EX-13 3 dex13.txt ANNUAL REPORT TO STOCKHOLDERS [GRAPHIC] Kankakee Bancorp, Inc. 2000 Annual Report [Kankakee Bancorp Logo] CORPORATE PROFILE Kankakee Bancorp, Inc. (the "Company") is the holding company for Kankakee Federal Savings Bank (the "Bank"). As a community-oriented financial institution, the Bank operates fifteen retail banking offices. Its mission is to provide comprehensive financial services to families and local businesses residing in Kankakee, Champaign, Iroquois and Livingston Counties, and portions of Will, Grundy and Vermilion Counties in Illinois. The common stock of the Company is publicly traded on the American Stock Exchange under the symbol "KNK". TABLE OF CONTENTS Letter to Stockholders............................................................... 4 Directors and Officers............................................................... 6 Selected Consolidated Financial Information.......................................... 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Independent Auditor's Report......................................................... 27 Consolidated Financial Statements.................................................... 28 Notes to Consolidated Financial Statements........................................... 34 Corporate Information................................................................ 51 Office Locations/Map................................................................. 53
Factors That May Affect Future Results This publication contains statements concerning earnings, revenues, operating margins, growth and other financial measurements; new business and business opportunities; acquisitions; and other aspects of future operating or financial performance. These statements are based on assumptions currently believed to be valid and may be "forward-looking statements" under the securities laws, as further detailed on pages 25 and 26 of this Annual Report. Various factors could materially affect actual results. These include, among other things, changes in general economic or market conditions, government regulation and competition. For additional information about these factors, see our report on Form 10-K for 2001 and reports on Forms 10-Q and 8-K filed with the Securities and Exchange Commission. CORPORATE PROFILE & TABLE OF CONTENTS -------------------------------------------------------------------------------- 2 FINANCIAL HIGHLIGHTS ------------------------
Years Ended December 31, --------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (Dollars in thousands, except per share data) Selected Financial Condition Data: Total assets.................................. $490,280 $459,894 $404,718 $411,779 $343,409 Loans, net, including loans held for sale..... 394,618 338,956 270,360 247,144 239,050 Mortgage-backed securities held-to-maturity... 38 67 109 168 204 Mortgage-backed securities available-for-sale. 11,636 16,051 17,491 18,578 28,300 Investment securities held-to-maturity (1).... 1,516 1,999 857 893 2,173 Investment securities available-for-sale...... 34,755 57,170 65,132 75,943 36,823 Deposits...................................... 415,467 388,050 354,977 346,803 280,022 Total borrowings.............................. 30,000 29,000 11,200 22,900 23,495 Stockholders' equity.......................... 41,191 39,289 36,248 39,677 37,821 For the period: Net interest income after provision for losses on loans......................... $ 13,528 $ 12,852 $ 11,557 $ 11,396 $ 10,589 Net income.................................... 3,261 2,584 1,759 2,289 3,012 Per common share: Book value per share outstanding.............. $ 33.86 $ 31.11 $ 29.15 $ 29.02 $ 27.57 Tangible book value per share outstanding (2)............................. 30.22 27.30 24.97 24.93 26.00 Financial ratios: Stockholders' equity to total assets.......... 8.40% 8.54% 8.96% 9.64% 11.01% Non-performing assets to total assets......... 0.45% 0.76% 0.69% 0.82% 1.27% Net charge-offs to average loans.............. 0.02% 0.02% 0.08% 0.06% 0.11% Net interest margin........................... 3.16% 3.25% 3.08% 3.07% 3.22% Operating expenses to average assets.......... 2.58% 2.68% 2.92% 2.60% 2.36% Return on average assets...................... 0.69% 0.60% 0.43% 0.57% 0.87% Return on average stockholders' equity........ 8.20% 6.95% 4.61% 5.86% 8.04%
-------- (1) Includes certificates of deposit and non-marketable equity securities. (2) Calculated by subtracting intangible assets from stockholders' equity. 3 4 [PHOTO] [PHOTO] Larry D. Huffman; Vice Chairman, President and CEO of Kankakee Bancorp, Inc. (left); William Cheffer, Chairman, Kankakee Bancorp, Inc. TO OUR STOCKHOLDERS AND FRIENDS: The year 2001 brought much emotional and financial upheaval to our country. Despite these conditions and the Federal Open Market Committee's (the "FOMC") unprecedented action of incrementally reducing its target short-term interest rates by a total of 4.75% during the year, Kankakee Bancorp experienced an impressive increase in our year to year earnings. Building on such growth strategies as aggressive balance sheet management and fee income enhancement initiated last year, in 2001 the Company realized better than 26 percent net income growth and increased diluted earnings per share by more than 31 percent, to $2.62 from $1.99 for 2000. Stockholders' equity per share rose from $31.11 to $33.86 during 2001. The Company's return on equity has increased by 78 percent in two years, from 4.61% in 1999 to 8.20% in 2001. During 2001, the Company's assets grew by more than $30 million, net loans increased by nearly $55 million and stockholders' equity grew nearly $2 million. The FOMC's reduction of the discount rate had an effect of reduced yields on securities and loans, but increased activity in mortgage and commercial lending grew the loan portfolio. As part of our normal course of balance sheet management, sales of mortgage loans with terms of 12 years and longer (servicing rights retained) were initiated during the year in order to reduce interest-rate risk as the Federal Reserve discount rate fell. The Company's loan portfolio increased in 2001, with the larger proportion of growth occurring in residential mortgages as compared to commercial loans, resulting in a narrowing of the net interest margin. [LOGO] Two Year Financial Performance . Increased Diluted EPS by 104%! . Increased Return on Equity by 78%! . 21% Growth in Assets . 17% Growth in Deposits . Resulting Stock Price Appreciation 12/31/1999 12/31/2001 --------------------------- $19.75 $29.30 LETTER TO STOCKHOLDERS -------------------------------------------------------------------------------- As was pointed out in the letter to stockholders in the 2000 Annual Report, the Company is committed to continuing profitable growth. As management and the Board of Directors continue to build stockholder value, we also recognize the importance of managing the various opportunities and types of risk which may be encountered. In 2001, management engaged consultants to study the Company's operations and advise management and the Board regarding additional opportunities for profitable growth, as well as cost-cutting measures which might improve efficiency, increase profitability, and maintain our high level of customer service. We will make this our major focus in 2002. The Company's current operating locations and our recently upgraded data processing facilities provide capacity for growth without significant additional capital outlay. During 2001 we also continued our practice of evaluating opportunities to grow through acquisition. In 2002 we will continue to evaluate possible acquisitions, in both the Company's current markets and other markets where profitable growth seems likely. However, we will not acquire just for the sake of acquiring. Only acquisitions which will have a positive impact on operating results and which will enhance stockholder value will be pursued. Kankakee Federal Savings Bank and its predecessors have steadfastly supported local civic and charitable organizations for more than 116 years. Members of the Board of Directors and staff have filled leadership roles in many of these organizations, leading to increased recognition of the importance of the Bank in the communities we serve. This recognition, in turn, has resulted in additional business for the Bank as the organizations and other individuals who serve in them have decided to "invest" in a bank that demonstrates its commitment to the community. We feel privileged to serve with Board members and staff who have demonstrated success in their own fields of endeavor as well as having been actively involved in community affairs. The Company's financial results in 2001 exemplify the progress being made toward our goal of becoming one of the highest performing in our industry. As is the case when a work is "in-progress", however, one is not able to reach the desired goal in one large leap but, instead, through a series of progressively positive movements in the desired direction. We believe that plans for 2002 will enable the Company to continue the trend of increased earnings and to provide enhanced value to stockholders over the long term. We appreciate the confidence and support of our stockholders and wish you well in 2002. /s/ William Cheffer WILLIAM CHEFFER Chairman KANKAKEE BANCORP, INC. /s/ Larry D. Huffman LARRY D. HUFFMAN Vice Chairman, President and CEO KANKAKEE BANCORP, INC. LETTER TO STOCKHOLDERS -------------------------------------------------------------------------------- 5 [PHOTO] [Photo] Kankakee Bancorp, Inc. Board of Directors, seated left to right: Larry D. Huffman; William Cheffer; back row, left to right: Charles C. Huber; Mark L. Smith; Wesley E. Walker; Ronald J. Walters, Vice President and Treasurer, Kankakee Bancorp, Inc.; Brenda L. Baird; Michael A. Stanfa; David B. Cox. DIRECTORS AND OFFICERS ----------------------------- Kankakee Bancorp, Inc. Directors William Cheffer, Chairman of the Board Larry D. Huffman, Vice Chairman; President and CEO Charles C. Huber, Retired; Former Plant Manager, Armstrong World Industries Wesley E. Walker, Retired; Former Executive Director, Kankakee YMCA Michael A. Stanfa, Executive Vice President and Secretary Brenda L. Baird, President, Mobile Communications Corporation Mark L. Smith, President, Bacon, Smith, Koelling & Ohm, PC Kankakee Bancorp, Inc. Officers William Cheffer, Chairman of the Board Larry D. Huffman, Vice Chairman, President and CEO Michael A. Stanfa, Executive Vice President and Secretary Ronald J. Walters, Vice President and Treasurer Thomas G. Henry, Assistant Treasurer Jeannie Cyrier, Assistant Secretary Carol S. Hoekstra, Assistant Secretary Lynn O'Brien, Assistant Secretary Kankakee Federal Savings Bank Officers Chairman of the Board, William Cheffer Vice Chairman of the Board, Larry D. Huffman and President and Chief Executive Officer Senior Vice President and Secretary, Michael A. Stanfa Senior Vice President and Treasurer, Ronald J. Walters Senior Vice Presidents: Carol S. Hoekstra, Keith M. Roseland Vice Presidents: Georgann J. Butterfield, Monte S. Crowl, Ronald R. Grubbs, Thomas G. Henry, Marsha S. Lloyd, Tammy J. Lucht, Terry L. Ralston, Dorcilla C. Schoolman, W. Eric Volkmann Assistant Secretaries: Margaret Johnston, Joyce A. Jones, Lynn O'Brien Assistant Treasurer, Marvin G. Saxsma DIRECTORS AND OFFICERS -------------------------------------------------------------------------------- 6 SELECTED CONSOLIDATED FINANCIAL INFORMATION -------------------------------------------------------
December 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (Dollar in thousands, except per share data) Selected Financial Condition Data: Total assets................................ $ 490,280 $ 459,894 $ 404,718 $ 411,779 $ 343,409 Loans, net, including loans held for sale... 394,618 338,956 270,360 247,144 239,050 Mortgage-backed securities held-to- maturity.................................. 38 67 109 168 204 Mortgage-backed securities available-for- sale...................................... 11,636 16,051 17,491 18,578 28,300 Investment securities held-to- maturity (1).............................. 1,516 1,999 857 893 2,173 Investment securities available-for-sale.... 34,755 57,170 65,132 75,943 36,823 Deposits.................................... 415,467 388,050 354,977 346,803 280,022 Total borrowings............................ 30,000 29,000 11,200 22,900 23,495 Stockholders' equity........................ 41,191 39,289 36,248 39,677 37,821 Shares outstanding.......................... 1,216,358 1,263,108 1,243,383 1,367,358 1,371,638 Stockholders' equity per share.............. $ 33.86 $ 31.11 $ 29.15 $ 29.02 $ 27.57 Stockholders' tangible equity per share (2)............................. 30.22 27.30 24.97 24.93 26.00 Years Ended December 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Selected Operations Data: Total interest income....................... $ 32,759 $ 30,339 $ 26,900 $ 27,522 $ 24,895 Total interest expense...................... 18,729 17,437 15,343 16,126 14,273 ---------- ---------- ---------- ---------- ---------- Net interest income..................... 14,030 12,902 11,557 11,396 10,622 Provision for losses on loans............... 502 50 -- -- 33 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for losses on loans........................... 13,528 12,852 11,557 11,396 10,589 ---------- ---------- ---------- ---------- ---------- Fee income.................................. 2,353 1,942 1,925 1,532 1,023 Gain on sales of loans and securities....... 730 -- 365 179 112 Other non-interest income................... 521 572 674 765 554 ---------- ---------- ---------- ---------- ---------- Total non-interest income............... 3,604 2,514 2,964 2,476 1,689 ---------- ---------- ---------- ---------- ---------- Other expenses.............................. 12,231 11,472 11,900 10,432 8,185 Income tax expense.......................... 1,640 1,310 862 1,151 1,081 ---------- ---------- ---------- ---------- ---------- Total non-interest expense.............. 13,871 12,782 12,762 11,583 9,266 ---------- ---------- ---------- ---------- ---------- Net income.................................. $ 3,261 $ 2,584 $ 1,759 $ 2,289 $ 3,012 ========== ========== ========== ========== ==========
-------- (1) Includes certificates of deposit and non-marketable equity securities. (2) Calculated by subtracting intangible assets from stockholders' equity. 7 SELECTED CONSOLIDATED FINANCIAL INFORMATION (continued) -------------------------------------------------------------------
Years Ended December 31, --------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- Selected Financial Ratios and Other Data: Performance Ratios: Return on assets (ratio of net income to average total assets)..................................... 0.69% 0.60% 0.43% 0.57% 0.87% Interest rate spread information: Average during the year......................... 3.02% 3.13% 2.99% 2.92% 2.86% End of year..................................... 3.01% 2.85% 2.96% 2.68% 2.73% Net interest margin (1)......................... 3.16% 3.25% 3.08% 3.07% 3.22% Ratio of operating expense to average total assets........................................ 2.58% 2.68% 2.92% 2.60% 2.36% Return on equity (ratio of net income to average equity)............................... 8.20% 6.95% 4.61% 5.86% 8.04% Ratio of average interest-earning assets to average interest-bearing liabilities.......... 103.25% 102.66% 102.39% 103.47% 108.25% Quality Ratios: Non-performing assets to total assets at end of period............................................ 0.45% 0.76% 0.69% 0.82% 1.27% Allowance for losses on loans to non-performing loans............................................. 230.33% 83.89% 124.20% 160.43% 75.64% Classified assets to total assets at end of period (2)........................................ 1.80% 1.29% 1.20% 1.70% 1.89% Allowance for losses on loans to classified assets.. 29.32% 36.34% 44.84% 33.95% 32.86% Capital Ratios: Equity to total assets at end of period............. 8.40% 8.54% 8.96% 9.64% 11.01% Average equity to average assets.................... 8.41% 8.70% 9.38% 9.75% 10.71% Dividend payout ratio............................... 18.32% 24.12% 37.50% 30.77% 24.00% Other Data: Number of full service branch offices............... 15 15 15 15 9
