -------
Total loans.................. 90,594 100.00% 89,652 100.00%
====== ======
Less:
Loans in process.............. 527 3,007
Deferred fees and discounts... 1,717 1,706
Allowance for losses.......... 125 125
-------- --------
Total loans receivable, net.. $88,225 $84,814
======= =======
5
The following table shows the composition of the Bank's loan portfolios
by fixed- and adjustable-rate at the dates indicated.
September 30, November 30,
------------------------------------------------------------ --------------------------------------
1997 1996 1995 1994 1993
------------------ --------------------- ------------------- ------------------ -------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family........... $79,440 80.09% $77,577 82.93% $75,321 83.40% $76,509 84.45% $76,857 85.73%
Multi-family.................. 12,237 12.34 12,239 13.08 12,060 13.35 11,218 12.38 10,171 11.34
Commercial real estate........ 4,573 4.61 3,317 3.55 2,598 2.88 2,473 2.73 1,802 2.01
Construction.................. 529 .53 --- --- --- --- --- --- --- ---
------- ------- --------- -------- ------- -------- ------ ------- -------- -------
Total real estate loans...... 96,779 97.57 93,133 99.56% 89,979 99.63 90,200 99.56 88,830 99.08
------ ------ ------- ------
Consumer....................... 227 .23 260 .28 188 .21 167 .18 219 .24
------- ------- -------- ------- -------- ------- ------- ------- --------- ------
Total fixed-rate loans....... 97,006 97.80 93,393 99.84 90,167 99.84 90,367 99.74 89,049 99.32
------ ------ ------- ------ ------- ------ ------- ------ ------- -----
Adjustable-Rate Loans:
Real estate:
One- to four-family........... 146 .15 148 .16% 150 .16 227 .26 603 .68
Consumer:
Secured lines of credit.... 2,010 2.03 --- --- --- --- --- --- --- ---
Other...................... 24 .02 --- --- --- --- --- --- --- ---
-------- -------- --------- -------- ------- -------- -------- -------- -------- -------
Total loans.................. 99,186 100.00% 93,541 100.00% 90,317 100.00% 90,594 100.00% 89,652 100.00%
====== ====== ====== ====== ======
Less:
Loans in process............... 338 466 792 527 3,007
Deferred fees and discounts.... 1,272 1,584 1,694 1,717 1,706
Allowance for loan losses...... 332 345 275 125 125
-------- -------- ------- -------- --------
Total loans receivable, net.. $97,244 $91,146 $87,556 $88,225 $84,814
======= ======= ======= ======= =======
6
The following schedule sets forth the weighted average interest rate and
contractual maturity of the Bank's loan portfolio at September 30, 1997. The
table does not reflect prepayments, scheduled principal repayments or
enforcement of due-on-sale clauses. Loans which have adjustable or renegotiable
interest rates are shown as maturing in the period during which the contract is
due.
Real Estate
----------------------------------------------------
Multi-family and Construction
One- to Four-Family Commercial real estate Consumer Total
-------------------------- ------------------------- ------------------------- -------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
-------------------------- ------------------------- ------------------------- -------------------------
(Dollars in Thousands)
Due During
Twelve Months
Ending September 30,
--------------------
1998.................... $ 139 8.71% $ 62 8.75% $ 81 7.30% $ 282 8.32%
1999.................... 394 8.49 586 8.28 119 7.65 1,099 8.29
2000 and 2001........... 4,250 7.42 604 8.17 24 8.52 4,878 7.52
2002 to 2004............ 16,252 7.53 3,493 7.96 27 8.50 19,772 7.61
2005 to 2021............ 44,139 7.42 12,594 8.31 2,010 8.90 58,743 7.66
2022 and following...... 14,412 7.89 --- --- --- --- 14,412 7.89
------- ------- ------ ------- -----
$79,586 $17,339 $2,261 $99,186
======= ======= ====== =======
The total amount of loans due after September 30, 1998 which have
predetermined interest rates is approximately $96.2 million, while the total
amount of loans due after such dates which have floating or adjustable interest
rates is approximately $2.7 million.
Under the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"), the aggregate amount of loans that the Bank is permitted to
make to any one borrower is generally limited to 15% of unimpaired capital and
surplus (25% if the security for such loan has a "readily ascertainable" value).
At September 30, 1997, based on the above, the Bank's loans-to-one borrower
limit was approximately $5.9 million. On that date, the Bank had no borrowers
with outstanding balances in excess of this amount. As of September 30, 1997,
the Bank had committed a total of $2.9 million on a condominium construction
loan on Michigan Avenue in Chicago although only $529,000 was disbursed as of
September 30, 1997. The next two largest dollar amounts outstanding to one
borrower or, group of related borrowers, were approximately $922,000 and
$888,000. These loans are secured by both one- to four-family and multi-family
properties located primarily in the Bank's market area and, as of September 30,
1997, were performing in accordance with their terms except that the loans
totaling $922,000 were all one month delinquent at September 30, 1997.
One- to Four-Family Residential Real Estate Lending. The cornerstone of
the Bank's lending program is the origination of loans secured by mortgages on
owner-occupied one- to four-family residences. The Bank offers fixed-rate loans
with terms of 7, 10, 15, 20 and 30 years and
7
during the mid 1980s, originated a limited amount of one and three year
adjustable rate mortgage loans ("ARMs"). At September 30, 1997, $79.6 million,
or 80.24% of the Bank's loan portfolio consisted of mortgage loans on one- to
four-family residences. At that date, the average outstanding residential loan
balance was approximately $54,600.
Substantially all of the one- to four-family residential loans
originated by Damen are secured by properties located in the Bank's market area
and all mortgage loans originated by the Bank are retained and serviced by it.
Because of competitive factors, most of the Bank's one- to four-family
residential loans have been made to persons residing near its Chicago office,
which is located in a low and moderate income community. The Bank has been an
active lender in this market for many years and has never experienced a
delinquency level on these loans which was significantly higher than that of its
loan portfolio as a whole.
The Bank offers fixed-rate loans with maximum terms of up to 30 years
for retention in its own portfolio as a central part of its lending program.
However, consistent with its asset/liability management philosophy, the Bank
focuses its fixed-rate loan origination activities on loans having terms to
maturity of 15 years or less. At September 30, 1997, $79.6 million or 82.1% of
the Bank's mortgage loans had original terms of 15 years or less. The interest
rate on the Bank's fixed-rate loans is generally set based on competitive
factors.
During the mid 1980s, the Bank originated a limited amount of ARMs for
retention in its own portfolio. However, as a result of strong competition and
price cutting on these loans in its market area, the Board concluded that
continued efforts to originate ARMs were no longer justified. In the future, the
Board may consider reinstating the Bank's ARM lending program, although there
can be no assurance as to when, if ever, this will be the case.
In underwriting one- to four-family residential real estate loans, the
Bank evaluates the borrower's ability to make principal, interest and escrow
payments, the value of the property that will secure the loan and the borrower's
debt to income ratios. Because of the economic conditions in parts of the Bank's
market area, the Bank's underwriting practices do not comply in every way with
those required by most purchasers in the secondary market. For instance, some of
the Bank's low and moderate income borrowers do not have the net worth or
income/debt service levels required by many secondary market purchasers. The
non-compliance of many of the Bank's loans with secondary market standards
limits the Bank's ability to build a held-for-sale portfolio, which could be
useful for asset/liability management structuring and for the development of
non-interest income. Also, such non-compliance may limit to some extent the
Bank's ability to use such loans as collateral for borrowings. However, the Bank
believes that non-compliance with secondary market standards does not in and of
itself cause credit problems since the Bank has engaged in this type of lending
for many years and its delinquency experience on these loans has been
satisfactory to date.
Properties securing one- to four-family residential real estate loans
made by Damen are appraised by independent appraisers. Damen originates
virtually all of its residential mortgage loans with loan-to-value ratios of
less than 95%, and private mortgage insurance is obtained
8
in an amount sufficient to reduce the Bank's exposure to not more than 80% of
the appraised value or sales price, where applicable.
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.
Many of the Bank's one- to four-family loans are on properties with
more than one unit. In some cases, at least one unit in the property is occupied
by the borrower while other one- to four-family loans are on non-owner occupied
properties.
Multi-Family and Commercial Real Estate Lending. During recent years,
Damen has modestly increased its acquisition of permanent multi-family and
commercial real estate loans secured by properties generally located in its
market area. At September 30, 1997, the Bank had $12.2 million in multi-family
loans, representing 12.34% of the Bank's total loan portfolio, and $4.6 million
in commercial real estate loans, or 4.61% of the Bank's total loan portfolio.
The Bank's multi-family and commercial real estate loan portfolio
includes loans secured by apartment buildings and other non-residential building
properties. Because of competitive factors, most of the Bank's multi-family and
commercial real estate loans are originated in the southern portion of the
Bank's market area.
