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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________________
FORM 10-Q
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the Quarterly Period Ended September 30, 2002.
or
[_] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the Transition Period From __________ to __________.
Commission File Number 1-13676
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KANKAKEE BANCORP, INC.
----------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-3846489
- ------------------------------------- -------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
310 South Schuyler Avenue, Kankakee, Illinois 60901
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(815) 937-4440
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No ___
---
As of November 1, 2002, there were 1,165,881 issued and outstanding shares of
the Issuer's common stock (exclusive of 584,119 shares of the Issuer's common
stock held as treasury stock).
KANKAKEE BANCORP, INC.
INDEX
Page
Number
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial
Statements (Unaudited)
Statements of Financial Condition,
September 30, 2002 and December 31, 2001 3 - 4
Statements of Income and Comprehensive Income,
Three Months Ended September 30, 2002 and 2001 5
Statements of Income and Comprehensive Income,
Nine Months Ended September 30, 2002 and 2001 6
Statements of Cash Flows, Nine Months
Ended September 30, 2002 and 2001 7 - 8
Notes to Financial Statements 9 - 10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11 - 25
Item 3. Quantitative and Qualitative Disclosure 14 - 15
About Market Risk
Item 4. Controls and Procedures 22
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES AND CERTIFICATIONS 27
2
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (UNAUDITED)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
September 30, December 31,
2002 2001
---- ----
Assets
Cash and due from banks $ 27,455,440 $ 15,432,128
Federal funds sold 8,290,431 7,112,641
Money market funds 12,134,255 4,117,945
------------ ------------
Cash and cash equivalents 47,880,126 26,662,714
------------ ------------
Certificates of deposit: 50,000 50,000
------------ ------------
Securities:
Investment securities:
Available-for-sale, at fair value 36,479,664 34,755,192
Held-to-maturity, at cost (fair value: September 30, 2002
$1,470,335; December 31, 2001 - $1,483,946) 1,461,297 1,464,804
------------ ------------
Total investment securities 37,940,961 36,219,996
------------ ------------
Mortgage-backed securities:
Available-for-sale, at fair value: 40,887,755 11,635,592
Held-to-maturity, at cost (fair value: September 30, 2002
$27,769; December 31, 2001 - $38,003) 27,769 37,627
------------ ------------
Total mortgage-backed securities 40,915,524 11,673,219
------------ ------------
Non-marketable equity securities 1,000 1,000
Loans, net of allowance for losses on loans ($6,313,499 at
September 30, 2002; $2,582,234 at December 31, 2001) 393,362,629 393,789,828
Loans held for sale 685,489 828,610
Real estate held for sale 106,395 469,165
Federal Home Loan Bank stock, at cost 2,706,400 2,443,300
Office properties and equipment 10,041,228 8,397,173
Accrued interest receivable 2,926,146 2,823,090
Other assets 10,903,325 2,490,672
Intangible assets 4,293,050 4,431,101
------------ ------------
Total assets $551,812,273 $490,279,868
============ ============
(Continued)
3
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (UNAUDITED) (continued)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
September 30, December 31,
2002 2001
---- ----
Liabilities and stockholders' equity
Liabilities:
Deposits
Noninterest bearing $ 28,983,455 $ 25,854,152
Interest bearing 405,112,783 389,612,684
Other borrowings 65,000,000 30,000,000
Trust preferred indentures 10,000,000 -
Advance payments by borrowers for taxes and insurance 648,057 1,905,766
Other liabilities 1,986,478 1,716,366
------------- -------------
Total liabilities 511,730,773 449,088,968
------------- -------------
Stockholders' equity
Preferred stock, $.01 par value; authorized, 500,000
shares; none outstanding - -
Common stock, $.01 par value; authorized, 3,500,000
shares; issued 1,750,000 17,500 17,500
Additional paid-in capital 15,010,583 15,226,853
Retained income, partially restricted 37,502,511 36,964,331
Treasury stock (584,119 shares at September 30, 2002;
533,642 shares at December 31, 2001), at cost (14,099,004) (11,622,862)
Accumulated other comprehensive income 1,649,910 605,078
------------- -------------
Total stockholders' equity 40,081,500 41,190,900
------------- -------------
Total liabilities and stockholders' equity $ 551,812,273 $ 490,279,868
============= =============
See notes to consolidated financial statements (unaudited).