-------- (1) Net interest income divided by average interest earning assets. (2) Includes items classified as special mention. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- Overview Kankakee Bancorp, Inc. (the "Company") is the holding company for Kankakee Federal Savings Bank (the "Bank"). All references to the Company in the following discussion include the Bank and the Bank's wholly-owned service corporation, KFS Service Corporation ("KFS"), unless indicated otherwise. In the last two years, the Company has implemented much of its strategic plan, resulting in significant asset and core earnings growth. During that time, operating results have shown significant improvement. Net income rose 26% and 47% respectively in 2001 and 2000. Diluted earnings per share also rose 32% and 55% in the same periods. Assets grew from $404.8 million in 1999 to $490.3 million at the end of 2001, representing an increase of 21% over the two-year period. The Company has also employed an aggressive capital management plan over the last two years. As part of this strategy, the Company made open market purchases of its own stock, repurchasing 64,200 common shares at an average cost of $24.03 per share in 2001 and 46,300 common shares at an average cost of $22.11 per share in 2000. Since converting to a stock organization in 1992, the Company has repurchased 669,507 shares at an average cost of $21.44 per share. In addition, the Company is continuously evaluating balance sheet opportunities to augment and leverage its strong capital base to maximize stockholder's return on equity. As a result, the Company's return on equity has increased almost 78% in two years, from 4.61% in 1999 to 8.20% in 2001. The Company will continue to evaluate opportunities and believes that 2002 should continue the positive earnings trend. In an effort to increase profitability and efficiency, in 2001 the Company began an overall analysis of its expense structure, including a branch network profitability analysis. Upon completion, management believes that significant reductions in the efficiency ratio may occur in 2002 and 2003. The Company made significant fixed asset and technological expenditures throughout the 1990s which have provided the organization with a platform that can sustain the high growth objectives of the strategic plan while minimizing increases of the expense base. Management is making improved efficiency a major focus of 2002. The Company's results of operations are dependent primarily on net interest income, which is the difference, or "spread", between the interest income earned on its loan, mortgage-backed securities and investment portfolios and its cost of funds, consisting of interest paid on its deposits and on borrowed funds. The Company's operating expenses principally consist of employee compensation and benefits, occupancy, federal deposit insurance premiums, marketing and other general and administrative expenses. The Company's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. Current Economic Climate During 2001, the Federal Open Market Committee 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, MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 9 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. Management continuously reviews asset quality and aggressively addresses delinquent situations. Historically, the Company's non-performing assets and net charge offs have been low. Most recently, the FOMC has held target interest rates at the current 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. 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. Since the Company has a negative cumulative one-year gap (see section on Asset/Liability Management) of 5.0%, an increase in market interest rates might negatively affect net interest income and the results of operations. This is 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 continuously reviews the Company's gap position and evaluates potential strategies to offset interest rate risk. Furthermore, the Company will continue to look for strategic opportunities to take advantage of interest rate movements. 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 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 the fourth quarter of 2001, management discussed methods of evaluating growth potential within the Company's market areas, appropriateness and cost effectiveness of current delivery systems and possible expansion into new markets. Subsequently, the Company engaged the services of a consultant to conduct a review and evaluation of the Company's branch network and other delivery systems, such as ATMs. Each of the Company's existing market areas, and a few market areas identified as potential expansion targets for the Company, are being reviewed as to competitive environment, demographics, economic factors and associated costs. Demographic factors include such things as total population, ages, income levels and other factors. Economic factors include such things as the level of business activity and business growth within the area, the area's long term growth expectations and other factors. As a result of this review, the Company will be better positioned to make strategic decisions regarding contraction or expansion of its branch network, acquisitions in markets where an acquisition provides the best opportunity to expand and modifications of other systems. Decisions resulting from this review will be driven by their impact on profitability and stockholder value. During the late 1990s, the Company also 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. These efforts have been successful to date. Non-interest income has increased by 43% during 2001, although primarily due to some balance sheet management. Management believes that the strategic shift to a more sales and marketing oriented culture will continue to increase non-interest income as the employees become more comfortable cross-selling various product lines. MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 10 In the first quarter of 2000, management initiated an aggressive growth strategy aimed at increasing deposits and growing the loan portfolio, resulting in the reduction of the size of the investment portfolio. The strategy was intended to improve earnings in a number of ways which included: . improved utilization of facilities and increased productivity of personnel; . increased capital leverage; . improved asset yields, due to increased commercial and consumer lending; and . replacement of some investments with fixed-rate, long-term 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; . 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; and . require an even more market-sensitive approach to interest rate risk management, as short-term objectives replaced a long-standing policy of selling newly-originated, long-term, fixed-rate mortgage loans in the secondary market. The Company is committed to continuing the profitable growth of its assets and liabilities, if market conditions warrant, although management may control the rate of growth. During 2001, in light of declining market interest rates, the Company resumed its usual practice of selling newly-originated, long-term, fixed-rate mortgage loans. The favorable climate for such sales resulted in gains for the year and an increase in servicing income. The Company monitors interest rates and economic conditions in its own market, as well as on a regional and national basis. During 2000, the Company began offering 100% financing on the purchase of single-family, owner occupied homes. Loans under this program are required to have private mortgage insurance covering the top 35% of the loan balance, and can be either fixed rate or adjustable rate. This program continued through 2001. Since receiving regulatory approval in 1998, the Bank has offered trust services. Although granted full trust powers, the Bank has initially focused on personal trust services and limited employee plan services. Initially, it was anticipated that the trust operations would generate operating losses through 2000, after which it would break even or produce a small profit. However, current projections indicate that trust operations will continue to generate small operating losses in the near term. The trust department is continuing to increase its business, having more than doubled its assets under management in 2001. Results of Operations The Company's results of operations depend primarily on the level of its net interest and non-interest income and its control of operating expenses. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rate earned from or paid on them. Net Interest Income Analysis The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were made. All average balances are monthly average balances. Non-accruing loans have been included in the table as loans carrying a zero yield. MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 11
Year Ended December 31, 2001 Year Ended December 31, 2000 Year Ended December 31, 1999 --------------------------- ------------------------------ --------------------------- Average Interest/ Average Interest Average Interest Outstanding Earned Yield/ Outstanding Earned/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Yield/Rate Balance Paid Rate ----------- --------- ------ ----------- -------- ---------- ----------- -------- ------ (Dollars in thousands) Interest-earning assets: Loans receivable (1)......... $368,955 $ 28,403 7.70% $303,499 $ 24,220 7.98% $261,883 $ 20,407 7.79% Mortgage-backed securities (2)......................... 13,938 970 6.96% 17,488 1,222 6.99% 19,075 1,125 5.90% Investments securities (3)... 43,599 2,529 5.80% 60,764 3,788 6.23% 69,980 4,138 5.91% Other interest-earning assets 14,980 709 4.73% 13,915 966 6.94% 21,998 1,109 5.04% FHLB stock................... 2,325 148 6.37% 1,903 143 7.51% 1,808 121 6.69% -------- -------- -------- -------- -------- -------- Total interest-earning assets 443,797 32,759 7.38% 397,569 30,339 7.63% 374,744 26,900 7.18% -------- -------- -------- -------- Other assets................. 29,551 29,827 32,194 -------- -------- -------- Total assets................. $473,348 $427,396 $406,938 ======== ======== ======== Interest-bearing liabilities: Time deposits................ $251,367 13,952 5.55% $231,198 12,981 5.61% $210,899 11,141 5.28% Savings deposits............. 62,035 1,573 2.54% 59,637 1,502 2.52% 61,413 1,503 2.45% Demand and NOW deposits...... 88,715 1,861 2.10% 77,776 1,835 2.36% 74,903 1,683 2.25% Borrowings................... 27,692 1,343 4.85% 18,662 1,119 6.00% 18,769 1,016 5.41% -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities................. 429,809 18,729 4.36% 387,273 17,437 4.50% 365,984 15,343 4.19% -------- -------- -------- -------- Other liabilities............ 3,751 2,951 2,799 -------- -------- -------- Total liabilities............ 433,560 390,224 368,783 Stockholders' equity......... 39,788 37,172 38,155 -------- -------- -------- Total liabilities and stockholders' equity........ $473,348 $427,396 $406,938 ======== ======== ======== Net interest income.......... $ 14,030 $ 12,902 $ 11,557 ======== ======== ======== Net interest rate spread..... 3.02% 3.13% 2.99% ==== ==== ==== Net earning assets........... $ 13,988 $ 10,296 $ 8,760 ======== ======== ======== Net yield on average interest-earning assets (net interest margin)............ 3.16% 3.25% 3.08% ==== ==== ==== Average interest-earning assets to average interest- bearing liabilities......... 103.25% 102.66% 102.39% ======== ======== ========
-------- (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 certificated of deposit. The following table sets forth the weighted average yields on the Company's interest-earning assets, the weighted average interest rates on interest-bearing liabilities and the interest rate spread between the Company's weighted average yields and rates at the dates indicated. Non-accruing loans have been included in the table as loans carrying a zero yield.
As of December 31, ------------------ 2001 2000 1999 ----- ----- ----- Weighted average yield on: Loans receivable (1)............................................... 7.12% 8.12% 7.78% Mortgaged-backed securities (2).................................... 6.82% 7.09% 6.41% Investment securities (3).......................................... 5.46% 6.04% 5.85% Other interest-earning assets...................................... 1.41% 6.08% 4.44% Combined weighted average yield on interest-earning assets......... 6.79% 7.74% 7.22% Weighted average rate paid on: Saving deposits.................................................... 2.08% 2.57% 2.50% Demand and NOW deposits............................................ 1.61% 2.55% 2.19% Certificates....................................................... 4.97% 6.09% 5.42% Borrowings......................................................... 4.47% 6.25% 5.37% Combined weighted average rate paid on interest-bearing liabilities 3.78% 4.89% 4.26% Spread.............................................................. 3.01% 2.85% 2.96%
-------- (1) Includes loans held for sale. (2) Includes mortgage-backed securities available-for-sale. (3) Includes investment securities available-for-sale and certificates of deposit. MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 12 The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the increase related to higher outstanding balances and that due to the levels and volatility of interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
Year Ended December 31, Year Ended December 31, 2001 vs. 2000 2000 vs. 1999 ----------------------------- ----------------------------- Increase (Decrease) Increase (Decrease) Due to Due to ------------------ ------------------- Total Total Increase Increase Volume Rate (Decrease) Volume Rate (Decrease) ------- ------- ---------- ------ ------ ---------- (Dollars in thousands) Interest earning assets: Loans receivable..................... $ 5,063 ($ 880) $ 4,183 $3,305 $ 508 $3,813 Mortgage-backed securities........... (247) (5) (252) (101) 198 97 Investment securities................ (1,012) (247) (1,259) (560) 210 (350) Other interest-earning assets........ 74 (331) (257) (482) 339 (143) Federal Home Loan Bank stock......... 25 (20) 5 6 16 22 ------- ------- ------- ------ ------ ------ Total interest-earning assets...... $ 3,903 ($1,483) $ 2,420 $2,168 $1,271 $3,439 ======= ======= ======= ====== ====== ====== Interest bearing liabilities: Certificate accounts................. $ 1,122 ($ 151) $ 971 $1,116 $ 724 $1,840 Savings deposits..................... 60 11 71 (44) 43 (1) Demand and NOW deposits.............. 243 (217) 26 67 85 152 Borrowings........................... 474 (250) 224 (7) 110 103 ------- ------- ------- ------ ------ ------ Total interest-bearing liabilities. $ 1,899 ($ 607) $ 1,292 $1,132 $ 962 $2,094 ======= ======= ======= ====== ====== ====== Net interest income................... $ 1,128 $1,345 ======= ======
Comparison of Operating Results for 2001 to 2000 General Consolidated net income was $3.3 million, or $2.62 per share (diluted), for the year ended December 31, 2001 compared to $2.6 million, or $1.99 per share (diluted), for the year ended December 31, 2000. The 26% increase in net income occurred primarily due to the continuing success of strategic initiatives begun in 2000. Net Interest Income Net interest income was $14.0 million for the year ended December 31, 2001, an increase of $1.1 million, or 8.7%, during 2001 as compared to 2000. Net interest income increased primarily due to the increase in interest income exceeding the increase in interest expense. The increase in interest income resulted from the increase in the average balance of interest-earning assets, which was partially offset by a decrease in the average rate of interest on interest-earning assets. The increase in interest expense resulted from the increase in the average balance of interest-bearing liabilities, which was partially offset by a decrease in the average rate of interest on interest-bearing liabilities. Interest Income Interest income totaled $32.8 million for the year ended December 31, 2001, an increase of $2.5 million or 8.0%, as compared to $30.3 million for 2000. This resulted from a $46.2 million increase in average interest-earning assets from $397.6 million during 2000 to $443.8 million during 2001, which was partially offset by a decrease in the yield earned on assets from 7.63% during 2000 to 7.38% during 2001. Interest on loans was $28.4 million for 2001, an increase of $4.2 million, or 17.3%, as compared to 2000. This was primarily attributable to the effect of an increase of $65.5 million in average outstanding loans, which was partially offset by a decrease in the yield on loans from 7.98% during MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 13 2000 to 7.70% during 2001. The increase in interest income on loans and the decrease in interest earned on investment securities discussed below resulted in part from the Company's continued efforts during 2000 and 2001 to shift its asset mix to higher yielding loans. Interest earned on mortgage-backed securities was $970,000 for 2001, as compared to $1.2 million for 2000. This represented a decrease of 20.6% between the periods and was primarily due to a decrease of $3.6 million in average mortgage-backed securities, and to a decrease in the yield on mortgage-backed securities to 6.96% during 2001 from 6.99% during 2000. Interest earned on investment securities and other interest-earning assets and dividends on Federal Home Loan Bank of Chicago ("the FHLB") stock totaled $3.4 million for 2001, as compared to $4.9 million for 2000. This represented a decrease of 30.9% during 2001. This was primarily due to a decrease in the average balance of these assets from $76.6 million in 2000 to $60.9 million in 2001 and to a decrease in average yield on these assets from 6.39% in 2000 to 5.56% in 2001. Interest Expense Interest expense was $18.7 million for 2001, or $1.3 million (7.4%) greater than in 2000. This was due to an increase of $42.5 million in the average balance of interest-bearing liabilities to $429.8 million for 2001 from $387.3 million for 2000, which was partially offset by a decrease in average rates to 4.36% for 2001 from 4.50% for 2000. During 2001, the deposit mix of average deposits remained stable with the ratio of average certificates of deposit to average total deposits decreasing slightly from 62.7% in 2000 to 62.5% in 2001. The decreases in the average cost of funds were the result of market interest rates trending lower throughout 2001. During 2001, $1.3 million of the Company's interest expense, compared to $1.1 million during 2000, related to advances from the FHLB. The increase in interest expense on borrowed funds was the result of a $9.0 million increase in average balance of borrowed funds from $18.7 million to $27.7 million in 2001, which was partially offset by a decrease in the average interest rate on borrowed funds to 4.85% in 2001 from 6.00% in 2000. Provision for Losses on Loans The Company recorded a $502,000 provision for losses on loans during 2001 compared to a $50,000 provision during 2000. Charge-offs during 2001 decreased to $103,000 from $135,000 during 2000. Recoveries during 2001 decreased to $26,000 from $70,000 in 2000. The ratio of net charge-offs to average outstanding loans was 0.02% in 2001 and in 2000. The increase in the provision for losses on loans during 2001 was the result of several factors, including the increase in the total loan portfolio and the increase in classified assets. Additionally, based on management's review of the adequacy of the allowance for losses on loans, the provision in 2000, as well as in the prior two years, was somewhat lower than might otherwise have been expected. This was due to the Company having acquired a significant amount of reserves with the purchase of Coal City National Bank in 1998. The allowance for losses on loans is maintained at a level believed adequate by management to absorb probable losses in the loan portfolio. Management's methodology to determine the adequacy of the allowance for losses on loans considers specific credit reviews, past loan loss experience, current economic conditions and trends, and the volume, growth and composition of the loan portfolio. Based upon the Company's quarterly analysis of the adequacy of the allowance for losses on loans, considering remaining collateral of loans with more than a normal degree of risk, historical loan loss percentages and economic conditions, it is management's belief that the $2.6 million allowance for losses on loans at December 31, 2001 was adequate. However, there can be no assurance that the allowance for losses on loans will be adequate to cover all losses. Each credit on the Company's internal loan "watch list" is evaluated periodically to estimate potential losses. In addition, minimum loss estimates for each category of watch list credits are provided for based on management's judgment which considers past loan loss experience and other MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 14 factors. For installment and real estate mortgage loans, specific allocations are based on past loss experience adjusted for recent portfolio growth and economic trends. The total of the estimated loss exposure resulting from the analysis is considered the allocated portion of the allowance for losses on loans. The amounts specifically provided for individual loans and pools of loans are supplemented by an unallocated portion of the allowance for losses on loans. This unallocated amount is determined based on management's judgment which considers, among other things, the risk of error in the specific allocations, other potential exposure in the loan portfolio, economic conditions and trends, and other factors. The allowance for losses on loans is charged when management determines that the prospects of recovery of the principal of a loan have significantly diminished. Subsequent recoveries, if any, are credited to the allowance for losses on loans. Credit card loans are charged off at the earliest of notice of bankruptcy, when at least 120 days past due, or when otherwise deemed to be uncollectible. All other installment loans that are 90 to 120 days past due are charged off monthly unless the loans are insured for credit loss or where scheduled payments are being received. Real estate mortgage loans are written down to fair value upon the earlier of receipt of a deed of foreclosure or upon completion of foreclosure proceedings. Commercial and other loan charge-offs are made based on management's on-going evaluation of non-performing loans. Net charge-offs have not exceeded .11% of average loans for the last five years, and averaged less than .06% of average loans during those five years. The following is a summary of loan loss experience and nonperforming assets for the years ended December 31, 2001 and 2000:
