EXHIBIT 13
ANNUAL REPORT TO SECURITYHOLDERS
CONTENTS
Letter to Shareholders .................................................... 2
Board of Directors and Officers ........................................... 5
Selected Conslidated Financial Information ................................ 6
Management's Discussion and Analysis ...................................... 8
Report of Independent Auditors ............................................ 22
Consolidated Financial Statements ......................................... 23
Notes to Consolidated Financial Statements ................................ 29
Shareholder Information ................................................... 46
FINANCIAL HIGHLIGHTS
Years Ended September 30
------------------------
1997 1996 1995
---- ---- ----
(dollars in thousands)
Total Assets ............................... $231,109 $234,555 $232,358
Total Loans ................................ 97,244 91,146 87,555
Mortgage-Backed and Other Securities ....... 126,028 136,328 119,541
Deposits ................................... 125,746 118,973 126,632
Borrowings ................................. 56,500 59,600 45,500
Net Income ................................. 1,745 1,780 1,375
Earnings Per Share ......................... .53 .49 .38
Stockholders' Equity ....................... 45,939 52,870 55,710
Stockholders' Equity as a Percent of Assets 19.88% 22.54% 23.98%
COMPANY PROFILE
Damen Financial Corporation was incorporated in 1995 and is the holding
company for Damen National Bank.
Damen National Bank has deep roots in the Chicago area. Since 1916, its
primary purposes have been to provide a safe, secure place for families to save
and to provide affordable home mortgages. Today, it has evolved into a strong
community bank still dedicated to its original purposes but with an increasing
number of financial products and services designed to meet the growing needs of
a diversified customer base.
Damen Financial Corporation has assets of $231 million and is headquartered
in Schaumburg, Illinois. Damen National Bank operates from three offices in the
Chicagoland area. The Company's common stock is traded on the NASDAQ Stock
Market under the symbol: DFIN.
THIS PAST YEAR USHERED IN A NEW ERA FOR OUR PRINCIPAL SUBSIDIARY AND OPENED THE
DOOR TO NEW OPPORTUNITIES FOR DAMEN FINANCIAL CORPORATION
MESSAGE TO OUR SHAREHOLDERS
On February 27, 1997, Damen Federal Bank was granted a new charter to
operate as a national bank, Damen National Bank. This change is a key element in
our long-term strategy to enhance net income and profitability with a wider
array of financial products. These new products can be blended with our more
traditional home-related lending programs to give us greater earning power and
greater investment flexibility.
We saw progress in several important areas over the past year. We are
pleased to say that we remained profitable and that per share earnings
increased. However, profitability and performance are not yet at the levels we
feel are possible. While net income for the fiscal year decreased, net income
showed significant progress for the last quarter of the fiscal year, a positive
trend. Stock repurchases included our successful "Modified Dutch Auction" which
was held during March 1997. By necessity, funds had to be set aside for these
repurchases, resulting in a lower level of income producing assets. We are
encouraged that our net interest income declined by only 4.6% in spite of the
$9.8 million for stock repurchases and the more than $1.0 million in dividends
paid to shareholders.
Other encouraging aspects of our operations for fiscal 1997 include an
increased book value per share, high asset quality, and the fact that loans and
deposits, which remain the conerstone of our banking franchise, have continued
to grow.
At September 30, 1997, book value per share was $14.78, an increase of $.76
from $14.02 at the end of the previous fiscal year. Stockholders' equity
decreased from $52.9 million to $45.9 million. The increase in per share value
and the decrease in stockholders' equity were both affected by the $9.8 million
repurchase of common stock and the payment of $1.0 million in cash dividends. We
have continued to pay a quarterly cash dividend of $.06 per share.
Our assets were $231 million at fiscal year-end. As in the past, the board
and management place a great deal of emphasis on asset quality. That quality
level remained high as our loan portfolio continued to increase. At year-end,
our loan portfolio was $97.2 million, up from $91.1 million at September 30,
1996. Of that
2
amount, only 12 one-hundredths of 1% were considered to be non-performing assets
(includes $79,000 real estate owned), a favorable ratio. We remain committed to
the communities we serve in providing a continual flow of home mortgage money
while maintaining conservative lending standards.
We are also proud of the niche we fill for low to moderate income
neighborhoods. That niche addresses the need for shorter term, lower amount
mortgages where we remain very competitive. These secure investments have low
delinquency histories. We will not abandon our commitment to our low-to-moderate
income communities.
In spite of heavy competition from stocks and mutual funds, our deposit
base continued to grow. Our depositors have displayed their financial needs with
deposits that helped us reach a level of $125.7 million, an increase of $6.8
million over last year.
Our home equity line-of-credit program has been very successful. It gives
us a lending product with a variable rate of return that provides a solid
interest rate spread. At year-end, over $3.3 million in new home equity lines of
credit had been extended with outstanding balances of $2.0 million.
In keeping with our commitment to maintaining long-term relationships
through quality service and quality products, we have introduced securities
investment services and financial advice as an option to our customers. These
services are made available through our affiliation with INVEST Financial
Corporation.
Capital remains one of our greatest strengths ... far above regulatory
requirements even after our repurchases of stock.
- --------------------------------------------------------------------------------
IN SPITE OF HEAVY COMPETITION FROM STOCKS AND MUTUAL FUNDS, OUR DEPOSIT BASE
CONTINUED TO GROW.
----------
A commitment to customer service and offering competitive rates have been prine
factors in the growth of our deposit base.
3
We will consider further repurchases of stock when we feel it is advantageous to
do so. Our capital is also at a level that continues to enable us to consider
the expansion of our curret markets.
There were no surprises over the last year. Our long-term business plan
correctly anticipated the growth levels we achieved as we turned from savings
institution to a national bank with a more diverse product line. We also
recognize our challenges for the future. As consolidation in the banking
business increases, our efforts to find niches in which we can better compete
must increase. We must meet the competition from outside sources for our market
base. More specifically, we must put our newly created tools to work in the most
efficient way so as to produce greater profit levels and maximize the return on
shareholder investment. Our goals are clear. We shall continue to seek avenues
of maximizing efficiency so as to improve our bottom line.
The officers and directors of Damen Financial Corporation look to the
coming year with enthusiasm. We are grateful to the well-trained, dedicated
people who function on your behalf and thank you, our shareholders and customers
for your continued support.
Sincerely,
Mary Beth Poronsky Stull
President and Chairman of the Board
- --------------------------------------------------------------------------------
AS A LEADER IN MEETING THE CREDIT NEEDS OF OUR LOCAL MARKETS, OUR LENDING
PORTFOLIO HAS INCREASED.
----------
Our local communities continue to demonstrate strong market potential. the
diligence of our borrowers has kept the quality of our loans at an excellent
level.
4
DAMEN FINANCIAL CORPORATION AND DAMEN NATIONAL BANK
Directors
- ---------
MARY BETH PORONSKY STULL
Chairman of the Board of the Company
President and Chief Executive Officer of the Company and
the Bank
EDWARD R. TYBOR
Chairman of the Board of the Bank
Owner, Kubina-Tybor Funeral Home, Chicago,
Illinois
GERALD J. GARTNER(1)
Treasurer and Chief Financial Officer of the Company
Cashier and Chief Financial Officer of the Bank
JANINE M. PORONSKY(2)
Vice President and Corporate Secretary
CHARLES J. CAPUTO
Retired, Former Owner, Caputo Southwest Cement, Orland Hills,
Illinois
CAROL A. DIVER
Corporate Secretary, Chicago Park District
MARK C. GUINAN(1)
Retired Physician
NICHOLAS J. RAINO(2)
Chairman of the Board, Dale, Smith & Associates, Inc.
Executive Officers
- ------------------
MARY BETH PORONSKY STULL
President and Chief Executive Officer
GERALD J. GARTNER
Treasurer and Chief Financial Officer of the Company
Cashier and Chief Financial Officer of the Bank
JANINE M. PORONSKY
Vice President and Corporate Secretary
KENNETH D. VANEK
Senior Vice President
(1) Director of the Bank only
(2) Director of the Company only
5
SELECTED CONSOLIDATED FINANCIAL INFORMAT10N
AT SEPTEMBER 30 AT NOVEMBER 30
(dollars in thousands) 1997 1996 1995(1) 1994 1993
---------------------- ---- ---- ------- ---- ----
Selected Financial Condition Data:
Total assets ....................................... $231,109 $234,555 $232,358 $190,643 $183,001
Loans receivable, net .............................. 97,244 91,146 87,555 88,225 84,814
Mortgage-backed securities ......................... 84,610 88,098 82,192 67,742 65,262
Tax-exempt securities .............................. 22,493 24,905 20,478 16,711 12,810
Investment securities .............................. 18,925 23,325 16,871 11,483 13,446
Deposits ........................................... 125,746 118,973 126,632 126,210 126,586
Borrowings ......................................... 56,500 59,600 45,500 44,000 36,000
Total equity ....................................... 45,939 52,870 55,710 17,874 17,406
TEN MONTHS
YEARS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 YEAR ENDED NOVEMBER 30
------------------------ ------------------ ----------------------
(dollars in thousands) 1997 1996 1995 1995(1) 1994 1994 1993
---------------------- ---- ---- ---- ------- ---- ---- ----
Selected Operations Data:
Total interest income ........................... $ 16,494 $ 16,661 $ 14,029 $ 11,851 $ 10,555 $ 12,723 $ 13,576
Total interest expense .......................... 9,823 9,672 9,397 7,997 6,234 7,632 7,784
-------- -------- -------- -------- -------- -------- --------
Net interest income .......................... 6,671 6,989 4,632 3,854 4,321 5,091 5,792
Provision for loan losses ....................... 37 70 163 163 -- -- --
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision for
loan losses .................................. 6,634 6,919 4,469 3,691 4,321 5,091 5,792
Fees and service charges ........................ 42 109 77 69 54 72 129
Gain (loss) on sales of mortgage-backed
securities and investment securities ......... 140 84 (6) 3 48 40 483
Unrealized gain (loss) on mortgage-backed
securities and investment securities
held-for-sale ................................ -- -- (892) -- (645) (1,537) --
Other non-interest income ....................... 85 74 82 66 83 97 143
-------- -------- -------- -------- -------- -------- --------
Total non-interest income ....................... 267 267 (739) 138 (460) (1,328) 755
Total non-interest expense ...................... 4,816 5,243 3,610 3,032 2,583 3,167 3,383
-------- -------- -------- -------- -------- -------- --------
Income before taxes and change in
accounting principles ........................ 2,085 1,943 120 797 1,278 596 3,164
Income tax (provision) benefit .................. (340) (163) 348 108 (277) 216 (860)
Cumulative effect of change in accounting for
securities available-for-sale, net of
tax effect .................................... -- -- 907 907 -- -- --
Cumulative effect of change in accounting for
income taxes .................................. -- -- -- -- (253) (253) --
Net income ...................................... $ 1,745 $ 1,780 $ 1,375 $ 1,812 $ 748 $ 559 $ 2,304
======== ======== ======== ======== ======== ======== ========
(1) During 1995, the Company changed its fiscal year end from November 30 to
September 30.
6
SELECTED FINANCIAL RATIOS AND OTHER DATA
AT OR FOR THE YEARS AT OR FOR TEN MONTHS AT OR FOR THE YEAR
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 ENDED NOVEMBER 30
------------------- -------------------- ------------------
1997 1996 1995 1995(1) 1994 1994 1993
---- ---- ---- ------- ---- ---- ----
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets (ratio of net
income to average total assets)(2)(3) ............... .75% .76%(5) .69% .54% .52% .30% 1.28%
Return on average stockholders' equity
(ratio of net income to average
retained earnings)(2)(3) ............................ 3.45 3.21(6) 6.75 4.83 5.27 3.12 14.15
Efficiency ratio(7) ................................... 70.84 61.11 75.35 76.02 57.94 60.20 55.79
Interest rate spread information:
Average during period ............................... 1.84 1.80 1.89 1.82 2.48 2.42 2.92
End of period ....................................... 1.72 1.70 1.65 1.65 2.08 2.26 2.95
Net interest margin(4) ................................ 2.98 3.07 2.41 2.37 2.91 2.84 3.32
Ratio of operating expense to average
total assets(2) ..................................... 2.07 2.23 1.82 1.81 1.69 1.71 1.88
Ratio of average interest-earning
assets to average interest-
bearing liabilities ................................. 1.26 1.30x 1.11x 1.11x 1.10x 1.10x 1.09x
Per Share Information:
Book value per share outstanding .................... 14.78 14.02 14.04 14.04 N/A N/A N/A
Earnings per share--primary ......................... .53 .49 .38 .50 N/A N/A N/A
Earnings per share--fully diluted ................... .53 .49 .38 .50 N/A N/A N/A
Dividends declared per share ........................ .24 .12 -- -- N/A N/A N/A
Quality Ratios:
Non-performing assets to total
assets at end of period ........................... .12 .15 .03 .03 .06 .06 .09
Allowance for loan losses to
non-performing loans .............................. 168.56 98.42 420.71 420.71 108.13 108.13 80.20
Allowance for loan losses to
loans receivable, net ............................. .34 .38 .31 .31 .14 .14 .15
Capital Ratios:
Stockholders' equity to total
assets at end of period ........................... 19.88 22.54 23.98 23.98 9.38 9.38 9.51
Average stockholders' equity
to average assets ................................. 21.73 23.63 10.26 11.16 9.77 9.64 9.04
Other Data:
Number of full-service offices ...................... 3 3 3 3 3 3 3
(1) During 1995, the Company changed its fiscal year end from November 30 to
September 30.
(2) Ratios for the ten month period have been annualized.
(3) Calculated prior to cumulative effect of change in accounting for
securities available-for-sale. For ten months ended September 30, 1995, the
Company's return on average assets and return on average equity would have
been .99% and 87.8%, respectively, if calculated to include the cumulative
effect of change in accounting.
(4) Net interest income divided by average interest earning assets.
(5) Return would have been .97% if calculated without regard to SAIF
assessment.
(6) Return would have been 4.12% if calculated without regard to SAIF
assessment.
(7) Non-interest expense, excluding SAIF special assessment, divided by net
interest income plus other income except for gains and losses on
investments available-for-sale and unrealized gains and losses on
securities held-for-sale.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Organization and History
Damen Financial Corporation, a Delaware corporation (the "Company"), was
formed in 1995 at the direction of Damen Federal Bank for Savings (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 ceased to be a savings and loan holding company, and became a bank
holding company.
The Bank was organized in 1916 to serve a primarily Slovak community from
an office established near 51st Street and South Damen Avenue, on the south side
of Chicago. This office has served the community with uninterrupted service
since 1916. In 1972 a branch office was opened in Schaumburg, Illinois, a
northwest suburb of Chicago. The Schaumburg office is now designated as the
"main office". In 1991 a branch office was opened in Burbank, Illinois, a
southwest suburb of Chicago. All offices are "full-service" facilities.
Forward-Looking Statements
When used in this Annual Report 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.
General
The Company conducts no significant business other than holding investment
securities and holding the common stock of its subsidiary, the Bank. All
references to the Company include the Bank and the Bank's subsidiary, Dasch,
Inc., unless otherwise indicated.
