UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the Quarterly Period Ended June 30, 2002.
or
[_] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period From __________ to __________.
Commission File Number 1-13676
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KANKAKEE BANCORP, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 36-3846489
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification
or Organization) Number)
310 South Schuyler Avenue, Kankakee, Illinois 60901
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(Address of Principal Executive Offices) (Zip Code)
(815) 937-4440
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(Registrant's telephone number, including area code)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
---
As of August 1, 2002, there were 1,176,756 issued and outstanding shares of the
Issuer's common stock (exclusive of 573,244 shares of the Issuer's common stock
held as treasury stock).
KANKAKEE BANCORP, INC.
INDEX
Page
Number
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial
Statements (Unaudited)
Statements of Financial Condition,
June 30, 2002 and December 31, 2001 3 - 4
Statements of Income and Comprehensive Income,
Three Months Ended June 30, 2002 and 2001 5
Statements of Income and Comprehensive Income,
Six Months Ended June 30, 2002 and 2001 6
Statements of Cash Flows, Six Months
Ended June 30, 2002 and 2001 7 - 8
Notes to Financial Statements 9 - 10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11 - 24
Item 3. Quantitative and Qualitative Disclosure 14 - 15
About Market Risk
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25 - 26
SIGNATURES 27
2
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
June 30, December 31,
2002 2001
------------- ------------
Assets
Cash and due from banks $ 14,737,771 $ 15,432,128
Federal funds sold 2,273,689 7,112,641
Money market funds 12,143,985 4,117,945
------------- ------------
Cash and cash equivalents 29,155,445 26,662,714
------------- ------------
Certificates of deposit 50,000 50,000
------------- ------------
Securities:
Investment securities:
Available-for-sale, at fair value 36,965,208 34,755,192
Held-to-maturity, at cost (fair value: June 30, 2002 -
$1,471,645; December 31, 2001 - $1,483,946) 1,461,343 1,464,804
------------- ------------
Total investment securities 38,426,551 36,219,996
------------- ------------
Mortgage-backed securities:
Available-for-sale, at fair value 42,238,219 11,635,592
Held-to-maturity, at cost (fair value: June 30, 2002 -
$30,116; December 31, 2001 - $38,003) 29,967 37,627
------------- ------------
Total mortgage-backed securities 42,268,186 11,673,219
------------- ------------
Non-marketable equity securities 1,000 1,000
Loans, net of allowance for losses on loans ($3,179,842 at
June 30, 2002; $2,582,234 at December 31, 2001) 400,558,441 393,789,828
Loans held for sale 623,300 828,610
Real estate held for sale 163,821 469,165
Federal Home Loan Bank stock, at cost 2,673,500 2,443,300
Office properties and equipment 9,174,124 8,397,173
Accrued interest receivable 3,112,201 2,823,090
Bank Owned Life Insurance 8,125,550 -
Goodwill and intangible assets 4,339,067 4,431,101
Other assets 2,647,304 2,490,672
------------- ------------
Total assets $ 541,318,490 $490,279,868
============= ============
(Continued)
3
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) (continued)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
June 30, December 31,
2002 2001
------------- ------------
Liabilities and stockholders' equity
Liabilities:
Deposits
Noninterest bearing $ 29,154,614 $ 25,854,152
Interest bearing 390,233,525 389,612,684
Other borrowings 67,300,000 30,000,000
Trust preferred indentures 10,000,000 -
Advance payments by borrowers for taxes and insurance 1,883,810 1,905,766
Other liabilities 1,812,078 1,716,366
------------- ------------
Total liabilities 500,384,027 449,088,968
------------- ------------
Stockholders' equity
Preferred stock, $.01 par value; authorized, 500,000
shares; none outstanding - -
Common stock, $.01 par value; authorized, 3,500,000
shares; issued 1,750,000 17,500 17,500
Additional paid-in capital 15,010,583 15,226,853
Retained income, partially restricted 38,466,860 36,964,331
Treasury stock (568,699 shares at June 30, 2002;
533,642 shares at December 31, 2001), at cost (13,530,586) (11,622,862)
Accumulated other comprehensive income 970,106 605,078
------------- ------------
Total stockholders' equity 40,934,463 41,190,900
------------- ------------
Total liabilities and stockholders' equity $ 541,318,490 $490,279,868
============= ============
See notes to consolidated financial statements (unaudited)
4
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
Three Months Ended June 30,
-----------------------------------
2002 2001
------------ ------------
Interest income:
Loans $ 7,074,868 $ 7,084,193
Investment securities and other 638,602 918,042
Mortgage-backed securities 603,086 255,582
------------ ------------
Total interest income 8,316,556 8,257,817
------------ ------------
Interest expense:
Deposits 3,435,576 4,524,089
Borrowed funds 802,840 328,652
------------ ------------
Total interest expense 4,238,416 4,852,741
------------ ------------
Net interest income 4,078,140 3,405,076
Provision for losses on loans 463,952 40,000
------------ ------------
Net interest income after provision for losses on loans 3,614,188 3,365,076
------------ ------------
Other income:
Net gain on sales of real estate held for sale 23,934 931
Net gain on sales of loans held for sale 174,026 40,080
Fee income 670,874 616,781
Insurance commissions 15,298 21,341
Other 229,827 110,289
------------ ------------
Total other income 1,113,959 789,422
------------ ------------
Other expenses:
Compensation and benefits 1,772,144 1,618,205
Occupancy 291,651 301,828
Furniture and equipment 144,898 164,960
Federal deposit insurance premiums 18,131 18,207
Advertising 85,643 105,211
Provision for losses on foreclosed assets 48,301 18,214
Data processing services 98,659 99,256
Telephone and postage 78,366 119,776
Amortization of intangible assets 46,017 93,687
Other general and administrative 792,059 512,420
------------ ------------
Total other expenses 3,375,869 3,051,764
------------ ------------
Income before income taxes 1,352,278 1,102,734
Income taxes 413,850 369,150
------------ ------------
Net income $ 938,428 $ 733,584
============ ============
Net income $ 938,428 $ 733,584
Other comprehensive income:
Unrealized gains (losses) on available-for-sale
securities, net of related income taxes 731,604 (135,780)
------------ ------------
Comprehensive income $ 1,670,032 $ 597,804
============ ============
Basic earnings per share $ 0.78 $ 0.61
============ ============
Diluted earnings per share $ 0.77 $ 0.60
============ ============
See notes to consolidated financial statements (unaudited)
5
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
Six Months Ended June 30,
-----------------------------------
2002 2001
------------ ------------
Interest income:
Loans $ 14,055,198 $ 13,939,859
Investment securities and other 1,227,164 1,975,286
Mortgage-backed securities 813,966 537,412
------------ ------------
Total interest income 16,096,328 16,452,557
------------ ------------
Interest expense:
Deposits 7,006,697 9,011,143
Borrowed funds 1,164,789 691,054
------------ ------------
Total interest expense 8,171,486 9,702,197
------------ ------------
Net interest income 7,924,842 6,750,360
Provision for losses on loans 611,920 55,000
------------ ------------
Net interest income after provision for losses on loans 7,312,922 6,695,360
------------ ------------
Other income:
Net gain on sales of real estate held for sale 34,143 11,314
Net gain on sales of loans held for sale 411,944 40,080
