SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 0-26574
DAMEN FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-4029638
- ---------------------------- ---------------
(State or other jurisdiction I.R.S. Employer
of incorporation or Identification
organization) Number
200 West Higgins Road, Schaumburg, Illinois 60195
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(Address of Principal executive offices) (Zip Code)
Registrant telephone number, including area code: (847) 882-5320
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Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
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As of February 12, 1999 there were 2,820,154 shares of the Registrant's
common stock issued and outstanding.
Transitional Small Business Disclosure Format(check one): Yes No X
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DAMEN FINANCIAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
December 31, 1998 (Unaudited) and September 30, 1998 ....... 4
Consolidated Statements of Earnings for the three
months ended December 31, 1998 and 1997 (unaudited) ........ 5
Consolidated Statements of Changes in
Stockholders' Equity for the three months
ended December 31, 1998 (unaudited) ........................ 6
Consolidated Statements of Cash Flows for the three
months ended December 31, 1998 and 1997 (unaudited) ........ 7
Notes to Unaudited Consolidated Financial Statements ....... 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 10-15
Part II. OTHER INFORMATION ............................................... 16
Signatures ...................................................... 17
Index to Exhibits ............................................... 18
Earnings Per Share Analysis (Exhibit 11) ........................ 19
Financial Data Schedule (Exhibit 27) ............................ 20
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PART I - FINANCIAL INFORMATION
-3-
DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, September 30,
1998 1998
------------ -------------
(unaudited)
Assets
- ------
Cash and amounts due from depository institutions ...... $ 486,008 541,682
Interest-bearing deposits .............................. 2,587,335 1,245,446
------------ -----------
Total cash and cash equivalents .................... 3,073,343 1,787,128
Investment securities held to maturity
(fair value: $1,764,800 at December 31, 1998
and $1,728,900 at September 30, 1998) ................ 1,764,829 1,728,931
Investment securities, available for sale, at fair value 37,250,754 40,377,371
Mortgage-backed securities held to maturity
(fair value: $13,563,500 at December 31, 1998
and $16,478,500 at September 30, 1998) ............... 13,601,243 16,434,332
Mortgage-backed securities, available for sale,
at fair value ........................................ 43,300,540 48,617,275
Loans receivable (net of allowance for loan losses:
$449,000 at December 31, 1998 and
$449,000 at September 30, 1998) ...................... 112,228,000 109,417,586
Stock in Federal Home Loan Bank and
Federal Reserve Bank of Chicago ...................... 3,530,150 3,815,150
Accrued interest receivable ............................ 1,500,055 1,755,466
Office properties and equipment - net .................. 3,538,723 3,530,443
Prepaid expenses and other assets ...................... 416,354 569,040
------------ -----------
Total assets ....................................... 220,203,991 228,032,722
============ ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities
- -----------
Deposits ............................................... 116,513,549 115,698,518
Borrowed money ......................................... 57,000,000 61,800,000
Advance payments by borrowers for taxes and insurance .. 1,588,434 2,598,991
Other liabilities ...................................... 1,929,190 2,681,029
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Total liabilities .................................. 177,031,173 182,778,538
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Stockholders' Equity
- --------------------
Preferred stock, $.01 par value; authorized
100,000 shares; none outstanding ..................... -- --
Common stock, $.01 par value; authorized
4,500,000 shares; 3,981,434 shares issued and
2,820,154 shares outstanding at December 31, 1998
and 2,957,154 shares outstanding at September 30, 1998 39,814 39,814
Additional paid-in capital ............................. 38,860,638 38,837,468
Retained earnings, substantially restricted ............ 23,055,484 22,882,928
Accumulated other comprehensive income,
net of income taxes .................................. 1,296,980 1,740,980
Treasury stock, at cost (1,161,280 shares at
December 31, 1998 and 1,024,280 shares at
September 30, 1998) ................................... (16,892,277) (14,913,027)
Common stock acquired by Employee Stock Ownership Plan . (2,286,300) (2,339,200)
Common stock awarded by Recognition and Retention Plan . (901,521) (994,779)
------------ -----------
Total stockholders' equity ......................... 43,172,818 45,254,184
------------ -----------
Total liabilities and stockholders' equity ......... $220,203,991 228,032,722
============ ===========
See accompanying notes to consolidated financial statements.