2001 2000 -------- -------- (Dollars in thousands) Total loans.......................................... $396,371 $341,113 Total assets......................................... 490,280 459,894 Allowance for losses on loans........................ 2,582 2,156 Net loan charge-offs................................. 77 65 Net loan charge-offs as a percentage of average loans 0.02% 0.02% Nonperforming loans.................................. $ 1,121 $ 2,570 Nonperforming assets................................. 2,201 3,487 Nonperforming assets to total assets................. 0.45% 0.76% Allowance for losses on loans to total loans......... 0.65% 0.63% Allowance for losses on loans to nonperforming loans. 230.3% 83.9%
The Company will continue to monitor and adjust its allowance for losses on loans based on management's analysis of its loan portfolio and general economic conditions. Other Income Other income increased $1.1 million for 2001 to $3.6 million, compared to $2.5 million for 2000. The 43.4% increase in other income was the result of increases of $401,000 in the net gain on the sale of securities, $411,000 in fee income, $329,000 in gain on sale of loans held for sale and $37,000 in other income. These increases were partially offset by decreases of $12,000 in gain on the sale of office related property and $84,000 in insurance commissions. The increase in net gain on the sale of securities was the result of a $441,000 gain on a $5.0 million investment in securities available-for-sale, which was partially offset by a loss of $40,000 on the sale of non-marketable equity securities. The increase in the gain on the sale of loans was the result of a resumption in loan sales during the year. The increase in fee income was primarily the result of an increase in checking related fees due to an increase in the number of checking accounts and to an increase in discount fees related to debit cards. The increase in other income was the result of a $50,000 increase in appraisal fees in 2001 compared to 2000. The decrease in insurance premiums was due to reduced volume of sales of insurance related products. MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 15 Other Expenses Other expenses were $12.2 million for 2001, as compared to $11.5 million for 2000. This represented an increase of $759,000 or 6.6% during 2001. There were increases in compensation and benefits of $307,000 (5.0%), occupancy costs of $144,000 (13.1%), advertising of $47,000 (13.7%), data processing costs of $43,000 (11.9%), telephone and postage of $69,000 (19.1%) and other expenses of $248,000 (12.8%). These increases were partially offset by decreases in furniture and equipment expenses of $47,000 (7.0%), the provision for losses on foreclosed assets of $48,000 (34.7%) and amortization of intangibles of $3,000 (0.7%). The increase in compensation and benefits was the result of several factors, including a small increase in total employees, increased health insurance costs and, due to an unusually low rate of employee turnover, an increase in retirement benefits. The increase in occupancy costs was primarily the result of an increase in repair and maintenance work during the year. The increase in advertising was due in part to the promotion of an on-line banking system which was begun mid-year. The data processing cost increase was primarily due to increased maintenance costs associated with new equipment. The increase in telephone and postage expense was due in part to an extensive mailing related to privacy policy disclosures and to the increase in checking accounts. The increase in other expenses was due to several factors, including increases in expenses related to debit cards and ATMs and a second provision for the Company's grant program for first-time home buyers. The first provision was made in 1999. Income Taxes Federal income tax expense was $1.6 million for 2001, as compared to $1.3 million for 2000. This increase was primarily the result of the increase in pre-tax income. The Company's effective tax rate was 34% for both 2001 and 2000. A summary of the significant tax components is provided in Note 8 of the Notes to Consolidated Financial Statements included later in this report. Comparison of Operating Results for 2000 to 1999 General Consolidated net income was $2.6 million, or $1.99 per share (diluted), for the year ended December 31, 2000 compared to $1.8 million, or $1.28 per share (diluted), for the year ended December 31, 1999. This 47% increase in net income occurred primarily due to the successful implementation of the growth strategy initiatives implemented during 2000. Net Interest Income Net interest income was $12.9 million for the year ended December 31, 2000, an increase of $1.3 million, or 11.6%, during 2000 as compared to 1999. Net interest income increased primarily due to the increase in interest income exceeding the increase in interest expense. The increase in interest income resulted from increases in both the average balance of and the average rate of interest on interest-earning assets. The increase in interest expense resulted from increases in both the average balance of and the average rate of interest on interest-bearing liabilities. Interest Income Interest income totaled $30.3 million for the year ended December 31, 2000, an increase of $3.4 million or 12.8%, as compared to $26.9 million for 1999. This resulted from an increase in the yield earned on assets from 7.18% during 1999 to 7.63% during 2000, and from a $22.9 million increase in average interest-earning assets from $374.7 million during 1999 to $397.6 million during 2000. Interest on loans was $24.2 million for 2000, an increase of $3.8 million, or 18.7%, as compared to 1999. This was primarily attributable to the effect of an increase of $41.6 million in average outstanding loans, and by an increase in the yield on loans from 7.79% during 1999 to 7.98% during 2000. The increase in interest income on loans and the decrease in interest earned on investment securities discussed below resulted in part from the Company's continued efforts to shift its asset mix to higher yielding loans. MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 16 Interest earned on mortgage-backed securities was $1.2 million for 2000, as compared to $1.1 million for 1999. This represented an increase of 8.6% between the periods and was primarily due to an increase in the yield on mortgage-backed securities to 6.99% during 2000 from 5.90% during 1999, which was partially offset by a decrease of $1.6 million in average mortgage-backed securities. Interest earned on investment securities and other interest-earning assets and dividends on FHLB stock totaled $4.9 million for 2000, as compared to $5.4 million for 1999. This represented a decrease of 8.8% during 2000. This was primarily due to a decrease in the average balance of these assets from $93.8 million in 1999 to $76.6 million in 2000, which was partially offset by an increase in average yield on these assets from 5.72% in 1999 to 6.39% in 2000. Interest Expense Interest expense was $17.4 million for 2000, or $2.1 million (13.7%) greater than in 1999. This was due to an increase in average yield to 4.50% for 2000 from 4.19% for 1999 and an increase of $21.3 million in the average balance of interest-bearing liabilities to $387.3 million for 2000 from $366.0 million for 1999. The higher average yield during 2000 was attributable to increases in the average cost of deposit accounts, which resulted from an aggressive growth strategy which increased the rates of the average balance of certificates of deposit to average total deposits from 60.7% in 1999 to 62.7% in 2000, certificates of deposit renewing at slightly higher rates during most of the year, and from an increase in the use of borrowing as a funding source. During 2000, $1.1 million of the Company's interest expense, compared to $1.0 million during 1999, related to advances from the FHLB and from securities sold under agreements to repurchase. Provision for Losses on Loans Based on management's review of the adequacy of the allowance for losses on loans, a $50,000 provision for losses on loans was recorded during 2000. No provision for losses on loans was deemed necessary during 1999. Charge-offs during 2000 decreased by more than half to $135,000, from $287,000 during 1999. Recoveries during 2000 decreased to $70,000 from $83,000 in 1999. The ratio of net charge-offs to average outstanding loans decreased to 0.02% in 2000 from 0.08% in 1999. Other Income Other income decreased $451,000 for 2000 to $2.5 million, compared to $3.0 million for 1999. The 15.2% decrease in other income was primarily related to a decrease of $304,000 in the net gain on the sale of office-related properties, and to decreases of $19,000 in gain on the sale of real estate held for sale, $11,000 in gain on sale of loans held for sale and $149,000 in other income. These decreases were partially offset by increases of $18,000 in fee income and $65,000 in insurance commissions. The decrease in net gain on the sale of office-related properties was the result of a $316,000 gain during 1999 which did not recur during 2000. The $149,000 decrease in other income was primarily the result of the receipt, during 1999, of rental income of $171,000 on a commercial building in real estate held for sale, which did not recur during 2000 due to the sale of the building in 1999. Additionally, appraisal fees decreased by $26,000 in 2000 compared to 1999. The increase in fee income was attributable to the increase in outstanding balances of transaction accounts through growth. Other Expenses Other expenses were $11.5 million for 2000, as compared to $11.9 million for 1999. This represented a decrease of $428,000 or 3.6% during 2000. The decrease in other expenses during 2000 was reflected in all but three categories of such expense. Federal insurance premiums decreased by $96,000 (56.8%), occupancy decreased by $9,000 (0.8%), furniture and equipment expense decreased by $15,000 (2.0%), advertising expense decreased by $37,000 (9.9%), the amortization of intangibles decreased by $13,500 (3.5%), data processing services decreased by $30,000 (7.7%) and other general and administrative expenses decreased by $350,000 (15.3%). These decreases were partially offset by increases in compensation and benefits of $24,000 (0.4%), the provision for losses MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 17 on foreclosed assets of $95,000 (215.9%) and telephone and postage of $3,000 (0.9%). The decreases in expenses, as well as the modest increases in two of the three categories which increased, was primarily due to ongoing efforts to contain costs. The increase in provisions for losses on foreclosed assets was primarily due to one foreclosed property which had experienced substantial deterioration during the period preceding foreclosure. Income Taxes Federal income tax expense was $1.3 million for 2000, as compared to $862,000 for 1999. This increase was primarily the result of the increase in pre-tax income. The Company's effective tax rate was 34% for the year ended December 31, 2000 and 33% for the year ended December 31, 1999. A summary of the significant tax components is provided in Note 8 of the Notes to Consolidated Financial Statements included later in this report. Financial Condition Total assets increased by $30.4 million or 6.6% to $490.3 million at December 31, 2001, from $459.9 million at December 31, 2000. The increase in total assets during 2001 was primarily attributed to an increase in loans which was partially offset by decreases in investment securities and mortgage-backed securities. Cash and cash equivalents increased by $1.5 million to $26.7 million at December 31, 2001, from $25.2 million at December 31, 2000. The increase was primarily attributed to increased levels of loan repayments and issuer calls on nearly all securities subject to call, which were substantially offset by growth in loans. At December 31, 2001, investment securities available-for-sale totaled $34.8 million, a decrease of $22.4 million or 39.2% from the amount classified as available-for-sale at December 31, 2000. The Company used these funds, in part, to continue shifting its asset mix in favor of higher yielding loans. The decrease was the result of maturities and calls of $40.1 million and sales of $5.0 million of available-for-sale securities, which were partially offset by a positive adjustment of $538,000 in the market value of available-for-sale securities and by purchases totaling $22.1 million of available-for-sale securities, during the year ended December 31, 2001. At December 31, 2001, mortgage-backed securities available-for-sale totaled $11.6 million, a decrease of $4.4 million or 27.5% from the amount classified as available-for-sale at December 31, 2000. The decrease in mortgage-backed securities available-for-sale was the result of principal repayments totaling $4.9 million, which was partially offset by a positive adjustment to market value of $205,000 and by the purchase of $301,000 in mortgage-backed securities available-for-sale. During the year ended December 31, 2001, net loans increased by $54.8 million or 16.2% to $393.8 million from $339.0 million at December 31, 2000. The increase was the result of the origination of $139.8 million of real estate loans, the origination of $57.6 million of consumer and commercial business loans and loan repayments which totaled $141.2 million. There were no loans purchased during 2001. The year 2001 was a period of falling market rates, during which the Company experienced a high volume of loan origination. This was particularly so with mortgage loans and both real estate and non-real estate commercial loans. The volume in mortgage loans resulted from a competitive price structure and a high volume of refinancing of both the Company's mortgage loans and those of other lenders. Loans held for sale totaled $829,000 at December 31, 2001. There were no loans held for sale at December 31, 2000. During 2001, $23.1 million of loans held for sale were originated which were offset by $22.3 million in the sale of such loans. Additionally, $1.8 million of commercial real estate loans were sold. MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 18 The Company participates in government-sponsored, insured and guaranteed loan programs, such as those offered by the Veterans' Administration and the Federal Housing Authority but does not aggressively seek such originations. During 2001, no such loans were either originated or sold. Borrowers under these programs are notified at the time of application that their loan will be sold to, and serviced by, a party other than the Company. Held-to-maturity investment securities and non-marketable equity securities decreased by $483,000 to $1.5 million at December 31, 2001, from $1.9 million at December 31, 2000. This 24.8% decrease was the result of the maturity of $643,000 of held-to-maturity securities and the sale of $500,000 of non-marketable equity securities. These decreases were partially offset by the purchase of $660,000 of held-to-maturity securities. Real estate held for sale decreased by $15,000 (3.1%) to $469,000 at December 31, 2001 from $484,000 at December 31, 2000. The decrease was the result of the disposal of four one-to-four family properties, the disposal of one commercial property and write downs to fair value totaling $70,000. The decreases were partially offset by the transfer of six one-to-four family properties to real estate held for sale during the year ended December 31, 2001, and to additional capital expenditures incurred. Deposits increased by $27.4 million (7.1%) to $415.5 million at December 31, 2001, from $388.1 million at December 31, 2000. The increase resulted from a $19.0 million increase in certificates of deposit, and an $8.5 million increase in passbook savings, checking and money market accounts. Borrowed money increased by $1.0 million (3.4%) to $30.0 million at December 31, 2001, from $29.0 million at December 31, 2000. Borrowed money consisted entirely of advances from the FHLB. During 2001, borrowed money was primarily used for both short-term and long-term cash management requirements and as a method of increasing the leverage on the Company's capital. Stockholders' equity on a per share basis increased