Fee income 1,261,290 1,089,684
Insurance commissions 26,091 47,968
Other 339,952 197,941
------------ ------------
Total other income 2,073,420 1,386,987
------------ ------------
Other expenses:
Compensation and benefits 3,574,876 3,173,361
Occupancy 589,395 605,847
Furniture and equipment 293,774 348,981
Federal deposit insurance premiums 36,398 36,534
Advertising 153,566 173,729
Provision for losses on foreclosed assets 54,301 34,914
Data processing services 213,702 199,958
Telephone and postage 214,418 221,756
Amortization of intangible assets 92,034 187,374
Other general and administrative 1,533,567 1,048,856
------------ ------------
Total other expenses 6,756,031 6,031,310
------------ ------------
Income before income taxes 2,630,311 2,051,037
Income taxes 798,696 686,450
------------ ------------
Net income $ 1,831,615 $ 1,364,587
============ ============
Net income $ 1,831,615 $ 1,364,587
Other comprehensive income:
Unrealized gains on available-for-sale
securities, net of related income taxes 365,028 337,862
------------ ------------
Comprehensive income $ 2,196,643 $ 1,702,449
============ ============
Basic earnings per share $ 1.51 $ 1.12
============ ============
Diluted earnings per share $ 1.49 $ 1.10
============ ============
See notes to consolidated financial statements (unaudited)
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
Six Months Ended June 30,
-----------------------------------
2002 2001
------------- ------------
Cash flows from operating activities:
Net income $ 1,831,615 $ 1,364,587
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on loans 611,920 55,000
Provisions for losses on real estate held for sale 54,301 34,914
Depreciation and amortization 521,311 656,998
Amortization of investment premiums and discounts, net 22,302 (16,564)
Accretion of loan fees and discounts (35,399) 2,020
Deferred income tax provision (benefit) - 23,858
Originations of loans held for sale (25,953,008) (5,598,265)
Proceeds from sales of loans 26,570,262 5,247,595
Decrease (increase) in interest receivable (289,111) 205,964
Decrease in interest payable on deposits (98,769) (130,036)
Net gain on sales of loans (411,944) (40,080)
Net gain on sales of real estate held for sale (34,143) (11,314)
Federal Home Loan Bank of Chicago, stock dividend (65,900) (79,100)
Increase in cash surrender value of Bank Owned Life Insurance (125,550) -
Other, net (336,377) (986,405)
------------- ------------
Net cash from operating activities 2,261,510 729,172
------------- ------------
Cash flows from investing activities:
Investment securities
Available-for sale:
Purchases ($4,011,223) ($6,041,387)
Proceeds from calls and maturities 2,000,000 23,070,000
Held-to-maturity:
Purchases - (660,404)
Proceeds from maturities and paydowns 3,367 3,166
Mortgage-backed securities:
Available-for-sale:
Purchases (32,532,683) (300,890)
Proceeds from maturities and pay downs 2,262,106 2,737,439
Held-to-maturity:
Proceeds from maturities and pay downs 7,660 15,962
Proceeds from sales of real estate 400,016 58,484
Deferred loan fees and costs, net (79,411) 134,661
Loans originated (77,822,929) (97,779,454)
Loans purchased (1,853,194) -
Principal collected on loans 72,237,042 63,824,276
Purchases of office properties and equipment, net (1,206,228) (322,350)
Purchase of Bank Owned Life Insurance (8,000,000) -
------------- ------------
Net cash from investing activities (48,595,477) (15,260,497)
------------- ------------
See notes to consolidated financial statements (unaudited).
7
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (continued)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
Six Months Ended June 30,
-----------------------------------
2002 2001
------------- ------------
Cash flows from financing activities
Net increase in non-certificate of deposit accounts $ 2,502,935 $ 9,053,886
Net increase in certificate of deposit accounts 1,517,137 4,250,059
Net increase in advance payments by
borrowers for taxes and insurance (40,294) 190,736
Proceeds from short-term borrowings - 5,000,000
Repayments of short-term borrowings - (19,000,000)
Proceeds from other borrowings 52,600,000 12,000,000
Repayments of other borrowings (5,300,000) -
Proceeds from exercise of stock options 509,722 66,280
Dividends paid (329,087) (291,758)
Purchase of treasury stock (2,633,715) (1,491,460)
------------- ------------
Net cash from financing activities 48,826,698 9,777,743
------------- ------------
Increase (decrease) in cash and cash equivalents 2,492,731 (4,753,582)
Cash and cash equivalents:
Beginning of period 26,662,714 25,147,273
------------- ------------
End of period $ 29,155,445 $ 20,393,691
============= ============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest on deposits $ 7,105,500 $ 9,141,200
============= ============
Interest on borrowed funds $ 990,400 $ 716,900
============= ============
Income taxes $ 678,644 $ 692,218
============= ============
Supplemental disclosures of non-cash investing activities:
Real estate acquired through foreclosure $ 120,060 $ 182,393
============= ============
Increase in unrealized gains
on securities available-for-sale $ 548,899 $ 511,912
============= ============
Increase in deferred taxes attributable to the
unrealized gains on securities available-for-sale ($183,871) ($174,050)
============= ============
See notes to consolidated financial statements (unaudited).
8
KANKAKEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2002
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with instructions
to Form 10-Q. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The statement of condition
at December 31, 2001 has been derived from the audited financial statements at
that date, but does not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. Operating results for the three-month and
six-month periods ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the annual report for Kankakee Bancorp, Inc. (the "Company")
on Form 10-K for the year ended December 31, 2001.
Note 2 - Earnings Per Share
Basic earnings per share of common stock have been determined by dividing
net income for the period by the average number of shares of common stock
outstanding of 1,207,074 and 1,217,827, respectively, for the three-month and
six-month periods ended June 30, 2002. Diluted earnings per share of common
stock have been determined by dividing net income for the period by the average
number of shares of common stock and common stock equivalents outstanding.
Common stock equivalents, totaling 1,594 and 7,786, respectively, for the
three-month and six-month periods ended June 30, 2002 assume exercise of stock
options, and the calculation assumes purchase of treasury stock with the option
proceeds at the average market price for the period (when dilutive). The Company
has an incentive stock option plan for the benefit of directors, officers and
employees. Diluted earnings per share have been determined considering the stock
options granted, net of stock options which have been exercised.
Note 3 - Accounting for Certain Investments in Debt and Equity Securities
At June 30, 2002, stockholders' equity included a positive $970,000, which
represents the amount by which the market value of the available-for-sale
securities and the available-for-sale mortgage-backed securities exceeded the
book value, net of income tax of $500,000. A decrease in market interest rates
during the six months ended June 30, 2002 resulted in a $365,000 increase in the
market value, net of income tax effect, of the available-for-sale securities and
the available-for-sale mortgage-backed securities. At the end of 2001, the
market value of the available-for-sale securities portfolio exceeded the book
value by $605,000, net of income tax benefit.