4
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
Three Months Ended September 30,
--------------------------------
2002 2001
---- ----
Interest income:
Loans $ 6,867,477 $ 7,195,970
Mortgage-backed securities 600,570 227,850
Investment securities and other 650,860 788,540
----------- -----------
Total interest income 8,118,907 8,212,360
----------- -----------
Interest expense:
Deposits 3,235,699 4,358,917
Borrowed funds 827,056 307,740
----------- -----------
Total interest expense 4,062,755 4,666,657
----------- -----------
Net interest income 4,056,152 3,545,703
Provision for losses on loans 3,143,700 139,000
----------- -----------
Net interest income after provision for losses on loans 912,452 3,406,703
Other income:
Net gain on sale of securities available-for-sale - 441,120
Net gain on sales of foreclosed assets 7,993 14,330
Net gain on sales of loans held for sale 300,976 72,548
Fee income 526,653 600,114
Insurance commissions 29,323 23,537
Other 216,300 90,811
----------- -----------
Total other income 1,081,245 1,242,460
----------- -----------
Other expenses:
Compensation and benefits 1,809,498 1,605,956
Occupancy 316,363 337,918
Furniture and equipment 153,966 150,146
Federal deposit insurance premiums 18,039 18,351
Advertising 81,943 101,204
Provision for losses on foreclosed assets 3,014 45,300
Data processing services 95,687 93,434
Telephone and postage 124,042 96,451
Amortization of intangible assets 46,017 93,687
Other general and administrative 590,174 573,801
----------- -----------
Total other expenses 3,238,743 3,116,248
----------- -----------
Income (loss) before income taxes (benefit) (1,245,046) 1,532,915
Income taxes (benefit) (456,250) 512,700
----------- -----------
Net income (loss) $ (788,796) $ 1,020,215
=========== ===========
Net income (loss) $ (788,796) $ 1,020,215
Other comprehensive income:
Unrealized gains on available-for-sale securities,
net of related income taxes 679,804 376,340
----------- -----------
Comprehensive income (loss) $ (108.992) $ 1,396,555
=========== ===========
Basic earnings (loss) per share ($0.67) $ 0.84
=========== ===========
Diluted earnings (loss) per share ($0.67) $ 0.82
=========== ===========
See notes to consolidated financial statements (unaudited).
5
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
Nine Months Ended September 30,
-------------------------------
2002 2001
---- ----
Interest income:
Loans $20,922,675 $21,135,829
Mortgage-backed securities 1,414,536 765,262
Investment securities and other 1,878,024 2,763,826
----------- -----------
Total interest income 24,215,235 24,664,917
----------- -----------
Interest expense:
Deposits 10,242,396 13,370,060
Borrowed funds 1,991,845 998,794
----------- -----------
Total interest expense 12,234,241 14,368,854
----------- -----------
Net interest income 11,980,994 10,296,063
Provision for losses on loans 3,755,620 194,000
----------- -----------
Net interest income after provision for losses on loans 8,225,374 10,102,063
----------- -----------
Other income:
Net gain on sale of securities available-for-sale - 441,120
Net gain on sales of foreclosed assets 42,136 25,644
Net gain on sales of loans held for sale 712,920 112,628
Fee income 1,787,943 1,689,798
Insurance commissions 55,414 71,505
Other 556,252 288,752
----------- -----------
Total other income 3,154,665 2,629,447
----------- -----------
Other expenses:
Compensation and benefits 5,384,374 4,779,317
Occupancy 905,758 943,765
Furniture and equipment 447,740 499,127
Federal deposit insurance premiums 54,437 54,885
Advertising 235,509 274,933
Provision for losses on foreclosed assets 57,315 80,214
Data processing services 309,389 293,392
Telephone and postage 338,460 318,207
Amortization of intangible assets 138,051 281,061
Other general and administrative 2,123,741 1,622,657
----------- -----------
Total other expenses 9,994,774 9,147,558
----------- -----------
Income before income taxes 1,385,265 3,583,952
Income taxes 342,446 1,199,150
----------- -----------
Net income $ 1,042,819 $ 2,384,802
=========== ===========
Net income $ 1,042,819 $ 2,384,802
Other comprehensive income:
Unrealized gains on available-for-sale securities,
net of related income taxes 1,044,832 714,202
----------- -----------
Comprehensive income $ 2,087,651 $ 3,099,004
=========== ===========
Basic earnings per share $ 0.87 $ 1.96
=========== ===========
Diluted earnings per share $ 0.86 $ 1.92
=========== ===========
See notes to consolidated financial statements (unaudited).