by 8.8% from $31.11 at December 31, 2000, to $33.86 at December 31, 2001. Stockholders' equity increased by $1.9 million (4.8%) to $41.2 million at December 31, 2001. The increase in stockholders' equity was attributed to net income of $3.3 million, an increase in the market value adjustment on available-for-sale securities, which, net of provision for income taxes, amounted to $489,000 and proceeds from the exercise of stock options totaling $278,000. These increases were partially offset by the payment of dividends of $583,000 during the year ended December 31, 2001 and the repurchase of 64,200 shares of Company common stock at a total cost of $1.5 million. Asset Quality Asset quality is an important aspect of the economic condition of a financial institution such as the Company. Measurements of asset quality are indicators of both the current strength of a financial institution and of its ability to generate the desired returns from its business activities. Non-performing assets include foreclosed assets, loans that have been placed on non-accrual status, loans 90 days or more past due that continue to accrue interest and restructured troubled debt. During the year ended December 31, 2001, total non-performing assets decreased by $1.3 million, or 36.9%, to $2.2 million from $3.5 million at December 31, 2000. The decrease was due to decreases of $108,000 in non-accruing one-to-four family loans, $808,000 in accruing commercial business loans 90 days or more past due and $900,000 in accruing construction and development loans 90 days or more past due. These decreases were partially offset by increases of $125,000 in non-accruing commercial business loans, $219,000 in accruing consumer loans 90 days or more past due, $33,000 in non-accruing commercial real estate loans and $172,000 in restructured troubled debt. Based on its review of the non-performing loans, management does not anticipate that the Company will incur a material loss with respect to these non-performing assets. However, there can be no assurance that adverse developments, either in the general or local economy, or in the operation of individual businesses, would not result in possible losses. MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 19 Company management performs a quarterly analysis of the adequacy of the allowance for losses on loans. Management classifies problem assets into one of four categories: Substandard, Doubtful, Loss and Special Mention. During the year ended December 31, 2001, total classified assets increased by $2.9 million to $8.8 million from $5.9 million at December 31, 2000. This increase was due to increases of $31,000 in assets classified as Loss and $5.0 million in assets classified as Substandard. These increases were partially offset by a decrease of $2.1 million in assets classified as Special Mention. The increase in assets categorized as Substandard was due to the inclusion of $1.9 million in commercial loans, $1.0 million in subdivision loans and $2.0 million in townhome development loans. Several commercial borrowers experienced cash flow problems, and the loans on both the subdivision and townhome development have experienced slower than anticipated sales. For additional information with respect to asset quality, please refer to the section on Provision for Losses on Loans, which is part of the analysis of the Company's results of operations. Asset/Liability Management The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated, based upon certain assumptions, to mature or reprice within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income. At December 31, 2001, total interest-bearing liabilities maturing or repricing within one year exceeded total interest-earning assets maturing or repricing in the same period by $24.3 million, representing a negative cumulative one-year gap equal to 5.0% of total assets. 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. MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 20 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"). However, ARMs are not currently in great demand, and only about 14% of one-to-four family residential loans originated in 2001 were ARMs. The remaining 86% of the one-to-four family loan originations during 2001 were for fixed rates with maturities ranging from ten years to 30 years. At December 31, 2001, approximately $70.2 million, or 28.5%, of the Company's one-to-four family residential loan portfolio consisted of 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. At December 31, 2001, the Company held $176.4 million of fixed-rate one-to-four family loans, of which $77.7 million had original terms of more than 15 years (i.e., long-term loans). These loans are carried as part of the Company's permanent loan portfolio and are intended to be held until maturity. Through December 31, 1999, the Company's policy was to sell substantially all newly originated 30 year, fixed-rate loans. During 2000, the Company began to retain substantially all newly originated 30 year, fixed-rate loans, as part of its growth strategy. During 2001, market interest rates declined steadily in response to the actions of the FOMC. As interest rates decreased, the Company began selling newly originated, fixed-rate loans. Initially, newly originated loans with maturities greater than 20 years were sold, adjusted later to include newly originated loans with maturities greater than 15 years, until by the fourth quarter virtually all newly-originated, fixed-rate loans were designated for sale. At December 31, 2001, there were $829,000 of fixed-rate loans classified as held for sale. 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 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. Commitments to extend credit and letters of credit are not recorded as an asset by the Company until the commitment is accepted and funded or the letter of credit is exercised. The Company's exposure to market risk is reviewed on a regular basis by the funds management committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. Tools used by management include the standard GAP report and the quarterly Office of Thrift Supervision (the "OTS") report measuring interest rate sensitivity. The OTS report provides the Company the economic value of each type of asset, liability, and off-balance sheet contract under the assumption that the Treasury yield curve shifts instantaneously and parallel up and down by 100 to 300 basis points in 100 basis point increments. The Company has no market risk sensitive instruments held for trading purposes. It appears that the Company's market risk is reasonable at this time. The following condensed GAP report summarizing the Company's interest rate sensitivity sets forth the interest rate MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 21 sensitivity of the Bank's assets and liabilities at December 31, 2001. Except as stated below, the amounts of assets and liabilities shown which reprice or mature during a particular period are determined in accordance with the earlier of the term to repricing or maturity of the asset or liability. The Bank has assumed that its passbook and statement savings accounts, checking accounts and money market accounts, which totaled $162.7 million at December 31, 2001, are withdrawn at the annual percentage rates of 15.0%, 37.4% and 37.6%, respectively. Certificate accounts are assumed to reprice at the date of contractual maturity.
Maturing or Repricing ----------------------------------------------------------- 4 Months 1-3 to One Over 1-3 Over 3-5 Over 5 Months Year Years Years Years Total -------- --------- --------- -------- ------- -------- Amount Amount Amount Amount Amount Amount -------- --------- --------- -------- ------- -------- (Dollars in thousands) Fixed rate one-to-four family (including mortgage- backed securities, commercial real estate and construction loans)...................................... $ 15,397 $ 23,884 $ 46,307 $34,818 $87,260 $207,666 Adjustable rate one-to-four family (including mortgage-backed securities, commercial real estate and construction loans).................................. 39,556 70,114 17,144 8,168 -- 134,982 Commercial business loans................................. 18,368 5,126 5,823 1,363 127 30,807 Consumer loans............................................ 16,785 7,035 9,578 3,196 1,168 37,762 Investment securities and other........................... 16,112 5,173 12,235 16,289 2,533 52,342 -------- --------- --------- -------- ------- -------- Total interest-earning assets........................... 106,218 111,332 91,087 63,834 91,088 463,559 -------- --------- --------- -------- ------- -------- Savings deposits.......................................... 2,539 7,616 15,968 11,537 30,037 67,697 Checking and money market................................. 8,905 26,715 36,183 14,138 9,067 95,008 Certificates.............................................. 60,267 119,801 58,893 14,447 -- 253,408 FHLB advances............................................. 9,000 7,000 7,000 7,000 -- 30,000 Other borrowings.......................................... -- -- -- -- -- -- -------- --------- --------- -------- ------- -------- Total interest-bearing liabilities...................... 80,711 161,132 118,044 47,122 39,104 446,113 -------- --------- --------- -------- ------- -------- Interest-earning assets less interest- bearing liabilities $ 25,507 ($ 49,800) ($ 26,957) $16,712 $51,984 $ 17,446 ======== ========= ========= ======== ======= ======== Cumulative interest-rate sensitivity gap.................. $ 25,507 ($ 24,293) ($ 51,250) ($34,538) $17,446 ======== ========= ========= ======== ======= Cumulative interest-rate gap as a percentage of assets.... 5.20% -4.95% -10.45% -7.04% 3.56% ======== ========= ========= ======== =======
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARMs, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase. Liquidity and Capital Resources The Company's primary sources of funds are deposits, proceeds from principal and interest payments on loans and on investment and mortgage-backed securities. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows and mortgage loan prepayments are greatly influenced by general interest rates, economic conditions and competition. In a period of declining interest rates, mortgage loan prepayments generally increase. As a result, the proceeds from mortgage loan prepayments are invested in lower yielding loans or other investments which have the effect of reducing interest income. In a period of rising interest rates, mortgage loan prepayments generally decrease and the proceeds from such prepayments are invested in higher yielding loans or investments which would have the effect of increasing interest income. The Company's liquidity, represented by cash and cash equivalents, is a result of its operating, investing and financing activities. These activities are summarized as follows for the years ended December 31, 2001, 2000 and 1999, respectively: MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 22
Years Ended December 31, ---------------------------- 2001 2000 1999 -------- -------- -------- (Dollars in thousands) Net income........................................................ $ 3,261 $ 2,584 $ 1,759 Adjustments to reconcile net income to net cash provided (used) by operating activities............................................ (904) 1,437 3,724 -------- -------- -------- Net cash provided by operating activities......................... 2,357 4,021 5,483 Net cash used by investing activities............................. (27,596) (59,140) (14,903) Net cash provided (used) by financing activities.................. 26,755 50,172 (7,477) -------- -------- -------- Net increase (decrease) in cash and cash equivalents.............. 1,516 (4,947) (16,897) Cash and cash equivalents at beginning of period.................. 25,147 30,094 46,991 -------- -------- -------- Cash and cash equivalents at end of period........................ $ 26,663 $ 25,147 $ 30,094 ======== ======== ========
The primary investing activities of the Company are the origination of loans, the purchase of investment and mortgage-backed securities, and, to a lesser extent, the purchase of loans and loan participations. During the years ended December 31, 2001, 2000 and 1999, respectively, the Company's loan originations totaled $197.4 million, $175.5 million and $133.5 million, respectively. Purchases of loans totaled $1.4 million for 1999. There were no loans purchased in either 2001 or 2000. Purchases of mortgage-backed securities totaled $301,000, $2.0 million and $7.0 million for 2001, 2000 and 1999, respectively. Other investment activities included the purchase of investment securities which totaled $22.8 million, $8.7 million and $17.0 million for 2001, 2000 and 1999, respectively. During 2001, 2000 and 1999, these activities were funded primarily by maturities of investment securities totaling $40.7 million, $17.1 million and $24.0 million, respectively, by principal repayments on loans and mortgage-backed securities and proceeds from the sale of mortgaged-backed securities totaling $146.2 million, $110.0 million and $107.7 million, respectively, and, by sales of investment securities totaling $5.4 million in 2001 and $2.0 million in 1999. There were no sales of investment securities during 2000. The major sources of cash from financing activities during 2001 were a net increase of $27.4 million in deposit accounts and a $1.0 million net increase in borrowed money. Additionally, financing activities for 2001 included the purchase of common stock totaling $1.5 million, the payment of dividends to stockholders of $583,000 and proceeds from the exercise of stock options of $278,000. The major sources of cash from financing activities during 2000 were a net increase of $33.0 million in deposit accounts and a net increase of $17.8 million in borrowed money. Additionally, financing activities for 2000 included the purchase of common stock totaling $1.0 million, the payment of dividends to stockholders of $607,000 and proceeds from the exercise of stock options of $726,000. The major source of cash from financing activities during 1999 was a net increase of $8.1 million in deposit accounts. Additionally, financing activities for 1999 included the purchase of common stock totaling $3.5 million, the payment of dividends to stockholders totaling $634,000 and the net repayment of borrowings totaling $11.7 million. Net cash used in investing activities was offset by cash provided by operating and financing activities for both 2001 and 2000. Net cash used in financing activities and investing activities was offset by the net cash provided by operating activities for 1999. 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 OTS regulations currently require each savings association to maintain sufficient liquidity to ensure its safe and sound operation. Liquidity has traditionally been measured as a percentage of a base consisting of net withdrawable accounts plus borrowed money repayable in 12 months or less. The Bank's liquidity ratio was 7.4% at December 31, 2001. The Company's most liquid assets are cash, cash in banks and highly liquid, short-term investments. The levels of these assets are dependent on the Company's operating, financing, lending and investing activities during any given period. At December 31, 2001, 2000 and 1999, these liquid assets totaled $26.7 million, $25.2 million, and $30.1 million, respectively. The level of liquid assets at both December 31, 2001 and December 31, 2000 was somewhat inflated by significant year-end, MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 23 holiday weekend deposits at the end of each year. The higher level of liquid assets at December 31, 1999 was due, in part, to larger than normal levels of cash on hand at the Company's offices during the weeks preceding the Year 2000. Additionally, securities available-for-sale may be utilized to meet liquidity needs. Liquidity management for the Company is both a daily and long-term function of the Company's management strategy. Excess funds are generally invested in short-term investments such as federal funds. In the event that the Company should require funds beyond its ability to generate them internally, additional sources of funds are available, including FHLB advances. At December 31, 2001, the Company had outstanding borrowings totaling $30.0 million, all of which were advances from the FHLB. At December 31, 2001, the Company had outstanding commitments to originate mortgage loans of $21.5 million, of which 84.7% were at fixed interest rates. These commitments provided that the loans would be secured by properties located, for the most part, in the Company's primary market areas. The Company anticipates that it will have sufficient funds available to meet its current loan commitments. Certificates of deposit which were scheduled to mature in one year or less from December 31, 2001, totaled $178.3 million. Based upon the historically stable nature of the Company's deposit base, management believes that a significant portion of such deposits will remain with the Company. The Company also had unused lines of credit provided to customers of $23.8 million and $26.4 million at December 31, 2001, and 2000, respectively. At December 31, 2001, the Bank exceeded all of its capital requirements on a fully phased-in basis. See Note 9 of the Notes to Consolidated Financial Statements and the discussion of the Company's financial condition above. Dividends A federal thrift institution is precluded under current regulations of the OTS from declaring or paying a dividend or repurchasing any of its common stock if either of such actions would reduce the institution's core, tangible or risk-based capital levels below its liquidation account balance or any of the three current minimum regulatory capital requirements. Under presently effective OTS regulations, the maximum amount of dividends that a thrift institution will be permitted to pay in any calendar year without prior OTS approval is limited to the institution's year-to-date net income plus its retained net income for the preceding two years. The Bank declared and paid dividends totaling $1.7 million, $1.3 million and $1.0 million to the Company, its sole stockholder, during 2001, 2000 and 1999, respectively. Cash dividends in the total amount of $.48 per share were paid during each year from 1999 through 2001. The Board of Directors of the Company has declared a quarterly cash dividend of $.12 per share payable on February 28, 2002, to stockholders of record as of February 8, 2002. Future dividends will depend primarily upon the Company's earnings, financial condition and need for funds, as well as restrictions imposed by regulatory authorities regarding dividend payments and net worth requirements. Mission and Goals The Company's mission is to provide, safely and profitably, financial services to families and businesses in the communities served by its offices. In seeking to accomplish this mission, management has adopted a business strategy designed to accomplish a number of goals, including: . increase return on equity and increase stockholders' value; . maintain the Bank's tangible capital at a level that exceeds regulatory requirements; . maintain a high level of asset quality; . manage the Company's exposure to changes in market interest rates; . increase the Company's interest rate spread; and MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 24 . to the extent available, take advantage of loan and deposit growth opportunities in the Company's principal market areas. The Company has attempted to achieve these goals by focusing on a number of areas, including: . management of the Company's capital to enhance stockholders' value; . the origination, to the extent requested in its lending areas, of ARMs on residential properties for retention in its portfolio; . actively monitoring local and national economic trends to determine if fixed-rate loans originated will be retained in portfolio or sold, with servicing retained. . the origination of commercial real estate, consumer, commercial business, and, to a lesser extent, multi-family and construction loans; . providing high quality service to enhance customer loyalty; and . offering a variety of financial products and services to serve as comprehensively as practicable the financial needs of families and community businesses in its market areas. 