9
Note 4 - Accounting Change
Effective January 1, 2002, the Company applied FASB Statement No. 142,
Goodwill and Other Intangible Assets. Among its provisions is a requirement to
disclose what reported net income would have been in all periods presented
exclusive of amortization expense (net of related income tax effects) recognized
in those periods related to goodwill, intangible assets no longer being
amortized, and changes in amortization periods for intangible assets that will
continue to be amortized together with related per share amounts.
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
------------------------ -------------------------
Reported net income $938,428 $733,584 $1,831,615 $1,364,587
Add goodwill amortization - 31,462 - 62,924
------------------------ -------------------------
Adjusted net income $938,438 $765,046 $1,831,615 $1,427,511
======================== =========================
Basic earnings per share:
Reported net income $ 0.78 $ 0.61 $ 1.51 $ 1.12
Goodwill amortization - 0.03 - 0.05
------------------------ -------------------------
Adjusted net income $ 0.78 $ 0.64 $ 1.51 $ 1.17
======================== =========================
Diluted earnings per share:
Reported net income $ 0.77 $ 0.60 $ 1.49 $ 1.10
Goodwill amortization - 0.03 - 0.05
------------------------ -------------------------
Adjusted net income $ 0.77 $ 0.63 $ 1.49 $ 1.15
======================== =========================
Based on current information, the Company determined during the second quarter
that there was no impairment as the result of the application of FASB Statement
No. 142. Impairment testing will be done annually in accordance with the
requirements of the statement.
10
KANKAKEE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a Delaware company formed in 1992 for the purpose of
becoming the savings and loan holding company of Kankakee Federal Savings Bank
(the "Bank"), the Company's principal subsidiary. The Bank was originally
chartered in 1885 as an Illinois savings and loan association and was converted
to a federally chartered thrift institution in 1937.
The Company serves the financial needs of families and local businesses in
its primary market areas through its main office at 310 South Schuyler Avenue,
Kankakee, Illinois and fourteen branch offices located in the communities of
Ashkum, Bourbonnais, Bradley, Braidwood, Champaign, Coal City (2), Diamond,
Dwight, Herscher, Hoopeston, Manteno, Momence and Urbana, Illinois. The
Company's business involves attracting deposits from the general public and
using such deposits to originate residential mortgage loans and, to a lesser
extent, commercial real estate, consumer, commercial business, multi-family and
construction loans in its market areas. The Company also invests in investment
securities, mortgage-backed securities and various types of short term liquid
assets.
ECONOMIC CLIMATE
During 2001, the Federal Open Market Committee ("the FOMC") lowered its
target short-term interest rates by a total of four and three-quarters
percentage points. The federal funds target went from 6.50% to 1.75% and the
Federal Reserve discount rate went from 6.00% to 1.25%. The federal funds rate
is the rate at which financial institutions borrow from each other, while the
discount rate is the rate at which member banks borrow from the Federal Reserve.
During 2001, the FOMC cited a slowing economy and a possible recession as the
primary reasons for lowering interest rates. Lower short-term interest rates
would tend to stimulate economic activity by reducing the financing costs on
borrowed funds for both businesses and individuals.
A slowing economy would usually result in some increase in problem assets,
and could possibly result in some increase in loan losses. In a slowing economy
or recession, cash flows and profits of commercial customers decrease, which
could result in an increase in delinquencies. Additionally, individual borrowers
experience cash flow problems from job loss, reduction in investment returns or
other causes. This could also result in an increase in delinquencies.
During the first six months of 2002, the FOMC held target interest rates at
the December 31, 2001 levels while maintaining a cautionary posture on the state
of the economy. While some economic indicators are pointing toward a recovery,
others are still weak, indicating that the economy remains slow. During the
second quarter of 2002, a number of accounting and corporate governance problems
at large publicly held companies have come to light, contributing to the
volatility in the markets, which could impact the speed at which the economy
moves into a full recovery. If the economy does move into a full recovery, then
the next FOMC interest rate move would likely be an increase in its target
rates.
Rising interest rates, because of the Company's current structure of assets
and liabilities, could have a detrimental effect on the Company's interest rate
spread and results of operations. The Company had negative cumulative one-year
gaps of 5.0% and 2.5%, respectively, at
11
December 31, 2001 and March 31, 2002, the most recent information available. A
negative gap indicates that an increase in market interest rates might
negatively affect net interest income and the results of operations, due to
liabilities maturing, and repricing, from their current rates to higher rates,
more quickly than assets will mature and reprice to higher rates. Management
believes that the Company's current level of interest rate sensitivity is
reasonable, in light of the current market rates and the possibility of
increasing market rates. However, significant fluctuations in interest rates may
have an adverse effect on the Company's financial condition and results of
operations.
BUSINESS DEVELOPMENTS AND CURRENT INITIATIVES
During the late 1990s, the Company experienced significant growth and
improvement in its office facilities and a widening of its market areas. This
was accomplished through the acquisition of a bank, the opening of several new
offices and the replacement of an outdated office building. There were also
significant changes and improvements in products and services brought about
through the use of technology.
During this same period, the Company began the process of shifting its
operating philosophy to a sales orientation and away from traditional approaches
to banking services. Management continues to support and encourage this process,
recognizing that changes, particularly of this type and magnitude, require
employee education and customer communication. These changes in philosophy and
culture require not only time but allocation of other Company resources. None of
these efforts were without cost, and have been, and, to some degree, will
continue to be, reflected in operating expenses and net income.
In the first quarter of 2000, management initiated an aggressive growth
strategy which was aimed at increasing deposits and growing the loan portfolio,
which resulted in the reduction of the size of the investment portfolio. The
strategy, which continued into the first quarter of 2001, was intended to
improve earnings in a number of ways which included:
. Improved utilization of facilities and increased productivity of
personnel;
. Increased capital leverage; and
. Improved asset yields, due to increased commercial and consumer
lending and the replacement of investments with fixed-rate
mortgage loans.
It was recognized that such a strategy would:
. Likely increase the cost of funds, due to aggressive deposit
pricing and the potential need to borrow money at wholesale
market rates; and
. Necessitate the assumption of an increased level of interest rate
risk, due to aggressive loan pricing and the need to retain
longer term, fixed-rate mortgages for the portfolio.
In response to rapidly falling interest rates during 2001, the Company
modified its growth strategy and, once again, began to sell its fixed-rate
mortgage originations in the secondary market. This strategy remained in effect
through the first six months of 2002.
Late In the first quarter of 2002, the Company's wholly-owned subsidiary
Kankakee Federal Savings Bank invested $8.0 million in Bank Owned Life
Insurance, (commonly referred to as "BOLI"), covering the lives of fourteen (14)
senior officers. BOLI is variable rate, single premium whole life insurance. The
Bank is the beneficiary of the policies, and the policies build cash value.