6
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
Nine Months Ended September 30,
-------------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 1,042,819 $ 2,384,802
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on loans 3,755,620 194,000
Provisions for losses on foreclosed assets 57,315 80,214
Depreciation and amortization 792,808 967,657
Amortization of investment premiums and discounts, net 35,571 (19,803)
Accretion of loan fees and discounts (44,650) 5,983
Deferred income tax provision (benefit) - 23,858
Originations of loans held for sale (40,469,642) (10,824,918)
Proceeds from sales of loans 41,325,683 10,411,971
Decrease (increase) in interest receivable (103,056) 235,730
Decrease in interest payable on deposits (127,807) (118,948)
Net gain on sales of loans (712,920) (112,628)
Net gain on sales of securities available-for-sale - (441,120)
Net gain on sales of foreclosed assets (42,136) (25,644)
Federal Home Loan Bank of Chicago, stock dividend (98,800) (116,900)
Increase in cash surrender value of Bank
Owned Life Insurance (238,548) -
Other, net (383,996) (279,556)
------------- -------------
Net cash from operating activities 4,788,261 2,364,698
------------- -------------
Cash flows from investing activities:
Investment securities
Available-for-sale:
Purchases (5,023,609) (22,106,834)
Proceeds from sales - 5,437,350
Proceeds from calls and maturities 4,000,000 35,070,000
Held-to-maturity:
Purchases - (660,404)
Proceeds from maturities and pay downs 3,367 3,166
Mortgage-backed securities:
Available-for-sale:
Purchases (32,532,683) (300,890)
Proceeds from maturities and pay downs 4,127,259 3,888,898
Held-to-maturity:
Proceeds from maturities and pay downs 9,858 22,480
Proceeds from sales of real estate 594,585 260,762
Deferred loan fees and costs, net 20,272 209,117
Loans originated (115,635,178) (145,272,661)
Loans purchased (2,025,000) -
Principal collected on loans 114,032,034 98,988,189
Purchases of office properties and equipment, net (2,298,812) (421,079)
Purchase of Bank Owned Life Insurance (8,000,000) -
------------- -------------
Net cash from investing activities (42,727,907) (24,881,906)
------------- -------------
See notes to consolidated financial statements (unaudited).
7
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (continued)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
Nine Months Ended September 30,
-------------------------------
2002 2001
---- ----
Cash flows from financing activities:
Net increase in non-certificate of deposit accounts $ 3,181,917 $ 10,719,539
Net increase in certificate of deposit accounts 15,575,292 7,678,327
Net decrease in advance payments by
borrowers for taxes and insurance (1,403,100) (1,286,290)
Proceeds from short-term borrowings - 15,000,000
Repayments of short-term borrowings - (29,000,000)
Proceeds from other borrowings 52,600,000 25,000,000
Repayments of other borrowings (7,600,000) (10,000,000)
Proceeds from exercise of stock options 509,722 103,952
Dividends paid (504,640) (436,647)
Purchase of treasury stock (3,202,133) (1,543,360)
------------ ------------
Net cash from financing activities 59,157,058 16,235,521
------------ ------------
Increase (decrease) in cash and cash equivalents 21,217,412 (6,281,687)
Cash and cash equivalents:
Beginning of period 26,662,714 25,147,273
------------ ------------
End of period $ 47,880.126 $ 18,865,586
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest of deposits $ 10,370,200 $ 13,489,000
============ ============
Interest on borrowed funds $ 1,713,600 $ 1,030,000
============ ============
Income taxes $ 1,204,514 $ 1,140,218
============ ============
Supplemental disclosures of non-cash investing activities:
Real estate acquired through foreclosure $ 270,007 $ 310,110
============ ============
Increase in unrealized gains on securities available-for-sale $ 1,571,176 $ 1,073,988
============ ============
Increase in deferred taxes attributable to the
unrealized gains on securities available-for-sale ($526,344) ($359,786)
============ ============
See notes to consolidated financial statements (unaudited).