Permanent multi-family and commercial real estate loans are generally
originated for a maximum term of 15 years and have fixed rates. Multi-family and
commercial real estate loans are written in amounts of up to 75% of the
appraised value of the property.
Appraisals on properties serving multi-family and commercial real
estate loans originated by the Bank are performed by an independent appraiser
prior to the time the loan is made. All appraisals on commercial and
multi-family real estate are reviewed by the Bank's management. The Bank's
underwriting procedures require verification of the borrower's credit history,
income and financial statements, banking relationships. The Bank generally
requires personal guarantees on loans secured by multi-family and commercial
real estate. From time to time, the Bank has purchased interests in multi-family
and commercial real estate loans originated by other lenders. Prior to purchase,
such loans are generally subjected to the same underwriting standards as the
Bank's originated loans.
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be impaired. At September
30, 1997, the Bank had no multi-family loans and no commercial real estate loans
90 days or more delinquent.
9
In the future, the Bank intends to continue to make multi-family and
commercial real estate lending as well as other types of commercial loans.
Consumer Lending. The only consumer loans (other than home equity lines
of credit, as described below) offered by the Bank are those secured by certain
types of deposit accounts. At September 30, 1997, consumer loans secured by
deposit accounts totaled $227,000 or .23% of net loans outstanding.
The Bank's consumer loans secured by deposit accounts are made in
amounts not to exceed 90% of the deposit holders available passbook or
certificate of deposit balance and carry a maximum term of three years when
secured by passbook accounts and as of the maturity date for loans secured by
certificates of deposit. Such loans carry an interest rate which is 2.5% above
the stated interest rate for the pledged account. The Bank may determine to
increase the types of consumer loan products offered.
The Bank also offers an adjustable home equity line of credit secured
by real estate with an interest rate at prime rate or a percentage over the
prime rate, as reported in The Wall Street Journal and is adjusted monthly. At
September 30, 1997, such loans totaled $3.3 million with $2.0 million being
drawn by borrowers which represents 2.03% of the Company's loan portfolio.
Originations, Purchases and Sales of Loans and Mortgage-Backed and Related
Securities
Real estate loans are originated by Damen's staff of salaried loan
officers through referrals from real estate brokers, attorneys and customers. In
addition, in the future, the Bank may utilize commissioned loan originators in
an attempt to increase loan production, although there are no specific plans to
do so at this time. Loan applications are taken and processed at each of Damen's
offices.
The Bank's ability to originate loans is dependent upon customer demand
for loans in its market and to a limited extent, various marketing efforts.
Demand is affected by both the local economy and the interest rate environment.
Historically, all loans originated by Damen are retained in the Bank's
portfolio.
In order to supplement loan originations, the Company has acquired
mortgage-backed and related securities which are held, depending on the
investment intent, in the "held-to-maturity" or "available- for-sale"
portfolios. During the years ended September 30, 1997 and 1996, the Company
purchased $12.2 million and $23.2 million, respectively, of mortgaged-backed and
related securities. During the same periods, the Company sold $1.8 million and
$920,000, respectively, of mortgage-backed and related securities. In order to
supplement loan production, the Bank purchased single-family loans from a third
party originator totaling $1.1 million during the year ended September 30, 1997
compared to none in prior years. See " - Investment Activities - Mortgage-Backed
and Related Securities" and Notes 4 and 5 to the Notes to Consolidated Financial
Statements in the Annual Report to Stockholders for the fiscal year ended
September 30, 1997 attached hereto as Exhibit 13 (the "Annual Report").
10
The following table shows the loan origination, purchase, sale and
repayment activities of the Company for the periods indicated.
Ten Months
Year Ended Ended
September 30, September 30,
------------------------- -------------
1997 1996 1995
---- ---- ----
(In Thousands)
Originations by type:
Fixed rate:
Real estate - one- to four-family.................. $15,514 $15,612 $ 9,280
- multi-family....................... 3,594 2,137 2,051
- commercial......................... 1,703 1,528 626
Consumer and Other................................. 145 212 315
Secured line of credit...................... 2,763 --- ---
-------- ------- --------
Total loans originated...................... 23,719 19,489 12,272
-------- ------- --------
Purchases:
Mortgage-backed securities (excluding
REMICs and CMOs).................................. 11,215 21,828 18,911
REMICs and CMOs.................................... 964 1,365 2,986
-------- ------- -------
Total purchased............................. 12,179(1) 23,193 21,897
-------- ------- -------
Sales and Repayments:
Mortgage-backed security sales..................... 1,816 920 1,288
-------- -------- ---------
Total sales................................. 1,816 920 1,288
Principal repayments............................... 33,093 31,888 20,212
--------- -------- ---------
Total reductions............................ 34,909 32,808 21,500
Increase (decrease) in other items, net.............. 1,621 (377) 1,111
---------- --------- ---------
Net increase................................ $ 2,610 $ 9,497 $13,780
========= ======== =======
(1) Includes $4.1 million of adjustable-rate mortgage-backed and related
securities.
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, the Bank attempts to cure the delinquency by contacting the
borrower. A late notice is sent on all delinquent loans. Additional written and
verbal contacts may be made with the borrower between 30 and 90 days after the
due date. If the loan is contractually delinquent 90 days, the Bank either
arranges payment with the borrower or institutes appropriate action to foreclose
on the property. If a borrower agrees to a payment plan to bring a delinquent
loan current, a designated officer monitors the loan for compliance with the
payment agreement. If foreclosed, the property is sold at sheriff's sale and may
be purchased by the Bank. Delinquent consumer loans are generally handled in a
similar manner. Once a loan has been set to Damen's attorney to begin
foreclosure proceedings, no payments are accepted without the prior approval of
Damen's President.
11
Real estate acquired by Damen as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until it is sold. When
property is acquired by foreclosure or deed in lieu of foreclosure, it is
recorded at the lower of cost or estimated fair value less estimated selling
costs. After acquisition, all costs incurred in maintaining the property are
expensed. Costs relating to the development and improvement of the property,
however, are capitalized.
The following table sets forth the Bank's loan delinquencies by type,
amount and percentage of type at September 30, 1997.
Loans Delinquent For:
-------------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
-------------------------------- ------------------------------- ---------------------------
Percent Percent Percent
of Total of Total of Total
Number Amount Loans Number Amount Loans Number Amount Loans
------ ------ ----- ------ ------ ----- ------ ------ -----
(Dollars in Thousands)
Real Estate:
One- to four-family........ 7 $207 .20% 7 $197 .20% 14 $404 .40%
Multi-family............... 2 99 .10 --- --- --- 2 99 .10
Commercial real estate..... --- --- --- --- --- --- --- --- ---
Construction............... --- --- --- --- --- --- --- --- ---
Other........................ --- --- --- --- --- --- --- --- ---
---- ------ ---- ---- ------ --- ---- ------
Total 9 $306 .30% 7 $197 .20% 16 $503 .50%
==== ==== === ==== ==== === ==== ==== ===
Classification of Assets. Federal regulations require that each
national bank classify its own assets on a regular basis. In addition, in
connection with examinations of national banks, examiners of the Office of the
Comptroller of the Currency (the "OCC") and the FDIC have authority to identify
problem assets and, if appropriate, require them to be classified. There are
three classifications for problem assets: Substandard, Doubtful and Loss.
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the Bank will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
Substandard assets, with the additional characteristics that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified Loss is considered uncollectible and of such little value that
continuance as an asset on the balance sheet of the institution is not
warranted. Assets classified as Substandard or Doubtful require the institution
to establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as Loss, the institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified Loss, or charge off such amount.
12
On the basis of management's review of its assets, at September 30,
1997, the Bank had classified a total of $276,000 of its loans and other assets
as follows:
At
September 30,
1997
----
(In Thousands)
Special Mention............................. $ ---
Substandard................................. 276
Doubtful assets............................. ---
Loss assets................................. ---
------
Total.................................. 276
====
General loss allowance...................... 332
====
Specific loss allowance..................... ---
=====
Charge-offs................................. 50
====
Damen's classified assets consist of the non-performing loans and loans
and other assets of concern discussed herein. As of the date hereof, these asset
classifications are materially consistent with those of the OCC and FDIC.
Non-Performing Assets. Loans are reviewed monthly and any loan the
collectibilty of which is doubtful is placed on non-accrual status. Loans are
placed on non-accrual status when either principal or interest is 90 days or
more past due, unless, in the judgment of management, the loan is well
collateralized and in the process of collection. Interest accrued and unpaid at
the time a loan is placed on non-accrual status is charged against interest
income. Subsequent payments are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate collectibility of the loan. Restructured loans include troubled debt
restructurings (which involved forgiving a portion of interest or principal on
any loans or making loans at a rate materially less than the market rate). At
September 30, 1997, the Bank had one foreclosed property with an estimated net
realizable value of $79,000. The property is an eight unit apartment building
and store located in southwest Chicago. The store and several apartment units
are currently vacant. There were no structured loans as of September 30, 1997.