Neither the increase in cash value, which is included in other income, nor the
death
12
benefits are taxable to the Bank or the Company. This provides a significant
enhancement to earnings, which will help offset increases in the cost of
employee benefits such as health insurance.
In late March, Kankakee Federal Savings Bank reimplemented a capital
utilization strategy, which involved the purchase of $30.0 million of
adjustable-rate, mortgage-backed securities, using borrowed funds. The
securities are the collateral for the borrowed funds, and there is a positive
spread in the transaction which enhances net interest income, net income and
earnings per share. The Company has evaluated the program, and it is comfortable
with potential earnings volatility that may result from interest rate
fluctuation. This strategy increased net interest income and pretax income by
approximately $136,000 and $143,000, respectively for the three- and six-month
periods ended June 30, 2002.
The results of the Company's evaluation of its existing branch network and
other service delivery systems, including locations, market areas, physical
layouts, accessibility and market potentials and corporate identity are under
review. Several market areas other than those currently served by the Company
are also being considered as part of the process. As part of this process, on
August 2, 2002, Kankakee Federal Savings Bank announced plans to construct a
full-service banking facility in Bradley, Illinois, which, when completed in
2003, will replace its in-store branch in that community. In addition, the Bank
also announced the acquisition of property at the north edge of Bourbonnais,
Illinois as the site for a new banking facility. Planning for both facilities is
in process. It is expected that several other changes will result as the
evaluation process continues. In addition, the Company has completed a review of
its organizational structure, including lines of authority, job functions and
supervisory responsibilities. As a result of this review, three positions at the
vice president level were eliminated, effective July 10, 2002.
During the second quarter, the Company issued $10.0 million in trust
preferred securities as part of a large pool of such securities. These
securities, which carry a variable rate of interest, are includable, within
specified limits, in regulatory capital. These funds are available to repurchase
stock, fund an accretive acquisition or purchase securities as part of a
leveraging strategy. Interest payments on these securities are deductible for
income tax purposes.
FINANCIAL CONDITION
Total assets of the Company increased by $51.0 million, or 10.4%, to $541.3
million at June 30, 2002 from $490.3 million at December 31, 2001.
Cash and cash equivalents increased by $2.5 million, or 9.4%, from $26.7
million at December 31, 2001 to $29.2 million at June 30, 2002. The increase was
primarily attributable to increases in deposits and borrowed money.
During the six-month period ended June 30, 2002, net loans receivable
increased by $6.8 million, or 1.7%, from $393.8 million to $400.6 million. This
was primarily the result of the origination of $50.8 million of real estate
loans, the purchase of $1.9 million of real estate loans and the origination of
$26.0 million of consumer and commercial business loans, offset by loan
repayments which totaled $72.2 million.
Loans held for sale decreased by $205,000, or 24.8%, from $828,000 at
December 31, 2001 to $623,000 at June 30, 2002. This was the result of the sale
of $26.6 million of loans held for sale, at a net gain of $412,000, which was
partially offset by the origination of $26.0 million of such loans.
13
Securities available-for-sale increased by $2.2 million, or 6.4%, to $37.0
million at June 30, 2002 from $34.8 million at December 31, 2001 as the result
of the purchase of $4.0 million of securities, which was partially offset by the
exercise of call options by issuers on $2.0 million of securities, and by the
net change in market value adjustment.
Mortgage-backed securities available-for-sale increased by $30.6 million,
or 263.0%, to $42.2 million at June 30, 2002 from $11.6 million at December 31,
2001. The increase resulted from the purchase of $32.5 million of securities,
which was partially offset by the maturity of $2.3 of securities, and by the net
change in market value adjustments.
Deposits increased by $3.9 million, or 0.9%, from $415.5 million at
December 31, 2001 to $419.4 million at June 30, 2002. During the six month
period, there was a $1.5 million increase in certificate of deposit accounts, a
$2.5 million increase in passbook, checking and money market accounts and a
$99,000 decrease in accrued interest on deposits.
Total borrowings increased by $47.3 million, or 157.7%, from $30.0 million
at December 31, 2001 to $77.3 million at June 30, 2002. The increase was the
result of $52.6 million in new borrowings, which were partially offset by
repayments of $5.3 million. Borrowings at June 30, 2002 consisted of $10.0
million of Trust Preferred Debentures, $39.7 million in advances from the
Federal Home Loan Bank of Chicago and $27.6 million in funds from securities
sold under agreement to repurchase.
ASSET/LIABILITY MANAGEMENT
During the first quarter of 2001, consistent with the growth strategy
implemented in 2000, the Company retained virtually all the fixed-rate mortgage
loans it originated. As a result of the changing interest rate environment
during 2001, the Company, during the second quarter of 2001, resumed selling
fixed-rate mortgage loans with terms of 20 years or longer in the secondary
market. Late in the third quarter of 2001, the Company also began selling loans
with terms of 15 years. Through the first six months of 2002, the Company
continued to sell virtually all fixed-rate mortgage loans it originated with
terms of 15 years of longer.
In an attempt to manage its exposure to changes in interest rates,
management closely monitors the Company's interest rate risk. The Bank has a
funds management committee, consisting of the president, certain vice presidents
and the controller of the Bank, which meets weekly and reviews the Bank's
interest rate risk position and evaluates its current asset/liability pricing
and strategies. This committee adjusts pricing and strategies as needed and
makes recommendations to the Bank's board of directors regarding significant
changes in strategy. In addition, on a quarterly basis the board reviews the
Bank's asset/liability position, including simulations of the effect on the
Bank's capital of various interest rate scenarios.
In managing its asset/liability mix, the Company, at times, depending on
the relationship between long-term and short-term interest rates, market
conditions and consumer preferences, may place somewhat greater emphasis on
maximizing its net interest margin than on better matching the interest rate
sensitivity of its assets and liabilities in an effort to improve its net
income. Management believes that the increased net income resulting from a
mismatch in the maturity of its asset and liability portfolios can, during
periods of declining or stable interest rates, provide returns that justify the
increased exposure to sudden and unexpected increases in interest rates which
can result from such a mismatch.
14
The Company attempts to manage its interest rate risk to the extent
consistent with its interest margin objectives through management of the mix of
its assets and liabilities in a number of ways, including the following:
. To the extent requested in its lending areas, the Company has
focused its one-to-four family residential lending program on
adjustable rate mortgages ("ARMS").
. The Company has continued its origination of consumer loans
having terms to maturity that are significantly shorter than
residential loans.
. The Company has increased originations of commercial business and
construction loans having adjustable or floating interest rates,
relatively short terms to maturity, or a combination thereof.
. The Company regularly reviews its policy on newly originated
fixed-rate mortgage loans, as to the question of which loans, if
any, should be retained in portfolio versus which should be sold
in the secondary market. Trends in the economy, trends in market
interest rates, the Company's interest margin and the Company's
current asset/liability mix are among the factors considered.
Changes resulting from these reviews take effect on a specific
calendar date and impact either those loans which are applied for
on or after that date, or those loans which are closed on or
after that date.