8
KANKAKEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2002
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with instructions
to Form 10-Q. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The statement of condition
at December 31, 2001 has been derived from the audited financial statements at
that date, but does not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. Operating results for the three-month and
nine-month periods ended September 30, 2002 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2002. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the annual report for Kankakee Bancorp, Inc. (the
"Company") on Form 10-K for the year ended December 31, 2001.
Note 2 - Earnings Per Share
Basic earnings per share of common stock have been determined by dividing
net income for the period by the average number of shares of common stock
outstanding. Diluted earnings per share of common stock have been determined by
dividing net income for the period by the average number of shares of common
stock and common stock equivalents outstanding. Common stock equivalents assume
exercise of stock options, and the purchase of treasury stock with the option
proceeds at the average market price for the period (when dilutive). The Company
has an incentive stock option plan for the benefit of directors, officers and
employees. Diluted earnings per share have been determined considering the stock
options granted, net of stock options which have been exercised.
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) ($788,796) $ 1,020,215 $ 1,042,819 $ 2,384,802
========= =========== =========== ===========
Average outstanding shares
of common stock 1,173,475 1,206,701 1,202,880 1,215,097
Average common stock equivalents 1,020 26,234 5,517 26,205
--------- ----------- ----------- -----------
Total 1,174,495 1,232,935 1,208,397 1,241,302
========= =========== =========== ===========
Basic earnings (loss) per share ($0.67) $ 0.84 $ 0.87 $ 1,96
========= =========== =========== ===========
Diluted earnings (loss) per share ($0.67) $ 0.82 $ 0.86 $ 1.92
========= =========== =========== ===========
9
Note 3 - Accounting for Certain Investments in Debt and Equity Securities
At September 30, 2002, stockholders' equity included a positive $1.6
million, which represents the amount by which the market value of the
available-for-sale securities and the available-for-sale mortgage-backed
securities exceeded the book value, net of income tax of $850,000. A decrease in
market interest rates during the nine months ended September 30, 2002 resulted
in a $1.0 million increase in the market value, net of income tax effect, of the
available-for-sale securities and the available-for-sale mortgage-backed
securities. At the end of 2001, the market value of the available-for-sale
securities portfolio exceeded the book value by $605,000, net of income tax
benefit.
Note 4 - Accounting Change
Effective January 1, 2002, the Company applied FASB Statement No. 142, Goodwill
and Other Intangible Assets. Among its provisions is a requirement to disclose
what reported net income would have been in all periods presented exclusive of
amortization expense (net of related income tax effects) recognized in those
periods related to goodwill, intangible assets no longer being amortized, and
changes in amortization periods for intangible assets that will continue to be
amortized together with related per share amounts.
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Reported net income (loss) ($ 788,796) $ 1,020,215 $ 1,042,819 $ 2,384,802
Add goodwill amortization - 31,462 - 94,386
----------- ------------- ------------- -------------
Adjusted net income (loss) ($ 788,796) $ 1,051,677 $ 1,042,819 $ 2,479,188
=========== ============= ============= =============
Basic earnings (loss) per share:
Reported net income (loss) ($ 0.67) $ 0.84 $ 0.87 $ 1.96
Goodwill amortization - 0.03 - 0.08
----------- ------------- ------------- -------------
Adjusted net income (loss) ($ 0.67) $ 0.87 $ 0.87 $ 2.04
=========== ============= ============= =============
Diluted earnings (loss) per share:
Reported net income (loss) ($ 0.67) $ 0.82 $ 0.86 $ 1.92
Goodwill amortization - 0.03 - 0.08
----------- ------------- ------------- -------------
Adjusted net income (loss) ($ 0.67) $ 0.85 $ 0.86 $ 2.00
=========== ============= ============= =============
Based on current information, the Company determined during the second quarter
that there was no impairment as the result of the application of FASB Statement
No. 142. Impairment testing will be done annually as of September 30, in
accordance with the requirements of the statement.