13
Non-Performing Assets. The following table sets forth the amounts and
categories of non- performing assets in the Bank's portfolio.
September 30, November 30,
----------------------------------------------- -----------------------
1997 1996 1995 1994 1993
------------- -------------- ------------------ ------------ ----------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family................................ $ 197 $ 99 $65 $109 $156
Multi-family....................................... --- 252 --- --- ---
Commercial real estate............................. --- --- --- --- ---
Construction....................................... --- --- --- --- ---
Other.............................................. --- --- --- 7 ---
------- ------ ----- ---- -----
Total........................................... 197 351 65 116 156
------ ----- --- ---- ----
Accruing loans delinquent more than 90 days:
Total........................................... --- --- --- --- ---
------- ------ ---- ----- -----
Foreclosed assets:
Commercial and multi-family real estate............ 79 --- --- --- ---
------ ------ ---- ----- -----
Total........................................... 79 --- --- --- ---
------ ------ ---- ----- -----
Total non-performing assets.......................... $ 276 $ 351 $65 $116 $156
===== ====== === ==== ====
Total as a percentage of total assets................ .12% .15% .03% .06% .09%
===== ====== === ==== ====
For the years ended September 30, 1997 and 1996, gross interest income
which would have been recorded had the non-accruing loans been current in
accordance with their original terms amounted to $16,500 and $8,900,
respectively.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of September 30, 1997, there were no loans with
respect to which known information about the possible credit problems of the
borrowers or the cash flows of the security properties have caused management to
have concerns as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories.
Management has considered the Bank's non-performing and "of concern"
assets in establishing its allowance for loan losses.
14
Allowance for losses on loans. The following table sets forth
information with respect to the Bank's allowance for loan losses for the periods
indicated. During each of the periods presented, there were no recoveries of
amounts charged off.
Ten Months
Year Ended Ended Year Ended
September 30, September 30, November 30,
-------------------------- --------------- ---------------------------
1997 1996 1995 1994 1993
----------- -------------- --------------- ------------ --------------
(Dollars in Thousands)
Balance at beginning of period.................... $ 345 $275 $125 $125 $125
Charge-offs:
One- to four-family............................. 5 --- 9 --- ---
Multi-family.................................... 45 --- --- --- ---
Consumer........................................ --- --- 4 --- ---
------ ----- ----- ----- -----
Total........................................ 50 --- 13 --- ---
----- ----- ----- ----- -----
Recoveries:
Total........................................ --- --- --- --- ---
------ ----- ----- ----- -----
Net charge-offs................................... 50 --- 13 --- ---
----- ----- ----- ----- -----
Additions charged to operations................... 37 70 163 --- ---
----- ----- ----- ----- -----
Balance at end of period.......................... $332 $345 $275 $125 $125
==== ==== ==== ==== ====
Ratio of net charge-offs during the period to
average loans outstanding during the period...... .05% ---% .01% ---% ---%
==== === === === ===
Ratio of net charge-offs during the period to
average non-performing assets.................... 15.92% ---% 11.21% ---% ---%
===== === ===== === ===
15
The following table sets forth the allocation of the Bank's allowance
for loan losses by loan category and the percent of loans in each category to
total loans receivable, net, at the end of the periods indicated. The portion of
the loan loss allowance allocated to each loan category does not represent the
total available for future losses which may occur within the loan category since
the total loan loss allowance is a valuation reserve applicable to the entire
loan portfolio.
September 30,
----------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- -------------------------------- ----------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- ----- --------- -------- -----
(In Thousands)
One- to four-family...... $198 $79,586 80.24% $201 $77,725 83.09% $196 $75,471 83.56%
Multi-family............. 61 12,237 12.34 119 12,239 13.08 57 12,060 13.35
Commercial real estate... 35 4,573 4.61 25 3,317 3.55 19 2,598 2.88
Construction............. 3 529 .53 --- --- --- --- --- ---
Secured line of credit... 15 2,010 2.03 --- --- --- --- --- ---
Consumer................. 16 251 .25 --- 260 .28 --- 188 .21
Unallocated.............. 4 --- --- --- --- --- 3 --- ---
------ ------- ------- ---- ------ -------- ------ ----- --------
Total............... $332 $99,186 100.00% $345 $93,541 100.00% $275 $90,317 100.00%
==== ======= ====== ==== ======= ====== ==== ======= ======
November 30,
-----------------------------------------------------------------
1994 1993
--------------------------------- -------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- -----
(In Thousands)
One- to four-family...... $ 82 $76,736 84.71 $ 85 $77,460 86.41
Multi-family............. 22 11,218 12.38 20 10,171 11.34
Commercial real estate... 6 2,473 2.73 5 1,802 2.01
Construction............. --- --- --- --- --- ---
Secured line of credit... --- --- --- --- --- ---
Consumer................. 1 167 .18 --- 219 .24
Unallocated.............. 14 --- --- 15 --- ---
----- -------- ------- ----- -------- -----
Total............... $125 $90,594 100.00 % $125 $89,652 100.00%
==== ======= ====== ==== ======= ======
16
The allowance for losses on loans is established through a provision
for losses on loans charged to earnings based on management's evaluation of the
risk inherent in its entire loan portfolio and changes in the nature and volume
of its loan activity. Such evaluation, which includes a review of all loans of
which full collectibility may not be reasonably assured, considers specific
occurrences, general and local economic conditions, loan portfolio composition,
historical and local experience and other factors that warrant recognition in
providing for an adequate allowance for loan losses. In determining the general
reserves under these policies, historical charge-offs and recoveries, changes in
the mix and levels of the various types of loans, net realizable values, the
current loan portfolio and current economic conditions are considered. The Bank
also requires additional reserves for all classified loans.
While management believes that it uses the best information available
to determine the allowance for losses on loans, unforeseen economic and market
conditions could result in adjustments to the allowance for losses on loans, and
net earnings could be significantly affected, if circumstances differ
substantially from the assumptions used in making the final determination.
Investment Activities
General. National banks have the authority to invest in various types
of liquid assets, including United States Treasury obligations, securities of
various federal agencies, certain certificates of deposit of insured banks and
savings institutions, certain bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, national banks may also invest
their assets in certain investment securities and mutual funds the assets of
which conform to the investments that a national bank is authorized to make
directly.
Generally, the investment policy of DFC and the Bank is to invest funds
among categories of investments and maturities based upon the Company's and the
Bank's asset/liability management policies, investment quality, loan and deposit
volume, liquidity needs and performance objectives. Prior to December 1, 1994,
the Company recorded its investments in its investment securities portfolio at
the lower of cost or current market value if held-for-sale or at amortized cost
if held-for-investment. Unrealized declines in the market value of securities
held-to-maturity were not reflected in the financial statements; however,
unrealized losses in the market value of securities held-for-sale were recorded
as a charge to current earnings. Effective December 1, 1994, the Company adopted
SFAS 115, which resulted in a one-time charge to stockholders' equity of
approximately $1.1 million, while the cumulative effect of this change in
accounting principle, net of taxes, resulted in a one-time $907,000 credit to
earnings. As required by SFAS 115, securities are classified into three
categories: trading, held-to-maturity and available-for-sale. Securities that
are bought and held principally for the purpose of selling them in the near term
are classified as trading securities and are reported at fair value with
unrealized gains and losses included in trading account activities in the
statement of operations. Securities that DFC has the positive intent and ability
to hold to maturity are classified as held-to-maturity and reported at amortized
cost. All other securities not classified as held-to-maturity are classified as
available-for-sale. At September 30, 1997, DFC had no securities which were
classified as trading. Available-for-sale securities are reported at fair market
value with unrealized gains and losses included, on an after-tax basis, in a
separate component of stockholders' equity. At
17
September 30, 1997, $35.9 million of investment securities and $56.7 million of
mortgage-backed and related securities were classified as available-for-sale.
Investment Securities. The Company and the Bank have used investment
securities to supplement loan volume and to provide adjustable rate and/or short
and intermediate-term assets for asset/liability management purposes. To date,
the Company's and the Bank's investments have been directed toward high-quality
assets with various terms to maturity. In addition to federal agency obligations
and tax-exempt municipal bonds, but to a much lesser extent, the Company and the
Bank invest in FHLB stock, stock in the Federal Reserve Bank ("FRB") of Chicago,
equity securities and mutual funds. At September 30, 1997 and 1996, the
Company's investment securities portfolio totaled $41.4 million and $48.2
million, respectively. At September 30, 1997, the Company did not own any
investment securities of a single issuer which exceeded 10% of the Company's
equity, other than federal agency obligations. See Notes 2 and 3 of the Notes to
the Consolidated Financial Statements in the Annual Report for additional
information regarding the Company's investment securities portfolio.