The Company currently does not enter into derivative financial instruments
including futures, forwards, interest rate risk swaps, option contracts, or
other financial instruments with similar characteristics. However, the Company
is a party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers such as
commitments to extend credit and letters of credit.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOSSES ON LOANS
The Company's non-performing assets increased to $4.1 million, or 0.76%, of
total assets at June 30, 2002 from $2.2 million, or 0.45% of total assets at
December 31, 2001. This represented an increase of $1.9 million over the
six-month period and a decrease of $1.6 million from the March 31, 2002 total of
$5.7 million in non-performing assets. During the six month period ended June
30, 2002, non-performing construction and development loans, non-performing
commercial real estate loans and non-performing commercial business loans
increased by $1.9 million, $432,000 and $226,000, respectively. These increases
were partially offset by decreases in non-performing one-to-four family real
estate loans and non-performing consumer loans of $130,000 and $135,000,
respectively. In addition, foreclosed assets decreased by $306,000 and
restructured troubled debts decreased by $63,000.
Non-performing assets increased by approximately $1.9 million. The increase
was primarily due to previously classified loans to three of the Company's
long-term borrowers that became non-performing during the first quarter of 2002,
the largest of which remained non-performing at the end of the second quarter.
Many financial institutions, such as the Company, have experienced an increase
in non-performing assets during this difficult economic period, as even
well-established business borrowers have developed cash flow and other business
related problems. It is management's belief that the allowance for losses on
loans at June 30, 2002, was adequate, particularly in light of the second
quarter reduction in total non-performing assets and the increase in the
allowance for losses on loans. However, there can be no assurance that the
allowance for losses on loans will be adequate to cover all losses.
The ratio of the allowance for losses on loans to non-performing loans
decreased to 93.2% as of June 30, 2002 compared to 230.3% as of December 31,
2001. The decrease in this ratio,
15
which excludes foreclosed assets and restructured troubled debt, was the result
of the increase of $2.3 million in non-performing loans.
The Company classified $949,000 of its assets as Special Mention, $6.2
million as Substandard and $295,000 as Loss as of June 30, 2002. No assets were
classified as Doubtful at June 30, 2002. This represents a decrease of $561,000
in the Special Mention category and a net decrease of $823,000 in the other
categories from the December 31, 2001 totals for classified assets. The ratio of
classified assets to total assets (including items classified as Special
Mention) was 1.37% at June 30, 2002 as compared to 1.80% at December 31, 2001.
The ratio of the allowance for losses on loans to classified assets increased to
42.9% as of June 30, 2002 compared to 29.3% as of December 31, 2001.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
Net income for the quarter ended June 30, 2002 was $938,000 compared to
$734,000 for the same period in 2001. This represented a $204,000, or 27.9%,
increase. The increase in net income resulted from an increase of $673,000 in
net interest income and $325,000 in other income which were partially offset by
increases of provisions for losses on loans of $424,000, other expenses of
$324,000 and income tax expense of $44,000.
Basic earnings per share were $.78 for the quarter ended June 30, 2002
compared to $.61 for the 2001 quarter. Diluted earnings per share were $.77 for
the quarter ended June 30, 2002 compared to $.60 for the comparable 2001 period,
representing an increase of 28.3%.
Net interest income increased $673,000, or 19.8%, during the quarter ended
June 30, 2002, compared to the quarter ended June 30, 2001.
The table presented on page 23 ("Table I"), sets forth an analysis of the
Company's net interest income for the three-month periods ended June 30, 2002
and 2001.
As Table I indicates, interest income increased $59,000, or 0.7%, remaining
at approximately $8.3 million for the three-month period ended June 30, 2002
compared to the same period in 2001. The increase in interest income was the
result of an increase in the average balance of interest-earning assets to
$503.2 million during the 2002 period from $441.1 million during the 2001
period, which was substantially offset by a decrease in the yield earned on
interest-earning assets to 6.63% during the 2002 period from 7.51% during the
2001 period. The increase in the average balance of interest-earning assets was
due to increases in balances of loans, mortgage-backed securities and other
interest-earning assets, which were partially offset by a decrease in balances
of investment securities during the quarter. The decrease in the yield earned on
interest-earning assets was the result of decreasing market interest rates
during the quarter, which resulted in lower yields on short term assets and a
lower yield on the reinvestment of principal repayments and prepayments on loans
and on newly originated loans. The increase in average loans was primarily the
result of an aggressive residential mortgage lending program during the first
half of 2001, and growth in both commercial real estate and commercial business
loans.
Interest expense decreased $614,000, or 12.7%, to $4.2 million during the
second quarter from $4.9 million in the same period in 2001. The decrease in
interest expense was the result of a decrease in the average yield on
interest-bearing liabilities to 3.43% during the 2002 period from 4.56% during
the 2001 period, which was partially offset by an increase in the average
outstanding balance of interest-bearing liabilities to $495.0 million during the
2002 period from
16
$426.9 million during the 2001 period. The increase in average interest-bearing
liabilities resulted from the implementation of a leveraging strategy, increased
use of borrowed funds, and the continuing movement to a sales oriented
operation. The decrease in the average yield on interest-bearing liabilities
resulted from decreasing market interest rates during the last eighteen months
and an improvement in the deposit mix with a higher ratio of non-certificate
deposit accounts.
The provision for losses on loans totaled $464,000 during the second
quarter of 2002, compared to $40,000 during the second quarter of 2001. The
increase in the provision for losses on loans during the 2002 period was the
result of several factors, including a specific reserve of $250,000, the overall
increase in the loan portfolio and an increase in non-performing assets since
December 31, 2001.
Other income for the three-month period ended June 30, 2002 increased
$325,000, or 41.1%, to $1.1 million compared to $789,000 for the same period in
2001. The increase was attributable to increases of $54,000 (8.8%) in fee
income, $134,000 (334.2%) in gain on sale of loans held for sale, $120,000
(108.4%) in other income and $23,000 in net gain on the sale of real estate held
for sale. These increases were partially offset by a decrease of $6,000 in
insurance commissions. The $134,000 increase in gain on the sale of loans held
for sale was the result of a full quarter of loan sales during 2002, compared to
the 2001 quarter, during which loan sales were resumed. The increase in other
income was the result of $137,000 in earnings from the investment in BOLI.
Other expenses for the second quarter of 2002 increased $324,000 or 10.6%,
to $3.4 million from $3.1 million for the second quarter of 2001. There were
increases of $280,000 (54.6%) in other expenses, $154,000 (9.5%) in compensation
and benefits, and $30,000 (165.2%) in provision for losses on foreclosed assets.
These increases were partially offset by decreases of $10,000 (3.4%) in
occupancy costs, $20,000 (12.2%) in furniture and equipment expense, $20,000
(18.6%) in advertising, $41,000 (34.6%) in telephone and postage and $48,000
(50.9%) in amortization of intangible assets. The increase in other expenses was
primarily due to additional costs related to a proxy contest in connection with
the annual meeting. A significant contributing factor to the increase in
compensation and benefits was the higher cost of health insurance. Postage
expenses decreased from the 2001 quarter during which an extensive mailing was
required informing customers of the Company's privacy policy.