10
KANKAKEE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a Delaware company formed in 1992 for the purpose of
becoming the savings and loan holding company of Kankakee Federal Savings Bank
(the "Bank"), the Company's principal subsidiary. The Bank was originally
chartered in 1885 as an Illinois savings and loan association and was converted
to a federally chartered thrift institution in 1937.
The Company serves the financial needs of families and local businesses in
its primary market areas through its main office at 310 South Schuyler Avenue,
Kankakee, Illinois and fourteen branch offices located in the communities of
Ashkum, Bourbonnais, Bradley, Braidwood, Champaign, Coal City (2), Diamond,
Dwight, Herscher, Hoopeston, Manteno, Momence and Urbana, Illinois. The
Company's business involves attracting deposits from the general public and
using such deposits to originate residential mortgage loans and, to a lesser
extent, commercial real estate, consumer, commercial business, multi-family and
construction loans in its market areas. The Company also invests in investment
securities, mortgage-backed securities and various types of short term liquid
assets.
ECONOMIC CLIMATE
During 2001, the Federal Open Market Committee ("the FOMC") lowered its
target short-term interest rates by a total of four and three-quarters
percentage points. The federal funds target went from 6.50% to 1.75% and the
Federal Reserve discount rate went from 6.00% to 1.25%. The federal funds rate
is the rate at which financial institutions borrow from each other, while the
discount rate is the rate at which member banks borrow from the Federal Reserve.
During 2001, the FOMC cited a slowing economy and a possible recession as the
primary reasons for lowering interest rates. Lower short-term interest rates
would tend to stimulate economic activity by reducing the financing costs on
borrowed funds for both businesses and individuals.
A slowing economy would usually result in some increase in problem assets,
and could possibly result in some increase in loan losses. In a slowing economy
or recession, cash flows and profits of commercial customers decrease, which
could result in an increase in delinquencies. Additionally, individual borrowers
experience cash flow problems from job loss, reduction in investment returns or
other causes. This could also result in an increase in delinquencies. In that
regard, the Company experienced an increase of delinquencies and problem loans
during the third quarter which resulted in a substantial increase in its
provision for losses on loans.
During the first nine months of 2002, the FOMC held target interest rates
at the December 31, 2001 levels while maintaining a cautionary posture on the
state of the economy. While some economic indicators are pointing toward a
recovery, others are still weak, indicating that the economy remains slow.
During 2002, a number of accounting and corporate governance problems at large
publicly held companies have come to light, contributing to the volatility in
the markets, which could impact the speed at which the economy moves into a full
recovery. If the economy does move into a full recovery, then the next FOMC
interest rate move would likely be an increase in its target rates.
11
Rising interest rates, because of the Company's current structure of assets
and liabilities, could have a detrimental effect on the Company's interest rate
spread and results of operations. The Company had negative cumulative one-year
gaps of 5.0% and 3.0%, respectively, at December 31, 2001 and June 30, 2002, the
most recent information available. A negative gap indicates that an increase in
market interest rates might negatively affect net interest income and the
results of operations, due to liabilities maturing, and repricing, from their
current rates to higher rates, more quickly than assets will mature and reprice
to higher rates. Management believes that the Company's current level of
interest rate sensitivity is reasonable, in light of the current market rates
and the possibility of increasing market rates. However, significant
fluctuations in interest rates may have an adverse effect on the Company's
financial condition and results of operations.
BUSINESS DEVELOPMENTS AND CURRENT INITIATIVES
During the late 1990s, the Company experienced significant growth and
improvement in its office facilities and a widening of its market areas. This
was accomplished through the acquisition of a bank, the opening of several new
offices and the replacement of an outdated office building. There were also
significant changes and improvements in products and services brought about
through the use of technology.
During this same period, the Company began the process of shifting its
operating philosophy to a sales orientation and away from traditional approaches
to banking services. Management continues to support and encourage this process,
recognizing that changes, particularly of this type and magnitude, require
employee education and customer communication. These changes in philosophy and
culture require not only time but allocation of other Company resources. None of
these efforts were without cost, and have been, and, to some degree, will
continue to be, reflected in operating expenses and net income.