As part of DFC's asset/liability management strategy, the Company's
investment securities portfolio contains both short- and intermediate-term (five
years or less) securities. At September 30, 1997, $14.0 million of the Company's
investment securities (excluding FHLB and FRB stock) had terms to maturity or
were likely to be called in five years or less. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -Asset/Liability
Management" in the Annual Report.
In the past several years, DFC carried a portion of this investment
portfolio as "held-for-sale", contributing to some volatility in earnings.
However, subsequent to the adoption of SFAS 115 effective December 1, 1994 and
the recording of a cumulative effect adjustment, the effect of changes in the
value of securities available-for-sale caused by interest rate movements has
affected the Company's stockholders' equity and not results of operations.
18
The following table sets forth the carrying value of the Company's
investment securities and FHLB and FRB stock at the dates indicated. At
September 30, 1997, the market value of the Company's held-to-maturity
investment securities portfolio was $5.5 million.
September 30,
------------------------------------------------------------------------------
1997 1996 1995
------------------------- --------------------------- ----------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
(Dollars in Thousands)
Investment securities:
Held-to-Maturity:
Tax-Exempt securities(1)...................... $ --- ---% $ --- ---% $ --- ---%
FHLB stock.................................... 3,121 7.54 3,110 6.45 2,570 6.88
FRB stock..................................... 578 1.40 --- --- --- ---
Other......................................... 1,845 4.45 1,777 3.68 1,090 2.92
-------- ------ ------- ----- ------- -----
Subtotal..................................... 5,544 13.39 4,887 10.13 3,660 9.80
-------- ------ ------- ------ ------- -----
Tax-Exempt securities(1)...................... $22,493 54.31% $24,905 51.64% $20,478 54.83%
Federal Agency Obligations.................... 11,051 26.68 14,785 30.66 11,166 29.90
Equity securities............................. 2,330 5.62 3,653 7.57 2,045 5.47
--------- ------- ------- ------ ------- ------
Subtotal..................................... 35,874 86.61 43,343 89.87 33,689 90.20
-------- ------ ------- ------ ------- ------
Total investment securities.................. $41,418 100.00% $48,230 100.00% $37,349 100.00%
======= ====== ======= ====== ======= ======
Average remaining life of investment securities
(excluding FHLB and FRB stock and other
equities)....................................... 9.6 years 9.4 years 11.3 years
Other interest-earning assets:
Interest-earning deposits with banks............ $ 1,591 100.00% $ 1,011 100.00% $19,938 100.00%
======= ====== ======== ====== ======= ======
(1) Effective with the adoption of SFAS 115 on December 1, 1994, the Company's
tax-exempt securities were classified as available-for-sale.
The following table sets forth certain information regarding the
composition and maturities of the securities portfolio, excluding FHLB and FRB
stock, equity securities and other items, at September 30, 1997. See Note 3 of
the Notes to the Consolidated Financial Statements in the Annual Report for a
discussion of the Company's investment securities portfolio. A portion of the
Company's municipal bonds have been prerefunded and the maturity on these bonds
reflect the prerefunded maturity dates.
September 30, 1997
--------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Investment Securities
------ ----- ----- -------- ---------------------------
Book Value Book Value Book Value Book Value Book Value Market Value
---------- ---------- ---------- ---------- ---------- -------------
(Dollars in Thousands)
Municipal bonds............................. $1,020 $4,911 $2,177 $14,385 $22,493 $22,493
Federal agency obligations.................. 3,513 5,052 2,486 --- 11,051 11,051
----- ----- ------ -------- ------- ---------
Total investment securities
(excluding FHLB and FRB
stock, equity securities and
other items)......................... $4,533 $9,963 $4,663 $14,385 $33,544 $33,544
====== ====== ====== ======= ======= =======
Weighted average yield...................... 6.80% 6.46% 6.91% 6.10% 6.33% 6.33%
19
Mortgage-Backed and Related Securities. In order to supplement loan and
investment activities and achieve its asset/liability management goals, the
Company invests in mortgage-backed and related securities. As of September 30,
1997, all of the mortgage-backed and related securities owned by the Company
were issued, insured or guaranteed either directly or indirectly by a federal
agency or rated "A" (in most cases "AAA") or higher by a nationally recognized
credit rating agency. However, it should be noted that, while a (direct or
indirect) federal guarantee or a high credit rating may indicate a high degree
of protection against default, such guarantee or rating does not mean that the
securities will be protected from declines in value based on changes in interest
rates or prepayment speeds.
At September 30, 1997, DFC had $84.6 million of mortgage-backed and
related securities, representing 36.6% of total assets. On that date, the
Company had $51.0 million of Federal National Mortgage Association ("FNMA"),
FHLMC and Government National Mortgage Association ("GNMA") participation
certificates and conventional mortgage-backed securities and $33.6 million of
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMICs"). At September 30, 1997, $44.2 million of the Company's
mortgage-backed securities were issued by either FHLMC, FNMA or GNMA and the
remaining $6.8 million were privately issued mortgage-backed securities. On that
date, $11.6 million of the Company's CMOs and REMICs were issued either by FHLMC
or FNMA and the remaining $22.0 million were privately issued securities. None
of the Company's privately issued mortgage-backed or related securities are
insured or guaranteed by FHLMC or FNMA. All of the privately issued securities
were rated "AA" or higher by a nationally recognized credit rating agency at the
time of purchase.
Consistent with its asset/liability management strategy, at September
30, 1997, $37.5 million or 44.3% of DFC's mortgage-backed and related securities
had adjustable interest rates. In addition, the Company has a substantial
portfolio of CMOs and REMICs with anticipated average lives of five years or
less. For information regarding the Company's mortgage-backed and related
securities portfolio, see Notes 4 and 5 of the Notes to the Consolidated
Financial Statements in the Annual Report.
At September 30, 1997, the Company had no mortgage-backed or related
securities in excess of 10% of stockholders' equity except for FNMA, FHLMC and
GNMA issues, amounting to $17.6 million, $7.3 million and $30.9 million,
respectively.
In addition to its conventional mortgage-backed securities, the Company
invests in CMOs and REMICs. CMOs and REMICs are securities derived by
reallocating the cash flows from mortgage-backed securities or pools of mortgage
loans in order to create multiple classes, or tranches, of securities with
coupon rates and average lives that differ from the underlying collateral as a
whole. The terms to maturity of any particular tranche is dependent upon the
prepayment speed of the underlying collateral as well as the structure of the
particular CMO or REMIC. Although a significant proportion of the Company's CMOs
are interests in tranches which have been structured (through the use of cash
flow priority and "support" tranches) to give somewhat more predictable cash
flows, the cash flow and the value of CMOs and REMICs are subject to change.
20
The Company invests in CMOs and REMICs as an alternative to mortgage
loans and conventional mortgage-backed securities as part of its asset/liability
management strategy. Management believes that CMOs and REMICs can represent
attractive investment alternatives relative to other investments due to the wide
variety of maturity and repayment options available through such investments. In
particular, the Company has from time to time concluded that short and
intermediate duration CMOs and REMICs (five year or less average life) represent
a better combination of rate and duration than adjustable rate mortgage-backed
securities. Because the Company's CMOs and REMICs (with the exception of those
classified as "high risk" at the time of purchase, as described below) are
purchased as an alternative to mortgage loans and because the Company has the
ability and intent to hold such securities to maturity, all such securities
(with the exception of those classified as "high risk" at the time of purchase)
are classified as held-to-maturity. At September 30, 1997, the Company held
$33.6 million of CMOs and REMICs, including $31.6 million of short and
intermediate duration (five year or less average life) or adjustable rates.
Substantially all mortgage derivatives recently purchased by the
Company are not classified as "high-risk" under regulatory guidelines and are
subject to normal effects of changes in interest rates. To assess price
volatility, the Federal Financial Institutions Examination Council ("FFIEC")
adopted a policy in 1992 which requires an annual "stress" test of mortgage
derivative securities. This policy, which has been adopted by the OCC and the
OTS, requires the Bank to annually test its CMOs and other mortgage-related
securities to determine whether they are high-risk or nonhigh-risk securities.
Mortgage derivative products with an average life or price volatility in excess
of a benchmark 30-year mortgage-backed pass-through security are considered
high-risk mortgage securities. Under the policy, national banks may generally
only invest in high-risk mortgage securities in order to reduce interest rate
risk. In addition, all high-risk mortgage securities acquired after February 9,
1992 which are classified as high risk at the time of purchase must be carried
in the institution's trading account or as assets held-for-sale. Additionally,
DFC's investment policy limits the amount of "high-risk" CMOs that the Company
may purchase to 12% of total assets and mandates that these assets must be
retested and monitored quarterly. At September 30, 1997, the Company held CMOs
and REMICs that did not meet the criteria established by the FFIEC policy and
were classified as "high-risk" with a carrying value of $7.4 million (including
$3.8 million of securities which were held for investment because there was an
ability and intent to hold to maturity and such securities were either acquired
before February 9, 1992 or were not classified as high risk until sometime after
purchase) and a market value of $7.3 million. While the Company's current
investment policy permits its investment, subject to certain limitations, in
CMOs and REMICs classified as "high-risk," it is currently anticipated that any
future investments in "high-risk" securities will be minimal. To date, neither
the OCC (after the Bank Conversion) nor the OTS (before the Bank Conversion) has
required the Company to dispose of any high-risk securities.