The business of the Company consists primarily of the business of the Bank.
The Bank is principally engaged in attracting deposits from the general public
and using such deposits, together with other funds, to originate primarily fixed
rate one-to four-family residential mortgages and to a much lesser extent,
multi-family, commercial real estate and deposit loans primarily in its market
area. The Bank also invests in mortgage-backed securities, U.S. Government and
Agency securities, tax exempt securities and other investments.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest earned on loans,
mortgage-backed securities and other investments, and its cost of funds,
consisting of interest paid on deposits and borrowings. In addition, the
Company's operating results are affected by loan fees, service charges, other
income and operating expenses which primarily consist of employee compensation
and benefits, occupancy expense, advertising, federal insurance premiums and
other general and administrative expenses.
8
The operations of the Company are significantly influenced by general
economic conditions and by policies of financial institution regulatory
agencies, including the Office of Thrift Supervision (the "OTS") (before the
Bank Conversion) and the Office of the Comptroller of the Company (the "OCC")
(after the Bank Conversion) and the FDIC. The Company's cost of funds is
influenced by interest rates on competing investments and general market
interest rates. Lending activities are affected by the demand for financing of
real estate and other types of loans, which in turn is affected by the interest
rates at which such financings may be offered.
The Bank's basic mission is to provide quality financial products and
services in an efficient and caring manner in the communities it serves, and in
so doing, create growth opportunities and value to its shareholders. In order to
enhance shareholder value, the Company will strive to maintain strength and
flexibility through high capital ratios, maintain high asset quality, increase
net interest rate spread, control operating expenses and increase efficiency.
The Company will consider expanding products and services where feasible and
beneficial.
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the financial statements and accompanying
notes thereto contained elsewhere herein.
Financial Condition
September 30, 1997 compared to September 30, 1996. Total assets decreased
$3.4 million to $231.1 million as of September 30, 1997 from $234.6 million as
of September 30, 1996. Loans receivable increased while most categories of
investments decreased primarily due to liquidations to fund stock repurchases of
$9.8 million during the year. Loans receivable increased by $6.1 million to
$97.2 million at September 30, 1997 from $91.1 million at September 30, 1996
primarily due to new mortgage loan originations of $21.0 million and new home
equity line of credit loan originations of $2.8 million exceeding loan
repayments during the year. Investment securities available-for-sale decreased
$7.5 million to $35.9 million from $43.4 million due to maturities and sales of
$15.5 million partially offset by purchases of $7.2 million and a net increase
in market value of $821,000. Mortgage-backed securities held to maturity
decreased $7.6 million to $27.9 million from $35.5 million primarily due to
repayments. Mortgage-backed securities available-for-sale increased $4.1 million
to $56.7 million as of September 30, 1997 from $52.6 million as of September 30,
1996, which was the result of purchases of $12.2 million and a net increase in
market value of $1.2 million exceeding repayments of $7.4 million and sales of
$1.8 million. Purchases of mortgage-backed securities included $4.1 million of
adjustable rate securities purchased to help reduce interest rate sensitivity.
Deposits increased by $6.8 million to $125.7 million at September 30, 1997
from $118.9 million at September 30, 1996 due to net deposits of $2.3 million
and interest credited of $4.5 million. Borrowings from the Federal Home Loan
Bank of Chicago decreased by $3.1 million to $56.5 million at September 30, 1997
from $59.6 million at September 30, 1996. Longer term borrowed money (terms over
two years) increased by $2 million while shorter term borrowings decreased $5.1
million. Advance maturities were extended somewhat during the year to take
advantage of a relatively flat yield curve and to help reduce interest rate
risk.
Stockholders' equity decreased by $6.9 million to $45.9 million at
September 30, 1997 from $52.8 million at September 30, 1996, due primarily to
the purchase of treasury stock at a cost of $9.8 million and payment of cash
dividends of $1.0 million, partially offset by net income of $1.7 million and
an increase of $1.2 million in net unrealized market gains, net of taxes, on
investments available for sale. The Company declared cash dividends of six cents
per share each quarter for the year ended September 30, 1997. At September 30,
1997 book value per share was $14.78 compared to $14.02 at September 30, 1996.
September 30, 1996 compared to September 30, 1995. Total assets increased
$2.2 million to $234.6 million as of September 30, 1996 from $232.4 million as
of November 30, 1995. Loans receivable and most categories of investments
increased as proceeds from the Conversion were deployed into loans and longer
term investments, thereby reducing cash and interest-bearing deposits by $19.2
million. Investment securities held to maturity increased $687,000 to $1 .8
million at September 30, 1996 from $1.1 million at September 30, 1995 due to
additional
9
investments of $785,000 exceeding repayments. Investment securities
available-for-sale increased $9.6 million to $43.3 million from $33.7 million
due to purchases of $19.6 million, less maturities and sales of $9.7 million and
a net decrease in market value of $298,000. Mortgage-backed securities held to
maturity decreased $7.0 million to $35.5 million from $42.5 million due
primarily to repayments. Mortgage-backed securities available-for-sale increased
$12.9 million to $52.6 million as of September 30, 1996 from $39.7 million as of
September 30, 1995, which was the result of purchases of $23.0 million exceeding
repayments of $8.4 million and sales of $1.0 million and a net decrease in
market value of $748,000. Purchases of mortgage-backed securities included $8.6
million of adjustable rate securities purchased to help reduce interest rate
sensitivity. Loans receivable increased by $3.6 million to $91.1 million at
September 30, 1996 from $87.5 million at September 30, 1995 due primarily to new
loans disbursed of $19.8 million exceeding loan repayments during the year.
Deposits decreased by $7.6 million to $119.0 million at September 30, 1996
from $126.6 million at September 30, 1995 due to net withdrawals of $12.8
million exceeding interest credited, as depositors sought higher returns on
other investment products. Borrowings from the Federal Home Loan Bank ("FHLB")
of Chicago increased by $14.1 million to $59.6 million at September 30, 1996
from $45.5 million at September 30, 1995. Longer term borrowed money (terms over
two years) increased by $2 million while shorter term borrowings increased by
$12.1 million. The proceeds were used primarily to offset net savings
withdrawals, and to a lesser extent, to fund loans and investments.
Stockholders' equity decreased by $2.8 million to $52.9 million at
September 30, 1996 from $55.7 million at September 30, 1995, due primarily to
the acquisition of stock for the previously unfunded Recognition and Retention
Plan at a cost of $1.9 million, an increase in net unrealized market losses on
investments available-for-sale, net of taxes, of $619,000 and the acquisition of
treasury shares at a cost of $2.3 million. In addition, the Company declared
cash dividends of twelve cents per share during the year ended September 30,
1996, which reduced stockholders' equity by $464,000. At September 30, 1996,
book value per share was $14.02 compared to $14.04 at September 30, 1995.
Asset/Liability Management
The Company's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. When
interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net interest
income. Finally, a flattening of the "yield curve" (i.e., a decline in the
difference between long- and short-term interest rates), could adversely impact
net interest income to the extent that the Company's assets have a longer
average term than its liabilities.
In an attempt to manage its exposure to changes in interest rates,
management monitors the Company's and the Bank's interest rate risk. Since the
late 1980s, the Bank's Investment - Asset/Liability Committee has met monthly to
review the Bank's interest rate risk position and profitability and to make
recommendations for adjustments to the Bank's Board of Directors. Management
also reviews the Company's and the Bank's portfolios, formulates investment
strategies and oversees the timing and implementation of transactions to assure
attainment of the Board's objectives in the most effective manner.
Until 1990, the Bank's interest rate monitoring efforts were focused
primarily on an analysis of the difference or "gap" between the amounts of its
assets and liabilities repricing during specific time periods. However,
beginning in 1991, the Bank also began to focus on a "Net Portfolio Value"
analysis (described below) in order to avoid distortions in gap analysis that
could be caused by changes in mortgage loan prepayment speeds and changes in the
relationship between long- and short-term interest rates.
In managing its asset/liability mix, and depending on the relationship
between long- and short-term interest rates, market conditions and consumer
preference, and in view of its substantial capital position, the Bank may place
more emphasis on managing net interest margin than on better matching the
interest rate sensitivity of its assets and liabilities in an effort to enhance
net interest income.
10
Management believes that the increased net interest income resulting from a
mismatch in the maturity of its asset and liability portfolios can, during
periods of declining or stable interest rates and "positively sloped" yield
curves, provide high enough returns to justify the increased exposure to sudden
and unexpected increases in interest rates. However, in view of the above, the
Bank's results of operations and net portfolio values remain vulnerable to
increases in interest rates and to declines in the difference between long- and
short-term interest rates.
To the extent consistent with its interest rate spread objectives and
market conditions, the Bank attempts to manage its interest rate risk and has
taken several steps in this regard. First, a significant portion of the Bank's
recent mortgage-backed and related securities acquisitions have been of
securities having adjustable interest rates or anticipated average lives of five
years or less. As of September 30, 1997, the Bank had $57.7 million of
adjustable rate and/or short or intermediate anticipated term (average life
projected to be five years or less) mortgage-backed and related securities.
Second, the Bank has devoted a portion of its investment securities to
instruments having short or intermediate (five years or less) terms. As of
September 30, 1997, the Bank had $14.0 million in investment securities maturing
or likely to be called in five years or less. Third, the Bank has devoted a
portion of its borrowing activity to indebtedness having terms of three years or
more. At September 30, 1997, the Bank had $18.0 million of borrowed money due
after September 30, 2000. Fourth, a portion of the Bank's deposits consists of
passbook accounts, which are considered by management to be somewhat more
resistant to interest rate changes than most other types of accounts, and
certificates of deposit, having maturities of three years or more. As of
September 30, 1997, the Bank had $19.9 million of passbook accounts and $4.9
million of certificates of deposit due after September 30, 2000. Also, although
the Bank does not make adjustable-rate loans due to competitive factors, the
Bank's fixed-rate lending program is focused on loans with terms 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 Bank voluntarily measures its interest rate risk ("IRR") in calculating
its risk-based capital. The IRR component of capital is a dollar amount that
measures the sensitivity of the Bank's net portfolio value ("NPV") to changes in
interest rates. In essence, this approach calculates the difference between the
present value of liabilities, expected cash flows from assets and cash flows
from off balance sheet contracts. Presented below, as of September 30, 1997, is
an analysis of the Bank's estimated interest rate risk as measured by changes in
NPV for instantaneous and sustained parallel shifts in interest rates, up and
down 400 basis points in 100 point increments.
NET PORTFOLIO VALUE
ASSUMED CHANGE
IN INTEREST RATES $ AMOUNT $ CHANGE CHANGE
- ----------------- -------- -------- ------
(basis points) (dollars in thousands)
+400 $22,391 $(18,018) (45)%
+300 26,799 (13,609) (34)
+200 31,252 (9,156) (23)
+100 35,951 (4,457) (11)
0 40,408 0 0
-100 43,740 3,332 8
-200 44,717 4,308 11
-300 46,578 6,169 15
-400 48,909 8,500 21
As noted above, the market value of the Bank's net assets would be
anticipated to decline significantly in the event of certain designated
increases in interest rates. For instance, in the event of a 200 basis point
increase in interest rates, NPV is anticipated to fall by $9.2 million or 22.7%.
On the other hand, a decrease in interest rates is anticipated to cause an
increase in NPV.
Certain assumptions were made in preparing the table above. These
assumptions relate to interest rates, loan prepayment rates, deposit decay rates
and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. In the event that interest rates change to the designated
levels, there can be no assurance that the Bank's assets and liabilities would
perform as set forth above. In
11
addition, a change in Treasury rates to the designated levels accompanied by a
change in the shape of the Treasury yield curve would cause significantly
different changes to the NPV than indicated above.
During the last several years, the Board has determined to reduce the level
of tolerated interest rate risk as measured by the Bank's interest rate
sensitivity gap and, beginning in 1991, by the changes to its NPV based upon
specified interest rate shocks. The actual and targeted levels of tolerated
interest rate risk are reviewed on a quarterly basis and are subject to change
depending on economic and competitive factors. The level of interest rate risk
in the NPV table set forth above as of September 30, 1997 is within the Bank's
current guidelines for tolerated interest rate risk.
Quantitative and Qualitative Disclosure
About Market Risk
The Company's interest rate risk position is discussed under the heading
Asset/Liability Management on page 10. Other types of market risk, such as
foreign currency exchange risk and commodity price risk, do not arise in the
normal course of the Company's business activities.
Liquidity and Capital Resources
The Company's principal sources of funds are deposits and borrowings,
amortization and prepayment of loan principal and mortgage-backed securities,
maturities and sales of investment securities and operations. While scheduled
loan repayments and maturing investments are relatively predictable, deposit
flows and early loan repayments are more influenced by interest rates, floors
and caps on adjustable rate loans and mortgage-backed securities, general
economic conditions and competition. The Company generally manages the pricing
of its deposits to be competitive and to increase core deposit relationships.
However, management has from time to time decided not to pay deposit rates that
are as high as those of its competitors and, when necessary, to supplement
deposits with longer term and/or less expensive alternative sources of funds.
OCC regulations require the Bank to maintain an adequate level of liquid
assets. Liquid assets generally include cash, certain time deposits, and
investments "available-for-sale." The Company has historically maintained a
significant level of liquid assets. At September 30, 1997, the Company's liquid
assets totaled approximately $94.7 million or 41.0% of total assets.
The Company's most liquid assets are cash and cash equivalents, which
consist of short-term, highly liquid investments with original maturities of
less than three months that are readily convertible to known amounts of cash and
interest-bearing deposits. The level of these assets is dependent on the
Company's operating, financing and investing activities during any given period.
At September 30, 1997 and 1996, cash and cash equivalents totaled $2.1 million
and $1.2 million respectively.
Operating activities provided positive cash flows for the years ended
September 30, 1997 and 1996 and the ten months ended September 30, 1995.
The primary investing activities of the Company are originating loans and
purchasing mortgage-backed and investment securities. During the years ended
September 30, 1997, and 1996 and the ten months ended September 30, 1995, the
Company's mortgage loan originations and purchases totaled $23.8 million, $19.8
million and $12.0 million, respectively. Purchases of mortgage-backed and
investment securities during the years ended September 30, 1997 and 1996, and
the ten months ended September 30, 1995 totaled $19.6 million, $43.5 million and
$32.2 million, respectively. A substantial portion of loan originations and
purchases of mortgage-backed securities and other investments were funded by
proceeds from the sale of the Company's stock in September 1995, loan repayments
(including prepayments), the maturity or sale of securities, and borrowed money.
The primary financing activities of the Company are deposits and
borrowings. For the year ended September 30, 1997 deposits increased $6.8
million due to net deposits of $2.3 million and interest credited of $4.5
million. For the year ended September 30, 1996 deposits decreased $7.6 million
due to net withdrawals of $12.8 million exceeding interest credited of $5.2
million. For the ten months ended September 30, 1995, deposits increased
$422,000 due to net withdrawals of $3.4 million and interest credited of
approximately $3.9 million. During the years ended September 30, 1997 and 1996,
and the ten months ended September 30,
12
1995, the Company's net (proceeds less repayments) financing activity with the
Federal Home Loan Bank ("FHLB") totaled ($3.1 )million, $14.1 million and $1.5
million respectively.