In the first quarter of 2000, management initiated an aggressive growth
strategy which was aimed at increasing deposits and growing the loan portfolio,
which resulted in the reduction of the size of the investment portfolio. The
strategy, which continued into the first quarter of 2001, was intended to
improve earnings in a number of ways which included:
. Improved utilization of facilities and increased productivity of
personnel;
. Increased capital leverage; and
. Improved asset yields, due to increased commercial and consumer
lending and the replacement of investments with fixed-rate mortgage
loans.
It was recognized that such a strategy would:
. Likely increase the cost of funds, due to aggressive deposit pricing
and the potential need to borrow money at wholesale market rates; and
. Necessitate the assumption of an increased level of interest rate
risk, due to aggressive loan pricing and the need to retain longer
term, fixed-rate mortgages for the portfolio.
In response to rapidly falling interest rates during 2001, the Company
modified its growth strategy and, once again, began to sell its fixed-rate
mortgage originations in the secondary market. This strategy remained in effect
through the first nine months of 2002.
12
During 2002, the Company has initiated a number of strategies to improve
profitability and enhance stockholder value. These include:
- The Company's wholly-owned subsidiary, Kankakee Federal Savings Bank,
invested $8.0 million in Bank Owned Life Insurance (commonly referred to as
"BOLI"). This investment provides non-taxable current income through
increases in cash surrender values. Net income of $239,000 from this
investment has been recorded through the third quarter.
- - The Bank implemented a capital utilization strategy in which $30.0 million
of adjustable-rate, mortgage-backed securities were purchased using
borrowed funds. This strategy has increased net interest income and pre-tax
income by $291,000 through the third quarter.
- - The Company issued $10.0 million in variable-rate trust preferred
securities, as part of a large pool of such securities. These securities
are includable, within specified limits, in regulatory capital, and the
funds are available for a number of purposes, including the repurchase of
stock, funding an accretive acquisition or purchasing securities as part of
a leveraging strategy.
- - The Company has conducted an evaluation of the branch network and other
service delivery systems, including locations, market areas, physical
layouts, accessibility, market potentials and corporate identity. As part
of this process, the organizational structure, including lines of
authority, job functions and supervisory responsibilities was also
reviewed. A number of changes have already resulted from this process.
These include:
- the elimination of three positions at the vice president level;
- the recently announced change of the name of the Bank to KFS
Bank, F.S.B., which will be effective December 1, 2002;
- the announcement on October 10, 2002 of the pending sale of the
Bank's branch office in Hoopeston, Illinois;
- the announced construction of a new office in Bradley, Illinois, to
replace an in-store office, as well as a new office in Bourbonnais,
Illinois; and
- the renovation of the Coal City main office, and the planned
renovation of offices in Bourbonnais, Manteno and Momence, all in
Illinois.
FINANCIAL CONDITION
Total assets of the Company increased by $62.0 million, or 12.6%, to $551.8
million at September 30, 2002 from $490.3 million at December 31, 2001.
Cash and cash equivalents increased by $21.2 million, or 79.6%, from $26.7
million at December 31, 2001 to $47.9 million at September 30, 2002. The
increase was primarily attributable to increases in deposits and borrowed money.
During the nine-month period ended September 30, 2002, net loans receivable
decreased by $427,000, or 0.1%, from $393.8 million to $393.4 million. This was
primarily the result of loan repayments which totaled $114.0 million and an
increase in the allowance for losses on loans of $3.7 million, which were
substantially offset by the origination of $74.6 million of real estate loans,
the purchase of $2.0 million of real estate loans and the origination of $41.1
million of consumer and commercial business loans.
13
Loans held for sale decreased by $143,000, or 17.3%, from $828,000 at
December 31, 2001 to $685,000 at September 30, 2002. This was the result of the
sale of $41.3 million of loans held for sale, at a net gain of $713,000, which
was partially offset by the origination of $40.5 million of such loans.
Securities available-for-sale increased by $1.7 million, or 5.0%, to $36.5
million at September 30, 2002 from $34.8 million at December 31, 2001 as the
result of the purchase of $5.0 million of securities, which was partially offset
by the maturity or the exercise of call options by issuers on $4.0 million of
securities, and by the net change in market value adjustment.
Mortgage-backed securities available-for-sale increased by $29.3 million,
or 251.4%, to $40.9 million at September 30, 2002 from $11.6 million at December
31, 2001. The increase resulted from the purchase of $32.5 million of
securities, which was partially offset by the maturity of $4.1 of securities,
and by the net change in market value adjustments.