Federal income taxes increased $45,000 to $414,000 for the three-month
period ended June 30, 2002, compared to $369,000 for the same period in 2001.
The primary reason for this increase was the increase in pre-tax income.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Net income for the six months ended June 30, 2002 was $1.8 million compared
to $1.4 million for the same period in 2001. This represented a $467,000, or
34.2%, increase. The increase in net income resulted from an increase of $1.2
million in net interest income, and an increase of $686,000 in other income,
which were partially offset by increases of $725,000 in other expenses, $557,000
in provision for losses on loans and $112,000 in income tax expense.
Basic earnings per share were $1.51 for the six months ended June 30, 2002
compared to $1.12 for the 2001 period. Diluted earnings per share were $1.49 for
the six months ended June 30, 2002 compared to $1.10 for the comparable 2001
period, representing an increase of 35.5%.
17
Net interest income increased $1.2 million, or 17.4%, during the six months
ended June 30, 2002, compared to the six months ended June 30, 2001.
The table presented on page 24 ("Table II") sets forth an analysis of the
Company's net interest income for the six-month periods ended June 30, 2002 and
2001.
As Table II indicates, interest income decreased $356,000, or 2.2%, to
$16.1 million for the six-month period ended June 30, 2002 from $16.5 million
for the same period in 2001. The decrease in interest income was the result of a
decrease in the yield earned on interest-earning assets to 6.68% during the 2002
period from 7.62% during the 2001 period, which was partially offset by an
increase in the average balance of interest-earning assets to $485.9 million
during the 2002 period from $435.1 million during the 2001 period. The decrease
in the yield earned on interest-earning assets was the result of decreasing
market interest rates during 2001. Market rates have remained relatively low
during the first half of 2002, resulting in lower rates on newly originated or
purchased assets and on the reinvestment of maturing and prepaying assets. The
increase in the average balance of interest-earning assets was primarily due to
increases in balances of loans, mortgage-backed securities and other
interest-earning assets, which were partially offset by a decrease in balances
of investment securities during the period.
Interest expense decreased $1.5 million, or 15.8%, to $8.2 million during
the first six months of 2002 from $9.7 million in the same period in 2001. The
decrease in interest expense was the result of a decrease in the average yield
on interest-bearing liabilities to 3.48% during the 2002 period from 4.65%
during the 2001 period, which was partially offset by an increase in the average
outstanding balance of interest-bearing liabilities to $474.0 million during the
2002 period from $421.1 million during the 2001 period. The decrease in the
average yield on interest-bearing liabilities resulted from decreasing market
rates during 2001 and an improvement in the deposit mix with a higher ratio of
non-certificate deposit accounts. The increase in average interest-bearing
liabilities resulted from the implementation of a leveraging strategy, increased
use of borrowed funds and the continuing movement to a sales oriented operation.
The provision for losses on loans totaled $612,000 during the first six
months of 2002, compared to $55,000 during the first six months of 2001. The
increase in the provision for losses on loans during 2002 was the result of
several factors, including a specific reserve of $250,000, the overall increase
in the loan portfolio and an increase in non-performing loans. Although
non-performing loans have increased since the end of 2001, they decreased during
the second quarter of 2002.
Other income for the six-month period ended June 30, 2002 increased
$686,000, or 49.5%, to $2.1 million compared to $1.4 million for the same period
in 2001. The increase was attributable to increases of $172,000 (15.7%) in fee
income, $142,000 (71.7%) in other income, $372,000 (927.8%) in gain on the sale
of loans held for sale and $23,000 (201.8%) in net gain on the sale of real
estate held for sale. These increases were partially offset by a decrease of
$22,000 in insurance commissions. The increase in fee income was primarily the
result of an increase in checking accounts subject to fees. The increase in gain
on the sale of loans held for sale was the result of a full six months of loan
sales during 2002 compared to 2001, when loan sales were resumed during the
second quarter. The increase in other income was the result of earnings from the
investment in BOLI, which was made during the first quarter of 2002.
Other expenses for the first half of 2002 increased $725,000, or 12.0%, to
$6.8 million from $6.0 million during the 2001 period. There were increases of
$402,000 (12.7%) in
18
compensation and benefits, $19,000 (55.5%) in provision for losses on foreclosed
assets, $14,000 (6.9%) in data processing services, and $485,000 (46.2%) in
other expenses. These increases were partially offset by decreases of $16,000
(2.7%) in occupancy costs, $55,000 (15.8%) in furniture and equipment expense,
$20,000 (11.6%) in advertising and $95,000 (50.9%) in amortization of intangible
assets. The increase in compensation and benefits was due in large part to cost
increases in employee benefits, such as health insurance. The increase in other
expenses was primarily due to additional costs related to a proxy contest in
connection with the 2002 annual meeting.
Federal income taxes increased $113,000 to $799,000 for the six-month
period ended June 30, 2002, compared to $686,000 for the same period in 2001.
The primary reason for this increase was the increase in pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a certain level of cash and other liquid assets to
fund normal volumes of loan commitments, deposit withdrawals and other
obligations. The Office of Thrift Supervision (the "OTS") regulations currently
require each savings association to maintain sufficient liquidity to ensure its
safe and sound operation.
The Company's primary sources of funds are deposits and proceeds from
payments of principal and interest on loans and the sale or maturity of
investment securities and mortgage-backed securities. Management considers
current liquidity and additional sources of funds adequate to meet outstanding
liquidity needs.
Federally insured savings banks, such as the Bank, are required by federal
law and OTS regulations to maintain minimum levels of regulatory capital. The
OTS has established the following minimum capital requirements: a risk-based
capital ratio, a core capital ratio and a tangible capital ratio. In addition to
these minimum regulatory capital requirements, another provision of federal law
grants the OTS broad power to take prompt corrective action to resolve the
problems of undercapitalized institutions. The OTS regulations implementing this
statutory authority (the "prompt corrective action regulations") establish other
capital thresholds which determine whether an institution will be deemed to be
"well capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" or "critically undercapitalized". The capital category to
which an institution is assigned in turn determines the actions the OTS may take
to address the institution's undercapitalization. The capital regulations of the
OTS exclude the effect of accumulated other comprehensive income for the purpose
of calculating regulatory capital.
The capital regulations currently require tangible capital of at least 1.5%
of adjusted total assets (as defined by regulation). Under the prompt corrective
action regulations, however, an institution with a ratio of tangible capital to
total assets below 2.0% is deemed to be "critically undercapitalized" and, as
such, will be subject to a variety of sanctions under the prompt corrective
action regulations, including, without limitation, limits on asset growth,
restrictions on activities and, ultimately, the appointment of a receiver.
Tangible capital generally includes common stockholders' equity and retained
income and certain non-cumulative perpetual preferred stock and related income
less intangible assets (other than specified amounts of mortgage servicing
rights) and certain non-includable investments in subsidiaries.