Liquidity management is both a daily and a long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-earning deposits and investment
securities, and (iv) the objectives of its asset/liability management program.
Excess liquidity is invested generally in interest-earning overnight deposits
and short- to intermediate-term U.S. Government and agency obligations and
mortgage-backed securities of short duration. If the Company requires funds
beyond its ability to generate them internally, it has additional borrowing
capacity with the FHLB of Chicago. The Company anticipates that it will have
sufficient funds available to meet current loan commitments. At September 30,
1997, the Company had outstanding loan commitments totaling $5.9 million and
unused home equity lines of credit of $1.2 million. See Note 10 of the Notes to
Consolidated Financial Statements for details of deposits and certificate
maturities.
The Bank is subject to various regulatory capital requirements imposed by
the OCC. At September 30, 1997, the Bank was in full compliance with all
applicable capital requirements. See Note 16 of the Notes to Consolidated
Financial Statements for a reconciliation of equity capital of the Bank to
regulatory capital.
Results of Operations
The Company's results of operations depend primarily upon the level of net
interest income, which is the difference between the interest income earned on
its interest-earning assets such as loans and investments, and the costs of the
Company's interest-bearing liabilities, primarily deposits and borrowings.
Results of operations are also dependent upon the level of the Company's
noninterest income, including fee income and service charges, and are affected
by the level of its noninterest expenses, including its general and
administrative expenses. Net interest income depends upon the volume of
interest-earning assets and interest-bearing liabilities and the interest rate
earned or paid on them, respectively.
Comparison of Operating Results for the
Years Ended September 30, 1997 and 1996
General. Net income for the year ended September 30, 1997 totaled $1.7
million, a decrease of $35,000 from net income of $1.8 million for the year
ended September 30, 1996. The decrease was primarily due to a decrease in net
interest income of $318,000, an increase in noninterest expense of $433,000
(excluding the SAIF special assessment) plus an increase in income tax expense
of $177,000, partially offset by the elimination of the SAIF special assessment
of $860,000 from the prior year.
Net Interest Income. Net interest income decreased $318,000 to $6.7 million
for the year ended September 30, 1997 from $7.0 million for the prior year.
Interest income decreased $167,000 due to a $4.0 million decrease in average
interest-earning assets to $223.8 million from $227.8 million, primarily due to
the liquidation of assets for stock repurchases of $9.8 million during the year,
partially offset by an increase of six basis points in the weighted average
yield to 7.37% during the year ended September 30, 1997 from 7.31% the prior
year. Interest expense increased by $151,000 for the year ended September 30,
1997 to $9.8 million from $9.7 million the prior year. The increase was due to
an increase of $2.3 million in average savings and borrowings in the year ended
September 30, 1997 as well as an increase of two basis points in the average
cost of funds to 5.53% from 5.51%. A decrease in the net interest margin to
2.98% from 3.07% during the year was primarily due to a significant decrease in
the ratio of interest-earning assets to interestbearing liabilities primarily
due to treasury stock purchases of $9.8 million which reduced the amount of
interest-earning assets by 4.3%.
Interest Income. Interest income decreased $167,000 to $16.5 million for
the year ended September 30, 1997 from $16.7 million for the prior year. The
decrease was primarily due to a decrease of $487,000 in interest earned on all
categories of investments, dropping to $8.6 million from $9.1 million, due to a
reduction in average outstanding balances of $8.3 million to $127.5 million from
$135.8 million, partially offset by an increase in the average yield on
securities to 6.76% from 6.71%. The decrease in investment income was partially
offset by an increase in interest on
13
loans of $269,000 to $7.6 million from $7.3 million which was the result of
average outstanding loans of $3.6 million during the year, partially offset by a
decrease of four basis points in the average loan yield to 8.22% from 8.26%.
Interest Expense. Interest expense increased $151,000 to $9.8 million for
the year ended September 30, 1997 from $9.7 million for the prior year. Interest
on deposits decreased $249,000 as average interest-bearing deposits decreased
$4.1 million to $119.4 million for the year ended September 30, 1997 from $123.5
million for the prior year. The cost of savings decreased to 5.18% from 5.21%
primarily due to most maturing certificates renewing at lower rates. Interest
expense on borrowed money increased $400,000 as the average balance of borrowing
from the Federal Home Loan Bank of Chicago increased $6.4 million to $58.3
million for the year ended September 30, 1997 from $51.9 million for the prior
year. The cost of borrowings remained unchanged at 6.25%.
Provision for Loan Losses. The provision for loan losses decreased to
$37,000 for the year ended September 30, 1997 from $70,000 for the prior year.
The provision is based on a formula which weighs loans by property type and
delinquency status. There were no significant individual loans which contributed
to the calculation of the allowance and there were no regulatory requests for
additional provisions for loan losses during the years ended September 30, 1997
or 1996.
Other Income. Other income of $267,000 for the year ended September 30,
1997 was unchanged from the prior year. A reduction in loan fees of $67,000, due
to a lower number of new loan originations and increased loan costs, (especially
for home equity and commercial loans), was partially offset by an increase of
$56,000 in gains on sales of investments.
Other Expenses. Other expenses decreased $427,000 to $4.8 million for the
year ended September 30, 1997 from $5.2 million for the prior year primarily due
to the SAIF special assessment of $860,000 in 1996 and a reduction in regular
FDIC insurance premiums of $180,000 in 1997. These decreases were partially
offset by an increase of $465,000 in compensation expenses to $2.7 million from
$2.2 million primarily due to the Bank's efforts to develop a commercial loan
capability and the additional cost of the RRP benefit plan which began in June
1996. Occupancy and equipment expense increased $110,000 during the year ended
September 30, 1997 to $772,000 from $662,000 the prior year. The increase was
primarily due to significant repairs and maintenance at the Schaumburg and
Burbank offices and increased costs associated with an upgraded computer system
installed in the spring of 1996 and two ATM machines installed in the fall of
1996.
Provision for Income Taxes. The provision for income taxes increased
$177,000 for the year ended September 30, 1997 to $340,000 from $163,000 for the
prior year. This increase was due to an increase in state income tax due to a
reduction in exempt interest on U.S. Government obligations as well as an
increase in federal tax due to a reduction in allowable low-income housing tax
credits because of a tax loss at the Bank level for the current year created by
the SAIF special assessment,
Comparison of Operating Results for the
Years Ended September 30, 1996 and 1995
General. Net income for the year ended September 30, 1996 totaled $1.8
million, an increase of $405,000 from net income of $1.4 million for the year
ended September 30, 1995. The increase was due primarily to an increase in net
interest income of $2.4 million and a reduction in the provision for loan losses
of $93,000, partially offset by an increase in noninterest expense of $1.6
million (including an $860,000 SAIF special assessment) and an increase in
income taxes of $511,000.
Net Interest Income. Net interest income increased $2.4 million to $7.0
million for the year ended September 30, 1996 from $4.6 million for the same
period in 1995. Interest income increased $2.6 million due to increases in
average interest-earning assets to $227.8 million from $192.2 million due to
proceeds from the Conversion being deployed and an increase in the weighted
average yield to 7.31% during the 1996 period from 7.30% during the 1995
period. The increase in interest income was partially offset by an increase in
interest expense of $275,000 to $9.7 million for the year ended September 30,
1996 from $9.4 million for the previous year. The increase was the result of an
increase in average savings and borrowings in the year ended September 30, 1996
as well as an increase of ten basis points in
14
the average cost of funds to 5.51% from 5.41% the previous year. The increase in
the net interest margin during the year was due primarily to a significant
increase in the ratio of interest-earning assets to interest-bearing liabilities
as the result of the stock conversion in September 1995.
Interest Income. Interest income increased $2.6 million to $16.6 million
for the year ended September 30, 1996 from $14.0 million for the prior year.
This increase was primarily due to an increase in the interest earned on
mortgage-backed securities of $1.4 million caused by a $15.0 million increase in
the average outstanding balance of mortgage-backed securities, as well as an
increase in the average yield on these securities to 6.91% from 6.42% as a
result of adjustable-rate mortgage-backed securities resetting at higher rates
during the year and a greater proportion of higher yielding fixed-rated
securities. Interest on tax-exempt securities increased $472,000 as the average
outstanding balance of these securities increased to $23.3 million from $17.5
million, and the yield increased to 6.35% for the year ended September 30, 1996
from 5.77% for the prior year. Also, interest on investment securities increased
$556,000 as the average balance increased by $13.0 million, but was partially
offset by a decrease in the average yield to 6.31% from 8.61%. The average
yield on loans increased by seven basis points to 8.26% from 8.19% as new higher
yielding fixed-rate loans replaced by lower yielding fixed-rate loans and the
average outstanding balance increased by $1.5 million.
Interest Expense. Interest expense increased $275,000 to $9.7 million for
the year ended September 30, 1996 from $9.4 million for the prior year. Interest
on deposits decreased $101,000 as average interest-bearing deposits decreased
$5.3 million to $123.5 million for the year ended September 30, 1996 from $128.8
million for the prior year. The cost of savings increased to 5.21% from 5.07%
due primarily to maturing certificates renewing at higher rates, especially
earlier in the year. Also, due in part to the increase in general interest
rates, the proportion of the Bank's deposits consisting of noncertificate
accounts declined, thus contributing to the increase in the Bank's cost of
funds. Interest expense on borrowed money increased $376,000 as the average
balance of borrowings from the FHLB of Chicago increased $7.0 million to $52.0
million for the year ended September 30, 1996 from $45.0 million for the prior
year, partially offset by a decline in the cost of borrowings to 6.25% from
6.37% due primarily to a greater concentration of shorter-term advances than in
the previous year.
Provision for Loan Losses. The provision for loan losses decreased to
$70,000 for the year ended September 30, 1996 from $163,000 for the prior year.
The provision is based upon management's review of the loan portfolio by
property type and delinquency status. There were no significant individual loans
which contributed to the increase in the allowance, and there were no regulatory
requests for additional provisions for loan losses during the year ended
September 30, 1996 and 1995.
Other Income. Other income increased $1.0 million for the year ended
September 30, 1996. The increase was primarily the result of a decrease of
$892,000 in unrealized losses on securities held-for-sale as the Bank adopted
SFAS 115 effective December 1, 1994 and thereafter no longer charged unrealized
losses on securities available-for-sale to operations. The cumulative effect of
the change of this accounting principle, net of tax, resulted in a one-time
$907,000 credit to earnings. Other income increased due to an increase of
$90,000 in net gains on mortgage-backed securities available-for-sale.
Other Expenses. Other expenses increased $1.6 million to $5.2 million for
the year ended September 30, 1996 from $3.6 million for the prior year
primarily due to the SAIF special assessment of $860,000. Also, compensation
related expenses increased $410,000 due to normal increases in salaries and the
additional costs of ESOP and RRP benefit plans. Occupancy expenses increased
$22,000 during the year ended September 30, 1996 due primarily to an increase in
real estate taxes. Legal, audit, and examination expenses increased $136,000
during the year ended September 30, 1996 primarily as a result of becoming a
public company in September 1995. Advertising expense increased $110,000 to
$458,000 for the year ended September 30, 1996 due primarily to additional costs
of operating as a public company.
15
Provision for Income Taxes. The provision for income taxes increased to
$163,000 for the year ended September 30, 1996 from a benefit of $348,000 for
the prior year. This increase was due to an increase of $1.8 million in pre-tax
income to $1.9 million for the year ended September 30, 1996 from $120,000 for
the prior year. The Company realized a tax reduction due to tax-exempt income
and low-income housing tax credits.
Analysis of Net Interest Income
Net interest income represents the difference between interest earned on
interest-earning assets and interest paid on interest-bearing liabilities. Net
interest income depends on the volumes of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
16
The following table sets forth certain information relating to average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the most periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material differences in the information presented.
Year Ended Year Ended Year Ended
September 30 September 30 September 30
(dollars in thousands) 1997 1996 1995
- --------------------- ------------------------------ -------------------------------- -------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ---- ------- ---- ----
Assets
Interest-earning Assets:
Loans receivable ................ $ 92,931 $ 7,642 8.22% $ 89,288 $ 7,373 8.26% $ 87,820 $ 7,191 8.19%
Mortgage-backed securities ...... 87,169 6,061 6.95 88,034 6,082 6.91 73,054 4,690 6.42
Investment securities ........... 18,015 1,153 6.40 24,440 1,542 6.31 11,447 986 8.61
Tax-exempt securities ........... 22,236 1,405 6.32 23,341 1,482 6.35 17,508 1,010 5.77
------ ----- ---- ------ ----- ---- ------ ----- ----
FHLB and FRB stock .............. 3,452 233 6.75 2,706 182 6.73 2,335 152 6.51
------ ---- ------ ---- ----- ----
Total interest-earning assets ... 223,803 16,494 7.37 227,809 16,661 7.31 192,164 14,029 7.30
------- ------ ---- ------- ------ ---- ------- ------ ----
Noninterest-earning assets ....... 9,282 7,155 6,508
======== ======= =======
Total Assets .................... $233,085 234,964 198,672
Liabilities and
Equity Capital
Interest-bearing Liabilities:
Savings deposits ................ 20,453 608 2.97 21,662 710 3.28 25,316 806 3.18
NOW and Money Market Accounts ... 10,380 414 3.99 11,149 444 3.98 11,801 477 4.04
Certificate accounts ............ 88,524 5,155 5.82 90,646 5,272 5.82 91,650 5,244 5.72
------ ----- ---- ------ ----- ---- ------ ----- ----
Borrowings ...................... 58,328 3,646 6.25 51,950 3,246 6.25 45,024 2,870 6.37
----- ---- ----- ---- ----- ----
Total interest-bearing
liabilities ................... 177,685 9,823 5.53 175,407 9,672 5.51 173,791 9,397 5.41
------- ----- ---- ------- ----- ---- ------- ----- ----
Noninterest-bearing liabilities .. 4,754 4,042 4,504
Total Liabilities ............... 182,439 179,449 178,295
------- ------- -------
Total Equity .................... 50,646 55,515 20,377
======= ======== ========
Total Equity and Retained
Earnings ...................... $233,085 $234,964 $198,672
====== ====== ======
Net interest income ............. $6,671 $6,989 $4,632
==== ==== ====
Net interest rate spread (3) .... 1.84% 1.80% 1.89%
======== ======== ========
Net interest-earning assets ..... $ 46,118 $ 52,402 $ 18,373
Net yield on average interest- ==== ==== ====
earning assets ................ 2.98% 3.07% 2.41%
Ratio of average interest-
earnings assets to average ==== ==== ====
interest-bearing liabilities .. 1.26x 1.30x 1.11x
Ten Months Ended
September 30
1995(1)
------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------- ---- ----
Assets
Interest-earning Assets:
Loans receivable ........................ $ 87,775 $ 6,000 8.20%
Mortgage-backed securities .............. 73,829 4,020 6.53
Investment securities ................... 13,303 748 6.75
Tax-exempt securities ................... 17,752 953 6.44
------ ---- ----
FHLB and FRB stock ...................... 2,361 130 6.61
----- ----
Total interest-earning assets ......... 195,020 11,851 7.29
------- ------ ----
Noninterest-earning assets ................ 6,313
========
Total Assets .......................... $201,333
Liabilities and
Equity Capital
Interest-bearing Liabilities:
Savings deposits ........................ 24,027 643 3.21
NOW and Money Market Accounts ........... 12,860 399 3.72
Certificate accounts .................... 92,471 4,510 5.85
------ ----- ----
Borrowings .............................. 45,940 2,445 6.39
----- ----
Total interest-bearing liabilities .... 175,298 7,997 5.47
------- ----- ----
Noninterest-bearing liabilities ........... 3,570
Total Liabilities ..................... 178,868
-------
Total Equity .......................... 22,465
========
Total Equity and Retained Earnings .. $201,333
======
Net interest income ....................... $3,854
====
Net interest rate spread(3) ............... 1.82%
========
Net interest-earning assets ............... $ 19,722
Net yield on average interest-earning ====
assets .................................. 2.37%
Ratio of average interest-earning
assets to average interest-bearing ====
liabilities ............................. 1.11x
(1) During 1995, the Company changed its fiscal year end from November 30 to
September 30.