21
The following table sets forth the contractual maturities of the
Company's mortgage-backed and related securities at the dates indicated. These
securities are anticipated to be repaid in advance of their contractual
maturities as a result of projected mortgage loan prepayments. In addition,
under the structure of the Company's REMICs, the Company's short- and
intermediate-tranche interests have repayment priority over the longer term
tranches of the same underlying mortgage pool. The amounts set forth below
represent principal balances only and do not include premiums, discounts and
market value adjustments.
September 30,
1997
5 to 10 10 to 20 Over 20 Balance
Years Years Years Outstanding
----- ----- ----- -----------
(In Thousands)
CMOs and REMICs..................................... $ --- $6,695 $26,968 $33,663
FNMA participation certificates..................... --- 147 9,018 9,165
Conventional mortgage-backed securities............. --- --- 6,648 6,648
FHLMC participation certificates.................... --- 299 3,510 3,809
GNMA participation certificates..................... --- --- 30,273 30,273
----- -------- ------- --------
Total.......................................... $ --- $7,141 $76,417 $83,558
===== ====== ======= =======
The Company's holdings of mortgage-backed and related securities have
increased in recent years as a result of loan competition and deposit growth.
Since federal agency mortgage-backed securities generally carry a yield
approximately 50 to 100 basis points below that of the corresponding type of
residential loan (due to the implied federal agency guarantee fee and the
retention of a servicing spread by the loan servicer), and the Company's other
mortgage related securities also carry lower yields (due to the implied federal
agency guarantee and because such securities tend to have shorter actual
durations than 30 year loans), in the event that the proportion of the Company's
assets consisting of mortgage-backed and related securities increases, the
Company's asset yields could be somewhat adversely affected. The Company will
evaluate mortgage-backed and related securities purchases in the future based on
its asset/liability objectives, market conditions and alternative investment
opportunities.
The market values of a significant portion of the Company's
mortgage-backed and related securities held-to-maturity have been from time to
time significantly lower than their carrying values. However, for financial
reporting purposes, such declines in value are considered to be temporary in
nature since they have been due to changes in interest rates rather than credit
concerns. See Note 4 of the Notes to the Consolidated Financial Statements in
the Annual Report.
22
The following table sets forth the carrying value of the Company's
mortgage-backed and related securities at the dates indicated. At September 30,
1997, the market value of the Company's mortgage-backed and related securities
portfolio was $84.3 million.
September 30,
----------------------------------------------------------------------
1997 1996 1995
--------------------- ----------------------- ---------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
(Dollars in Thousands)
Held-to-Maturity:
CMOs and REMICs.................................. $27,870 32.94% $35,504 40.30% $42,533 51.75%
------- ------ ------- ------ ------- -----
Subtotal....................................... 27,870 32.94 35,504 40.30 42,533 51.75
-------- ------ ------- ------ ------- -----
Available-for-Sale:
CMOs and REMICs.................................. $5,742 6.79% $ 4,458 5.06% $ 3,636 4.42%
FNMA participation certificates.................. 9,332 11.03 10,928 12.40 13,711 16.68
FHLMC participation certificates................. 3,994 4.72 5,149 5.85 7,232 8.80
GNMA participation certificates.................. 30,910 36.53 24,826 28.18 7,833 9.53
Conventional mortgage-backed securities.......... 6,762 7.99 7,233 8.21 7,247 8.82
------- ------- -------- ------ ------- ------
Subtotal........................................ 56,740 67.06 52,594 59.70 39,659 48.25
------- ------- -------- ------ ------- ------
Total mortgage-backed securities................ $84,610 100.00% $88,098 100.00% $82,192 100.00%
======= ====== ======= ====== ======= ======
Sources of Funds
General. The Company's primary sources of funds are deposits, payments
(including prepayments) of loan principal, interest earned on loans and
securities, repayments of securities, borrowings and funds provided from
operations.
Deposits. Damen offers a variety of deposit accounts having a wide
range of interest rates and terms. The Bank's deposits consist of passbook, NOW,
money market and various certificate accounts. The Bank relies primarily on
competitive pricing policies and customer service to attract and retain these
deposits.
The variety of deposit accounts offered by the Bank has allowed it to
be competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. However, as customers have become more interest rate conscious,
the Bank has become more susceptible to short-term fluctuations in deposit
flows.
23
The Bank manages the pricing of its deposits in keeping with its
asset/liability management, profitability and growth objectives. For instance,
the Bank has recently implemented several marketing initiatives in order to
attract intermediate and long term deposits. However, the Bank has found it
difficult to increase rapidly its deposits on a cost effective basis as a result
of intense competition throughout its market area and slow economic growth in
the community located near its Chicago office. For information regarding the
amount of the Bank's deposit accounts in prior periods, see Note 10 of the Notes
to the Consolidated Financial Statements in the Annual Report.
The following table sets forth the savings flows at the Bank during the
periods indicated.
Ten Months
Year Ended Ended
September 30, September 30,
----------------------- -------------
1997 1996 1995
--------- --------- -----------
(Dollars in Thousands)
Opening balance......................... $118,973 $126,632 $126,210
Deposits................................ 80,169 66,969 67,709
Withdrawals............................. (77,870) (79,781) (71,146)
Interest credited....................... 4,474 5,153 3,859
--------- --------- ---------
Ending balance.......................... $125,746 $118,973 $126,632
======== ======== ========
Net increase (decrease)................. $ 6,773 $ (7,659) $ 422
======= ======== =========
Percent increase (decrease)............. 5.69% (6.05)% .33%
======= ======= =========
24
Deposits in the Bank as of September 30, 1997 were made pursuant to
various types of savings programs, described below.
September 30,
-------------------------------------------------------------------------
1997 1996 1995
--------------------- ------------------------ ------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Transactions and Savings Deposits:
Passbook Accounts 2.80%(1).......................... $ 19,938 15.86% $ 20,386 17.13% $23,350 18.44%
NOW and Money Market Accounts 2.50 -
4.35%(1)........................................... 10,737 8.53 10,764 9.05 11,467 9.05
-------- ---- --------- ------ ------- ------
Total Non-Certificates......................... 30,675 24.39 31,150 26.18 34,817 27.49
-------- ------ --------- ------ ------- ------
Certificates:
2.00 - 3.99%...................................... --- --- --- --- 1 .03
4.00 - 5.99%...................................... 62,938 50.05 63,143 53.07 54,536 43.05
6.00 - 7.99%...................................... 30,997 24.65 23,390 19.66 35,729 28.21
8.00 - 9.99%...................................... 1,136 .91 1,290 1.09 1,549 1.22
--------- --------- --------- ------- --------- -------
Total Certificates............................. 95,071 75.61 87,823 73.82 91,815 72.51
--------- ------- --------- ------ --------- -------
Total Deposits................................. $125,746 100.00% $118,973 100.00% $126,632 100.00%
======== ====== ======== ====== ======== ======
(1) Rates in effect at September 30, 1997.
25
The following table shows rate and maturity information for the Bank's
certificates of deposit as of September 30, 1997.
4.00- 5.00- 6.00- 7.00- 8.00- 9.00- Percent
4.99% 5.99% 6.99% 7.99% 8.99% 9.99% Total of Total
----- ----- ----- ----- ----- ----- ----- --------
Certificate accounts maturing
in quarter ending:
December 31, 1997............ $690 $19,434 $ 379 $ --- $ --- $ 7 $20,510 21.57%
March 31, 1998............... --- 10,887 1,176 --- 75 --- 12,138 12.77
June 30, 1998................ --- 9,311 1,812 --- 359 438 11,920 12.54
September 30, 1998........... --- 6,729 8,963 --- --- --- 15,692 16.50
December 31, 1998............ --- 3,927 2,294 80 --- 100 6,401 6.73
March 31, 1999............... --- 6,519 1,318 8 --- 109 7,954 8.37
June 30, 1999................ --- 1,636 3,896 --- --- 48 5,580 5.87
September 30, 1999........... --- 603 3,391 --- --- --- 3,994 4.20
December 31, 1999............ --- 350 736 944 --- --- 2,030 2.13
March 31, 2000............... --- 589 518 491 --- --- 1,598 1.68
June 30, 2000................ --- 24 767 --- --- --- 791 .83
September 30, 2000........... --- 477 1,057 8 --- --- 1,542 1.62
Thereafter................... --- 1,761 3,160 --- --- --- 4,921 5.19
------ ------- ------- --------- ---------- --------- -------- -------
Total..................... $690 $62,247 $29,467 $1,531 $ 434 $ 702 $95,071 100.00%
==== ======= ======= ====== ======== ======= ======= ======
Percent of total.......... .73% 65.47% 30.99% 1.61% .46% .74%
====== ====== ====== ===== ====== ========
26
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of September 30,
1997.