The capital regulations also currently require core capital equal to at
least 3.0% of adjusted total assets (as defined by regulation). Under the prompt
corrective action regulations, however, an institution with a ratio of core
capital to adjusted total assets of 3.0% will be
19
deemed to be "adequately capitalized" only if the institution also has a
composite rating of "1" under the Uniform Financial Institutions Rating System
("UFIRS"). All other institutions must maintain a minimum ratio of core capital
to adjusted total assets of 4.0% in order to be deemed to be "adequately
capitalized", and an institution, regardless of its UFIRS rating, will be deemed
to be "well capitalized" only if it maintains a ratio of core capital to
adjusted total assets of at least 5.0%. If an institution fails to remain at
least "adequately capitalized", the OTS may impose one or more of a variety of
sanctions on the institution to address its undercapitalized condition,
including, without limitation, requiring the submission of a capital plan,
restricting growth and restricting the payment of capital distributions (such as
dividends). Core capital generally consists of tangible capital plus specified
amounts of certain intangible assets.
The OTS risk-based requirement currently requires associations to have
total capital of at least 8.0% of risk-weighted assets. In order to be
considered "well capitalized" under the prompt corrective action regulations,
however, an institution must maintain a ratio of total capital to total
risk-weighted assets of at least 10.0% and a ratio of core capital to total
risk-weighted assets of at least 6.0%. Total capital consists of core capital
plus supplementary capital, which consists of, among other things, maturing
capital instruments, such as subordinated debt and mandatorily redeemable
preferred stock, and a portion of the Bank's general allowance for losses on
loans.
As of June 30, 2002, the Bank exceeded all current minimum regulatory
capital standards and was deemed to be "well capitalized" for purposes of the
OTS's prompt corrective action regulations. At June 30, 2002, the Bank's
tangible capital was $35.2 million, or 6.7%, of adjusted total assets, which
exceeded the 1.5% requirement by $27.4 million and exceeded the 2.0% "critically
undercapitalized" threshold by $24.7 million. In addition, at June 30, 2002, the
Bank had core capital of $35.2 million, or 6.7%, of adjusted total assets, which
exceeded the 4.0% requirement by $14.2 million and exceeded the 5.0% "well
capitalized" threshold by $9.0 million. The Bank had risk-based capital of $38.2
million at June 30, 2002, or 11.2%, of risk-adjusted assets, which exceeded the
minimum risk-based capital requirement by $10.8 million and exceeded the 10.0%
"well capitalized" threshold by $4.0 million. Additionally, the Bank's $35.2
million of core capital equaled 10.3% of total risk-weighted assets, which
exceeded the 6.0% "well capitalized" threshold by $14.7 million.
STOCK REPURCHASE
During the quarter ended June 30, 2002, the Company repurchased 50,156
shares of common stock at a total cost of $1.9 million under its current stock
repurchase program. Through June 30, 2002, a total of 737,699 shares of common
stock of the Company had been purchased under the current and previous
repurchase programs at a total cost of $17.0 million. As of June 30, 2002, the
Company held 568,699 shares of its common stock as treasury stock. During the
period from June 30, 2002 through August 1, 2002, an additional 4,545 shares of
common stock were repurchased at a total cost of $168,000. At its July 9, 2002
meeting, the Company's Board of Directors authorized the repurchase of an
additional 90,000 shares of common stock through January 31, 2003.
STOCK OPTIONS
During the second quarter of 2002, options on 7,700 shares of common stock
were exercised. Between June 30, 2002 and August 1, 2002, no options on shares
of common stock were exercised. Through August 8, 2002, no notice was received
from the one remaining holder of options of the intention to exercise options.
20
DIVIDENDS
On July 9, 2002, a cash dividend of $.15 per share was declared, payable on
August 30, 2002 to stockholders of record as of August 15, 2002. The Company's
strong earnings performance provided the Board with the opportunity to continue
dividend payments at the increased rate paid in the second quarter. The Company
has paid a dividend every quarter since the dividend program was instituted in
the first quarter of 1995. Future dividends will depend primarily upon earnings,
financial condition and need for funds, as well as restrictions imposed by
regulatory authorities regarding dividend payments and capital requirements.
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This document (including information incorporated by reference) contains,
and future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe," "expect," "anticipate," "plan," "intend"
"estimate," "may," "will," "would," "could," "should" or other similar
expressions. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and the
Company undertakes no obligation to update any statement in light of new
information or future events.
The Company's ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Factors which could have a material
adverse effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
. The strength of the United States economy in general and the
strength of the local economies in which the Company conducts its
operations which may be less favorable than expected and may
result in, among other things, a deterioration in the credit
quality and value of the Company's assets.
. The economic impact of the terrorist attacks that occurred on
September 11th, as well as any future threats and attacks, and
the response of the United States to any such threats and
attacks.
. The effects of, and changes in, federal, state and local laws,
regulations and policies affecting banking, securities, insurance
and monetary and financial matters.
. The effects of changes in interest rates (including the effects
of changes in the rate of prepayments of the Company's assets)
and the policies of the Board of Governors of the Federal Reserve
System.
. The ability of the Company to compete with other financial
institutions as effectively as the Company currently intends due
to increases in competitive pressures in the financial services
sector.
. The inability of the Company to obtain new customers and to
retain existing customers.
. The timely development and acceptance of products and services,
including products and services offered through alternative
delivery channels such as the Internet.
. Technological changes implemented by the Company and by other
parties, including third party vendors, which may be more
difficult or more expensive than anticipated or which may have
unforeseen consequences to the Company and its customers.
21
. The ability of the Company to develop and maintain secure and
reliable electronic systems.
. The ability of the Company to retain key executives and employees
and the difficulty that the Company may experience in replacing
key executives and employees in an effective manner.
. Consumer spending and saving habits which may change in a manner
that affects the Company's business adversely. o Business
combinations and the integration of acquired businesses which may
be more difficult or expensive than expected. o The costs,
effects and outcomes of existing or future litigation.
. Changes in accounting policies and practices, as may be adopted
by state and federal regulatory agencies and the Financial
Accounting Standards Board.
The ability of the Company to manage the risks associated with the
foregoing as well as anticipated. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements. Additional information concerning
the Company and its business, including other factors that could materially
affect the Company's financial results, is included in the Company's
filings with the Securities and Exchange Commission.