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 11, 2001 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. MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 25 . 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. . 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. . Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected. . 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. MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- 26 INDEPENDENT AUDITOR'S REPORT -------------------------------------------------------------------------------- To the Stockholders and Board of Directors Kankakee Bancorp, Inc. Kankakee, Illinois We have audited the accompanying consolidated statements of financial condition of Kankakee Bancorp, Inc. and Subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kankakee Bancorp, Inc. and Subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ McGladrey & Pullen, LLP Champaign, Illinois February 1, 2002 INDEPENDENT AUDITOR'S REPORT -------------------------------------------------------------------------------- 27 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ----------------------------------------------------------- KANKAKEE BANCORP, INC. AND SUBSIDIARY
December 31, ------------------------- 2001 2000 ------------ ------------ Assets Cash and due from banks.......................................................... $ 15,432,128 $ 18,707,762 Federal funds sold............................................................... 7,112,641 1,329,776 Money market funds............................................................... 4,117,945 5,109,735 ------------ ------------ Cash and cash equivalents...................................................... 26,662,714 25,147,273 ------------ ------------ Certificates of deposit.......................................................... 50,000 50,000 ------------ ------------ Securities: Investment securities: Available-for-sale, at fair value............................................ 34,755,192 57,169,644 Held-to-maturity, at cost (fair value: 2001 $1,483,946; 2000 $1,434,708)..... 1,464,804 1,447,846 ------------ ------------ Total investment securities.................................................. 36,219,996 58,617,490 ------------ ------------ Mortgage-backed securities: Available-for-sale, at fair value............................................ 11,635,592 16,050,792 Held-to-maturity, at cost (fair value: 2001 $38,003; 2000 $67,727)........... 37,627 66,867 ------------ ------------ Total mortgage-backed securities............................................. 11,673,219 16,117,659 ------------ ------------ Nonmarketable equity securities, at cost......................................... 1,000 501,000 Loans, net of allowance for losses on loans of $2,582,234 in 2001 and $2,156,420 in 2000........................................................................ 393,789,828 338,956,136 Loans held for sale.............................................................. 828,610 -- Real estate held for sale........................................................ 469,165 484,320 Federal Home Loan Bank stock, at cost............................................ 2,443,300 2,112,000 Office properties and equipment.................................................. 8,397,173 8,594,823 Accrued interest receivable...................................................... 2,823,090 3,282,214 Prepaid expenses and other assets................................................ 2,490,672 1,225,070 Intangible assets................................................................ 4,431,101 4,805,849 ------------ ------------ Total assets........................................................................ $490,279,868 $459,893,834 ============ ============
(Continued) 28
December 31, -------------------------- 2001 2000 ------------ ------------ Liabilities and Stockholders' Equity Liabilities Deposits Noninterest bearing............................................................ $ 25,854,152 $ 25,357,749 Interest bearing............................................................... 389,612,684 362,692,592 Short term borrowings............................................................. -- 14,000,000 Other borrowings.................................................................. 30,000,000 15,000,000 Advance payments by borrowers for taxes and insurance............................. 1,905,766 1,813,412 Other liabilities................................................................. 1,716,366 1,740,938 ------------ ------------ Total liabilities..................................................................... 449,088,968 420,604,691 ------------ ------------ Stockholders' Equity Preferred stock, $.01 par value; authorized, 500,000 shares; none outstanding -- -- Common stock, $.01 par value; authorized 3,500,000 shares; shares issued 1,750,000....................................................................... 17,500 17,500 Additional paid-in capital........................................................ 15,226,853 15,328,249 Retained income, partially restricted............................................. 36,964,331 34,285,960 Treasury stock (533,642 and 486,892 shares in 2001 and 2000, respectively), at cost......................................................................... (11,622,862) (10,458,535) Accumulated other comprehensive income............................................ 605,078 115,969 ------------ ------------ Total stockholders' equity............................................................ 41,190,900 39,289,143 ------------ ------------ Total liabilities and stockholders' equity............................................... $490,279,868 $459,893,834 ============ ============
See Accompanying Notes to Consolidated Financial Statements. 29 CONSOLIDATED STATEMENTS OF INCOME --------------------------------------------- KANKAKEE BANCORP, INC. AND SUBSIDIARY
Years Ended December 31, ----------------------------------- 2001 2000 1999 ----------- ----------- ----------- Interest income: Loans........................................................... $28,403,156 $24,220,459 $20,406,989 Investment securities and other................................. 3,385,323 4,897,215 5,368,712 Mortgage-backed securities...................................... 970,242 1,221,687 1,124,621 ----------- ----------- ----------- Total interest income....................................... 32,758,721 30,339,361 26,900,322 ----------- ----------- ----------- Interest expense: Deposits........................................................ 17,385,414 16,318,219 14,326,288 Borrowings...................................................... 1,343,239 1,118,979 1,016,271 ----------- ----------- ----------- Total interest expense...................................... 18,728,653 17,437,198 15,342,559 ----------- ----------- ----------- Net interest income......................................... 14,030,068 12,902,163 11,557,763 Provision for losses on loans...................................... 502,500 50,000 -- ----------- ----------- ----------- Net interest income after provision for losses on loans..... 13,527,568 12,852,163 11,557,763 ----------- ----------- ----------- Other income: Net gain on sales of securities................................. 401,120 -- 1,094 Net gain on sales of real estate held for sale.................. 27,484 29,968 37,187 Net gain on sales of loans held for sale........................ 329,097 328 10,880 Net gain on sale of property held for expansion................. 800 11,552 315,596 Fee income...................................................... 2,352,991 1,942,223 1,924,663 Insurance commissions........................................... 103,516 187,928 122,880 Other........................................................... 389,243 341,404 551,884 ----------- ----------- ----------- Total other income.......................................... 3,604,251 2,513,403 2,964,184 ----------- ----------- ----------- Other expenses: Compensation and benefits....................................... 6,400,114 6,093,309 6,069,433 Occupancy....................................................... 1,241,435 1,097,369 1,106,006 Furniture and equipment......................................... 646,637 695,048 709,565 Federal deposit insurance premiums.............................. 73,187 72,792 168,388 Advertising..................................................... 386,847 340,257 377,605 Provision for losses on real estate held for sale............... 90,643 138,805 43,936 Data processing services........................................ 404,104 361,006 391,155 Telephone and postage........................................... 431,081 361,987 358,887 Amortization of intangible assets............................... 374,748 377,538 391,043 Other general and administrative................................ 2,181,691 1,933,943 2,284,297 ----------- ----------- ----------- Total other expenses........................................ 12,230,487 11,472,054 11,900,315 ----------- ----------- ----------- Income before income taxes.................................. 4,901,332 3,893,512 2,621,632 Income taxes....................................................... 1,640,350 1,309,950 862,150 ----------- ----------- ----------- Net income.................................................. $ 3,260,982 $ 2,583,562 $ 1,759,482 =========== =========== =========== Basic Earnings Per Share........................................... $ 2.68 $ 2.05 $ $1.35 =========== =========== =========== Diluted Earnings Per Share......................................... $ 2.62 $ 1.99 $ $1.28 =========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements. 30 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 2001, 2000 and 1999 -------------------------------------------------------------- KANKAKEE BANCORP, INC. AND SUBSIDIARY
Accumulated Employee Additional Other Stock Common Paid-In Retained Treasury Comprehensive Ownership Stock Capital Income Stock Income (Loss) Plan Loan ------- ----------- ----------- ------------ ------------- --------- Balance, December 31, 1998................. $17,500 $16,070,157 $31,183,528 $ (7,621,599) $ 329,445 $(302,422) Comprehensive income: Net income............................... -- -- 1,759,482 -- -- -- Unrealized loss on securities available- for-sale arising during the period, net of tax of $(705,677).................... -- -- -- -- (1,425,645) -- Less: Reclassifications adjustment for gains included in net income, net of tax of $372............................. -- -- -- -- 722 -- Comprehensive income.................... Purchase of 136,000 shares of treasury stock..................................... -- -- -- (3,472,591) -- -- Exercise of stock options.................. -- -- -- 118,747 -- -- Adjustment to paid-in capital due to exercise of stock options................. -- (50,767) -- 123,544 -- -- Dividends paid on common stock--$.48 per share..................................... -- -- (633,585) -- -- -- Principal payment on ESOP loan............. -- -- -- -- -- 151,211 ------- ----------- ----------- ------------ ----------- --------- Balance, December 31, 1999................. 17,500 16,019,390 32,309,425 (10,851,899) (1,095,478) (151,211) Comprehensive income: Net income............................... -- -- 2,583,562 -- -- -- Unrealized gain on securities available- for-sale arising during the period, net of tax of $624,070...................... -- -- -- -- 1,211,447 -- Comprehensive income.................... Purchase of 46,300 shares of treasury stock -- -- -- (1,023,572) -- -- Exercise of stock options.................. -- -- -- 654,653 -- -- Adjustment to paid-in capital due to exercise of stock options................. -- (691,141) -- 762,283 -- -- Dividends paid on common stock--$.48 per share..................................... -- -- (607,027) -- -- -- Principal payment on ESOP loan............. -- -- -- -- -- 151,211 ------- ----------- ----------- ------------ ----------- --------- Balance, December 31, 2000................. 17,500 15,328,249 34,285,960 (10,458,535) 115,969 -- Comprehensive income: Net income............................... -- -- 3,260,982 -- -- -- Unrealized gain on securities available- for-sale arising during the period, net of tax of $401,942...................... -- -- -- -- 780,248 -- Less: Reclassifications adjustment for gains included in net income, net of tax of $(149,981)....................... -- -- -- -- (291,139) -- Comprehensive income.................... Purchase of 64,200 shares of treasury stock -- -- -- (1,543,360) -- -- Exercise of stock options.................. -- -- -- 172,320 -- -- Adjustment to paid-in capital due to exercise of stock options................. -- (101,396) -- 206,713 -- -- Dividends paid on common stock--$.48 per share..................................... -- -- (582,611) -- -- -- ------- ----------- ----------- ------------ ----------- --------- Balance, December 31, 2001................. $17,500 $15,226,853 $36,964,331 $(11,622,862) $ 605,078 $ -- ======= =========== =========== ============ =========== =========
Total Stockholders' Equity ------------- Balance, December 31, 1998................. $39,676,609 Comprehensive income: Net income............................... 1,759,482 Unrealized loss on securities available- for-sale arising during the period, net of tax of $(705,677).................... (1,425,645) Less: Reclassifications adjustment for gains included in net income, net of tax of $372............................. 722 ----------- (1,424,923) ----------- Comprehensive income.................... 334,559 Purchase of 136,000 shares of treasury stock..................................... (3,472,591) Exercise of stock options.................. 118,747 Adjustment to paid-in capital due to exercise of stock options................. 72,777 Dividends paid on common stock--$.48 per share..................................... (633,585) Principal payment on ESOP loan............. 151,211 ----------- Balance, December 31, 1999................. 36,247,727 Comprehensive income: Net income............................... 2,583,562 Unrealized gain on securities available- for-sale arising during the period, net of tax of $624,070...................... 1,211,447 ----------- 1,211,447 ----------- Comprehensive income.................... 3,795,009 Purchase of 46,300 shares of treasury stock (1,023,572) Exercise of stock options.................. 654,653 Adjustment to paid-in capital due to exercise of stock options................. 71,142 Dividends paid on common stock--$.48 per share..................................... (607,027) Principal payment on ESOP loan............. 151,211 ----------- Balance, December 31, 2000................. 39,289,143 Comprehensive income: Net income............................... 3,260,982 Unrealized gain on securities available- for-sale arising during the period, net of tax of $401,942...................... 780,248 Less: Reclassifications adjustment for gains included in net income, net of tax of $(149,981)....................... (291,139) ----------- 489,109 ----------- Comprehensive income.................... 3,750,091 Purchase of 64,200 shares of treasury stock (1,543,360) Exercise of stock options.................. 172,320 Adjustment to paid-in capital due to exercise of stock options................. 105,317 Dividends paid on common stock--$.48 per share..................................... (582,611) ----------- Balance, December 31, 2001................. $41,190,900 ===========
See Accompanying Notes to Consolidated Financial Statements. 31 CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------- KANKAKEE BANCORP, INC. AND SUBSIDIARY