Maturity
------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------ ------ --------- -----
Certificates of deposit less than $100,000... $ 9,838 $ 8,517 $19,439 $24,992 $62,786
Certificates of deposit of $100,000 or more.. 3,304 1,790 8,073 9,819 22,986
(excluding Public Funds)
Public funds(1).............................. $ 7,368 $ 1,831 $ 100 $ --- $ 9,299
Total certificates of deposit................ $20,510 $12,138 $27,612 $34,811 $95,071
======= ======= ======= ======= =======
(1) Deposits from governmental and other public entities.
For additional information regarding the composition of the Bank's
deposits, see Note 10 of the Notes to the Consolidated Financial Statements in
the Annual Report.
Borrowings. The Bank's other available sources of funds include
advances from the FHLB of Chicago and other borrowings. As a member of the FHLB
of Chicago, the Bank is required to own capital stock in the FHLB of Chicago and
is authorized to apply for advances from the FHLB of Chicago. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The FHLB of Chicago may prescribe the acceptable uses for these
advances, as well as limitations on the size of the advances and repayment
provisions.
Consistent with its asset/liability management strategy, the Bank may
utilize FHLB advances to extend the term to maturity of its liabilities. Also,
the Bank uses FHLB borrowings to fund loan demand and other investment
opportunities and to offset deposit outflows. At September 30, 1997, the Bank
had $56.5 million of FHLB advances outstanding with a weighted average interest
rate of 6.24%. See Note 11 of the Notes to the Consolidated Financial Statements
in the Annual Report.
27
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and all other borrowings for the periods
indicated.
Ten Months
Year Ended Ended
September 30, September 30,
----------------------- -------------
1997 1996 1995
---- ---- ----
(In Thousands)
Maximum Balance:
FHLB advances...................... $59,800 $61,800 $51,400
Average Balance:
FHLB advances...................... $58,323 $51,950 $45,949
The following table sets forth certain information as to the Bank's
FHLB advances at the dates indicated.
September 30,
---------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
FHLB advances............................................. $ 56,500 $59,600 $45,500
-------- ------- -------
Total borrowings..................................... $ 56,500 $59,600 $45,500
======== ======= =======
Weighted average interest rate of FHLB advances........... 6.24% 6.05% 6.33%
Subsidiary Activities
The Bank is permitted by OCC regulations to invest unlimited amounts in
subsidiaries that are engaged in activities in which the parent bank may engage.
In addition, a national bank may invest limited amounts in subsidiaries that
provide banking services, such as data processing, to other financial
institutions.
At September 30, 1997, Damen had one wholly-owned service corporation,
Dasch, Incorporated ("Dasch" or the "Subsidiary"). Dasch, an Illinois
corporation, was incorporated on March 25, 1976 for the purpose of operating a
retail insurance agency selling primarily homeowners and mortgage disability
insurance. The insurance agency was sold in August 1985 and since that time the
Subsidiary has remained inactive.
At September 30, 1997, the Subsidiary's assets consisted entirely of
$188,400 in a savings and a money market account at Damen. At that date, the
Subsidiary had liabilities of $3,200 and equity consisted of $5,000 of capital
stock owned by Damen and $180,200 of retained earnings. Net income for the years
ended September 30, 1997 and 1996 was $2,999 and $3,895, respectively.
28
Competition
The Bank faces strong competition both in originating real estate and
consumer loans and in attracting deposits. Competition in originating loans
comes primarily from other savings institutions, commercial banks, credit unions
and mortgage bankers which also make loans secured primarily by real estate
located in the Bank's market area. The Bank competes for loans principally on
the basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
The Bank attracts its deposits through its main and branch offices,
primarily from the communities in which those offices are located; therefore,
competition for those deposits is principally from other savings institutions,
commercial banks, credit unions, mutual funds and securities firms located in
the same communities. The ability of the Bank to attract and retain deposits
depends on its ability to provide an investment opportunity that satisfies the
requirements of investors as to rate of return, liquidity, risk, convenient
locations and other factors. The Bank competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours,
interbranch deposit and withdrawal privileges and a customer oriented staff. The
Bank's share of the loan and deposit markets in its market area is less than 1%.
Employees
At September 30, 1997, the Company had a total of 36 full-time
employees. None of the Company's employees are represented by any collective
bargaining agreement. Management considers its employee relations to be good.
Executive Officers
Information concerning the executive officers of the Registrant who are
not also directors of the Registrant is contained in Part I of this Form 10-K
under the caption "Executive Officers Who Are Not Directors.
Executive Officers Who Are Not Directors
The following is a description of the Company's and Bank's executive
officers who were not also directors as of September 30, 1997.
Gerald J. Gartner. Mr. Gartner, age 54, has served as Treasurer and
Chief Financial Officer of the Bank since 1975 and the Company since its
incorporation in 1995.
Kenneth D. Vanek. Mr. Vanek, age 67, has served as a branch manager and
Senior Vice President of the Bank since 1988, and of the Company since its
incorporation in 1995. Mr. Vanek joined Damen in 1971 as an accounting clerk.
29
REGULATION
General
The Company is a registered bank holding company, subject to broad
federal regulation and oversight by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). The Bank is a national bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, the Bank is subject to broad
federal regulation and oversight extending to all its operations by the OCC, the
FDIC and the Federal Reserve Board. The Bank is also a member of the FHLB of
Chicago. The Bank is a member of the SAIF and the deposits of the Bank are
insured by the FDIC.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of National Banks
The OCC has extensive authority over the operations of national banks.
As part of this authority, the Bank is required to file periodic reports with
the OCC and is subject to periodic examinations by the OCC. All national banks
are subject to a semi-annual assessment, based upon the institution's total
assets, to fund the operations of the OCC.
The OCC also has extensive enforcement authority over all national
banks, including the Bank. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports filed with the
OCC. Except under certain circumstances, public disclosure of final enforcement
actions by the OCC is required.
The Bank's loans-to-one borrower limit is generally limited to 15% of
unimpaired capital and surplus (except for loans fully secured by certain
readily marketable collateral, in which case this limit is raised to 25% of
unimpaired capital and surplus). At September 30, 1997, the maximum amount which
the Bank could have loaned under this limit to any one borrower and the
borrower's related entities was approximately $5.9 million. At September 30,
1997, the Bank had no loans or groups of loans to related borrowers with
outstanding balances in excess of this amount.
The OCC, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. The OCC and the other federal banking
30
agencies have also proposed additional guidelines on asset quality and earnings
standards. No assurance can be given as to whether or in what form the proposed
regulations will be adopted.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the FDIC. The FDIC
also has the authority to initiate enforcement actions against savings
associations, after giving the OCC an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
In order to equalize the deposit insurance premium schedules for SAIF
insured institutions and institutions with deposits insured by the Bank
Insurance Fund (the "BIF"), the FDIC imposed a one-time special assessment on
all SAIF-assessable deposits held as of March 31, 1995 pursuant to legislation
enacted on September 30, 1996. The Company's special assessment, which was
$860,000, was paid in November 1996 but accrued for the fiscal year ended
September 30, 1996. Effective January 1, 1997, the premium schedule for BIF and
SAIF insured institutions ranged from 0 to 27 basis points. However,
SAIF-insured institutions are required to pay a Financing Corporation (FICO)
assessment, in order to fund the interest on bonds issued to resolve thrift
failures in the 1980s, equal to 6.48 basis points for each $100 in domestic
deposits, while BIF-insured institutions pay an assessment equal to 1.52 basis
points for each $100 in domestic deposits. The assessment is expected to be
reduced to 2.43 no later than January 1, 2000, when BIF insured institutions
fully participate in the assessment. These assessments, which may be revised
based upon the level of BIF and SAIF deposits, will continue until the bonds
mature in the year 2017.
Regulatory Capital Requirements. The Bank is subject to the capital
regulations of the OCC. The OCC's regulations establish two capital standards
for national banks: a leverage requirement and a risk-based capital requirement.
In addition, the OCC may, on a case-by-case basis, establish individual minimum
capital requirements for a national bank that vary from the
31
requirements which would otherwise apply under OCC regulations. A national bank
that fails to satisfy the capital requirements established under the OCC's
regulations will be subject to such administrative action or sanctions as the
OCC deems appropriate.