-4-
DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Earnings
Three Months Ended
December 31,
----------------------
1998 1997
---------- ---------
(unaudited)
Interest income:
Loans ................................................... $2,186,441 2,046,023
Mortgage-backed securities .............................. 1,012,407 1,424,569
Tax-exempt securities ................................... 283,321 332,537
Interest and dividends on other investments ............. 393,178 277,460
Dividends on FHLB and FRB stock ......................... 60,757 63,728
---------- ---------
Total interest income ................................. 3,936,104 4,144,317
---------- ---------
Interest expense:
Deposits ................................................ 1,450,414 1,650,303
Borrowings .............................................. 897,198 896,110
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Total interest expense ................................ 2,347,612 2,546,413
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Net interest income before provision for loan losses .. 1,588,492 1,597,904
Provision for loan losses ................................. -- 21,000
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Net interest income after provision for loan losses ... 1,588,492 1,576,904
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Non-interest income:
Loan fees and service charges ........................... 50,044 13,047
Gain on sale of investment securities, available for sale 90,767 131,237
Rental income ........................................... 43,863 14,542
Other income ............................................ 32,150 17,636
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Total non-interest income ............................. 216,824 176,462
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Non-interest expense:
Compensation, employee benefits, and related expenses ... 742,692 661,856
Advertising and promotion ............................... 25,997 143,426
Occupancy and equipment expense ......................... 208,854 185,959
Data processing ......................................... 32,000 32,298
Insurance expense ....................................... 19,860 18,238
Federal deposit insurance premiums ...................... 17,919 19,115
Legal, audit, and examination services .................. 56,137 62,192
Other operating expenses ................................ 82,629 74,164
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Total non-interest expense ............................ 1,186,088 1,197,248
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Net income before income taxes ............................ 619,228 556,118
Provision for federal and state income taxes .............. 132,005 97,328
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Net income ............................................ $ 487,223 458,790
========== =========
Earnings per share - basic ................................ $ .19 .16
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Earnings per share - diluted .............................. .18 .15
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Dividends declared per common share ....................... $ .12 .06
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See accompanying notes to consolidated financial statements.
-5-
DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended December 31, 1998
(Unaudited)
Accumulated Common Common
Additional Other Stock Stock
Common Paid-In Retained Comprehensive Treasury Acquired Awarded
Stock Capital Earnings Income Stock by ESOP by RRP Total
------- ---------- ---------- ------------- ------------ ----------- --------- ----------
Balance at September 30, 1998 ...... $39,814 38,837,468 22,882,928 1,740,980 (14,913,027) (2,339,200) (994,779) 45,254,184
------- ---------- ---------- --------- ----------- ---------- -------- ----------
Additions (deductions) for the
period ended December 31, 1998:
Comprehensive income:
Net income ................... 487,223 487,223
Other comprehensive income,
net of tax:
Unrealized holding loss
during the period ...... (384,720) (384,720)
Less: reclassification
adjustment of gains
included in net income . (59,280) (59,280)
------- ---------- ---------- --------- ----------- ---------- -------- ----------
Total comprehensive income ..... -- -- 487,223 (444,000) -- -- -- 43,223
------- ---------- ---------- --------- ----------- ---------- -------- ----------
Purchase of treasury
stock (137,000 shares) ....... (1,979,250) (1,979,250)
Amortization of award
of RRP stock ................. 93,258 93,258
Contribution to fund ESOP loan . 23,170 52,900 76,070
Dividends declared on
common stock ................. (314,667) (314,667)
------- ---------- ---------- --------- ----------- ---------- -------- ----------
Balance at December 31, 1998 ....... $39,814 28,860,638 23,055,484 1,296,980 (16,892,277) (2,286,300) (901,521) 43,172,818
======= ========== ========== ========= =========== ========== ======== ==========
See accompanying notes to consolidated financial statements.