Years Ended December 31, ------------------------------------------- 2001 2000 1999 ------------- ------------- ------------- Cash Flows from Operating Activities Net income.................................................... $ 3,260,982 $ 2,583,562 $ 1,759,482 Adjustments to reconcile net income to net cash from operating activities: Provision for losses on loans............................... 502,500 50,000 -- Provision for losses on real estate held for sale........... 90,643 138,805 43,936 Depreciation and amortization............................... 1,276,306 1,299,133 1,287,009 Amortization of investment premiums and discounts, net...... (17,790) (832) 250,846 Accretion of loan fees and discounts, net................... (37,999) 6,722 41,295 Deferred income tax provision (benefit)..................... 23,858 (41,838) 100,107 Origination of loans held for sale.......................... (24,884,672) (327,882) (9,091,292) Proceeds from sales of loans................................ 24,385,159 328,210 11,013,138 (Increase) decrease in interest receivable.................. 459,124 (392,716) (116,626) Increase (decrease) in interest payable on deposits......... (99,747) 60,641 71,234 Net gain on sales of loans.................................. (329,097) (328) (10,880) Net gain on sales of securities............................. (401,120) -- (1,094) Net gain on sales of real estate held for sale.............. (27,484) (29,968) (37,187) Net gain on sale of property held for expansion............. (800) (11,552) (315,596) Federal Home Loan Bank stock dividend....................... (154,000) (100,600) -- Other, net.................................................. (1,689,605) 459,383 488,978 ------------- ------------- ------------- Net cash from operating activities............................. 2,356,258 4,020,740 5,483,350 ------------- ------------- ------------- Cash Flow from Investing Activities Investment securities: Available-for-sale: Purchases................................................. (22,113,099) (7,499,291) (16,972,198) Proceeds from sales....................................... 5,437,350 -- 2,001,094 Proceeds from calls and maturities........................ 40,070,000 17,000,000 24,000,000 Held-to-maturity: Purchases................................................. (660,404) (1,200,000) -- Proceeds from maturities.................................. 643,166 56,976 33,797 Mortgage-backed securities: Available-for-sale: Purchases................................................. (300,890) (1,962,724) (6,991,551) Proceeds from maturities and paydowns..................... 4,936,631 3,702,154 7,453,485 Held-to-maturity: Proceeds from maturities and paydowns..................... 29,241 41,857 59,017 Proceeds from sale of non-marketable equity securities........ 460,000 -- -- Proceeds from sales of real estate............................ 361,140 212,951 3,409,153 Deferred loan fees and costs, net............................. 403,633 90,445 (79,600) Loans originated.............................................. (197,403,420) (175,146,655) (124,417,009) Loans purchased............................................... -- -- (1,366,276) Principal collected on loans.................................. 141,244,204 106,274,103 100,159,376 Purchases of office properties and equipment, net............. (703,108) (709,549) (1,845,158) Payments for improvements on real estate...................... -- -- (347,623) ------------- ------------- ------------- Net cash from investing activities............................. (27,595,556) (59,139,733) (14,903,493) ------------- ------------- -------------
32 CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------- KANKAKEE BANCORP, INC. AND SUBSIDIARY
Years Ended December 31, ---------------------------------------- 2001 2000 1999 ------------ ------------ ------------ Cash Flows from Financing Activities Net increase in non-certificate of deposit accounts.............. 19,012,040 6,165,886 448,994 Net increase in certificate of deposit accounts.................. 8,504,202 26,846,363 7,654,377 Increase in advance payments by borrowers for taxes and insurance 86,831 265,238 34,369 Proceeds from short-term borrowings.............................. 15,000,000 41,000,000 3,000,000 Repayments of short-term borrowings.............................. (29,000,000) (27,000,000) (3,000,000) Proceeds from other borrowings................................... 25,000,000 10,000,000 -- Repayments of other borrowings................................... (10,000,000) (6,200,000) (11,700,000) Proceeds from exercise of stock options.......................... 277,637 725,795 191,524 Dividends paid................................................... (582,611) (607,027) (633,585) Purchase of treasury stock....................................... (1,543,360) (1,023,572) (3,472,591) ------------ ------------ ------------ Net cash from financing activities................................ 26,754,739 50,172,683 (7,476,912) ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents.................. 1,515,441 (4,946,310) (16,897,055) Cash and cash equivalents: Beginning of year................................................ 25,147,273 30,093,583 46,990,638 ------------ ------------ ------------ End of year...................................................... $ 26,662,714 $ 25,147,273 $ 30,093,583 ============ ============ ============ Supplemental Disclosures of Cash Flow Information Cash paid during the year for: Interest on deposits........................................... $ 17,485,200 $ 16,257,600 $ 14,255,000 ============ ============ ============ Interest on borrowed funds..................................... $ 1,360,600 $ 1,037,800 $ 1,068,200 ============ ============ ============ Income taxes................................................... $ 1,744,718 $ 776,824 $ 632,072 ============ ============ ============ Supplemental Disclosures of Noncash Investing Activities: Real estate acquired through foreclosure......................... $ 385,674 $ 129,308 $ 534,936 ============ ============ ============ Reduction of Employee Stock Ownership Plan loan.................. $ -- $ 151,211 $ 151,211 ============ ============ ============
See Accompanying Notes to Consolidated Financial Statements. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------ KANKAKEE BANCORP, INC. AND SUBSIDIARY Note 1. Significant Accounting Policies Through Kankakee Federal Savings Bank (the "Bank"), Kankakee Bancorp, Inc. (the "Company") provides a full range of banking services to individual and corporate customers through its 15 locations throughout central Illinois. The Bank is subject to competition from other financial institutions and nonfinancial institutions providing financial products. Additionally, the Company and the Bank are subject to the regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies. The significant accounting and reporting policies of the Company and its subsidiary follow: Basis of Consolidation and Financial Statement Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank and the Bank's wholly-owned subsidiary, KFS Service Corporation. Significant intercompany accounts and transactions have been eliminated in consolidation. Based on the Company's approach to decision making, it has decided that its business is comprised of a single business segment. The consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America and conform to predominate practice within the banking industry. In preparing the consolidated financial statements, Company management is required to make estimates and assumptions which significantly affect the amounts reported in the consolidated financial statements. Significant estimates which are particularly susceptible to change in a short period of time include the determination of the market value of investment and mortgage backed acquired in connection with foreclosures or in satisfaction of amounts due from borrowers on loans. Actual results could differ from those estimates. Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. Securities Securities classified as held-to-maturity are those securities the Company has both the positive intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the interest method over their contractual lives. Securities classified as available-for-sale are those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available-for-sale are carried at fair value. The difference between fair value and cost, adjusted for amortization of premium and accretion of discounts, results in an unrealized gain or loss. Unrealized gains or losses are reported as accumulated other comprehensive income (loss), net of the related deferred tax effect. Gains or losses on the sale of securities are determined on the basis of the specific security sold and are included in earnings. Premiums and discounts are recognized in interest income using the interest method over their contractual lives. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 34 Nonmarketable Equity Securities Nonmarketable equity securities are carried at cost, as fair values are not readily determinable. Loans Loans originated or purchased are identified as either held for sale or portfolio at origination or purchase. Loans held for portfolio are originated or purchased with the intent to hold them to maturity for the purpose of earning interest income. Since the Bank has the ability to hold such loans as intended, they are recorded at cost. Loans held for sale are recorded at the lower of aggregate cost or market until they are sold. Any transfers between portfolios, which are rare, are recorded at the lower of cost or market. Interest is credited to income as earned using the simple interest method applied to the daily balances of the principal outstanding. A loan is considered to be impaired when, based on current information and events, it is probable the Bank will not be able to collect all amounts due. The portion of the allowance for losses on loans applicable to impaired loans has been computed based on the present value of the estimated future cash flows of interest and principal discounted at the loan's effective interest rate or on the fair value of the collateral for collateral dependent loans. The entire change in present value of expected cash flows of impaired loans or of collateral value is reported as a provision for losses on loans in the same manner in which impairment initially was recognized or as a reduction in the amount of a provision for losses on loans that otherwise would be reported. The accrual of interest income on loans is discontinued when, in the opinion of management, there is reasonable doubt as to the borrower's ability to meet payments of interest or principal when they become due. Interest income on these loans is recognized to the extent interest payments are received and the principal is considered fully collectible. Loan origination fees and certain direct origination costs are being amortized as an adjustment of the yield over the contractual life of the related loan, adjusted for prepayments, using the interest method. Allowance for Losses on Loans The allowance for losses on loans ("allowance") is established as losses are estimated to have occurred through a provision for losses on loans charged to earnings. Loan losses are charged against the allowance when management believes that the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated values of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, various regulatory agencies periodically review the allowance. These agencies may require the Bank to make additions to the allowance based on their judgments of collectibility based on information available to them at the time of their examination. Real Estate Held for Sale Real estate acquired through foreclosure or deed in lieu of foreclosure represents specific assets to which the Company has acquired legal title in satisfaction of indebtedness. Such real estate is recorded at the property's fair value at the date of foreclosure (cost). Initial valuation adjustments, if NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 35 any, are charged against the allowance for losses on loans. Property is evaluated regularly to ensure the recorded amount is supported by its current fair value. Subsequent declines in estimated fair value are charged to expense when incurred. Revenues and expenses related to holding and operating these properties are included in operations. Office Properties and Equipment Office properties and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. Intangible Assets The excess of cost over the fair value of assets acquired for transactions accounted for as purchases is recorded as an asset by the Company. This amount is amortized into other expense on a straight-line basis using periods of eight to twenty years. On a periodic basis, the Company reviews the intangible assets for events or circumstances that may indicate a change in recoverability of the underlying basis. Deferred Income Taxes Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are also recognized for operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to an amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Earnings Per Share Basic earnings per share is computed by dividing net income for the year by the average number of shares outstanding of 1,215,084, 1,256,713 and 1,312,235 for 2001, 2000 and 1999, respectively. Diluted earnings per share are determined by dividing net income for the year by the average number of shares of common stock and dilutive potential common shares outstanding. Dilutive potential common shares assume exercise of stock options and use of proceeds to purchase treasury stock at the average market price for the period. The average shares outstanding for computing diluted earnings per share were 1,239,964, 1,296,231 and 1,383,613 for 2001, 2000 and 1999, respectively. Cash and Cash Equivalents For reporting cash flows, cash and cash equivalents represent highly liquid investments with maturities of 90 days or less at the time of purchase and includes cash on hand, due from bank accounts (including cash items in process of clearing), money market funds and federal funds sold. Trust Assets Assets of the trust department, other than trust cash on deposit at the Bank, are not included in these financial statements because they are not assets of the Bank. Emerging Accounting Standards Business Combinations and Goodwill and Other Intangible Assets In June 2001, the Financial Accounting Standards Board issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires that all business combinations consummated after June 30, 2001 be accounted for by the purchase method unless the combination was initiated on or prior to that date and it meets the conditions to be accounted for by the pooling-of-interests method in accordance with APB Opinion No. 16, Business Combinations. Statement No. 142 is required to be applied in years beginning after December 15, 2001. Under NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 36 Statement No. 142, goodwill and intangible assets that management concludes has indefinite useful lives will no longer be amortized but will be subject to impairment tests performed at least annually. Also, upon initial application, the Company is required to perform a transitional impairment test to all previously recognized goodwill and to assign all recognized assets and liabilities. Other intangible assets will continue to be amortized over their useful lives as determined at the date of initial application. The Company will apply Statement No. 142 beginning in 2002. Application of the nonamortization provisions of Statement No. 142 is expected to result in an increase in net income of approximately $124,000 ($.10 per share) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets, but has not yet determined what effect those tests will have on the earnings and financial position of the Company. Accounting for Asset Retirement In June 2001, Statement on Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, was issued to address financial reporting and obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities and to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal operations of a long-lived asset, except for certain obligations of lessees. Statement No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not expect the adoption of Statement No. 143 to have a material impact on the consolidated financial statements. Accounting for the Impairment or Disposal of Long-Lived Assets In August 2001, Statement on Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, was issued to supersede Statement No 121, Accounting for the Impairment and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Statement No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The Company does not expect the adoption of Statement No. 144 to have a material impact on the consolidated financial statements. Note 2. Securities Amortized costs and fair values of securities are summarized as follows:
Available-for-sale --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ----------- ---------- ---------- ----------- December 31, 2001..................... U. S. government and agency securities $33,572,272 $ 813,694 $ 63,825 $34,322,141 Mutual fund shares.................... 457,275 -- 24,224 433,051 ----------- ---------- -------- ----------- Total investment securities........ 34,029,547 813,694 88,049 34,755,192 Mortgage-backed securities............ 11,444,344 202,437 11,189 11,635,592 ----------- ---------- -------- ----------- Total.............................. $45,473,891 $1,016,131 $ 99,238 $46,390,784 =========== ========== ======== =========== December 31, 2000 U. S. government and agency securities $56,547,040 $ 386,348 $174,340 $56,759,048 Mutual fund shares.................... 432,894 -- 22,298 410,596 ----------- ---------- -------- ----------- Total investment securities........ 56,979,934 386,348 196,638 57,169,644 Mortgage-backed securities............ 16,064,679 90,074 103,961 16,050,792 ----------- ---------- -------- ----------- Total.............................. $73,044,613 $ 476,422 $300,599 $73,220,436 =========== ========== ======== ===========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 37
Held-to-maturity ------------------------------------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---------- ---------- ---------- ---------- December 31, 2001 Municipal bonds........... $1,464,804 $22,141 $ 2,999 $1,483,946 Mortgage-backed securities 37,627 376 -- 38,003 ---------- ------- ------- ---------- Total.................. $1,502,431 $22,517 $ 2,999 $1,521,949 ========== ======= ======= ========== December 31, 2000 Municipal bonds........... $1,447,846 $ 39 $13,177 $1,434,708 Mortgage-backed securities 66,867 860 -- 67,727 ---------- ------- ------- ---------- Total.................. $1,514,713 $ 899 $13,177 $1,502,435 ========== ======= ======= ==========
The amortized cost and fair value of securities classified as held-to-maturity and available-for-sale at December 31, 2001, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties, and certain securities require principal repayments prior to maturity. Therefore, these securities and mutual fund shares are not included in the maturity categories in the following maturity summary.