The leverage ratio adopted by the OCC requires a minimum ratio of "Tier
1 capital" to adjusted total assets of 3% for national banks rated composite 1
under the CAMEL rating system for banks. National banks not rated composite 1
under the CAMEL rating system for banks are required to maintain a minimum ratio
of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the level
and nature of risks of their operations. For purposes of the OCC's leverage
requirement, Tier 1 capital generally consists of common stockholders' equity
and retained income and certain non-cumulative perpetual preferred stock and
related income, except that no intangibles and certain purchased mortgage
servicing rights and purchased credit card relationships may be included in
capital.
The risk-based capital requirements established by the OCC's
regulations require national banks to maintain "total capital" equal to at least
8% of total risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" means Tier 1 capital (as described above) plus
"Tier 2 capital," provided that the amount of Tier 2 capital may not exceed the
amount of Tier 1 capital, less certain assets. The components of Tier 2 capital
include certain permanent and maturing capital instruments that do not qualify
as core capital and general valuation loan and lease loss allowances up to a
maximum of 1.25% of risk-weighted assets.
The OCC has revised its risk-based capital requirements to permit the
OCC to require higher levels of capital for an institution in light of its
interest rate risk. In addition, the OCC has proposed that a bank's interest
rate risk exposure would be quantified using either the measurement system set
forth in the proposal or the institution's internal model for measuring such
exposure, if such model is determined to be adequate by the institution's
examiner. Small institutions that are highly capitalized and have minimal
interest rate risk would be exempt from the rule unless otherwise determined by
the OCC. Management of the Bank has not determined what effect, if any, the
OCC's proposed interest rate risk component would have on the Bank's capital if
adopted as proposed.
Prompt Corrective Action. The OCC is authorized and, under certain
circumstances required, to take certain actions against national banks that fail
to meet their capital requirements. The OCC is generally required to take action
to restrict the activities of an "undercapitalized association" (generally
defined to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OCC may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OCC is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
32
Any national banking association that fails to comply with its capital
plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core
capital ratios of less than 3% or a risk-based capital ratio of less than 6%)
must be made subject to one or more of additional specified actions and
operating restrictions which may cover all aspects of its operations and include
a forced merger or acquisition of the Bank. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OCC
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
bank, with certain limited exceptions, within 90 days after it becomes
critically undercapitalized. Any undercapitalized bank is also subject to the
general enforcement authority of the OCC, including the appointment of a
conservator or a receiver.
The OCC is also generally authorized to reclassify a bank into a lower
capital category and impose the restrictions applicable to such category if the
institution is engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The imposition by the OCC of any of these measures on the Bank may have
a substantial adverse effect on the Bank's operations and profitability and the
value of the Company's Common Stock.
Limitations on Dividends and Other Capital Distributions
The Bank's ability to pay dividends is governed by the National Bank
Act and OCC regulations. Under such statute and regulations, all dividends by a
national bank must be paid out of current or retained net profits, after
deducting reserves for losses and bad debts. The National Bank Act further
restricts the payment of dividends out of net profits by prohibiting a national
bank from declaring a cash dividend on its shares of common stock until the
surplus fund equals the amount of capital stock or, if the surplus fund does not
equal the amount of capital stock, until one-tenth of the Bank's net profits for
the preceding half year in the case of quarterly or semi-annual dividends, or
the preceding two half-year periods in the case of annual dividends, are
transferred to the surplus fund. In addition, the prior approval of the OCC is
required for the payment of a dividend if the total of all dividends declared by
a national bank in any calendar year would exceed the total of its net profits
for the year combined with its net profits for the two preceding years, less any
required transfers to surplus or a fund for the retirement of any preferred
stock.
The OCC has the authority to prohibit the payment of dividends by a
national bank when it determines such payment to be an unsafe and unsound
banking practice. In addition, the Bank would be prohibited by federal statute
and the OCC's prompt corrective action regulations from making any capital
distribution if, after giving effect to the distribution, the Bank would be
classified as "undercapitalized" under the OCC's regulations. See "-- Insurance
of Accounts and Regulation by the FDIC-- Prompt Corrective Action." Finally, the
Bank would not be able to pay dividends on its capital stock if its capital
would thereby be reduced below the remaining balance of the liquidation account
established in connection with the Conversion.
33
Accounting
The OCC requires that investment activities of a national bank be in
compliance with approved and documented investment policies and strategies, and
must be accounted for in accordance with generally accepted accounting
principles ("GAAP"). Accordingly, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. The Bank is in compliance with these
requirements.
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OCC, in connection with the examination of the
Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OCC.
The federal banking agencies, including the OCC, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in 1996 and received a rating of "Satisfactory."
Transactions with Affiliates
Generally, transactions between a national bank or its subsidiaries and
its affiliates are required to be on terms as favorable to the bank as
transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the Bank's
capital. Affiliates of the Bank include any company which is under common
control with the Bank. In addition, the Bank may not acquire the securities of
most affiliates. Subsidiaries of the Bank are not deemed affiliates. However,
the Federal Reserve Board has the discretion to treat subsidiaries of national
banks as affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons
("Insiders") are also subject to conflict of interest rules enforced by the OCC.
These conflict of interest regulations and other statutes also impose
restrictions on loans to such persons and their related interests. Among other
things, as a general matter, loans to Insiders must be made on terms
substantially the same as for loans to unaffiliated individuals.
34
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At September 30, 1997, the Bank had $578,000 in FRB stock, which was in
compliance with these reserve requirements.
National banks are authorized to borrow from the FRB "discount window,"
but Federal Reserve Board regulations require associations to exhaust other
reasonable alternative sources of funds, including FHLB borrowings, before
borrowing from the FRB.
The Bank is a member of the Federal Reserve System.
Holding Company Regulation
General. The Company is a bank holding company, registered with the
Federal Reserve Board. Bank holding companies are subject to comprehensive
regulation by the Federal Reserve Board under the Bank Holding Company Act of
1956, as amended (the"BHCA"), and the regulations of the Federal Reserve Board.
As a bank holding company, the Company is required to file reports with the
Federal Reserve Board and such additional information as the Federal Reserve
Board may require, and will be subject to regular examinations by the Federal
Reserve Board. The Federal Reserve Board also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including its
bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
Under Federal Reserve Board policy, a bank holding company must serve
as a source of strength for its subsidiary banks. Under this policy the Federal
Reserve Board may require, and has required in the past, a holding company to
contribute additional capital to an undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain Federal Reserve
Board approval before: (i) acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve Board regulation or
order, have been identified as
35
activities closely related to the business of banking or managing or controlling
banks. The list of activities permitted by the Federal Reserve Board includes,
among other things, operating a savings institution, mortgage company, finance
company, credit card company or factoring company; performing certain data
processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers.
Interstate Banking and Branching. On September 29, 1994, the
Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Act") was enacted
to ease restrictions on interstate banking. Effective September 29, 1995, the
Act allows the Federal Reserve Board to approve an application of an adequately
capitalized and adequately managed bank holding company to acquire control of,
or acquire all or substantially all of the assets of, a bank located in a state
other than such holding company's home state, without regard to whether the
transaction is prohibited by the laws of any state. The Federal Reserve Board
may not approve the acquisition of the bank that has not been in existence for
the minimum time period (not exceeding five years) specified by the statutory
law of the host state. The Act also prohibits the Federal Reserve Board from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. The Act does not
affect the authority of states to limit the percentage of total insured deposits
in the state which may be held or controlled by a bank or bank holding company
to the extent such limitation does not discriminate against out-of-state banks
or bank holding companies. Individual states may also waive the 30% state-wide
concentration limit contained in the Act.
Additionally, on June 1, 1997, the federal banking agencies became
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state of
one of the banks opted out of the Act by adopting a law after the date of
enactment of the Act and prior to June 1, 1997 which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches will be permitted only
if the law of the state in which the branch is located permits such
acquisitions. Interstate mergers and branch acquisitions will also be subject to
the nationwide and statewide insured deposit concentration amounts described
above. The State of Illinois has authorized interstate merger transactions
effective June 1, 1997.
The Act authorizes the OCC and FDIC to approve interstate branching de
novo by national and state banks, respectively, only in states which
specifically allow for such branching.
Dividends. The Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies, which expresses the
Federal Reserve Board's view that a bank holding company should pay cash
dividends only to the extent that the holding company's net income for the past
year is sufficient to cover both the cash dividends and a rate of earning
retention that is consistent with the holding company's capital needs, asset
quality and overall
36
financial condition. The Federal Reserve Board also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the Federal Reserve Board, the Federal Reserve Board may
prohibit a bank holding company from paying any dividends if the holding
company's bank subsidiary is classified as "undercapitalized". See "
- --Regulatory Capital Requirements -- Prompt Corrective Action."