-6-
DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended
December 31,
--------------------------
1998 1997
------------ -----------
(unaudited)
Cash flows from operating activities:
Net income ........................................................ $ 487,223 458,790
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation .................................................. 70,731 58,876
Amortization of cost of stock benefit plans ................... 169,328 178,438
Provision for loan losses ..................................... -- 21,000
Decrease in deferred loan income .............................. (49,859) (89,651)
Change in current and deferred federal
and state income taxes ...................................... 154,895 283,517
Gain on sale of investment securities, available for sale ..... (90,767) (131,237)
Decrease in accrued interest receivable ....................... 255,411 26,323
Increase in accrued interest payable .......................... 40,976 38,900
Decrease in other assets ...................................... 32,886 39,731
Increase (decrease) in other liabilities ...................... (519,898) 79,372
------------ -----------
Net cash provided by operating activities ........................... 550,926 964,059
------------ -----------
Cash flows from investing activities:
Purchase of investment securities, available for sale .......... (500,000) (4,074,729)
Purchase of investment securities .............................. (132,757) --
Purchase of mortgage-backed securities, available for sale ..... -- (2,009,139)
Proceeds from sales of investment securities, available for sale 1,160,823 381,237
Proceeds from maturities of investment securities,
available for sale ........................................... 2,286,561 1,498,963
Proceeds from maturities of investment securities .............. 96,859 21,407
Proceeds from maturities of mortgage-backed securities,
available for sale ........................................... 4,834,735 3,351,339
Proceeds from maturities of mortgage-backed securities ......... 2,833,089 2,482,608
Proceeds from redemption of Federal Home Loan Bank stock ....... 285,000 --
Disbursements for loans ........................................ (10,636,241) (5,064,593)
Loan repayments ................................................ 7,875,686 3,354,948
Property and equipment expenditures ............................ (91,211) (14,853)
------------ -----------
Net cash provided by (for) investing activities ..................... 8,012,544 (72,812)
------------ -----------
Cash flows from financing activities:
Proceeds from exercise of stock options ........................ -- 115,867
Deposit receipts ............................................... 28,288,860 17,233,287
Deposit withdrawals ............................................ (28,869,963) (17,900,523)
Interest credited to deposit accounts .......................... 1,396,134 1,122,154
Proceeds from borrowed money ................................... 3,300,000 21,200,000
Repayment of borrowed money .................................... (8,100,000) (18,700,000)
Increase (decrease) in advance payments by borrowers
for taxes and insurance ...................................... (1,010,557) 916,975
Purchase of treasury stock ..................................... (1,979,250) --
Dividends paid on common stock ................................. (302,479) (163,394)
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Net cash provided by (for) financing activities ..................... (7,277,255) 3,824,366
------------ -----------
Increase in cash and cash equivalents ............................... 1,286,215 4,715,613
Cash and cash equivalents at beginning of period .................... 1,787,128 2,090,984
------------ -----------
Cash and cash equivalents at end of period .......................... $ 3,073,343 6,806,597
============ ===========
Cash paid during the period for:
Interest ....................................................... $ 2,306,636 2,507,513
Income taxes ................................................... 27,504 2,388
============ ===========
See accompanying notes to consolidated financial statements.
-7-
DAMEN FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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1. Statement of Information Furnished
- ---------------------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and Article 10 of Regulation
S-X, and in the opinion of management contains all adjustments (all of which are
normal and recurring in nature) necessary to present fairly the financial
position as of December 31, 1998, the results of operations for the three months
ended December 31, 1998 and 1997 and cash flows for the three months ended
December 31, 1998 and 1997. These results have been determined on the basis of
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The attached consolidated statements are those of Damen Financial
Corporation (the "Company") and its consolidated subsidiaries Damen National
Bank (the "Bank") and Dasch Inc. The results of operations for the three month
period ended December 31, 1998 are not necessarily indicative of the results to
be expected for the full year.
2. Earnings Per Share
- -----------------------
Earnings per share for the three month periods ended December 31, 1998 and
1997 were determined by dividing net income for the periods by the weighted
average number of both basic and diluted shares of common stock and common stock
equivalents outstanding (see Exhibit 11 attached). Stock options are regarded as
common stock equivalents and are therefore considered in 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.
-8-
3. Impact of New Accounting Standards
- ---------------------------------------
Disclosures about Segments of an Enterprise and Related Information. In
December 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. Management does not believe that adoption of SFAS No. 131
will have a material impact on the Company's consolidated financial condition or
results of operations.
Employers' Disclosures about Pension and Other Employee Benefits. In
February 1998, the FASB issued Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS No. 132"). SFAS No. 132 alters current disclosure requirements regarding
pensions and other postretirement benefits in the financial statements of
employers who sponsor such benefit plans. The revised disclosure requirements
are designed to provide additional information to assist readers in evaluating
future costs related to such plans. Additionally, the revised disclosures are
designed to provide changes in the components of pension and benefit costs in
addition to the year end components of those factors in the resulting asset or
liability related to such plans. The statement is effective for fiscal years
beginning after December 15, 1997 with earlier application available. Management
does not believe that adoption of SFAS No. 132 will have a material impact on
the Company's consolidated financial condition or results of operations.