Held-to-Maturity Available-for-Sale --------------------- ----------------------- Amortized Fair Amortized Fair Cost Value Cost Value ---------- ---------- ----------- ----------- Due within 1 year............... $ 560,000 $ 567,202 $ 4,493,781 $ 4,650,320 Due after 1 year through 5 years 815,350 827,738 29,078,491 29,671,821 Due after 5 through 10 years.... 31,269 30,821 -- -- Due after 10 years.............. 58,185 58,185 -- -- Mortgage-backed securities...... 37,627 38,003 11,444,344 11,635,592 Mutual fund shares.............. -- -- 457,194 433,051 ---------- ---------- ----------- ----------- Total........................ $1,502,431 $1,521,949 $45,473,810 $46,390,784 ========== ========== =========== ===========
The Bank, as a member of the Federal Home Loan Bank of Chicago (the "FHLB"), is required to maintain an investment in capital stock of the FHLB in an amount equal to 1% of its outstanding home loans. No ready market exists for the FHLB stock, and it has no quoted market value. For disclosure purposes, such stock is assumed to have a market value which is equal to cost. U. S. government and agency securities with a carrying value of approximately $30,508,000 and $23,693,000 at December 31, 2001 and 2000, respectively, were pledged in connection with certain deposit accounts and for other purposes as required or permitted by law. Realized gains and losses were as follows:
Year Ended December 31, ----------------------- 2001 2000 1999 -------- ----- ------ Realized gains. $441,120 $ -- $1,094 Realized losses (40,000) -- -- -------- ----- ------ Net gain.... $401,120 $ -- $1,094 ======== ===== ======
The tax expense applicable to these net realized gains and losses amounted to $136,381, $0, and $372, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 38 Note 3. Loans Loans consisted of the following:
December 31, ------------------------- 2001 2000 ------------ ------------ Real estate mortgage loans: One-to-four family................... $246,607,410 $211,891,202 Multifamily.......................... 11,982,786 11,608,341 Commercial........................... 48,543,332 39,564,924 Construction and development......... 22,555,019 17,796,945 Consumer loans: Mobile home loans.................... 1,408,214 1,734,407 Home equity loans.................... 18,407,160 17,814,212 Credit card loans.................... 1,212,847 1,285,772 Motor vehicle loans.................. 7,005,889 7,280,778 Personal loans....................... 9,704,747 11,132,818 Loans secured by savings accounts.... 830,612 785,830 Commercial loans........................ 31,254,811 23,749,610 ------------ ------------ Gross loans............................. 399,512,827 344,644,839 Less: Unearned discounts................... 835 859 Deferred loan fees, net.............. 468,877 190,760 Undisbursed portion of loan proceeds. 2,671,053 3,340,664 Allowance for losses on loans........ 2,582,234 2,156,420 ------------ ------------ $393,789,828 $338,956,136 ============ ============
The Company's lending activities have been concentrated primarily in the market areas immediately surrounding the branch locations. The largest portion of the Company's loans are originated for the purpose of enabling borrowers to purchase residential real estate property secured by first liens on such property and generally maintain loan-to-value ratios of no greater than 80%. The Company's opinion as to the ultimate collectibility of these loans is subject to estimates regarding the future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of the borrowers. Loans serviced by the Company for others approximated $70,772,000, $63,138,000 and $70,545,000 at December 31, 2001, 2000 and 1999. At December 31, 2001, one-to-four family real estate mortgage loans of approximately $255,700,000 were pledged to secure advances from the Federal Home Loan Bank of Chicago. Note 4. Allowance for Losses on Loans Changes in the allowance for losses on loans were as follows:
Year Ended December 31, ---------------------------------- 2001 2000 1999 ---------- ---------- ---------- Balance at beginning of year. $2,156,420 $2,171,040 $2,375,533 Provision for losses on loans 502,500 50,000 -- Charge-offs.................. (102,912) (134,718) (287,719) Recoveries................... 26,226 70,098 83,226 ---------- ---------- ---------- Balance at end of year....... $2,582,234 $2,156,420 $2,171,040 ========== ========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 39 Note 5. Office Properties and Equipment Office properties and equipment consisted of:
December 31, ----------------------- 2001 2000 ----------- ----------- Office properties: Land........................................ $ 1,763,733 $ 1,763,733 Building.................................... 7,225,507 7,160,936 Leasehold improvements...................... 444,902 444,902 Parking facilities: Land........................................ 340,862 340,862 Improvements................................ 189,572 189,572 Land acquired for future use................... 997,359 997,359 Furniture and equipment........................ 6,485,688 5,948,208 ----------- ----------- 17,447,623 16,845,572 Less: Accumulated depreciation and amortization 9,050,450 8,250,749 ----------- ----------- $ 8,397,173 $ 8,594,823 =========== ===========
Depreciation and amortization expense amounted to $901,558, $921,595 and $895,966 for the years ended December 31, 2001, 2000 and 1999, respectively. The Company leases space inside three grocery stores, which are the locations of the Bank's Braidwood and Bradley offices, and one of its Coal City offices. The leases on the Braidwood and Coal City locations expire in 2005 with options to renew for two additional periods of five years. The lease on the Bradley location expires in 2013, but the lease terms provide for early termination in either 2003 or 2008, providing certain advance notice requirements are met. The total minimum rental commitment including all option periods, at December 31, 2001, under the leases mentioned above is as follows:
Amount Year of Operation ---------- 2002.......... $ 87,764 2003.......... 89,608 2004.......... 97,290 2005.......... 99,675 2006.......... 95,723 Thereafter.... 798,156 ---------- $1,268,216 ==========
The total rental expense included in the income statement for the years ended December 31, 2001, 2000 and 1999 was $84,067, $81,449 and $74,803, respectively. Note 6. Deposits As of December 31, 2001, certificates of deposit had scheduled maturity dates as follows:
Amount Year of Maturity ------------ 2002...... $178,288,700 2003...... 54,835,833 2004...... 5,833,814 2005...... 9,753,422 2006...... 4,696,209 ------------ $253,407,978 ============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 40 The aggregate amount of time certificates of deposit in denominations of $100,000 or more was $34,949,941 and $29,700,045 at December 31, 2001 and 2000, respectively. Note 7. Borrowings Short-term borrowings at December 31, 2001 and 2000 consisted of advances from the FHLB of none and $14,000,000, respectively. Other borrowings at December 31, 2001 and 2000 consisted of advances from the FHLB of $30,000,000 and $15,000,000, respectively. The weighted average maturity date was approximately 54 months and 18 months, respectively, and the weighted average interest rates were approximately 4.47% and 6.25%, respectively. Advances from the FHLB are collateralized by one-to-four family residential mortgages. Future payments at December 31, 2001, for all borrowings were as follows:
Amount Year Ended ----------- 2002...... $ 4,000,000 2003...... 2,000,000 2004...... 5,000,000 2005...... -- 2006...... 9,000,000 Thereafter 10,000,000 ----------- Total..... $30,000,000 ===========
Note 8. Income Taxes Under provisions of the Internal Revenue Code and similar sections of the Illinois income tax law that apply to tax years beginning before December 31, 1995, qualifying thrifts were allowed to claim bad debt deductions based on the greater of (1) a specified percentage of taxable income, as defined, or (2) actual loss experience. If, in the future, any of the accumulated bad debt deductions are used for any purpose other than to absorb bad debt losses, gross taxable income may result and income taxes may be payable. Retained earnings at December 31, 2001 and 2000 included approximately $8,998,000 of the tax reserve which accumulated prior to 1988, for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amounts was approximately $3,059,000 as of December 31, 2001 and 2000. As of December 31, 2001, the Company had state net operating loss carryforwards of approximately $6,543,000 for income tax purposes. The difference between book and tax net operating income results from interest income from certain investments which is exempt from income tax for state income tax purposes. For financial reporting purposes, a valuation allowance of $310,000 and $459,000 based on the net effective state tax rate of 4.74% for the years ended December 31, 2001 and 2000, respectively, has been recognized to offset the deferred tax assets related to those carryforwards. The net operating loss carryforwards expire through 2007. Income taxes consisted of:
Year Ended December 31, ------------------------------- 2001 2000 1999 ---------- ---------- -------- Current. $1,616,492 $1,351,788 $762,043 Deferred 23,858 (41,838) 100,107 ---------- ---------- -------- $1,640,350 $1,309,950 $862,150 ========== ========== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 41 The Company's income tax expense differed from the maximum statutory federal rate of 35% as follows:
Year Ended December 31, -------------------------------- 2001 2000 1999 ---------- ---------- -------- Expected income taxes........................ $1,715,466 $1,362,729 $917,571 Income tax effect of: State income tax (carryforward), net of federal benefit............................. (149,305) (174,254) (46,246) Income taxed at lower rate............... (49,013) (38,935) (26,216) Utilization of (addition to) state net operating loss carryforwards............ 149,305 174,254 46,246 Other.................................... (26,103) (13,844) (29,205) ---------- ---------- -------- $1,640,350 $1,309,950 $862,150 ========== ========== ========
Significant components of the deferred tax liabilities and assets were as follows:
December 31, ----------------------- 2001 2000 ----------- ---------- Deferred tax assets: Allowance for losses on loans................................... $ 877,959 $ 837,334 State net operating loss carryforwards.......................... 309,970 459,261 Accrued benefits................................................ 136,680 151,229 Intangible assets............................................... -- 8,214 OREO............................................................ 141,342 134,323 Premises and equipment.......................................... 62,949 -- Other........................................................... 5,765 34,137 ----------- ---------- Total deferred tax assets.................................... 1,534,665 1,624,498 Valuation allowance for deferred tax assets..................... 309,970 459,261 ----------- ---------- Total deferred tax assets, net of valuation allowance................................................... 1,224,695 1,165,237 ----------- ---------- Deferred tax liabilities: Unrealized gain in assets available-for-sale.................... (311,815) (59,854) Loan fees deferred for income tax purposes...................... (38,292) (59,925) Excess of tax accumulated provision for losses over base year... -- (41,683) Stock dividend on FHLB stock.................................... (148,884) (128,833) Loan costs deferred for book purposes........................... (346,168) (318,256) Mortgage servicing rights....................................... (146,108) (138,483) Intangible assets............................................... (12,982) -- Prepaid expense................................................. (109,635) -- Other........................................................... (11,189) (42,762) ----------- ---------- Total deferred tax liabilities............................... (1,125,073) (789,796) ----------- ---------- Net deferred tax assets............................................. $ 99,622 $ 375,441 =========== ==========
The Company believes that it is more likely than not that the deferred tax asset will be realized based upon historical taxable income levels. The Company has reported federal taxable income and pretax book income amounts totaling approximately $9.9 million and $11.4 million over the past three years, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 42 Note 9. Stockholders' Equity and Regulatory Capital The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tangible and Core capital (as defined by the regulations) to tangible assets (as defined) and Total and Tier I capital (as defined) to risk-weighted assets (as defined). Management believes, as of December 31, 2001, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2001, the most recent notification from the Office of Thrift Supervision (the "OTS"), categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank's category.
To be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions -------------- ---------------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------- ----- ------- ----- ------- ----- (Dollars in thousands) As of December 31, 2001 Tangible Capital to Tangible Assets Kankakee Federal Savings Bank........ $33,522 6.94% $ 7,248 1.50% N/A Core Capital to Tangible Assets Kankakee Federal Savings Bank........ 33,522 6.94% 19,328 4.00% $24,160 5.00% Tier I Capital to Risk Weighted Assets Kankakee Federal Savings Bank........ 33,522 10.32% N/A 19,497 6.00% Total Capital to Risk Weighted Assets Kankakee Federal Savings Bank........ 36,080 11.10% 25,996 8.00% 32,496 10.00% As of December 31, 2000 Tangible Capital to Tangible Assets Kankakee Federal Savings Bank........ $31,325 6.93% $ 6,785 1.50% N/A Core Capital to Tangible Assets Kankakee Federal Savings Bank........ 31,325 6.93% 18,092 4.00% $22,615 5.00% Tier I Capital to Risk Weighted Assets Kankakee Federal Savings Bank........ 31,325 11.02% N/A 17,061 6.00% Total Capital to Risk Weighted Assets Kankakee Federal Savings Bank........ 33,407 11.75% 22,748 8.00% 28,435 10.00%
A liquidation account in the amount of $17,720,139 was established for the benefit of eligible deposit account holders who continue to maintain their deposit accounts in the Bank after the December 30, 1992 conversion from a mutual savings and loan association to a stock savings bank. In the unlikely event of a complete liquidation of the Bank, each eligible deposit account holder would be entitled to receive a liquidation distribution from the liquidation account, in the proportionate amount of the then-current adjusted balance for deposit accounts held, before any distribution may be made with NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 43 respect to the Bank's capital stock. The Bank may not declare or pay a cash dividend to the Company on, or repurchase any of, its capital stock if the effect thereof would cause the net worth of the Bank to be reduced below the amount required for the liquidation account. Due to various natural events, such as death, relocation and general attrition of accounts, the balance in the liquidation account has been reduced to $1,668,955 as of December 31, 2001. The OTS capital distribution regulations restrict the Bank's cash dividend payments or other capital distributions. The OTS regulations generally provide that an institution can make capital distributions during a calendar year up to 100% of its net income to date during the calendar year plus the amount that would reduce by one-half the excess capital over fully phased-in capital requirements at the beginning of the calendar year. Any additional capital distributions would also require prior notice to the OTS. The Company is not subject to these regulatory restrictions on the payment of dividends to its stockholders; however, the ability of the Company to pay future dividends will depend on dividends from the Bank. Note 10. Officer, Director and Employee Plans Money Purchase Pension Plan and Trust The Bank sponsors a Money Purchase Pension Plan and Trust (the "Money Purchase Plan") for the benefit of its employees meeting certain age and service requirements. The Bank contributes to the Money Purchase Plan on behalf of each Participant an amount equal to 7% of the Participant's compensation, as defined by the Money Purchase Plan. Expense related to the Money Purchase Plan amounted to approximately $309,000, $254,000 and $267,000, for the years ended December 31, 2001, 2000 and 1999, respectively. 401(k) Savings Plan The Bank sponsors a qualified, tax-exempt pension plan qualifying under section 401(k) of the Internal Revenue Code (the "401(k) Plan"). Virtually all employees are eligible to participate after meeting certain age and service requirements. Eligible employees are permitted to contribute 1% to 10% of their compensation to the 401(k) Plan. Expense related to the 401(k) Plan, including plan administration, amounted to approximately $15,300, $19,600 and $12,700, for the years ended December 31, 2001, 2000 and 1999, respectively. Employee Stock Ownership Plan The Kankakee Bancorp, Inc. Employee Stock Ownership Plan (the "ESOP") covers all full time employees who have completed twelve months of service and have attained the minimum age of twenty-one. A participant is 100 percent vested after seven years of credited service. During 2001, the Company made a direct cash contribution totaling $120,000 to the ESOP. The trust used the contribution to acquire Company stock in the open market, and the acquired shares were allocated to the participants at the end of the plan year. The contribution amount for 2002 and future years will be determined annually by the Board of Directors. The following table reflects the shares held by the ESOP:
December 31 ---------------------------- 2001 2000 1999 -------- --------- --------- Shares allocated to participants................. 99,920.0 106,081.0 93,552.5 Unallocated shares (grandfathered under SOP 93-6) -- -- 15,312.5 -------- --------- --------- Total............................................ 99,920.0 106,081.0 108,865.0 ======== ========= =========
Prior to 2001, the ESOP operated as a leveraged employee stock ownership plan. The ESOP borrowed from the Company to purchase the shares of common stock. The shares were held in trust and allocated to participants' accounts in the ESOP as the loan obligation was repaid. The loan obligation was considered unearned employee compensation and was recorded as a reduction of stockholders' equity, while the loan was outstanding. The final loan payment was made in December 2000. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 44 The Bank made discretionary cash contributions to the ESOP which, along with dividend payments, were sufficient to service the principal payments plus interest at 7 percent over the eight year loan term. Interest expense recognized by the ESOP was $7,939 and $18,523 for the years ended December 31, 2000 and 1999, respectively. The Bank contributed $151,698 and $162,883 to the ESOP to fund principal and interest payments for the years ended December 31, 2000 and 1999, respectively. The Board of Directors of the Company may direct payment of dividends with respect to shares allocated to the participants to be paid in cash to the participants. Dividends on unallocated shares were used to make payments on the loan. All shares of stock owned by the ESOP are considered outstanding and included in the weighted average shares outstanding for calculating earnings per share. Stock Option Plan In 1992, the Company adopted an incentive stock option plan for the benefit of directors, officers, and employees of the Company or the Bank (the "Stock Option Plan"). The number of shares of common stock authorized under the Stock Option Plan is 175,000. The option exercise price of an incentive stock option must be at least equal to the fair market value per share of the common stock on the date of grant. The Stock Option Plan also provides for the issuance of nonqualified stock options, restricted stock and stock appreciation rights and limited stock appreciation rights. Activity in the Stock Option Plan was as follows:
2001 2000 1999 ------------------ ------------------ ------------------ Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Fixed Options ------- --------- ------- --------- ------- --------- Outstanding at beginning of year........................ 50,335 $10.350 115,610 $ 9.960 127,635 $9.952 Granted.......................... 2,500 26.390 2,500 20.500 -- -- Exercised........................ (17,450) 9.875 (66,025) 9.915 (12,025) 9.875 Forfeited........................ -- -- (1,750) 15.500 -- -- ------- ------- ------- ------ Outstanding at end of year....... 35,385 11.717 50,335 10.350 115,610 9.960 ======= ======= ======= Options exercisable at year-end.. 35,385 50,335 115,610 ======= ======= ======= Weighted-average fair value of options granted during the year 5.41 4.60 -- ======= ======= ======
The fair value of the stock options granted in 2001 and 2000 has been estimated using the Black-Scholes option pricing model with the following weighted average assumptions. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions. In addition, such models require the use of subjective assumptions, including expected stock price volatility. In management's opinion, such valuation models may not necessarily provide the best single measure of option value. There were no stock options granted in 1999.