Bank holding companies are required to give the Federal Reserve Board
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve Board may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order, or any condition imposed by, or written agreement with, the Federal
Reserve Board. This notification requirement does not apply to any company that
meets the well-capitalized standard for commercial banks, has a safety and
soundness examination rating of at least a "2" and is not subject to any
unresolved supervisory issues.
Capital Requirements. The Federal Reserve Board has established capital
requirements for bank holding companies that generally parallel the capital
requirements for national banks. For bank holding companies with consolidated
assets of less than $150 million, compliance is measured on a bank-only basis.
See "-- Regulatory Capital Requirements - National Banks." At September 30,
1997, the Company satisfied the Federal Reserve Board's capital requirements for
bank holding companies.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Chicago, which is one of 12
regional FHLBs that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Chicago. At September 30, 1997, the Bank had $3.1 million in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past five calendar
years such dividends have averaged 6.47% and were 6.75% for calendar year 1996.
37
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
Federal and State Taxation
Federal Taxation. In addition to the regular income tax, corporations,
including the Bank, are generally subject to a minimum tax. An alternative
minimum tax is imposed at a minimum tax rate of 20% on alternative minimum
taxable income, which is the sum of a corporation's regular taxable income (with
certain adjustments) and tax preference items, less any available exemption. The
alternative minimum tax is imposed to the extent it exceeds the corporation's
regular income tax and net operating losses can offset no more than 90% of
alternative minimum taxable income. For taxable years beginning after 1986 and
before 1996, corporations, such as the Bank, were also subject to an
environmental tax equal to 0.12% of the excess of alternative minimum taxable
income for the taxable year (determined without regard to net operating losses
and the deduction for the environmental tax) over $2 million.
The Company and its subsidiaries filed separate federal income tax
returns on a fiscal year basis using the accrual method of accounting.
Neither the Company nor its subsidiary have been audited by the IRS
with respect to their federal income tax returns during the last ten years. In
the opinion of management, any examination of still open returns (including
returns of subsidiaries and predecessors of, or entities merged into, the
Company) would not result in a deficiency which could have a material adverse
effect on the financial condition of the Company on a consolidated basis.
Illinois Taxation. For Illinois income tax purposes, the Company is
taxed at an effective rate equal to 7.18% of Illinois taxable income. For these
purposes, "Illinois Taxable Income" generally means federal taxable income,
subject to certain adjustments (including the addition of interest income on
state and municipal obligations and the exclusion of interest income on United
States Treasury obligations). The exclusion of income on United States Treasury
obligations has had the effect of eliminating Illinois taxable income for the
Company.
The Company's accounting activities are maintained on an in-house
computer system and its record-keeping activities are maintained on an on-line
basis with an independent service bureau.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
38
Item 2. Description of Properties
DFC conducts its business at its main office and two other locations in
its market area. The following table sets forth information concerning each of
DFC's offices as of September 30, 1997. At September 30, 1997, the total net
book value of DFC's premises and equipment (including land, building and
leasehold improvements, and furniture, fixtures and equipment) was approximately
$3.5 million.
Year Owned or Net Book Value at
Location Acquired Leased September 30, 1997
- ------------------------- --------------- ---------------- ------------------
Main Office:
200 West Higgins Road 1993(1) Owned $1,947,000
Schaumburg, Illinois
Full Service Branches:
5100 South Damen Avenue 1964 Owned 181,000
Chicago, Illinois
5750 West 87th Street 1991 Owned 739,000
Burbank, Illinois
(1) Office first occupied in 1975.
The Company believes that its current facilities are adequate to meet
the present and foreseeable future needs of the Company. The Company's
Schaumburg office currently has approximately 12,000 square feet of unoccupied
office space which Damen intends to lease to third parties.
The Bank's depositor and borrower customer files are maintained by an
independent data processing company. The net book value of the data processing
and computer equipment utilized by the Company at September 30, 1997 was
approximately $290,000. The Company upgraded its data processing and computer
equipment during fiscal 1996 at a cost of $333,000.
Item 3. Legal Proceedings
From time to time, DFC is involved as plaintiff or defendant in various
legal proceedings arising in the normal course of its business. While the
ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on DFC's financial position or results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September 30,
1997.
39
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information under the caption "Stock Listing" on page 46 of the
attached 1997 Annual Report to Stockholders is herein incorporated by reference.
Item 6. Selected Financial Data
Pages 6 and 7 of the attached 1997 Annual Report to Stockholders is
herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Pages 8 through 21 of the attached 1997 Annual Report to Stockholders
is herein incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item contained in the attached 1997
Annual Report to Stockholders is herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
The following information appearing in the Company's Annual Report to
Stockholders for the year ended September 30, 1997, is incorporated by reference
in this Annual Report on Form 10-K as Exhibit 13.
Pages in
Annual
Annual Report Section Report
- --------------------- ------
Report of Independent Auditors....................................................................... 22
Consolidated Statement of Financial Condition as of September 30, 1997 and
September 30, 1996................................................................................. 23
Consolidated Statement of Earnings for the Periods Ended September 30, 1997
September 30, 1996 and September 30, 1995.......................................................... 24 and 25
Consolidated Statement of Changes in Stockholders' Equity for the Periods Ended
September 30, 1997, September 30, 1996 and September 30, 1995...................................... 26
Consolidated Statement of Cash Flows for the Periods Ended September 30, 1997,
September 30, 1996 and September 30, 1995.......................................................... 27 and 28
Notes to Consolidated Financial Statements........................................................... 29 through 45
40
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Information concerning directors of the Registrant is incorporated
herein by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held in 1998, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Executive Officers
Information concerning the executive officers of the Registrant who are
not also directors of the Registrant is contained in Part I of this Form 10-K
under the caption "Executive Officers Who Are Not Directors."
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended September 30, 1997, the
Registrant complied with all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10 percent beneficial owner were complied
with.
41
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1998, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1998, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1998, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
42
Item 14. Exhibits and Reports on Form 8-K
(a) Exhibits
Reference to
Regulation Prior Filing or
S-K Exhibit Exhibit Number
Number Document Attached Hereto
- ---------- ---------------------------------------------------- ----------------
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3(a) Articles of Incorporation *
3(b) By-Laws *
4 Instruments defining the rights of security holders, *
including debentures
9 Voting Trust Agreement None
10 Material contracts
Profit Sharing Plan and Trust *
Money Purchase Plan and Trust *
Form of 1995 Stock Option and Incentive Plan *
Employment Agreements of Mary Beth Poronsky *
Stull, Janine M. Poronsky, Gerald J. Gartner and
Kenneth D. Vanek
Form of Recognition and Retention Plan **
Employee Severance Compensation Plan **
11 Statement regarding computation of per share earnings None
13 Annual Report to Security Holders 13
16 Letter regarding change in certifying accountants None
18 Letter regarding change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote None
of security holders
23 Consents of Experts 23
24 Power of Attorney None
27 Financial Data Schedule 27
99 Additional Exhibits None
* Filed as exhibits to the Company's Form S-1 registration statement
filed on June 23, 1995 (File No. 33-93868) pursuant to Section 5 of the
Securities Act of 1933. All of such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-K.
** Filed as exhibits to the Company's Amendment No. 1 to Form S-1
registration statement filed on August 4, 1995 (File No. 33-93868)
pursuant to Section 5 of the Securities Act of 1933. All of such
previously filed documents are hereby incorporated herein by reference
in accordance with Item 601 of Regulation S-K.
43
b) Reports on Form 8-K
During the quarter ended September 30, 1997, the Company filed no
Current Reports on Form 8-K.
44
SIGNATURES
Pursuant to the requirements of Section 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, thereunto duly authorized.
DAMEN FINANCIAL CORPORATION
By: /s/ Mary Beth Poronsky Stull
----------------------------
Mary Beth Poronsky Stull, Chairman of the
Board, President and Chief Executive Officer
(Duly Authorized Representative)
Date: December 29, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Mary Beth Poronsky Stull
- ---------------------------------------
Mary Beth Poronsky Stull, Chairman of the
Board, President and Chief Executive
Officer
(Principal Executive and Operating Officer)
Date: December 29, 1997
/s/ Janine M. Poronsky
- ---------------------------------------
Janine M. Poronsky, Vice President,
Corporate Secretary and Director
Date: December 29, 1997
/s/ Gerald J. Gartner
- ---------------------------------------
Gerald J. Gartner, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: December 29, 1997
/s/ Nicholas J. Raino
- ---------------------------------------
Nicholas J. Raino, Director
Date: December 29, 1997
/s/ Charles J. Caputo
- ---------------------------------------
Charles J. Caputo, Director
Date: December 29, 1997
/s/ Edward R. Tybor
- ---------------------------------------
Edward R. Tybor, Director
Date: December 29, 1997
/s/ Carol A. Diver
- ---------------------------------------
Carol A. Diver, Director
Date: December 29, 1997
45