(2) Yield/Rate for the ten months ended September 30, 1995 has been annualized.
(3) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of in interest-bearing
liabilities.
17
The following table presents the weighted average yields earned on loans,
investments and other interest-earning assets, and the weighted average rates
paid on savings deposits and the resultant interest rate spreads at the dates
indicated.
AT AT AT AT
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 NOVEMBER 30
1997 1996 1995(1) 1994
---- ---- ------- ----
Weighted average yield on:
Loans receivable ............... 7.69% 7.58% 7.65% 7.64%
Mortgage-backed securities ..... 7.14% 7.10% 6.97% 6.31%
Tax-exempt securities .......... 6.24% 6.27% 6.39% 6.53%
Investment securities .......... 6.62% 6.48% 6.77% 6.72%
Other interest-earning assets .. 6.63% 5.75% 6.21% 5.60%
Combined weighted average
yield on interest-earning
assets ................... 7.25% 7.14% 7.18% 7.00%
Weighted average rate paid on:
Savings deposits .............. 2.80% 3.05% 3.05% 3.25%
NOW and Money Market accounts 3.92% 3.90% 4.23% 4.02%
Certificate accounts .......... 5.86% 5.78% 5.92% 5.24%
Borrowings .................... 6.24% 6.05% 6.33% 6.10%
Combined weighted average
rate paid on interest-
bearing liabilities ...... 5.53% 5.44% 5.53% 5.06%
Interest rate spread .......... 1.72% 1.70% 1.65% 1.94%
Interest rate spread based on
taxable equivalent yields.
for tax-exempt securities. 1.91% 1.93% 1.92% 2.26%
During 1995, the Company changed its fiscal year end from November 30 to
September 30.
Rate/Volume Analysis of Net Interest Income
The schedule on the following page presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the changes
related to outstanding balances and that due to the changes in interest rates.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
18
YEARS ENDED SEPTEMBER 30 YEARS ENDED SEPTEMBER 30 TEN MONTHS ENDED SEPTEMBER 30
(dollars in thousands) 1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
- ---------------------- --------------------------- ------------------------- -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
IN NET INTEREST IN NET INTEREST IN NET INTEREST
INCOME DUE TO INCOME DUE TO INCOME DUE TO
--------------------------- ------------------------ --------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- ----- ------ ---- -----
Interest Income:
Loans receivable ....................... $ 305 (36) 269 120 62 182 103 (195) (92)
Mortgage-backed securities ............. (57) 36 (21) 1,014 378 1,392 544 554 1,098
Investment securities .................. (411) 22 (389) 1,092 (536) 556 179 (71) 108
Tax-exempt securities .................. (70) (7) (77) 362 110 472 144 10 154
FHLB and FRB Stock ..................... 50 1 51 25 5 30 22 6 28
------ ---- ---- ----- ---- ----- --- --- -----
Total interest income ................. (183) 16 (167) 2,613 19 2,632 992 304 1,296
====== ==== ===== ===== ==== ===== === === =====
Interest Expense:
Savings deposits ....................... (38) (64) (102) (121) 25 (96) (90) 75 (15)
NOW and Money Market accounts .......... (31) 1 (30) (26) (7) (33) (1) 51 50
Certificate accounts ................... (117) -- (117) (59) 87 28 375 658 1,033
Borrowings ............................. 400 -- 400 432 (56) 376 519 176 695
------ ----- ---- ----- ---- ----- --- --- -----
Total interest expense ................ $ 214 (63) 151 226 49 275 803 960 1,763
====== ===== ==== ===== ==== ===== === === =====
Net interest income ..................... (318) 2,357 (467)
==== ===== ====
During 1995, the Company changed its fiscal year from November 30 to September
30.
19
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. The primary impact of
inflation on the operations of the Company is reflected in [increased/decreased]
operating costs. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a result,
interest rates, generally, have a more significant impact on a financial
institution's performance than does inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
Impact of New Accounting Standards
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. In December 1996, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
127 ("SFAS No. 127"), "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125." The statement delays for one year the implementation of
SFAS No. 125, as it relates to (1) secured borrowings and collateral, and (2)
for the transfers of financial assets that are part of repurchase agreements,
dollar-rolls, securities lending and similar transactions. The Company adopted
portions of SFAS No. 125 (those not deferred by SFAS No. 127) effective January
1, 1997. Adoption of these portions did not have a significant effect on the
Company's financial condition or results of operations. Based on its review of
SFAS No. 125, management does not believe that adoption of the portions of SFAS
No. 125 which have been deferred by SFAS No. 127 will have a material effect on
the Company.
Accounting for Earnings Per Share. In February 1997, the FASB issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
Per Share." This statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common
stock. This statement simplifies the standard for computing earnings per share
previously found in Accounting Principles Board Opinion ("APB") No. 15,
"Earnings Per Share" and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation of basic EPS and
fully diluted EPS with diluted EPS. It also requires dual presentation of basic
EPS and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.
Basic EPS, unlike primary EPS, excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Diluted EPS is
computed similarly to fully diluted EPS under APB No. 15.
SFAS No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. the following presentation
illustrates pro forma basic and diluted earnings per share based on the
provisions of SFAS No. 128:
PERIODS ENDED SEPTEMBER 30
-----------------------------------
1997 1996 1995
---- ---- ----
Weighted average number of common
shares outstanding used in basic
earnings per share calculation ........ 3,230,218 3,633,541 3,570,750
Add common stock equivalents for
shares issuable under Stock Option Plan 71,508 1,293 --
--------- --------- ---------
Weighted average number of shares
outstanding adjusted for common
stock equivalent ...................... 3,301,726 3,634,834 3,570,750
========= ========= =========
Net income .............................. $1,745,447 1,779,842 1,812,284
--------- --------- ---------
Basic earnings per share ................ $ .54 .49 .50
--------- --------- ---------
Diluted earnings per share .............. $ .53 .49 .50
========= ========= =========
20
Disclosure of Information about Capital Structure. In February 1997, the
FASB issued Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS No. 129"). This statement
establishes standards for disclosing information about an entity's capital
structure. It supersedes specific disclosure requirements of APB Opinions No.
10, "Omnibus Opinion-1966," and No. 15, "Earnings Per Share," and SFAS No. 47,
"Disclosure of Long-Term Obligations," and consolidates them in this statement
for ease of retrieval and for greater visibility to nonpublic entities. This
statement is effective for financial statements for periods ending after
December 15, 1997. It contains no changes in disclosure requirements for
entities that were previously subject to the requirements of Opinions No. 10 and
No. 15 and SFAS No. 47 and, therefore, is not expected to have a significant
impact on the consolidated financial condition or results of operations of the
Company.
Reporting Comprehensive Income. In June 1997, the FASB issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). This statement establishes standards for reporting and the display of
comprehensive income and its components (revenues, expenses, gains, losses) in a
full set of general-purpose financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The Company has not yet
determined the impact of adopting this statement.
Disclosures about Segments of an Enterprise and Related Information. In
June 1997, the FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") which becomes effective for fiscal years beginning after December 15,
1997. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments and requires enterprises
to report selected information about operating segments in interim financial
reports. The Company has not yet determined the impact of adopting this
statement.
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Company keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.
21
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Damen Financial Corporation
Schaumburg, Illinois
We have audited the consolidated statements of financial condition of Damen
Financial Corporation and subsidiaries as of September 30, 1997 and 1996, and
the related consolidated statements of earnings, changes in stockholders'
equity, and cash flows for the periods ended September 30, 1997, 1996 and 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Damen
Financial Corporation and subsidiaries at September 30, 1997 and 1996, and the
results of their operations and their cash flows for the periods ended September
30, 1997, 1996 and 1995 in conformity with generally accepted accounting
principles.
/s/ Cobitz, Vandenberg & Fennessy
October 30, 1997
Hickory Hills, Illinois
22
SEPTEMBER 30 SEPTEMBER 30
1997 1996
---- ----
Assets
Cash and amounts due from depository institutions ............................ 500,455 170,034
Interest-bearing deposits .................................................... 1,590,529 1,011,197
------------- -------------
Total cash and cash equivalents ............................................. 2,090,984 1,181,231
Investment securities (fair value:
1997 - $1,845,400; 1996 - $1,777,000) (note 2) ............................. 1,845,383 1,776,979
Investment securities, available for sale,
at fair value (note 3) ..................................................... 35,874,298 43,342,710
Mortgage-backed securities (fair value:
1997 - $27,548,700; 1996 - $34,641,300) (note 4) ........................... 27,869,570 35,503,531
Mortgage-backed securities, available for
sale, at fair value (note 5) ............................................... 56,740,190 52,594,450
Loans receivable (net of allowance for loan
losses: 1997 - $332,000; 1996 - $345,000) (note 6) ......................... 97,244,031 91,145,893
Foreclosed real estate ....................................................... 79,000 --
Stock in Federal Home Loan Bank and
Federal Reserve Bank of Chicago ............................................ 3,698,500 3,110,500
Accrued interest receivable (note 7) ......................................... 1,551,284 1,661,087
Office properties and equipment-net (note 8) ................................. 3,473,326 3,502,987
Prepaid expenses and other assets (note 9) ................................... 642,654 736,041
------- -------
Total assets ................................................................ 231,109,220 234,555,409
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 10) ........................................................... 125,746,001 118,973,335
Borrowed money (note 11) ..................................................... 56,500,000 59,600,000
Advance payments by borrowers for taxes
and insurance .............................................................. 722,141 638,768
Other liabilities (note 12) .................................................. 2,202,115 2,473,435
--------- ---------
Total liabilities ........................................................... 185,170,257 181,685,538
----------- -----------
Stockholders' Equity:
Preferred stock, $.01 par value; authorized
100,000 shares; none outstanding ........................................... -- --
Common stock, $.01 par value; authorized
4,500,000 shares; 3,967,500 shares
issued and 3,109,220 shares outstanding
at September 30, 1997 and 3,770,117 shares
outstanding at September 30, 1996 ......................................... 39,675 39,675
Additional paid-in capital ................................................... 38,452,948 38,345,966
Retained earnings, substantially restricted .................................. 22,100,190 21,131,170
Unrealized gain on securities available for
sale, net of income taxes ................................................. 1,382,560 167,679
Treasury stock, at cost (858,280 and
197,383 shares at September 30,
1997 and 1996) ............................................................ (12,117,799) (2,311,375)
Common stock acquired by Employee Stock
Ownership Plan ............................................................ (2,550,800) (2,762,400)
Common stock awarded by Recognition and
Retention Plan ............................................................ (1,367,811) (1,740,844)
---------- ----------
Total stockholders' equity (notes 16 and 17) ................................ 45,938,963 52,869,871
---------- ----------
Commitments and contingencies (notes 19 and 20)
Total liabilities and stockholders' equity .................................. $ 231,109,220 234,555,409
============= ===========
See accompanying notes to consolidated financial statements.
23
YEAR ENDED YEAR ENDED TEN MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
1997 1996 1995
---- ---- ----
Interest income:
Loans .............................................................. $ 7,641,587 7,372,382 5,999,647
Mortgage-backed securities ......................................... 6,061,307 6,081,879 4,019,530
Tax-exempt securities .............................................. 1,404,976 1,482,104 952,843
Interest and dividends on other investments ........................ 1,153,274 1,541,742 748,169
Dividends on FHLB and FRB stock .................................... 232,721 182,342 130,350
------------ ------------ ------------
Total interest income ............................................ 16,493,865 16,660,449 11,850,539
------------ ---------- ----------
Interest expense:
Deposits ......................................................... 6,176,720 6,426,006 5,551,631
Borrowings ....................................................... 3,646,005 3,245,920 2,445,028
------------ ------------ ------------
Total interest expense ......................................... 9,822,725 9,671,926 7,996,659
------------ ------------ ------------
Net interest income before provision for loan losses ........... 6,671,140 6,988,523 3,853,880
Provision for loan losses .............................................. 36,618 70,000 163,146
------------ ------------ ------------
Net interest income after provision for loan losses ............ 6,634,522 6,918,523 3,690,734
------------ ------------ ------------
Non-interest income:
Loan fees and service charges ....................................
42,491 108,797 68,818
Gain (loss) on sale of:
Mortgage-backed securities, available for sale ................. (17,365) 4,064 (13,553)
Investment securities, available for sale ...................... 157,083 79,509 16,820
Other income ..................................................... 84,866 74,171 66,364
------------ ------------ ------------
Total non-interest income ...................................... 267,075 266,541 138,449
------------ ------------ ------------
(continued on next page)
24
YEAR ENDED YEAR ENDED TEN MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
(continued) 1997 1996 1995
- ----------- ---- ---- ----
Noninterest expense:
Compensation, employee benefits, and related
expenses (notes 13 and 14) ........................................ $2,655,881 2,190,681 1,500,551
Advertising and promotion ........................................... 462,815 457,918 320,383
Occupancy and equipment expense (note 8) ............................ 772,045 661,776 526,983
Data processing ..................................................... 122,488 100,862 75,889
Insurance expense ................................................... 72,727 73,058 55,962
Federal insurance premiums (note 18) ................................ 114,674 295,265 245,714
SAIF special assessment (note 18) ................................... -- 860,000 --
Legal, audit, and examination services .............................. 272,702 264,659 114,976
Other operating expenses ............................................ 343,019 338,543 191,827
---------- ---------- ----------
Total non-interest expense ....................................... 4,816,351 5,242,762 3,032,285
---------- ---------- ----------
Net income before income taxes and change in
accounting principle .............................................. 2,085,246 1,942,302 796,898
Provision for federal and state income taxes
(benefit) (note 15) ............................................... 339,799 162,460 (108,206)
---------- ---------- ----------
Net income before change in accounting principle ..................... 1,745,447 1,779,842 905,104
---------- ---------- ----------
Cumulative effect of change in accounting for
securities available for sale, net of tax effect .................. -- -- 907,180
Net income ...................................................... $1,745,447 1,779,842 1,812,284
========== ========== ==========
Earnings per share - primary
Income before change in accounting principle ........................ $ .53 .49 .25
Cumulative effect of Change in accounting for
securities available for sale, net ................................ -- -- .25
---------- ---------- ----------
Net income ...................................................... $ .53 .49 .50
========== ========== ==========
Earnings per share - fully diluted
Income before change in accounting principle ........................ $ .53 .49 .25
Cumulative effect of change in accounting for
securities available for sale, net ................................ -- -- .25
---------- ---------- ----------
Net income ...................................................... $ .53 .49 .50
========== ========== ==========
Dividends declared per common share .................................. $ .24 12 --
========== ========== ==========
See accompanying notes to consolidated financial statements.