Accounting for Derivative Instruments and for Hedging Activities. In June
1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("SFAS
No. 133"), entitled "Accounting for Derivative Instruments and for Hedging
Activities." SFAS No. 133 provides a comprehensive and consistent standard for
the recognition and measurement of derivatives and hedging activities. The
statement requires all derivatives to be recorded on the balance sheet at fair
value and establishes special accounting for the following three different types
of hedges: hedges of changes in the fair value of assets, liabilities or firm
commitments (referred to as fair value hedges); hedges of the variable cash
flows of forecasted transactions (cash flow hedges); and hedges of foreign
currency exposures of net investments in foreign operations. Though the
accounting treatment and criteria for each of the three types of hedges is
unique, they all result in recognizing offsetting changes in value or cash flow
of both the hedge and the hedged item in earnings in the same period. Changes in
the fair value of derivatives that do not meet the criteria of one of these
three categories of hedges are included in earnings in the period of the change.
SFAS No. 133 is effective for years beginning after June 15, 1999, but companies
can adopt SFAS No. 133 as early as the beginning of any fiscal quarter that
begins after June 1998. Management does not believe that adoption of SFAS No.
133 will have a material impact on the Company's consolidated financial
condition or results of operations.
Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. In October
1998, the FASB issued Statement of Financial Accounting Standards No. 134,
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS No. 134"),
which is effective for the first fiscal quarter after December 15, 1998. This
statement amends SFAS No. 65 "Accounting for Certain Mortgage Banking
Activities." This statement revises the accounting for retained securities and
beneficial interests. Management does not believe that adoption of SFAS No. 134
will have a material impact on the Company's consolidated financial condition or
results of operations.
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.
-9-
Management's Discussion and Analysis of Financial
Condition and Results of Operations
FINANCIAL CONDITION
-------------------
December 31, 1998 compared to September 30, 1998
Total assets decreased $7.8 million to $220.2 million as of December 31, 1998
from $228.0 million as of September 30, 1998 as excess cash flows generated by
liquidating investment securities were used to reduce FHLB advances and fund
treasury stock purchases. Interest-bearing deposits increased $1.4 million to
$2.6 million as of December 31, 1998. Investment securities available-for-sale
decreased $3.1 million to $37.3 million at December 31, 1998 from $40.4 million
at September 30, 1998 due primarily to a market value decrease of $270,000 and
sales and maturities of $3.4 million. Mortgage-backed securities held to
maturity decreased to $13.6 million at December 31, 1998 from $16.4 million at
September 30, 1998 due primarily to repayments. Mortgage-backed securities
available-for-sale decreased $5.3 million to $43.3 million at December 31, 1998
from $48.6 million at September 30, 1998 due primarily to repayments of $4.8
million and a market value decrease of $480,000. Loans receivable increased $2.8
million to $112.2 million at December 31, 1998 from $109.4 million at September
30, 1998 due primarily to new loan originations of $10.2 million and loan
purchases of $400,000 exceeding repayments of $7.9 million. Loan originations
consisted primarily of mortgage loans and home equity line of credit loans and
increased due to favorable interest rates.
Total deposits increased $815,000 to $116.5 million at December 31, 1998 from
$115.7 million at September 30, 1998. The increase was primarily due to interest
credited. FHLB advances decreased $4.8 million to $57.0 million at December 31,
1998 from $61.8 million at September 30, 1998. The decreased advances were the
result of excess cash flows generated by investment maturities, accelerated
repayments and sales.
Stockholders' equity decreased $2.1 million to $43.2 million at December 31,
1998 from $45.3 million at September 30, 1998 due primarily to the purchase of
treasury stock at a cost of $2.0 million, a decrease in net unrealized gains of
$444,000 due partially to a decrease in the available-for-sale portfolio, and
the payment of dividends totaling $315,000, partially offset by net income of
$487,000 for the three month period. At December 31, 1998, there were 2,820,154
shares of common stock outstanding.