22
TABLE I
NET INTEREST INCOME ANALYSIS (UNAUDITED)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
Three Months Ended June 30,
-------------------------------------------------------------------------------------
2002 2001
---------------------------------------- ----------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- -------- ----------- -------- --------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) $398,827 $ 7,075 7.12% $362,541 $ 7,084 7.84%
Mortgage-backed securities (2) 41,565 603 5.82% 14,573 256 7.05%
Investments securities (3) 38,188 532 5.59% 41,692 632 6.08%
Other interest-earning assets 22,009 74 1.35% 19,972 248 4.98%
FHLB stock 2,625 33 5.04% 2,315 38 6.58%
-------- -------- -------- --------
Total interest-earning assets 503,214 8,317 6.63% 441,093 8,258 7.51%
-------- -------- -------- --------
Other assets 38,238 29,622
-------- --------
Total assets $541,452 $470,715
======== ========
Interest-bearing liabilities:
Certificate accounts $249,969 2,662 4.27% $249,478 3,633 5.84%
Savings deposits 74,124 384 2.08% 61,499 405 2.64%
Demand and NOW deposits 99,718 390 1.57% 88,942 486 2.19%
Borrowings 71,200 803 4.52% 27,000 329 4.89%
-------- -------- -------- --------
Total interest-bearing liabilities 495,011 4,239 3.43% 426,919 4,853 4.56%
-------- -------- -------- --------
Other liabilities 5,203 4,616
-------- --------
Total liabilities 500,214 431,535
-------- --------
Stockholders' equity 41,238 39,180
-------- --------
Total liabilities and stockholders' equity $541,452 $470,715
======== ========
Net interest income $ 4,078 $ 3,405
======== ========
Net interest rate spread 3.20% 2.95%
======== ========
Net earning assets $ 8,203 $ 14,174
======== ========
Net yield on average interest-earning
assets (net interest margin) 3.25% 3.10%
======== ========
Average interest-earning assets to
average interest-bearing liabilities 101.66% 103.32%
======== ========
(1) Calculated including loans held for sale, and net of deferred loan fees,
loan discounts, loans in process and the allowance for losses on loans.
(2) Calculated including mortgage-backed securities available-for-sale.
(3) Calculated including investment securities available-for-sale and
certificates of deposit.
23
TABLE II
NET INTEREST INCOME ANALYSIS (UNAUDITED)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
Six Months Ended June 30,
-------------------------------------------------------------------------------------
2002 2001
---------------------------------------- ----------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- -------- ----------- -------- --------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) $396,405 $ 14,055 7.15% $353,422 $ 13,940 7.95%
Mortgage-backed securities (2) 28,706 814 5.72% 15,126 537 7.16%
Investments securities (3) 36,802 991 5.43% 46,929 1,408 6.05%
Other interest-earning assets 21,384 173 1.63% 17,398 492 5.70%
FHLB stock 2,557 63 4.97% 2,240 75 6.75%
-------- -------- -------- --------
Total interest-earning assets 485,854 16,096 6.68% 435,115 16,452 7.62%
-------- -------- -------- --------
Other assets 34,365 29,468
-------- --------
Total assets $520,219 $464,583
======== ========
Interest-bearing liabilities:
Certificate accounts $250,592 5,506 4.43% $247,940 7,240 5.89%
Savings deposits 71,796 739 2.08% 59,375 762 2.59%
Demand and NOW deposits 98,103 761 1.56% 87,249 1,009 2.33%
Borrowings 53,543 1,165 4.39% 26,571 691 5.24%
-------- -------- -------- --------
Total interest-bearing liabilities 474,034 8,171 3.48% 421,135 9,702 4.65%
-------- -------- -------- --------
Other liabilities 4,776 4,344
-------- --------
Total liabilities 478,810 425,479
-------- --------
Stockholders' equity 41,409 39,104
-------- --------
Total liabilities and stockholders' equity $520,219 $464,583
======== ========
Net interest income $ 7,925 $ 6,750
======== ========
Net interest rate spread 3.20% 2.97%
======== ========
Net earning assets $ 11,820 $ 13,980
======== ========
Net yield on average interest-earning
assets (net interest margin) 3.29% 3.13%
======== ========
Average interest-earning assets to
average interest-bearing liabilities 102.49% 103.32%
======== ========
(1) Calculated including loans held for sale, and net of deferred loan fees,
loan discounts, loans in process and the allowance for losses on loans.
(2) Calculated including mortgage-backed securities available-for-sale.
(3) Calculated including investment securities available-for-sale and
certificates of deposit.
24
KANKAKEE BANCORP, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - There are no material pending legal proceedings
to which the Company or the Bank is a party other than ordinary
routine litigation incidental to their respective businesses.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - The Meeting of
Stockholders of the Company was held on April 26, 2002. At the meeting,
stockholders voted to elect two nominees to the board of directors and
to ratify the appointment of McGladrey & Pullen, LLP, as the Company's
independent auditors for 2002. Because of the contested nature of the
annual meeting, the Company hired IVS Associates, Inc. to act as the
independent inspectors of election. IVS Associates has certified that
William Cheffer and Michael A. Stanfa were elected to serve as
directors with terms expiring in 2005. The matters approved by
stockholders at the meeting and the number of votes cast for, against
or withheld (as well as the number of abstentions) as to each matter
are set forth below:
a. The election of directors for a three year term expiring in
2005.
-------------------------------------------------------------------------------------
NOMINEE FOR WITHHOLD
-------------------------------------------------------------------------------------
William Cheffer 603,911 9,252
-------------------------------------------------------------------------------------
Michael A. Stanfa 605,598 7,565
-------------------------------------------------------------------------------------
Lawrence Seidman 478,434 2,001
-------------------------------------------------------------------------------------
Robert Williamson 478,434 2,001
-------------------------------------------------------------------------------------
b. The ratification of McGladrey & Pullen, LLP, as the auditors
for the year ending December 31, 2002.
-------------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
-------------------------------------------------------------------------------------
1,062,964 10,640 19,984
-------------------------------------------------------------------------------------
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits - 99.1 - Certification of Chief Executive Officer
99.2 - Certification of Chief Financial Officer
b. Reports on Form 8-K
On April 15, 2002, the Company filed a report on Form 8-K
stating under Item 5 that the Company had, on April 15, 2002,
issued a news release announcing its earnings for the quarter
ending March 31, 2002, as well as other recent corporate
events.
25
On April 22, 2002, the Company filed a report on Form 8-K
stating under Item 5 that the Company had, on April 22, 2002,
issued a news release announcing that Institutional
Shareholder Services ("ISS"), recommended management's
nominees for director at this year's annual meeting of
stockholders.
On May 1, 2002, the Company filed a report on Form 8-K stating
under Item 5 that the Company had, on May 1, 2002, issued a
news release announcing the preliminary results of the
election of directors conducted at the annual meeting of
stockholders on April 26, 2002.
On May 8, 2002, the Company filed a report on Form 8-K stating
under Item 5 that the Company had, on May 8, 2002, issued a
news release announcing the certification of the results of
the election of directors conducted at the annual meeting of
stockholders on April 26, 2002.
On July 19, 2002, the Company filed a report on Form 8-K
stating under Item 5 that the Company had, on July 19, 2002
issued a news release announcing its earnings for the quarter
ended June 30, 2002, as well as other recent corporate events.
26
KANKAKEE BANCORP, INC.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KANKAKEE BANCORP, INC.
Registrant
Date: August 8, 2002 /s/ LARRY D. HUFFMAN
----------------------------- ---------------------------------
President and CEO
Date: August 8, 2002 /s/ RONALD J. WALTERS
----------------------------- ---------------------------------
Vice President and Treasurer
(Principal Financial
And Accounting Officer)
27