25
Unrealized
Gain (Loss) on Common Common
Additional Securities Stock Stock
Common Paid-In Retained Available Treasury Acquired Awarded
Stock Capital Earnings For Sale Stock By ESOP By RRP Total
----- ------- -------- -------- ----- ------- ------ -----
Balance at November 30, 1994 ............ $ -- -- 17,965,213 (91,450) -- -- -- 17,873,763
Additions (deductions) for the ten
months ended September 30, 1995:
Cumulative effect of change in
accounting for securities available
for sale, net of tax effect,
at December 1, 1994 ................. (1,126,880) (1,126,880)
Net income ............................ 1,812,284 1,812,284
Adjustment of securities to fair value,
net of tax effect ................... 2,004,800 2,004,800
Net proceeds of common stock issued in
stock conversion .................... 39,675 38,280,338 (3,174,000) 35,146,013
------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Balance at September 30, 1995 ........... 39,675 38,280,338 19,777,497 786,470 -- (3,174,000) -- 55,709,980
Additions (deductions) for the year
ended September 30, 1996:
Net income ............................ 1,779,842 1,779,842
Adjustment of securities to fair value,
net of tax effect ................... (618,791) (618,791)
Purchase of treasury stock (197,383
shares) ............................. (2,311,375) (2,311,375)
Purchase of stock for RRP ............. (1,865,187) (1,865,187)
Amortization of award of RRP stock .... 124,343 124,343
Contribution to fund ESOP loan ........ 65,628 411,600 477,228
Dividends declared on common stock .... (426,169) (426,169)
------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Balance at September 30, 1996 ........... 39,675 38,345,966 21,131,170 167,679 (2,311,375) (2,762,400) (1,740,844) 52,869,871
Additions (deductions) for the year
ended September 30, 1997:
Net income ............................ 1,745,447 1,745,447
Adjustment of securities to fair value,
net of tax effect ................... 1,214,881 1,214,881
Tax benefit related to employee stock
plans ............................... 27,800 27,800
Purchase of treasury stock (660,897
shares) ............................. (9,806,424) (9,806,424)
Amortization of award of RRP stock .... 373,033 373,033
Contribution to fund ESOP loan ........ 79,182 211,600 290,782
Dividends declared on common stock .... (776,427) (776,427)
------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
Balance at September 30, 1997 ........... $39,675 38,452,948 22,100,190 1,382,560 (12,117,799) (2,550,800) (1,367,811) 45,938,963
======= ========== ========== ========== =========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
26
YEAR ENDED YEAR ENDED TEN MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
1997 1996 1995
------------ ------------ ----------------
Cash flows from operating activities:
Net income ................................................................. $ 1,745,447 1,779,842 1,812,284
Adjustments to reconcile net income to net cash from Operating activities:
Depreciation ............................................................. 196,102 177,333 148,761
Amortization of cost of stock benefit plans .............................. 663,815 601,572 --
Provision for loan losses ................................................ 36,618 70,000 163,146
Decrease in deferred loan income ......................................... (312,174) (110,405) (22,526)
Federal Home Loan Bank stock dividend .................................... -- -- (34,300)
(Increase) decrease in prepaid and deferred federal and state income taxes (156,187) 18,602 600,783
(Gain) loss on sale of mortgage-backed securities, available for sale .... 17,365 (4,064) 13,553
Gain on sale of investment securities, available for sale ................ (157,083) (79,509) (16,820)
Unrealized (gain) loss on securities, held for sale ...................... -- -- (1,537,000)
(Increase) decrease in accrued interest receivable ....................... 109,803 (473,474) (177,809)
Increase (decrease) in accrued interest payable .......................... (16,900) (286,500) 470,600
(Increase) decrease in other assets ...................................... 15,462 (22,055) (24,998)
Increase (decrease) in other liabilities ................................. (725,622) 900,543 402,198
----------- ----------- -----------
Net cash provided by operating activities .................................. 1,416,646 2,571,885 1,797,872
----------- ----------- -----------
Cash flows from investing activities:
Purchase of investment securities, available for sale .................... (7,221,615) (19,553,246) 10,076,434)
Purchase of investment securities ........................................ (216,326) (785,126) (191,498)
Purchase of mortgage-backed securities, available for sale ............... (12,178,505) (22,963,828) (18,910,930)
Purchase of mortgage-backed securities ................................... -- (229,361) (2,985,736)
Proceeds from sales of investment securities, available for sale ......... 9,472,341 3,133,750 515,000
Proceeds from sales of mortgage-backed securities, available for sale .... 1,816,256 919,975 1,288,365
Proceeds from maturities of investment securities, available for sale .... 6,195,769 6,547,993 2,340,706
Proceeds from maturities of investment securities ........................ 147,922 97,922 118,081
Proceeds from maturities of mortgage-backed securities, available for sale 7,435,734 8,364,322 2,391,513
Proceeds from maturities of mortgage-backed securities ................... 7,633,961 7,259,192 5,284,201
Proceeds from redemption of Federal Home Loan Bank stock ................. 55,500 130,000 --
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock ........ (643,500) (670,500) (315,700)
Disbursements for loans .................................................. (23,846,339) (19,814,855) (12,006,880)
Loan repayments .......................................................... 18,023,757 16,264,628 12,536,002
Property and equipment expenditures ...................................... (166,441) (347,662) (73,026)
----------- ----------- -----------
Net cash provided by (for) investing activities ............................ 6,508,514 (21,646,796) (20,086,336)
----------- ----------- -----------
(continued on next page)
27
YEAR ENDED YEAR ENDED TEN MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
(continued) 1997 1996 1995
- ----------- ------------ ------------ ----------------
Cash flows from financing activities:
Net proceeds from sale of common stock ..................................... -- -- 35,146,013
Deposit receipts ........................................................... 80,168,443 66,969,226 67,708,828
Deposit withdrawals ........................................................ (77,870,072) (79,780,537) (71,146,187)
Interest credited to deposit accounts ...................................... 4,474,295 5,152,886 3,858,888
Proceeds from borrowed money ............................................... 179,400,000 181,100,000 99,200,000
Repayment of borrowed money ................................................ (182,500,000) (167,000,000) (97,700,000)
Increase (decrease) in advance payments by borrowers for taxes and insurance 83,373 (2,162,546) 958,953
Purchase of RRP stock ...................................................... -- (1,865,187) --
Purchase of treasury stock ................................................. (9,806,424) (2,311,375) --
Dividends paid on common stock ............................................. (965,022) (209,484) --
----------- ----------- -----------
Net cash provided by (for) financing activities .............................. (7,015,407) (107,017) 38,026,495
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents ............................. 909,753 (19,181,928) 19,738,031
Cash and cash equivalents at beginning of period ............................. 1,181,231 20,363,159 625,128
----------- ----------- -----------
Cash and cash equivalents at end of period ................................... $ 2,090,984 1,181,231 20,363,159
=========== =========== ===========
Cash paid during the period for:
Interest ................................................................... $ 9,839,625 9,958,426 7,526,059
Income taxes ............................................................... 350,142 232,229 --
Non cash investing activities:
Transfer of loans to foreclosed real estate ................................ $ 79,000 -- --
=========== =========== ===========
See accompanying notes to consolidated financial statements.
28
1. Summary of Significant Accounting Policies
------------------------------------------
Damen Financial Corporation (the "Company") is a Delaware corporation
incorporated on June 30, 1995 for the purpose of becoming the savings and loan
holding company for Damen Federal Bank for Savings (the "Savings Bank"). On
September 29, 1995, the Savings Bank converted from a mutual to a stock form of
ownership, and the Company completed its initial public offering, and, with a
portion of the net proceeds, acquired all of the issued and outstanding capital
stock of the Savings Bank (the "Conversion"). In addition, management, upon
completion of the Conversion, elected to change the Company's fiscal year end
from November 30 to September 30. During the current fiscal year, Damen Federal
Bank for Savings applied for and received approval from the Office of the
Comptroller of the Currency to convert its charter from a federal savings bank
to a national bank. Effective February 27, 1997, (the "Savings Bank" converted
to a national bank and changed its name to Damen National Bank ("the Bank"), and
the Company ceased to be a savings and loan holding company and became a bank
holding company.
The accounting and reporting policies of the Company and its subsidiaries
conform to generally accepted accounting principles and to general practice
within the financial institution industry. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The following is a description of the more significant policies which
the Company follows in preparing and presenting its consolidated financial
statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company, and its wholly owned subsidiary, Damen National Bank and the Bank's
wholly owned subsidiary, Dasch, Inc. Significant intercompany balances and
transactions have been eliminated in consolidation.
Investment Securities and Mortgage-Backed Securities, Available for Sale
Investment securities available for sale are recorded in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 requires the
use of fair value accounting for securities available for sale or trading and
retains the use of the amortized cost method for securities the Company has the
positive ability and intent to hold to maturity.
SFAS No. 115 requires the classification of debt and equity securities into
one of three categories: held to maturity, trading, or available for sale. Held
to maturity securities are measured at amortized cost. Unrealized gains and
losses for trading securities are included in income. Unrealized holding gains
and losses on available for sale securities are excluded from income and
reported net of taxes as a separate component of stockholders' equity.
The Company holds a portfolio of securities classified as available for
sale which are carried at current fair values. Premiums and discounts are
amortized and accreted into income over the remaining life of the security using
the level yield method. Unrealized gains and losses are recorded in a valuation
allowance, which is included as a separate component of stockholders' equity,
net of related income taxes. Gains and losses on the sale of available for sale
securities are determined using the specific identification method and are
reflected in earnings when realized.
Investment Securities and Mortgage-Backed Securities, Held to Maturity
These securities are carried at cost, adjusted for amortization of premiums and
accretion of discounts over the term of the security using the level yield
method. These securities are not carried at fair value because the Company has
both the ability and the intent to hold them to maturity.
Loans Receivable and Related Fees
Loans are stated at the principal amount outstanding, net of loans in process,
deferred fees and the allowance for losses. Interest on loans is credited to
income as earned and accrued only if deemed collectible. Loans are placed on
nonaccrual status when, in the opinion of management, the full timely collection
of principal or
29
interest is in doubt. As a general rule, the accrual of interest is discontinued
when principal or interest payments become 90 days past due or earlier if
conditions warrant. When a loan is placed on nonaccrual status, previously
accrued but unpaid interest is charged against current income.
Loan origination fees are being deferred in accordance with SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases'. This statement requires
that loan origination fees and direct loan origination costs for a completed
loan be netted and then deferred and amortized into interest income as an
adjustment of yield.
The Company has adopted the provisions of SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures". These statements
apply to all loans that are identified for evaluation except for large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment. These loans include, but are not limited to, credit card,
residential mortgage and consumer installment loans.
Under these statements, of the remaining loans which are evaluated for
impairment (a loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement), there were no
material amounts of loans which met the definition of an impaired loan during
the year ended September 30, 1997 and no loans to be evaluated for impairment at
September 30, 1997,
Allowance for Loan Losses
The determination of the allowance for loan losses involves material estimates
that are susceptible to significant change in the near term. The allowance for
loan losses is maintained at a level adequate to provide for losses through
charges to operating expense. The allowance is based upon past loss experience
and other factors which, in management's judgement, deserve current recognition
in estimating losses. Such other factors considered by management include growth
and composition of the loan portfolio, the relationship of the allowance for
losses to outstanding loans, and economic conditions.
Management believes that the allowance is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgements about information available to them at the time of their examination.
Foreclosed Real Estate
Real estate acquired through foreclosure or deed in lieu of foreclosure is
carried at the lower of fair value minus estimated costs to sell or the
acquisition cost. Valuations are periodically performed by management and an
allowance for loss is established by a charge to operations if the carrying
value of a property exceeds its fair value minus estimated costs to sell.
Depreciation
Depreciation of office properties and equipment is accumulated on the straight
line basis over the estimated lives of the related assets.
Income Taxes
The provision for federal and state income taxes is based on earnings reported
in the financial statements. Deferred income taxes arise from recognition of
certain items of income and expense for tax purposes in years different from
those in which they are recognized in the consolidated financial statements.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequence attributable to the differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income for the period that includes the
enactment date.
30
Consolidated Statement of Cash Flows
For the purposes of reporting cash flows, the Company has defined cash and cash
equivalents to include cash on hand, amounts due from depository institutions,
and interest-bearing deposits in other financial institutions, with original
maturities of three months or less.
Earnings per Share
Earnings per share for the year ended September 30, 1997 was determined by
dividing net income for the period by 3,290,145 and 3,301,726, the weighted
average number of primary and fully diluted shares of common stock and common
stock equivalents outstanding. Stock options are regarded as common stock
equivalents and are therefore considered in both primary and fully diluted
earnings per share calculations. Common stock equivalents are computed using the
treasury stock method. ESOP shares not committed to be released to participants
are not considered outstanding for purposes of computing earnings per share
amounts.
2. Investment Securities, Held to Maturity
---------------------------------------
Investment securities held to maturity are summarized as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
SEPTEMBER 30, 1997
Debt securities (a) ..................... $ 940,190 10 -- 940,200
Investment in limited partnerships (b) .. 905,193 7 -- 905,200
---------- --- --- ---------
$1,845,383 17 -- 1,845,400
========== === === =========
SEPTEMBER 30, 1996
Debt securities (a) ..................... $ 836,328 -- 28 836,300
Investment in limited partnerships (b) .. 940,651 49 -- 940,700
---------- --- --- ---------
$1,776,979 49 28 1,777,000
========== === === =========
(a) Investment in notes secured by mortgages originated by the Community
Investment Corporation and the National Housing Service; the weighted
average yield on these notes was 7.65% and 7.00% at September 30, 1997 and
1996, respectively.
(b) Investment in limited partnership ventures for the purpose of investment in
low-income housing projects qualifying for tax credits over approximately
the next ten years.
3. Investment Securities, Available for Sale
-----------------------------------------
This portfolio is being accounted for at fair value in accordance with SFAS No.