Results of Operations
---------------------
The Company's results of operations depend primarily upon the level of net
interest income, which is the difference between the interest income earned on
its interest-earning assets such as loans and investments, and the costs of the
Company's interest-bearing liabilities, primarily deposits and borrowing. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them,
respectively. Results of operations are also dependent upon the level of the
Company's non-interest income, including fee income and service charges, and
affected by the level of its non-interest expenses, including its general and
administrative expenses.
Comparison of Operating Results for the
Quarters Ended December 31, 1998 and 1997
-----------------------------------------
Net Income. The Company's net income for the three months ended December 31,
1998 was $487,000 as compared to $459,000 for the same period in 1997, an
increase of $28,000. This increase was due primarily to an increase in
loan-related fee income of $37,000, an increase in rental income of $29,000, an
increase in deposit-related fee income of $15,000, a decrease in the loan loss
provision of $21,000, and a decrease in non-interest expense of $11,000,
partially offset by a decrease in net interest income of $9,000, a decrease in
gains on the sale of investments available for sale of $40,000, and an increase
in income taxes of $35,000.
Interest Income. Total interest income for the quarter ended December 31, 1998
decreased $208,000 compared to a year ago due to a decrease in average
interest-earning assets of $7.6 million to $215.1 million from $222.7 million,
as well as a decrease in the yield on average interest-earning assets from 7.44%
to 7.32%. The decrease in average interest-earning assets was partially due to
the utilization of $4.8 million during 1998 for the repurchase of Company stock.
-10-
Interest Expense. The Company's interest expense decreased $199,000 for the
quarter ended December 31, 1998 compared to a year ago due to a decrease in
average interest-bearing liabilities to $176.8 million at December 31, 1998 from
$182.1 million a year ago, and the average interest rate decreased to 5.31% from
5.59%. The decrease in average interest bearing liabilities resulted from a
decrease in the average balance of savings deposits of $8.2 million partially
offset by an increase in the average balance of borrowed money of $2.9 million.
Provision for Loan Losses. The determination of the allowance for loan losses
involves material estimates that are susceptible to significant change in the
near term. The allowance for loan losses is maintained at a level deemed
adequate to provide for losses through charges to operating expense. The
allowance is based upon past loss experience and other factors which, in
management's judgment, deserve current recognition in estimating losses. Such
other factors considered by management include the growth and composition of the
loan portfolio, the relationship of the allowance for losses to outstanding
loans, and economic conditions.
The Company did not record a provision for loan losses for the quarter ended
December 31, 1998 compared to $21,000 for the same quarter in the prior year as
non-performing loans decreased to $459,000 from $562,000 at September 30, 1998.
The Company will continue to monitor its allowance for loan losses and make
future additions to the allowance through the provisions for loan losses in
light of its level of loans and as economic conditions dictate. There can be no
assurance that the Company will not make future provisions in an amount equal to
or greater than the amount provided during recent periods, or that future losses
will not exceed estimated amounts.
Non-Interest Income. The Company's non-interest income was $217,000 for the
quarter ended December 31, 1998 compared to $176,000 for the same quarter a year
ago due to the Company's continuing efforts to increase fee income. The increase
was due primarily to an increase in loan-related fee income of $37,000, an
increase in rental income of $29,000, and an increase in deposit-related fee
income of $15,000, partially offset by a decease in gains on the sale of
investments available for sale of $40,000.
Non-Interest Expense. The Company's non-interest expense decreased $11,000 for
the quarter ended December 31, 1998 due primarily to a decrease of $117,000 in
advertising costs due to the absence of special promotions, and a decrease of
$6,000 in professional fees, partially offset by an increase of $81,000 in
compensation costs and an increase in occupancy and equipment costs of $23,000.
Provision for Income Taxes. Tax expense for the quarter ended December 31, 1998
was $132,000 compared to $97,000 for the same quarter in 1997 due to an increase
in pre-tax income.
-11-
Liquidity and Capital Resources
-------------------------------
The Company's principal sources of funds are deposits and borrowings,
amortization and prepayments of loan principal and mortgage-backed securities,
maturities of investment securities and income from operations. While scheduled
loan repayments and maturing investments are relatively predictable, deposit
flows and early loan repayments are more influenced by interest rates, floors
and caps on loan rates, general economic conditions and competition. The Company
generally manages the pricing of its deposits to be competitive and to increase
core deposit relationships, where practicable.