2001 2000 ----- ----- Number of options granted 2,500 2,500 Risk-free interest rate.. 3.09% 5.13%
Expected life, in years........ 5.00 5.00 Expected volatility............ 23% 22% Expected dividend yield........ 1.82% 2.34% Estimated fair value per option $5.41 $4.60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 45 Grants under the stock option plan are accounted for following APB Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized for incentive stock option grants under the plan. Had compensation cost for all of the stock-based compensation plan been determined based on the fair values of awards (the method described by Statement No. 123), on the grant date, reported income and earnings per common share would have been reduced to the pro forma amounts shown below:
2001 2000 1999 ---------- ---------- ---------- Net income on common stock: As reported............. $3,260,982 $2,583,562 $1,759,482 Pro forma............... 3,252,057 2,575,969 1,759,482 Basic earnings per share: As reported............. $ 2.68 $ 2.05 $ 1.35 Pro forma............... 2.68 2.05 1.35 Diluted earnings per share: As reported............. $ 2.62 $ 1.99 $ 1.28 Pro forma............... 2.62 1.99 1.28
Stockholders' Rights Plan On May 14, 1999, the Company's Board of Directors adopted a Stockholders' Rights Plan. The Plan provided for the distribution of one Right on June 15, 1999, for each share of the Company's outstanding common stock as of May 24, 1999. The Rights have no immediate economic value to stockholders because they cannot be exercised unless and until a person, group or entity acquires 15% or more of the Company's common stock or announces a tender offer. The Plan also permits the Company's Board of Directors to redeem each Right for one cent under various circumstances. In general, the Rights Plan provides that if a person, group or entity acquires a 15% or larger stake in the Company or announces a tender offer, and the Company's Board chooses not to redeem the Rights, all holders of Rights, other than the 15% stockholder or the tender offeror, will be able to purchase a certain amount of the Company's common stock for half of its market price. Note 11. Commitments and Contingencies In the normal course of business, there are outstanding various contingent liabilities such as claims and legal action, which are not reflected in the consolidated financial statements. In the opinion of management, the ultimate resolution of these matters is not expected to have a material effect on the financial position or on the results of operations of the Company and its subsidiary. Note 12. Financial Instruments The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss, in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit, is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments whose contract represent credit risk follows:
December 31, ----------------------- 2001 2000 ----------- ----------- Commitments to originate new loans $34,672,000 $14,695,000 Commitments to extend credit...... 23,792,000 26,420,000 Standby letters of credit......... 1,712,000 841,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 46 Such commitments are recorded in the financial statements when they are funded or related fees are incurred or received. These commitments are principally at variable interest rates. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit written are conditional commitments issued by the bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company and the Bank do not engage in the use of interest rate swaps, futures, forwards, or option contracts. Note 13. Fair Value of Financial Instruments The following table reflects a comparison of carrying amounts and the fair values of the financial instruments:
December 31, --------------------------------------------------- 2001 2000 ------------------------- ------------------------- Carrying Carrying Amount Fair Value Amount Fair Value ------------ ------------ ------------ ------------ Assets: Cash and cash equivalents... $ 26,662,714 $ 26,662,714 $ 25,147,273 $ 25,147,273 Certificates of deposit..... 50,000 50,000 50,000 50,000 Investment and mortgage- backed securities......... 47,893,215 47,912,733 74,735,149 74,722,871 Nonmarketable equity securities................ 1,000 1,000 501,000 501,000 Loans, gross................ 396,372,062 397,542,235 341,112,556 342,677,559 Loans held for sale......... 828,610 832,268 -- -- FHLB stock.................. 2,443,300 2,443,300 2,112,000 2,112,000 Accrued interest receivable. 2,823,090 2,823,090 3,282,214 3,282,214 Liabilities: Deposits.................... $415,466,836 $420,301,232 $388,050,341 $389,087,939 Borrowed funds.............. 30,000,000 29,204,398 29,000,000 28,985,775 Advance payments by borrowers for taxes and insurance................. 1,905,766 1,905,766 1,813,412 1,813,412
The fair values utilized in the table were derived using the information described below for the group of instruments listed. It should be noted that the fair values disclosed in this table do not represent market values of all assets and liabilities of the Company and, thus, should not be interpreted to represent a market or liquidation value for the Company. The following methods and assumptions were used by the Bank in estimating the fair value disclosures for financial instruments: Cash and cash equivalents and certificates of deposit: The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets' fair values. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 47 Investment and mortgage-backed securities: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying amounts of accrued interest approximate their fair values. Nonmarketable equity securities and FHLB stock: Those securities are carried at cost, as fair values are not readily determinable. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for fixed-rate loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amounts of accrued interest approximate their fair value. Loans held for sale: Fair values are based on quoted market price. Off-balance-sheet instruments: Fair values for the Bank's off-balance-sheet instruments (guarantees and loan commitments) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value for such commitments is nominal. Deposits: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the balance sheet date. The carrying amounts for variable-rate, fixed-term money market accounts approximate their fair values at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. The carrying amounts of accrued interest payable, which is included in the deposit amount, and advance payments by borrowers for taxes and insurance approximates their fair value. Borrowed funds: Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. Note 14. Condensed Parent Company Only Financial Statements
December 31, -------------------------- 2001 2000 ------------ ------------ Statements of financial condition Assets: Cash and cash equivalents............................. $ 1,104,576 $ 1,626,075 Certificate of deposit................................ 50,000 50,000 Investment securities, available-for-sale............. 433,051 410,596 Equity in net assets of Kankakee Federal Savings Bank. 39,417,652 37,106,194 Other assets.......................................... 273,908 183,346 ------------ ------------ $ 41,279,187 $ 39,376,211 ============ ============ Liabilities and stockholders' equity: Other liabilities..................................... $ 88,287 $ 87,068 Common stock.......................................... 17,500 17,500 Additional paid-in capital............................ 15,226,853 15,328,249 Retained income....................................... 36,964,331 34,285,960 Accumulated comprehensive income...................... 605,078 115,969 Treasury stock........................................ (11,622,862) (10,458,535) ------------ ------------ $ 41,279,187 $ 39,376,211 ============ ============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 48
Years Ended December 31, -------------------------------- 2001 2000 1999 ---------- ---------- ---------- Statements of income Dividends from subsidiary........................... $1,714,888 $1,300,989 $1,011,253 Interest income..................................... 53,630 110,498 170,631 ---------- ---------- ---------- Operating income................................. 1,768,518 1,411,487 1,181,884 ---------- ---------- ---------- Equity in undistributed earnings of Kankakee Federal Savings Bank...................................... 1,821,132 1,487,864 948,175 Other noninterest income............................ -- 6,388 -- ---------- ---------- ---------- Total other income............................... 1,821,132 1,494,252 948,175 Other expenses...................................... 470,318 427,927 473,577 ---------- ---------- ---------- Income before income tax benefit................. 3,119,332 2,477,812 1,656,482 Income tax benefit.................................. 141,650 105,750 103,000 ---------- ---------- ---------- Net income....................................... $3,260,982 $2,583,562 $1,759,482 ========== ========== ==========
Years Ended December 31, ------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Statements of cash flows Operating activities: Net income.............................................. $ 3,260,982 $ 2,583,562 $ 1,759,482 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of Kankakee Federal Savings Bank.............................. (1,821,132) (1,487,864) (948,175) Other............................................... (88,715) 22,999 (13,253) ----------- ----------- ----------- Net cash provided by operating activities........ 1,351,135 1,118,697 798,054 ----------- ----------- ----------- Investing activities: Available-for-sale investment and mortgage backed securities: Purchase............................................ (24,300) (23,854) (21,999) Purchase of equipment................................... -- -- (579) ----------- ----------- ----------- Net cash provided by (used in) investing activities..................................... (24,300) (23,854) (22,578) ----------- ----------- ----------- Financing activities: Principal collected on ESOP loan........................ -- 151,211 151,211 Purchase of treasury stock.............................. (1,543,360) (1,023,572) (3,472,591) Dividends paid to stockholders.......................... (582,611) (607,027) (633,585) Proceeds from exercise of stock options................. 277,637 725,795 191,524 ----------- ----------- ----------- Net cash used in financing activities............ (1,848,334) (753,593) (3,763,441) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents........... (521,499) 341,250 (2,987,965) Cash and cash equivalents: Beginning of period..................................... 1,626,075 1,284,825 4,272,790 ----------- ----------- ----------- End of period........................................... $ 1,104,576 $ 1,626,075 $ 1,284,825 =========== =========== ===========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 49 Note 15. Quarterly Results of Operations (Unaudited)
Year Ended December 31, 2001 ---------------------------------------------- Three Months Ended December 31 September 30 June 30 March 31 ----------- ------------ ---------- ---------- Interest income............................ $8,093,804 $8,212,360 $8,257,817 $8,194,740 Interest expense........................... 4,359,799 4,666,657 4,852,741 4,849,456 ---------- ---------- ---------- ---------- Net interest income..................... 3,734,005 3,545,703 3,405,076 3,345,284 Provision for losses on loans.............. 308,500 139,000 40,000 15,000 ---------- ---------- ---------- ---------- Net interest income after provision for losses on loans....................... 3,425,505 3,406,703 3,365,076 3,330,284 Other income............................... 974,804 1,242,460 789,422 597,565 Other expense.............................. 3,082,929 3,116,248 3,051,764 2,979,546 ---------- ---------- ---------- ---------- Income before income taxes.............. 1,317,380 1,532,915 1,102,734 948,303 Income taxes............................... 441,200 512,700 369,150 317,300 ---------- ---------- ---------- ---------- Net income.............................. $ 876,180 $1,020,215 $ 733,584 $ 631,003 ========== ========== ========== ========== Basic earnings per share................... $ 0.72 $ 0.84 $ 0.61 $ 0.51 ========== ========== ========== ========== Diluted earnings per share................. $ 0.71 $ 0.82 $ 0.59 $ 0.50 ========== ========== ========== ==========
Year Ended December 31, 2000 ---------------------------------------------- Three Months Ended December 31 September 30 June 30 March 31 ----------- ------------ ---------- ---------- Interest income............................ $8,246,923 $7,894,213 $7,302,284 $6,895,941 Interest expense........................... 4,924,226 4,659,789 4,027,440 3,825,743 ---------- ---------- ---------- ---------- Net interest income..................... 3,322,697 3,234,424 3,274,844 3,070,198 Provision for losses on loans.............. 30,000 20,000 -- -- ---------- ---------- ---------- ---------- Net interest income after provision for losses on loans....................... 3,292,697 3,214,424 3,274,844 3,070,198 Other income............................... 656,215 662,705 593,181 601,302 Other expense.............................. 2,879,926 2,968,690 2,703,719 2,919,719 ---------- ---------- ---------- ---------- Income before income taxes.............. 1,068,986 908,439 1,164,306 751,781 Income taxes............................... 361,900 300,625 395,925 251,500 ---------- ---------- ---------- ---------- Net income.............................. $ 707,086 $ 607,814 $ 768,381 $ 500,281 ========== ========== ========== ========== Basic earnings per share................... $ 0.56 $ 0.48 $ 0.61 $ 0.40 ========== ========== ========== ========== Diluted earnings per share................. $ 0.54 $ 0.47 $ 0.59 $ 0.39 ========== ========== ========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 50 CORPORATE INFORMATION ----------------------------- Corporate Headquarters Kankakee Bancorp, Inc. 310 South Schuyler Avenue P.O. Box 3 Kankakee, Illinois 60901-0003 (815) 937-4440 (815) 937-3674 FAX Special Counsel Barack Ferrazzano Kirschbaum Perlman & Nagelberg 333 West Wacker Drive Suite 2700 Chicago, Illinois 60606 (312) 984-3100 Transfer Agent and Registrar The Company's transfer agent, LaSalle Bank N.A., maintains all stockholder records and can assist with stock transfer and registration, address changes, corrections in social security or tax identification numbers and 1099 tax reporting questions. If you have any questions, please contact the stock transfer agent at the address below: LaSalle Bank N.A. 135 S. LaSalle Street, Suite 1960 Chicago, Illinois 60603 Attn: Shareholder Services (312) 904-2458 Independent Auditors McGladrey & Pullen, LLP 1806 Fox Drive Champaign, Illinois 61820 Internal Audit Review Jeffrey A. Rice P.O. Box 135 Windsor, Illinois 61957 Annual Report on Form 10-K Copies of Kankakee Bancorp, Inc.'s 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission is available without charge to stockholders after April 1, 2002, upon written request to: Kankakee Bancorp, Inc. 310 South Schuyler Avenue P.O. Box 3 Kankakee, Illinois 60901-0003 Also available on the Internet at www.sec.gov CORPORATE INFORMATION -------------------------------------------------------------------------------- 51 Quarterly Press Releases Copies of Kankakee Bancorp, Inc.'s quarterly press releases and other public information are available upon request, without charge by contacting: Kankakee Bancorp, Inc. 310 South Schuyler Avenue P.O. Box 3 Kankakee, Illinois 60901-0003 (815) 937-4440 Annual Meeting The annual meeting of stockholders will be held at 10:00 a.m. on Friday, April 26, 2002, at Sully's-Sullivan's Warehouse, 555 South West Avenue, Kankakee, Illinois. Stockholders are encouraged to attend. Common Stock - Market and Dividend Information The common stock of the Company is traded on the American Stock Exchange under the symbol KNK. At March 4, 2002, there were 1,241,793 shares of the Company's common stock issued and outstanding and there were approximately 641 holders of record. The price range of the Company's common stock from January 1, 2000 through March 4, 2002, is set forth in the following table:
2001 2000 ------------- --------------- High Low High Low ------ ------ ------- ------- 1st Quarter............................... $24.00 $22.00 $23.750 $17.625 2nd Quarter............................... 26.00 23.00 21.875 18.500 3rd Quarter............................... 26.90 24.70 23.000 20.875 4th Quarter............................... 29.30 25.20 22.375 19.750 January 1, 2002, through March 4, 2002.... 37.00 28.27
The Company paid its first cash dividend since becoming a public company during the first quarter of 1995. Cash dividends in the total amount of $.48 per share per year were paid during 2001 and 2000. The Board of Directors of the Company declared a quarterly cash dividend of $.12 per share payable on February 28, 2002, to stockholders of record as of February 8, 2002. Future dividends will depend primarily upon the Company's earnings, financial condition and need for funds, as well as restrictions imposed by regulatory authorities regarding dividend payments and net worth requirements. See Note 9 of the Notes to Consolidated Financial Statements for additional information regarding restrictions on the payment of dividends by the Bank to the Company. CORPORATE INFORMATION -------------------------------------------------------------------------------- 52 [LOGO] Kankakee Federal Savings Bank [LOGO OF KANKAKEE FEDERAL SAVINGS BANK] [MAP] [GRAPHIC] Office Map [LOGO OF FDIC] OFFICE LOCATIONS -------------------------------------------------------------------------------- 53 [LOGO] FDIC INSURED EQUAL HOUSING LENDER (This page has been left blank intentionally.) 54 (This page has been left blank intentionally.) 55