115. A summary of investment securities available for sale is as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
SEPTEMBER 30, 1997
United States Government
and agency securities ......... $11,040,166 35,202 24,202 11,051,166
Tax-exempt securities (a) ....... 21,095,241 1,397,994 -- 22,493,235
Corporate equity securities ..... 2,146,891 183,006 -- 2,329,897
----------- --------- ------- ----------
$34,282,298 1,616,202 24,202 35,874,298
=========== ========= ======= ==========
SEPTEMBER 30, 1996
United States Government
and agency securities ......... $15,012,555 8,772 236,772 14,784,555
Tax-exempt securities ........... 24,011,328 1,021,068 127,598 24,904,798
Corporate equity securities ..... 3,547,827 105,530 -- 3,653,357
----------- --------- ------- ----------
$42,571,710 1,135,370 364,370 43,342,710
=========== ========= ======= ==========
During the year ended September 30, 1997, the Company sold securities realizing
gross proceeds of $9,472,341 and gross gains of $321,434 and gross losses of
$164,351. Proceeds from the sale of investment securities totaled $3,133,750 for
the year ended September 30, 1996, and $515,000 for the ten month period ended
31
September 30, 1995. Gross gains of $104,824 and $16,820 and gross losses of
$25,315 and $-0- were realized for the periods ended September 30, 1996 and
1995, respectively. In addition, during the current period, the increase in net
unrealized gains of $821,000, net of the tax effect of $336,610, resulted in a
$484,390 credit to stockholders' equity.
(a) Consists of obligations of school, city and park districts and general
obligations of various cities and municipalities. All securities carry at
least a AA rating due to financial strength or because of insurance
enhancements. At September 30, 1997, there were 64 tax-exempt securities
with an average balance of approximately $336,000. The largest
concentration (approximately $9,975,000) of securities are located within
the State of Illinois with the remainder spread throughout the country.
Tax-exempt securities with a cost basis of $5,612,000 and a fair value of
approximately $6,033,000 are pledged as collateral to secure the uninsured
portions of various municipalities' certificates of deposit at the Bank as
of September 30, 1997.
The contractual maturity of these investments are summarized as follows:
SEPTEMBER 30 SEPTEMBER 30
1997 1996
----------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ----- --------- -----
TERM TO MATURITY
Due in one year or less ................. $ 2,096,897 2,128,479 3,907,611 3,952,816
Due after one year through five years ... 10,641,030 10,972,237 13,432,689 13,550,809
Due after five years through ten years .. 6,947,655 7,174,873 6,186,134 6,189,207
Due after ten years ..................... 14,596,716 15,598,709 19,045,276 19,649,878
----------- ---------- ---------- ----------
$34,282,298 35,874,298 42,571,710 43,342,710
=========== ========== ========== ==========
4. Mortgage-Backed Securities, Held to Maturity
--------------------------------------------
The investment in mortgage-backed securities held to maturity consists of
collateralized mortgage obligations and real estate mortgage investment
conduits, and is summarized as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
SEPTEMBER 30, 1997
CMOs and REMICs
FHLMC - fixed rate ............ $ 3,334,844 783 11,527 3,324,100
FNMA - fixed rate (a) ......... 5,454,152 8,348 69,200 5,393,300
Privately issued
fixed rate (a) .............. 9,752,405 59,630 87,435 9,724,600
adjustable rate (a) ......... 9,328,169 7,737 229,206 9,106,700
----------- ------ ------- ----------
$27,869,570 76,498 397,368 27,548,700
=========== ====== ======= ==========
Weighted average interest rate .. 6.85%
SEPTEMBER 30, 1996
CMOs and REMICs
FHLMC - fixed rate ............ $ 4,459,202 -- 86,702 4,372,500
FNMA - fixed rate ............. 6,215,360 -- 273,460 5,941,900
Privately issued
fixed rate ................. 12,845,415 62,203 228,518 12,679,100
adjustable rate ............ 11,983,554 8,246 344,000 11,647,800
----------- ------ ------- ----------
$35,503,531 70,449 932,680 34,641,300
=========== ====== ======= ==========
Weighted average interest rate .. 6.87%
(a) Mortgage-backed securities with a cost basis of $3,135,769 and a fair value
of approximately $3,128,500 are pledged as collateral to secure advances
from the Federal Home Loan Bank of Chicago, and mortgage-backed securities
with a cost basis of $534,689 and a fair value of $540,600 are pledged as
collateral to secure the uninsured portions of various municipalities'
certificates of deposit at the Bank.
32
5. Mortgage-Backed Securities, Available for Sale
----------------------------------------------
Mortgage-backed securities available for sale are recorded at fair value in
accord ance with SFAS No. 115. This portfolio is summarized as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
SEPTEMBER 30, 1997
FHLMC participation certificates
adjustable rate (a)(b) ................ $ 3,059,204 171,131 2,487 3,227,848
fixed rate ............................ 741,428 25,010 -- 766,438
FNMA participation certificates
adjustable rate (a)(b) ................ 8,549,198 175,493 15,296 8,709,395
fixed rate (a) ........................ 637,108 1,884 16,029 622,963
GNMA participation certificates
adjustable rate (b) ................... 7,259,175 136,536 1,506 7,394,205
fixed rate (a)(b) ..................... 23,275,018 279,452 39,091 23,515,379
Conventional participation certificates
adjustable rate ....................... 6,658,548 123,256 20,341 6,761,463
CMOs and REMICs
FNMA - fixed rate (a) ................. 742,757 3,767 -- 746,524
- adjustable rate ................ 2,101,887 1,630 18,450 2,085,067
Privately issued
fixed rate ............................ 2,962,856 -- 51,948 2,910,908
----------- ------- ------- ----------
$55,987,179 918,159 165,148 56,740,190
=========== ======= ======= ==========
Weighted average interest rate 7.28%
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
SEPTEMBER 30, 1996
FHLMC participation certificates
adjustable rate ....................... $ 4,155,038 122,291 3,719 4,273,610
fixed rate ............................ 868,757 6,603 -- 875,360
FNMA participation certificates
adjustable rate ....................... 10,162,121 129,199 40,868 10,250,452
fixed rate ............................ 686,796 4,516 13,850 677,462
GNMA participation certificates
adjustable rate ....................... 6,467,392 24,789 28,084 6,464,097
fixed rate ............................ 18,736,355 22,890 396,914 18,362,331
Conventional participation certificates
adjustable rate ....................... 7,169,611 105,547 42,220 7,232,938
CMOs and REMICs
FNMA - fixed rate ..................... 1,875,500 -- 80,500 1,795,000
Privately issued - fixed rate ......... 2,956,459 -- 293,259 2,663,200
----------- ------- ------- ----------
$53,078,029 415,835 899,414 52,594,450
=========== ======= ======= ==========
Weighted average interest rate .......... 7.25%
(a) Mortgage-backed securities with a cost basis of $4,859,373 and a fair value
of approximately $4,941,200 are pledged as collateral to secure the
uninsured portions of various municipalities' certificates of deposit at
the Bank.
(b) Mortgage-backed securities with a cost basis of $14,623,529 and a fair
value of approximately $14,909,400 are pledged as collateral to secure
advances from the Federal Home Loan Bank of Chicago.
During the year ended September 30, 1997, the Company sold mortgage-backed
securities available for sale realizing gross proceeds of $1,816,256, and losses
of $17,365. During the year ended September 30, 1996, the Company sold mortgage-
backed securities available for sale realizing gross proceeds of $919,975,
profits of $7,829 and losses of $3,765. Proceeds from the sale of
mortgage-backed securities
33
totaled $1,288,365 for the ten month period ended September 30, 1995, resulting
in losses of $13,553. In addition, during the current period, the increase in
net unrealized gains of $1,236,590, net of the tax effect of $506,099, resulted
in a $730,491 credit to stockholders' equity.
6. Loans Receivable
----------------
Loans receivable consist of the following:
SEPTEMBER 30 SEPTEMBER 30
1997 1996
------------ ------------
Mortgage loans:
One-to-four family .............. $79,586,001 77,725,129
Multi-family .................... 12,237,282 12,239,019
Non-residential ................. 4,573,444 3,316,557
Construction ...................... 528,909 --
----------- ----------
Total mortgage loans .......... 96,925,636 93,280,705
Other loans:
Secured lines of credit ......... 2,009,733 --
Loans on deposits ............... 226,550 260,467
Other ........................... 24,400 --
----------- ----------
Total loans receivable ............ 99,186,319 93,541,172
----------- ----------
Less:
Loans in process ................ 338,592 466,409
Deferred loan fees .............. 1,271,696 1,583,870
Allowance for loan losses ....... 332,000 345,000
----------- ----------
Loans receivable, net ............. $97,244,031 91,145,893
=========== ==========
Weighted average interest rate .... 7.69% 7.58%
There were seven loans delinquent three months or more and nonaccruing
totaling $196,966, or .2% of total loans in force as of September 30, 1997.
Comparable figures at September 30, 1996 were eight loans totaling $350,528, or
.4% of total loans. The Bank has established an allowance for loan losses of
$332,000 at September 30, 1997 as required by its internal policies.
For the years ended September 30, 1997 and 1996, and the ten months ended
September 30, 1995, gross interest income which would have been recorded had the
non-accruing loans been current in accordance with their original terms amounted
to approximately $16,500, $8,900 and $4,800, respectively.
Activity in the allowance for loan losses is summarized as follows:
YEAR ENDED YEAR ENDED TEN MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
1997 1996 1995
------------ ------------ ----------------
Balance, beginning of period .. $345,000 275,000 125,000
Provision for loan losses ..... 36,618 70,000 163,146
Charge-offs ................... (49,618) -- (13,146)
-------- ------- -------
Balance, end of period ........ $332,000 345,000 275,000
======== ======= =======
At September 30, 1997, 1996 and 1995, loans serviced for others amounted to
$-0-, $86,015 and $96,365, respectively.
34
The Bank is required to maintain qualifying mortgage collateral for the
Federal Home Loan Bank of Chicago representing 170 percent of current Bank
credit. At September 30, 1997 and 1996 the Bank met this requirement. Qualifying
mortgage collateral is defined as fully disbursed, whole first mortgage loans on
improved residential property. The mortgages must not be past due more than 90
days. They must not be otherwise pledged or encumbered as security for other
indebtedness, and the documents must be in the physical possession or control of
the Bank. The documents that govern the determination of the qualifying mortgage
collateral are the (a) Federal Home Loan Bank of Chicago's Credit Policy
Statement, dated February 1, 1993, and (b) the Advances, Collateral Pledge and
Security Agreement between the institution and the Federal Home Loan Bank of
Chicago.
7. Accrued Interest Receivable
---------------------------
Accrued interest receivable is summarized as follows:
SEPTEMBER 30 SEPTEMBER 30
1997 1996
------------ ------------
U.S. Government and agency securities ........ $ 208,801 305,281
Mortgage-backed securities ................... 529,709 574,659
Tax-exempt securities ........................ 391,420 468,047
Loans receivable ............................. 369,875 248,248
Allowance for uncollected interest on loans .. (20,436) (8,900)
Other investments ............................ 71,915 73,752
---------- ---------
$1,551,284 1,661,087
========== =========
8. Office Property and Equipment
-----------------------------
Depreciation, computed by the straight line method, amounted to $196,102 and
$177,333 for the years ended September 30, 1997 and 1996, and $148,761 for the
ten months ended September 30, 1995. Office properties and equipment are
summarized as follows:
SEPTEMBER 30 SEPTEMBER 30
1997 1996
------------ ------------
Cost:
Land - Chicago ......................... $ 181,411 181,411
Land - Burbank ......................... 112,000 112,000
Land - Schaumburg ...................... 840,000 840,000
Office building - Chicago .............. 349,113 349,113
Office building - Burbank .............. 752,773 752,773
Office building - Schaumburg ........... 1,821,818 1,820,093
Parking lot improvements ............... 47,394 47,394
Furniture, fixtures, and equipment ..... 1,564,635 1,399,919
Automobiles ............................ 32,880 32,880
---------- ---------
5,702,024 5,535,583
---------- ---------
Less accumulated depreciation:
Office building - Chicago .............. 349,113 349,113
Office building - Burbank .............. 125,318 106,494
Office building - Schaumburg ........... 249,033 194,171
Parking lot improvements ............... 47,394 47,394
Furniture, fixtures, and equipment ..... 977,740 860,964
Automobiles ............................ 14,100 8,460
---------- ---------
1,762,698 1,566,596
---------- ---------
Less valuation allowance:
Office building Schaumburg ............. 466,000 466,000
---------- ---------
$3,473,326 3,502,987
========== =========
35
9. Prepaid Expenses and Other Assets
- ------------------------------------
Prepaid expenses and other assets consist of the following:
SEPTEMBER 30 SEPTEMBER 30
1997 1996
------------ ------------
Current federal and state income tax
overpayment--net ........................ $498,750 --
Deferred federal and state income tax
benefit--net (a) ........................ -- 576,675
Prepaid examination fees .................. 15,860 15,964
Prepaid federal insurance premiums ........ 19,115 72,926
Other prepaid insurance ................... 29,229 29,047
Prepaid advertising ....................... 1,570 24,510
Other prepaid expenses .................... 76,604 14,317
Accounts receivable ....................... 1,526 2,602
-------- -------
$642,654 736,041
======== =======
(a) The approximate tax effect of temporary differences that give rise to the
Company's net deferred tax asset at September 30, 1996 under SFAS 109 is as
follows:
SEPTEMBER 30, 1996 ASSETS LIABILITIES NET
- ------------------ ------ ----------- ---
Loan fees deferred for financial
reporting purposes $ 454,355 -- 454,355
Bad debt reserves established for
financial reporting purposes 141,450 -- 141,450
Increases to tax bad debt reserves
since January 1, 1988 -- (384,701) (384,701)
Accelerated depreciation for tax purposes -- (91,842) (91,842)
Valuation allowance on office building 191,060 -- 191,060
Unrealized gain on securities available for sale -- (119,740) (119,740)
Nondeductible incentive plan expense 50,981 -- 50,981
SAIF special assessment (note 18) 352,600 -- 352,600
Other items -- (17,488) (17,488)
---------- -------- --------
$1,190,446 (613,771) 576,675
========== ======== =======
10. Deposits
- ------------
Deposit accounts are summarized as follows:
SEPTEMBER 30 SEPTEMBER 30
1997 1996
------------ ------------
Passbook accounts ........................ $ 19,938,383 20,385,674
Certificates ............................. 95,071,195 87,823,338
NOW and money market accounts ............ 10,736,423 10,764,323
------------ -----------
Total .................................... $125,746,001 118,973,335
============ ===========
The composition of deposit accounts by interest rates is as follows:
SEPTEMBER 30 SEPTEMBER 30
1997 1996
------------ ------------
Noninterest bearing .................... $ 87,231 104,237
2.00 - 3.99% ........................... 21,668,240 22,078,773
4.00 - 4.99 ............................ 9,610,160 13,671,245
5.00 - 5.99 ............................ 62,247,299 58,439,500
6.00 - 6.99 ............................ 29,466,580 15,996,973
7.00 - 7.99 ............................ 1,530,587 7,392,701
8.00 - 8.99 ............................ 433,888 424,211
9.00 - 9.99 ............................ 702,016 865,695
------------ -----------
Total .................................. $125,746,001 118,973,335
============ ===========
Weighted average interest rate ......... 5.21% 5.14%
36
A summary of certificates of deposit by maturity is as follows:
SEPTEMBER 30 SEPTEMBER 30
1997 1996
------------ ------------
Within 12 months ....................... $60,259,565 54,076,495
12 months to 24 months ................. 23,928,672 17,541,274
24 months to 36 months ................. 5,961,203 10,141,388
36 months to 48 months ................. 2,650,080 3,993,695
Over 48 months ......................... 2,271,675 2,070,486
----------- ----------
Total .................................. $95,071,195 87,823,338
=========== ==========
Interest expense on deposits consists of the following:
TEN MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
1997 1996 1995
------------ ------------ ------------
Passbook accounts ................. $ 607,646 709,803 642,662
Certificates ...................... 5,154,822 5,271,871 4,509,964
NOW and money market accounts ..... 414,252 444,332 399,005
---------- --------- ---------
Total ............................. $6,176,720 6,426,006 5,551,631
The aggregate amount of deposit accounts with a balance of $100,000 or greater
was approximately $33,400,000 and $32,100,000 at September 30, 1997 and 1996,
respectively. Deposits in excess of $100,000 are not insured by the Federal
Deposit Insurance Corporation.