The Company's most liquid assets are cash and cash equivalents, which consist of
interest bearing deposits and short term highly liquid investments with original
maturities of less than three months that are readily convertible to known
amounts of cash. The level of these assets is dependent on the Company's
operating, financing and investing activities during any given period. At
December 31, 1998 and September 30, 1998, cash and cash equivalents totaled $3.1
million and $1.8 million respectively.
The primary financing activities of the Company are deposits and borrowings. For
the three months ended December 31, 1998, deposits increased $815,000 and the
Bank's net (proceeds less repayments) financing activity with the FHLB decreased
$4.8 million.
The Company anticipates that it will have sufficient funds available to meet
current commitments. At December 31, 1998 the Company has outstanding loan
commitments totaling $6,965,000, and unused lines of credit granted totaling
$1,581,000.
The Bank is subject to the capital regulations of the Office of the Comptroller
of the Currency ("OCC"). The OCC's regulations establish two capital standards
for national banks: a leverage requirement and a risk-based capital requirement.
In addition, the OCC may, on a case-by-case basis, establish individual minimum
capital requirements for a national bank that vary from the requirements which
would otherwise apply under OCC regulations. A national bank that fails to
satisfy the capital requirements established under the OCC's regulations will be
subject to such administrative action or sanctions as the OCC deems appropriate.
The leverage ratio adopted by the OCC requires a minimum ratio of "Tier 1
capital" to adjusted total assets of 3% for national banks rated composite 1
under the CAMEL rating system for banks. National banks not rated composite 1
under the CAMEL rating system for banks are required to maintain a minimum ratio
of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the level
and nature of risks of their operations. For purposes of the OCC's leverage
requirement, Tier 1 capital generally consists of common stockholders' equity
and retained income and certain non-cumulative perpetual preferred stock and
related income, except that no intangibles and certain purchased mortgage
servicing rights and purchased credit card relationships may be included in
capital.
The risk-based capital requirements established by the OCC's regulations require
national banks to maintain "total capital" equal to at least 8% of total
risk-weighted assets. For purposes of the risk-based capital requirement, "total
capital" means Tier 1 capital (as described above) plus "Tier 2 capital",
provided that the amount of Tier 2 capital may not exceed the amount of Tier 1
capital, less certain assets. The components of Tier 2 capital include certain
permanent and maturing capital instruments that do not qualify as core capital
and general valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets.
The OCC has revised its risk-based capital requirements to permit the OCC to
require higher levels of capital for an institution in light of its interest
rate risk. In addition, the OCC has proposed that a bank's interest rate risk
exposure would be quantified using either the measurement system set forth in
the proposal or the institution's internal model for measuring such exposure, if
such model is determined to be adequate by the institution's examiner.
Management of the Bank has not determined what effect, if any, the OCC's
proposed interest rate risk component would have on the Bank's capital
requirement if adopted as proposed.
At December 31, 1998, the Bank had Tier 1 capital of $38.2 million or 17.1% of
adjusted total assets and Tier 2 capital of $38.7 million or 42.0% of total
risk-weighted assets.
-12-
Non-Performing Assets
---------------------
The following table sets forth the amounts and categories of non-performing
assets in the Company's portfolio. Loans are placed on non-accrual status when
principal and interest is 90 days or more past due, unless, in the judgment of
management, the loan is well collaterized and in the process of collection.
Loans are also reviewed monthly and any loan whose collectibility is doubtful is
placed on non-accrual status. Interest accrued and unpaid at the time a loan is
placed on non-accrual status is charged against interest income. Subsequent
payments are either applied to the outstanding principal balance or recorded as
interest income, depending on the assessment of the ultimate collectibility of
the loan. Restructured loans include troubled debt restructuring (which involved
forgiving a portion of interest or principal on any loans or making loans at a
rate materially less than the market rate).
December 31, September 30,
1998 1998
------------ -------------
(Dollars in Thousands)
Non-accruing loans:
One-to-four family ............................ $ 373 $ 257
Multi-family .................................. 54 280
Commercial real estate ........................ -- --
Consumer ...................................... 32 25
----- -----
Total ....................................... 459 562
----- -----
Total non-performing assets ..................... $ 459 $ 562
===== =====
Total as a percentage of total assets ........... .21% .27%
===== =====
For the three months ended December 31, 1998, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $9,900.
In addition to the non-performing assets set forth in the table above, as of
December 31, 1998, there were no loans with respect to which known information
about the possible credit problems of the borrowers or the cash flows of the
secured properties have caused management to have concerns as to the ability of
the borrowers to comply with present loan repayment terms and which may result
in the future inclusion of such items in the non-performing asset categories.