11. Borrowed Money
- ------------------
Borrowed money consists of the following:
SEPTEMBER 30 SEPTEMBER 30
1997 1996
------------ ------------
Federal Home Loan Bank Advances--
Due date and current rates:
Period ended within 12 months
Weighted average fixed rate
of 6.29% at September 30, 1997 ......... $11,500,000 23,500,000
Weighted average adjustable rate
of 5.75% at September 30, 1997 ......... 7,000,000 600,000
Period from 12 months to 24 months
Weighted average fixed rate
of 6.32% at September 30, 1997 ......... 9,000,000 8,500,000
Period from 24 months to 36 months
Weighted average fixed rate
of 6.04% at September 30, 1997 ......... 11,000,000 9,000,000
Period from 36 months to 48 months
Weighted average fixed rate
of 6.77% at September 30, 1997 ......... 9,000,000 8,000,000
Period from 48 months and thereafter
Weighted average fixed rate
of 6.19% at September 30, 1997 ......... 9,000,000 10,000,000
----------- ----------
$56,500,000 59,600,000
=========== ==========
Weighted average interest rate .............. 6.24% 6.05%
See notes 4, 5 and 6 of the consolidated financial statements for collateral
securing this indebtedness.
37
Interest is accrued on all borrowings and recorded in other liabilities.
Interest expense on borrowed money totaled $3,646,005 and $3,245,920 for the
years ended September 30, 1997 and 1996, and $2,445,028 for the ten months ended
September 30, 1995.
In connection with the Company's initial public offering, the Bank
established an Employee Stock Ownership Plan (ESOP). The ESOP was funded by the
proceeds from a loan from the Company. The loan carries an interest rate of
6.73% and matures in the year 2010. The loan is secured by the shares of the
Company purchased with the loan proceeds. The Bank has committed to make
contributions to the ESOP sufficient to allow the ESOP to fund the debt service
requirements of the loan.
12. Other Liabilities
- ---------------------
Other liabilities consist of the following:
SEPTEMBER 30 SEPTEMBER 30
1997 1996
------------ ------------
Current federal and state income tax
liability--net ................................. $ -- 53,650
Deferred federal and state income tax
liability--net (a) ............................. 741,537 --
Accrued interest on borrowed money ............... 293,700 303,600
Accrued interest on deposits ..................... 251,000 258,000
Accrued real estate taxes ........................ 169,000 160,000
Accrued SAIF special assessment (note 18) ........ -- 860,000
Promissory note for capital contribution due
Kedzie Limited Partnership ..................... 497,045 497,045
Other accrued expenses ........................... 123,984 85,644
Accrued dividends payable ........................ -- 216,685
Accounts payable and other items ................. 125,849 38,811
---------- ---------
$2,202,115 2,473,435
========== =========
(a) The approximate tax effect of temporary differences that give rise to the
Company's net deferred tax liability at September 30, 1997 under SFAS No.
109 is as follows:
SEPTEMBER 30, 1997 ASSETS LIABILITIES NET
- ------------------ ------ ----------- ---
Loan fees deferred for financial
reporting purposes ......................... $365,007 -- 365,007
Bad debt reserves established for financial
reporting purposes ......................... 136,120 -- 136,120
Increases to tax bad debt reserves since
January 1, 1988 ............................ -- (384,701) (384,701)
Accelerated depreciation for tax purposes .... -- (132,697) (132,697)
Valuation allowance on office building ....... 191,060 -- 191,060
Unrealized gain on securities available
for sale ................................... -- (962,449) (962,449)
Nondeductible incentive plan expense ......... 70,200 -- 70,200
Other items .................................. -- (24,077) (24,077)
-------- ---------- --------
$762,387 (1,503,924) (741,537)
======== ========== ========
13. Benefit Plan
- ----------------
The Bank has a self-administered deferred profit sharing plan which covers all
full-time employees over 21 years of age with one or more years of continuous
employment. This plan is funded by employer contributions, which are determined
annually by the Bank's Board of Directors. No contributions were made for the
periods ended September 30, 1997, 1996 or 1995.
38
14. Director, Officer and Employee Plans
- ----------------------------------------
Stock Option Plan. On May 9, 1996, the stockholders of the Company approved the
Damen Financial Corporation 1996 Stock Option and Incentive Plan. This is an
incentive stock option plan for the benefit of the directors, officers and
employees of the Company and its affiliates. The number of shares authorized
under the Plan is 396,750, equal to 10.0% of the total number of shares issued
in the Conversion. As of June 13, 1996, 376,909 options were granted at $11.63
per share, exercisable at a rate of approximately 20% per year commencing May 9,
1997, and expiring ten years from the date of grant. On April 1, 1997, 19,837
additional options were granted at $14.56 per share, exercisable at a rate of
20% per year commencing April 1, 1998, and expiring ten years from the date of
grant. Four options are reserved for future grants. 75,382 options were
exercisable as of September 30, 1997. The following is an analysis of the stock
option activity for each of the years in the three year period ended September
30, 1997 and the stock options outstanding at the end of the respective periods.
EXERCISE PRICE
NUMBER -------------------------
OPTIONS OF SHARES PER SHARE TOTAL
- ------- --------- --------- -----
Outstanding at September 30, 1995 ....... 0
Granted ................................. 376,909 $11.63 $4,383,452
Exercised ............................... 0
Forfeited ............................... 0
-------- ------- ---------
Outstanding at September 30, 1996 ....... 376,909 11.63 4,383,452
Granted ................................. 19,837 14.56 288,827
Exercised ............................... 0
Forfeited ............................... 0
-------- ------- ---------
Outstanding at September 30, 1997 ....... 396,746 $11.63-14.56 $4,672,279
======= ============ ==========
Exercisable at September 30, 1997 ....... 73,661 $11.63 $ 856,677
====== ====== ==========
Options available for future
grants at September 30, 1997 .......... 4
=======
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations in accounting for its employee stock options. Under APB No. 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The Company implemented SFAS No. 123 "Accounting for Stock-Based
Compensation" during the year ended September 30, 1997. The Company will retain
its current accounting method for its stock-based compensation plans. This
statement will only result in additional disclosures for the Company, and as
such, its adoption did not, nor is it expected to have, a material impact on the
Company's financial condition or its results of operations.
The following summarizes the pro forma net income as if the fair value
method of accounting for stock-based compensation plans had been utilized:
YEAR ENDED YEAR ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1996
------------ ------------
Net income (as reported) .................. $1,745,447 1,779,842
Pro forma net income ...................... 1,664,987 1,753,022
Earnings per share (as reported) .......... $.53 .49
Pro forma earnings per share .............. .51 .48
The pro forma results presented above may not be representative of the effects
reported in pro forma net income for future years.
The fair value of the option grants for the years ended September 30, 1997
and 1996 was estimated using the Black Scholes Method, using the following
assumptions: dividend yield of approximately 2.0%, expected volatility of 10%,
risk free interest rate of 6.25%, and an expected life of approximately 10 years
during both periods.
39
Employee Stock Ownership Plan. In conjunction with the Conversion, the Bank
formed an Employee Stock Ownership Plan ("ESOP"). The ESOP covers substantially
all employees with more than one year of employment and who have attained the
age of 21. The ESOP borrowed $3,174,000 from the Company and purchased 317,400
common shares issued in the Conversion. The Bank will make scheduled
discretionary cash contributions to the ESOP sufficient to service the amount
borrowed. In accordance with generally accepted accounting principles, the
unpaid balance of the ESOP loan, which is comparable to unearned compensation,
is reported as a reduction of stockholders' equity. Total contributions by the
Bank to the ESOP which were used to fund principal and interest payments on the
ESOP debt totaled $392,158 and $609,808 for the years ended September 30, 1997
and 1996, respectively.
On November 22, 1993, the AICPA issued Statement of Position No. 93-6,
"Employers' Accounting for Employee Stock Ownership Plans" ("SOP No. 93-6"). SOP
No. 93-6 provides guidance for accounting for all ESOPs. SOP No. 93-6 requires
that the issuance or sale of treasury shares to the ESOP be reported when the
issuance or sale occurs and that compensation expense be recognized for shares
committed to be released to directly compensate employees equal to the fair
value of the shares committed. In addition, SOP No. 93-6 requires that leveraged
ESOP debt and related interest expense be reflected in the employer's financial
statements. Prior practice was to recognize compensation expense based on the
amount of the employer's contributions to the ESOP. SOP No. 93-6 is effective
for fiscal years beginning after December 31, 1992. The application of SOP No.
93-6 results in fluctuations in compensation expense as a result of changes in
the fair value of the Company's common stock; however, any such compensation
expense fluctuations will result in an offsetting adjustment to additional
paid-in capital. For the years ended September 30, 1997 and 1996, additional
compensation expense of $79,182 and $65,628 was recognized as a result of
implementation of this accounting principle.
Recognition and Retention Plan. On May 9, 1996, the stockholders of the Company
approved the Damen Financial Corporation 1996 Recognition and Retention Plan
("RRP"). This plan was established to award shares to directors and to employees
in key management positions in order to provide them with a proprietary interest
in the Company in a manner designed to encourage such employees to remain with
the Company. The number of shares authorized under the Plan is 158,700, equal to
4.0% of the total number of shares issued in the Conversion. These shares were
purchased in the open market during the quarter ended June 30, 1996 at a total
cost of $1,865,187. As of September 30, 1997, 146,796 shares were awarded, and
are vesting at a rate of 20% per year, while 11,904 shares are reserved for
future awards.
The $1,865,187 contributed to the RRP is being amortized to compensation
expense as the plan participants become vested in those shares. For the years
ended September 30, 1997 and 1996, $373,033 and $124,343 had been amortized to
expense. The unamortized cost, which is comparable to deferred compensation, is
reflected as a reduction of stockholders' equity.
15. Income Taxes
- ----------------
The Company has adopted Statement of Financial Accounting Standards No. 109
(SFAS No. 109) which requires a change from the deferred method to the liability
method of accounting for income taxes. Under the liability method, deferred
income taxes are recognized for the tax consequences of "temporary differences"
by applying statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and tax bases of existing
assets and liabilities.
Among the provisions of SFAS No. 109 which impact the Company is the tax
treatment of bad debt reserves. SFAS No. 109 provides that a deferred asset is
to be recognized for the bad debt reserve established for financial reporting
purposes and requires a deferred tax liability to be recorded for increases in
the tax bad debt reserve since January 1, 1988, the effective date of certain
changes made by the Tax Reform Act of 1986 to the calculation of savings
institutions' bad debt deduction. Accordingly, retained earnings at September
30, 1997 includes approximately $3,994,000 for which no deferred federal income
tax liability has been recognized.
40
The provision for income taxes consists of the following:
TEN MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
1997 1996 1995
------------ ------------ ------------
Current (benefit) .............. $(136,703) 438,031 (210,600)
Deferred (benefit) ............. 476,502 (275,571) 102,394
--------- -------- --------
$ 339,799 162,460 (108,206)
========= ======= ========
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
TEN MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
1997 1996 1995
------------ ------------ ------------
Statutory federal income tax rate .. 34.0% 34.0% 34.0%
State income taxes ................. 4.6 3.1 4.7
Tax-exempt interest income ......... (22.9) (22.8) (40.7)
Tax credits ........................ -- (5.4) (13.2)
Other .............................. 6 (0.5) 1.6
---- ---- ---
Effective income tax rate........... 16.3% 8.4% (13.6)%
==== === =====
Deferred income tax expense (benefit) consists of the following tax effects of
timing differences:
TEN MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
1997 1996 1995
------------ ------------ ------------
Loan fees ......................... $ 89,348 136,026 113,507
Book provision for loan losses
less than (in excess of) tax
bad debt deduction .............. 5,330 (28,700) (61,500)
Depreciation ...................... 40,855 24,737 7,666
Compensation related expenses ..... (19,219) (50,981) --
SAIF special assessment ........... 352,600 (352,600) --
Other, net ........................ 7,588 (4,053) 42,721
-------- -------- -------
$476,502 (275,571) 102,394
======== ======== =======
16. Regulatory Capital Requirements
- -----------------------------------
Capital standards require banks to satisfy two separate capital requirements.
Under these standards, banks must maintain "core" (Tier 1) capital equal to 3.0%
of adjusted total assets, and a combination of core and "supplementary" (Tier 2)
capital equal to 8.0% of "risk-weighted" assets. For purposes of meeting the
core and risk-based capital ratios, the stockholders' equity of Damen National
Bank must be adjusted for unrealized gains on debt and equity securities
available for sale, net of taxes. Adjusted total assets are the Bank's total
assets as determined under general accepted accounting principles, adjusted for
unrealized gains on debt and equity securities available for sale, net of taxes.
In determining compliance with the risk-based capital requirement, the Bank
is allowed to use both core capital and supplementary capital provided the
amount of supplementary capital used does not exceed the Bank's core capital.
Supplementary capital of Damen National Bank is defined to include all of the
Bank's general loss allowance. The risk-based capital requirement is measured
against risk-weighted assets which equals the sum of each asset and the
credit-equivalent amount of each off-balance sheet item after being multiplied
by an assigned risk weight.