Management has considered the Company's non-performing and "of concern" assets
in establishing its allowance for loan losses.
Impact of Inflation and Changing Prices
---------------------------------------
The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary impact of inflation on the
operations of the Company is reflected in increased operating costs. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates, generally, have
a more significant impact on a financial institution's performance than does
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
Recent Developments
-------------------
On January 19, 1999 the Board of Directors approved a cash dividend of $.12 per
share to be payable February 16, 1999 to shareholders of record on February 1,
1999.
-13-
Year 2000 Readiness Disclosure
------------------------------
Notice is hereby given that the Year 2000 statement set forth below is being
designated a Year 2000 Readiness Disclosure in accordance with Section 7(b) of
the Year 2000 Information and Readiness Disclosure Act. For more than a year,
the Company has been engaged in the process of addressing a potential problem
that is facing all users of automated information systems, including personal
computers, that is generally referred to as the Year 2000 Issue. The problem is
the result of computer systems processing transactions based upon 2 digits
representing the year of the transaction rather than 4 full digits (e.g., 98 for
1998). These computer systems may not operate properly when the last two digits
become "00", as will occur on January 1, 2000. In some cases, this could result
in a system failure, miscalculations causing disruptions of operations,
temporary inability to process transactions, send invoices or engage in similar
normal business activities. The problem could affect a wide variety of automated
information systems such as main frame computer applications, personal
computers, communication systems, including telephone systems, and other
information systems utilized not only by the Company, but also by its vendors
and customers. The most significant of the Company's automated information
systems affected by the Year 2000 issue is the data processing system used to
process transactions and information for loan and deposit customers. The Company
currently purchases the services for this system from a nationally recognized
data processing vendor. Other programs and applications used in the Company's
operations that will be affected by the Year 2000 issue include building and
security system equipment, ATM modems, loan document processing systems,
investment accounting programs, and computer software and hardware. All software
and hardware has been purchased from outside vendors. The Company has not
developed any in-house computer applications or equipment. All data processing
is done off-site. The Company has maintenance agreements with vendors on the
majority of its equipment and systems.
The Company's Year 2000 plan process began in the summer of 1997. At that time,
a Year 2000 plan coordinator was appointed and assessment of mission critical
systems began. The Company upgraded much of its computer hardware and software
during 1998, in large part to meet the system requirements when it converted to
a new data processing company in July 1998. The Company believes that Year 2000
compliance had been achieved for substantially all mission critical applications
by the end of 1998. Further renovation and testing is expected to occur during
the first quarter of 1999, with the timing dictated by external vendors. The
Company's vendors have been providing updates regarding their progress in
assessment, renovation and testing on a regular basis, and the Year 2000
Coordinator periodically presents updates regarding Year 2000 issues to the
Board of Directors.
The predominant risk associated with the Year 2000 issue for the Company rests
with the functionality of the data processing system. In order to offset the
inherent risk with its main data processing system, the Company is researching
sites and services offered by vendors which specialize in establishing
operations on an emergency basis, as well as preparing other contingency plans.
The Company has not identified any customers who present potential risk relative
to their compliance with Year 2000 within their own organizations. Loan officers
are aware of the Year 2000 issue, and the issue is being addressed with new
commercial customers. The Company has a large investment portfolio which carries
a potential liquidity risk should the companies handling the investments
experience a Year 2000 issue. These companies appear to be well advanced in
renovating and testing their systems. The Company outsources its item processing
operations to a nationally recognized data processing company. That Company
appears to be well advanced with year 2000 compliance efforts. Other vendors
also appear to be progressing in their Year 2000 efforts. The most difficult
risks for the Company to assess are the risks associated with the utilities
offered by gas, electric and telephone companies. Those are risk shared by
everyone and cannot be accurately quantified at this time.
As indicated above, the Company is researching "hot-site" options to establish
emergency operations if necessary because of Year 2000 failure. The Company has
generally identified critical requirements for minimum levels of outputs and
services and established recovery plans to implement those requirements. The
Company is considering increasing its liquidity levels during the last quarter
of 1999 in preparation for possible extreme customer reaction to the Year 2000
issue.