At September 30, 1997 and 1996, the Bank's regulatory equity capital was as
follows:
SEPTEMBER 30, 1997 CORE CAPITAL RISK-BASED CAPITAL
- ------------------ ------------ ------------------
Stockholders' equity ......................... $ 40,630,341 40,630,341
Unrealized gain on debt and equity securities
available for sale, net of taxes ........... (1,288,560) (1,288,560)
General loss allowances ...................... -- 332,000
---------- -------
Regulatory capital computed .................. 39,341,781 39,673,781
Minimum capital requirements ................. 6,724,000 6,998,000
--------- ---------
Regulatory capital excess .................... $ 32,617,781 32,675,781
============ ==========
Computed capital ratio ....................... 17.55% 45.35%
Minimum capital ratio ........................ 3.00 8.00
---- ----
Regulatory capital excess .................... 14.55% 37.35%
===== =====
41
SEPTEMBER 30, 1996 CORE CAPITAL RISK-BASED CAPITAL
- ------------------ ------------ ------------------
Stockholders' equity ......................... $ 37,747,723 37,747,723
Unrealized gain on debt and equity securities
available for sale, net of taxes ........... (219,679) (219,679)
General loss allowances ...................... -- 345,000
---------- -------
Regulatory capital computed .................. 37,528,044 37,873,044
Minimum capital requirements ................. 6,659,000 6,033,000
--------- ---------
Regulatory capital excess .................... $ 30,869,044 31,840,044
Computed capital ratio ....................... 16.91% 50.22%
Minimum capital ratio ........................ 3.00 8.00
---- ----
Regulatory capital excess .................... 13.91% 42.22%
===== =====
17. Stockholders' Equity
- ------------------------
As part of the Conversion, the Bank established a liquidation account for the
benefit of all eligible depositors who continue to maintain their deposit
accounts in the Bank after conversion. In the unlikely event of a complete
liquidation of the Bank, each eligible depositor will be entitled to receive a
liquidation distribution from the liquidation account, in the proportionate
amount of the then current adjusted balance for deposit accounts held, before
distribution may be made with respect to the Bank's capital stock. The Bank may
not declare or pay a cash dividend to the Company on, or repurchase any of, its
capital stock if the effect thereof would cause the retained earnings of the
Bank to be reduced below the amount required for the liquidation account. Except
for such restrictions, the existence of the liquidation account does not
restrict the use or application of retained earnings.
In addition, the Bank may not declare or pay cash dividends on or
repurchase any of its shares of common stock if the effect thereof would cause
stockholders' equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements.
Unlike the Bank, the Company is not subject to these regulatory
restrictions on the payment of dividends to its stockholders. However, the
Company's source of funds for future dividends may depend upon dividends
received by the Company from the Bank.
18. SAIF Special Assessment and its Impact on SAIF Insurance Premiums
- ---------------------------------------------------------------------
The deposits of Damen National Bank, are presently insured by the Savings
Association Insurance Fund ("SAIF"), which together with the Bank Insurance Fund
("BIF"), are the two insurance funds administered by the Federal Deposit
Insurance Corporation ("FDIC"). Financial institutions which are members of the
BIF are experiencing substantially lower deposit insurance premiums because the
BIF has achieved its required level of reserves while the SAIF has not yet
achieved its required reserves. In order to help eliminate this disparity and
any competitive disadvantage due to disparate deposit insurance premium
schedules, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation required a special one-time assessment of approximately
65.7 cents per $100 of SAIF insured deposits held by the Bank at March 31, 1995.
The one-time special assessment had resulted in a charge to earnings of $860,000
during the year ended September 30, 1996. The after-tax effect of this one-time
charge to earnings totaled $507,400. The legislation is intended to fully
recapitalize the SAIF fund so that commercial bank and thrift deposits are
charged the same FDIC premiums beginning January 1, 1997. As of such date,
deposit insurance premiums for highly rated institutions, such as the Bank, have
been substantially reduced.
The Bank, however, will continue to be subject to an assessment to fund
repayment of the Financing Corporation's ("FICO") obligations. The FICO
assessment for SAIF insured institutions will be 6.48 cents per $100 of deposits
while BIF insured institutions will pay 1.52 cents per $100 of deposits until
the year 2000 when the assessment will be imposed at the same rate on all FDIC
insured institutions.
42
19. Financial Instruments with Off-Balance Sheet Risk
- -----------------------------------------------------
The Company is a party to various transactions with off-balance sheet risk in
the normal course of its business. These transactions are primarily commitments
to originate or purchase loans. These financial instruments carry varying
degrees of credit and interest-rate risk in excess of amounts recorded in the
consolidated financial statements.
Commitments to originate mortgage loans totaling $5,938,000 at September
30, 1997 represent amounts which the Bank plans to fund within the normal
commitment period of 60 to 90 days. Of this amount, $3,595,000 are in fixed rate
commitments with rates ranging from 7.35% to 9.25%, and $2,343,000 are in
adjustable rate commitments. At September 30, 1996, commitments to originate
mortgage loans totaled $591,000 with fixed rates ranging from 7.12% to 8.88%.
Because the credit worthiness of each customer is reviewed prior to extension of
the commitment, the Bank adequately controls their credit risk on these
commitments, as it does to loans recorded on the balance sheet. The Bank
conducts all of its lending activities in the Chicagoland area which it serves.
Management believes the Bank has a diversified loan portfolio and the
concentration of lending activities in these local communities does not result
in an acute dependency upon economic conditions of the lending region.
The Bank has approved, but unused, equity lines of credit of approximately
$1,243,000 at September 30, 1997. Approval of lines of credit is based upon
underwriting standards and limitations similar to conventional lending.
At September 30, 1997, the Bank was committed to fund an additional
investment of $798,000, through the year 2000, in notes secured by adjustable
rate mortgage loans, issued by the Community Investment Corporation. The
outstanding commitment to fund this investment totaled $1,005,000 at September
30, 1996. The notes have an average maturity date of approximately twenty years.
The Bank has issued a letter of credit in the amount of $409,275 for the
benefit of the City of Chicago in connection with the Kedzie Limited Partnership
(see note 2).
20. Contingencies
- -----------------
The Bank is, from time to time, a party to certain lawsuits arising in the
ordinary course of its business, wherein it enforces its security interest.
Management, based upon discussions with legal counsel, believes that the Company
and the Bank are not engaged in any legal proceedings of a material nature at
the present time.
21. Disclosures About the Fair Value of Financial Instruments
- -------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents: For cash and interest-bearing deposits, the carrying
amount is a reasonable estimate of fair value.
U.S. Government and agency securities: Fair values for securities are based on
quoted market prices as published in financial publications.
Mortgage-backed securities: Fair values for mortgage-backed securities are based
on average quotes received from a third-party broker.
Loans receivable: The fair values of fixed-rate one-to-four family residential
mortgage loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions. The fair values for other
fixed-rate mortgage loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms and
collateral to borrowers of similar credit quality. For adjustable-rate loans
which reprice monthly and with no significant change in credit risk, fair values
approximate carrying values.
43
Other investments: Fair values for other investments are based on quoted market
prices received from third-party sources.
Deposit liabilities: The fair value of demand deposits, passbook accounts and
money market deposits is the amount payable on demand at the reporting date. The
fair value of fixed maturity certificates of deposit is estimated by discounting
the future cash flows using the rates currently offered for deposits of similar
original maturities.
Borrowed money: Rates currently available to the Company for debt with similar
terms and original maturities are used to estimate fair value of existing debt.
Financial instruments with off-balance sheet risk: Fair values of the Company's
off-balance sheet financial instruments, which consists of loan commitments and
letters of credit, are based on fees charged to enter into these agreements. As
the Company currently charges no fees on these instruments, no estimate of fair
value has been made.
The estimated fair values of the Company's financial instruments are as follows:
SEPTEMBER 30 SEPTEMBER 30
1997 1996
------------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ----------- ----------- -----------
Financial assets:
Cash and cash equivalents . $ 2,090,984 2,090,984 1,181,231 1,181,231
Investment securities ..... 1,845,383 1,845,400 1,776,979 1,777,000
Investment securities,
available for sale ...... 35,874,298 35,874,298 43,342,710 43,342,710
Mortgage-backed securities 27,869,570 27,548,700 35,503,531 34,641,300
Mortgage-backed securities,
available for sale ...... 56,740,190 56,740,190 52,594,450 52,594,450
Loans receivable, gross ... 99,186,319 99,702,100 93,541,172 93,061,700
Financial liabilities:
Deposits .................. 125,746,001 126,401,100 118,973,335 119,065,000
Borrowed money ............ 56,500,000 55,817,800 59,600,000 59,099,400
22. Condensed Parent Company Only
Financial Statements
- ---------------------------------
The following condensed statements of financial condition, as of September 30,
1997 and 1996, and condensed statements of cash flows and earnings for the years
ended September 30, 1997 and 1996 and for the period from September 29, 1995 to
September 30, 1995 for Damen Financial Corporation, should be read in
conjunction with the consolidated financial statements and the notes thereto.
Statements of Financial Condition
- ---------------------------------
SEPTEMBER 30 SEPTEMBER 30
1997 1996
------------ ------------
Assets
Cash and cash equivalents .................. $ 983,285 1,120,417
Securities available for sale .............. 1,808,310 11,297,960
Loans receivable ........................... 2,550,800 2,762,400
Equity investment in subsidiaries .......... 41,747,771 40,224,816
Prepaid expenses and other assets .......... 63,112 272,100
----------- ----------
47,153,278 55,677,693
========== ==========
SEPTEMBER 30 SEPTEMBER 30
1997 1996
------------ ------------
Liabilities and Stockholders' Equity
Accounts payable ........................... 96,885 330,729
Common stock ............................... 39,675 39,675
Additional paid-in capital ................. 38,308,138 38,280,338
Retained earnings .......................... 22,100,190 21,131,170
Unrealized gain (loss) on securities
available for sale, net of taxes ......... 94,000 (52,000)
Treasury stock ............................. (12,117,799) (2,311,375)
Common stock awarded by Recognition
and Retention Plan ....................... (1,367,811) (1,740,844)
----------- ----------
$47,153,278 55,677,693
=========== ==========
44
Statements of Cash Flows
- ------------------------
PERIOD FROM
YEAR ENDED YEAR ENDED SEPTEMBER 29
SEPTEMBER 30 SEPTEMBER 30 TO SEPTEMBER 30
1997 1996 1995
------------ ------------ ---------------
Operating activities:
Net income ...................................... $ 1,745,447 1,779,842 --
Equity in earnings of subsidiaries .............. (1,522,955) (1,287,312) --
Gain on sale of investment securities,
available for sale ............................ (139,718) (84,550) --
(Increase) decrease in accrued
interest receivable ........................... 171,762 (182,320) --
Change in other assets and liabilities .......... (82,224) (61,737) --
Amortization of cost of stock benefit plans ..... 373,033 124,343 --
------- ------- -------
Net cash provided by operating activities ......... 545,345 288,266 --
------- ------- -------
Investing activities:
Purchase of capital stock of subsidiary ......... -- -- (19,160,006)
Loan disbursements .............................. -- -- (3,174,000)
Loan repayments ................................. 211,600 411,600 --
Purchase of securities available for sale ....... (2,007,981) (15,581,411) --
Proceeds from maturities of investment
securities available for sale ................. 596,753 1,637,563 --
Proceeds from sales of investment
securities available for sale ................. 11,288,597 2,643,438 --
---------- --------- -----------
Net cash provided by (for) investing activities ... 10,088,969 (10,888,810) (22,334,006)
---------- ----------- -----------
Financing activities:
Net proceeds from sale of common stock .......... -- -- 38,320,013
Accrued conversion costs ........................ -- -- 121,000
Dividends paid on common stock .................. (965,022) (209,484) --
Purchase of treasury stock ...................... (9,806,424) (2,311,375) --
Purchase of RRP stock ........................... -- (1,865,187) --
---------- ---------- ----------
Net cash provided by (for) financing activities ... (10,771,446) (4,386,046) 38,441,013
----------- ---------- ----------
Increase (decrease) in cash and cash equivalents .. (137,132) (14,986,590) 16,107,007
Cash and cash equivalents at beginning of period .. 1,120,417 16,107,007 --
--------- ---------- ----------
Cash and cash equivalents at end of period ........ $ 983,285 1,120,417 16,107,007
=========== ========= ==========
Statements of Earnings
- ----------------------
PERIOD FROM
YEAR ENDED YEAR ENDED SEPTEMBER 29
SEPTEMBER 30 SEPTEMBER 30 TO SEPTEMBER 30
1997 1996 1995
------------ ------------ ---------------
Equity in earnings of subsidiaries .. $1,522,955 1,287,312 --
Interest and dividend income ........ 676,491 1,085,013 --
Gain on sale of investment
securities, available for sale .... 139,718 84,550 --
Non-interest expense ................ (467,994) (449,733) --
Provision for federal and
state income taxes ................ (125,723) (227,300) --
-------- -------- -------
Net income .......................... $1,745,447 1,779,842 --
========== ========= =======
23. Subsequent Event
- --------------------
At the October 21, 1997 Board of Directors' meeting, the Company declared a
quarterly dividend of $.06 per share, totaling $186,553, payable November 14,
1997 to shareholders of record as of October 31, 1997.
45
Corporate Office
- ----------------
200 West Higgins Road
Schaumburg, Illinois 60195
Annual Report on Form 10-K
- --------------------------
A copy of Damen Financial Corporation's Annual Report on Form 10-K as filed with
the Securities and Exchange Commission may be obtained without charge upon
written request to Janine M. Poronsky, Damen Financial Corporation, 200 West
Higgins Road, Schaumburg, Illinois 60195, or by calling (847) 882-5320.
Registrar/Transfer Agent
- ------------------------
Communications regarding change of address, transfer of stock and lost
certificates should be sent to:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Accountants
- -----------
Cobitz, VandenBerg & Fennessy
Suite 301
7800 West 95th Street
Hickory Hills, Illinois 60457
Dividends
- ---------
The Company paid a six cents per share dividend to holders of record for each
quarter since June 1996. The Board of Directors will consider the payment of
future cash dividends, dependent on the results of operations and financial
condition of the Company, tax considerations, industry standards, economic
conditions, regulatory restrictions, general business practices and other
factors. The Company's ability to pay dividends may be dependent on the dividend
payments it receives from its subsidiary, Damen National Bank, which are subject
to regulations and the Bank's continued compliance with all regulatory capital
requirements. See Note 17 of the Notes to the Consolidated Financial Statements
for information regarding limitations of the ability of Damen National Bank to
pay dividends to the Company.
Stock Listing
- -------------
Damen Financial Corporation's common stock is traded over the counter and is
listed on the Nasdaq National Market System under the symbol "DFIN." At
September 30, 1997, there were 3,109,220 shares of Damen Financial Corporation
common stock issued and outstanding and there were approximately 240 holders of
record. The table below shows the range of the common stock for each quarter
since the common stock began trading on October 2, 1995. These prices do not
represent actual transactions and do not include retail markups, markdowns or
commissions.
PER SHARE
------------------
QUARTER ENDED HIGH LOW DIVIDENDS
- ------------- ---- --- ---------
December 31, 1995(1) .............. $12.25 $11.25 --
March 31, 1996 .................... $11.75 $10.75 --
June 30, 1996 ..................... $12.25 $11.25 $.06
September 30, 1996 ................ $12.13 $11.00 $.06
December 31, 1996 ................. $12.94 $11.75 $.06
March 31, 1997 .................... $15.00 $12.63 $.06
June 30, 1997 ..................... $14.75 $13.88 $.06
September 30, 1997 ................ $15.75 $13.88 $.06
(1) Reflects the period from October 2 through December 31, 1995.
The stock price information set forth in the table above was provided by the
National Association of Securities Dealers, Inc. High, low and closing prices
and daily trading volume are reported in most major newspapers.
Market Makers
Chicago Capital, Inc.
The Chicago Corporation
Dean Witter Reynolds
Ernst & Company
Everen Securities, Inc.
Friedman Billings Ramsey & Co.
Herzog, Heine, Geduld, Inc.
46