-14-
The Company has planned for the Year 2000 with its officers and staff. It does
not intend to use outside consultants. Because the Company relies predominantly
on outsourced vendors for its core applications, it does not expect significant
costs related to Year 2000 renovation. Expenses incurred to date which are
directly related to the Year 2000 issue total approximately $40,000. Based on
the Year 2000 plan as currently being executed and the best available
information, the Company does not anticipate that the cost to address the Year
2000 issues will have a material adverse impact on its financial condition,
results of operation or liquidity.
Forward-Looking Statements
--------------------------
The preceding "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of this Form 10-Q contains various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, which represents Damen Financial Corporation's expectations and
beliefs concerning future events including, without limitation, the following:
the Company's efforts in retaining and expanding its customer base and
differentiating it from its competition; future FDIC insurance premium
assessments; the impact of conversion to a National Bank and its plan of
restructuring on its financial performance and future growth; the impact of
interest rates on its net interest income as a result of its balance sheet
structure; the impact of its policy guidelines and strategies on its net
interest income based on future interest rate projections; the ability to
provide funding sources for both the Bank and the Parent Company; Management's
assessment of its provision and allowance for loan loss levels based upon future
changes in the composition of its loan portfolio, loan losses, collateral value
and economic conditions; and Management's assessment of the impact of the Year
2000 on the financial condition, results of operations and liquidity of the
Company.
The Company cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those set
forth in the forward looking statements due to market, economic and other
business related risks and uncertainties effecting the realization of such
statements. Certain of these risks and uncertainties included in such forward
looking statements include, without limitation, the following: dynamics of the
market served in terms of competition from traditional and nontraditional
financial service providers can effect both the funding capabilities of the
Company in terms of deposit garnering as well as asset generation capabilities,
future legislation to combine the BIF and the SAIF, as well as future financial
losses in the bank and savings and loan industries and actions by the Federal
Reserve Board may result in the imposition of costs and constraints on the
Company through higher FDIC insurance premiums; significant fluctuations in
market interest rates and operational limitations; deviations from the
assumptions used to evaluate the appropriate level of the allowance for loan
losses as well as future purchases and sales of loans may affect the appropriate
level of the allowance for loan losses and thereby affect the future levels of
provisioning; and the steps necessary to address the Year 2000 Issue include
ensuring that not only the Company's automated systems, but also those of
vendors and customers, can become Year 2000 compliant.
Accordingly, results actually achieved may differ materially from expected
results in these statements. Damen Financial Corporation does not undertake, and
specifically disclaims, any obligation to update any forward looking statements
to reflect events or circumstances occurring after the date of such statements.
Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company's interest rate risk position is discussed under the heading
"Results of Operations" 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.
-15-
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
On December 30, 1998, a stockholder of the Company, Mr. Paul J.
Duggan, filed a lawsuit in the Delaware Court of Chancery against the
Company and each of its Directors. The suit alleged that the meeting
and record dates for this year's annual meeting were improperly
changed by the Board. Mr. Duggan asked the Court to force the Company
to hold the annual meeting on January 25, 1999 and to reset the record
date to December 9, 1998. On January 12, 1999, the Court agreed with
the Company's position that there was no merit to the stockholder's
allegations, and denied the stockholder's request for a preliminary
injunction.
Item 2. CHANGES IN SECURITIES
---------------------
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
Item 5. OTHER INFORMATION
-----------------
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Computation of earnings per share (Exhibit 11 filed herewith)
Financial Data Schedule (Exhibit 27 filed herewith)
(b) The Company filed a Form 8-K dated December 28, 1998 attaching
(i) its press release announcing the engagement of Keefe Bruyette
and Woods, Inc. to serve as its financial advisor to assist in
reviewing its strategic options including a possible sale of the
Company and (ii) attaching its press release announcing the
Company had changed the date of its annual meeting of
stockholders from January 25, 1999 to February 26, 1999.
-16-
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DAMEN FINANCIAL CORPORATION
---------------------------
Registrant
DATE: February 12, 1999
BY: /s/ Mary Beth Poronsky Stull
----------------------------
Mary Beth Poronsky Stull
President, Chief Executive Officer and Director
(Duly Authorized Representative)
BY: /s/ Gerald J. Gartner
----------------------------
Gerald J. Gartner
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
-17-
INDEX TO EXHIBITS
Exhibit No. Page No.
- ----------- --------
11 Statement regarding Computation of Earnings Per Share 19
27 Financial Data Schedule 20
-18-