Deposits increased by $18.6 million, or 4.5%, from $415.5 million at
December 31, 2001 to $434.1 million at September 30, 2002. During the nine month
period, there was a $3.2 million increase in certificate of deposit accounts, a
$15.6 million increase in passbook, checking and money market accounts and a
$128,000 decrease in accrued interest on deposits.
Total borrowings increased by $45.0 million, or 150.0%, from $30.0 million
at December 31, 2001 to $75.0 million at September 30, 2002. The increase was
the result of $52.6 million in new borrowings, which were partially offset by
repayments of $7.6 million. Borrowings at September 30, 2002 consisted of $10.0
million of trust preferred debentures, $37.4 million in advances from the
Federal Home Loan Bank of Chicago and $27.6 million in funds from securities
sold under agreement to repurchase.
ASSET/LIABILITY MANAGEMENT
During the first quarter of 2001, consistent with the growth strategy
implemented in 2000, the Company retained virtually all the fixed-rate mortgage
loans it originated. As a result of the changing interest rate environment
during 2001, the Company, during the second quarter of 2001, resumed selling
fixed-rate mortgage loans with terms of 20 years or longer in the secondary
market. Late in the third quarter of 2001, the Company also began selling loans
with terms of 15 years. Through the first nine months of 2002, the Company
continued to sell virtually all fixed-rate mortgage loans it originated with
terms of 15 years or longer.
In an attempt to manage its exposure to changes in interest rates,
management closely monitors the Company's interest rate risk. The Bank has a
funds management committee, consisting of the president, certain vice presidents
and the controller of the Bank, which meets weekly and reviews the Bank's
interest rate risk position and evaluates its current asset/liability pricing
and strategies. This committee adjusts pricing and strategies as needed and
makes recommendations to the Bank's board of directors regarding significant
changes in strategy. In addition, on a quarterly basis the board reviews the
Bank's asset/liability position, including simulations of the effect on the
Bank's capital of various interest rate scenarios.
In managing its asset/liability mix, the Company, at times, depending on
the relationship between long-term and short-term interest rates, market
conditions and consumer preferences, may place somewhat greater emphasis on
maximizing its net interest margin than on better matching the interest rate
sensitivity of its assets and liabilities in an effort to improve its net
income. Management believes that the increased net income resulting from a
mismatch in the
14
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.
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"). Approximately 18.0% of
one-to-four family originations in 2002 have been ARMs.
. The Company has continued its origination of consumer loans having
terms to maturity that are significantly shorter than residential
loans.
. The Company has increased originations of commercial business and
construction loans having adjustable or floating interest rates,
relatively short terms to maturity, or a combination thereof.
. The Company regularly reviews its policy on newly originated
fixed-rate mortgage loans, as to the question of which loans, if
any, should be retained in portfolio versus which should be sold
in the secondary market. Trends in the economy, trends in market
interest rates, the Company's interest margin and the Company's
current asset/liability mix are among the factors considered.
Changes resulting from these reviews take effect on a specific
calendar date and impact either those loans which are applied for
on or after that date, or those loans which are closed on or after
that date.
The Company currently does not enter into derivative financial instruments
including futures, forwards, interest rate risk swaps, option contracts, or
other financial instruments with similar characteristics. However, the Company
is a party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers such as
commitments to extend credit and letters of credit.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOSSES ON LOANS
The Company's non-performing assets increased to $9.7 million, or 1.76%, of
total assets at September 30, 2002 from $2.2 million, or 0.45% of total assets
at December 31, 2001. This represented an increase of $7.5 million over the
nine-month period. Non-performing assets are presented on a gross balance basis
and the totals have not been reduced by specific reserves. During the nine month
period ended September 30, 2002, non-performing construction and development
loans, non-performing commercial real estate loans and non-performing commercial
business loans increased by $1.7 million, $4.6 million and $1.3 million,
respectively. There were also small increases of $419,000 and $118,000 in
non-performing one-to four family real estate loans and non-performing
multi-family real estate loans, respectively. There were decreases of $94,000,
$369,000 and $72,000 in non-performing consumer loans, foreclosed assets and
restructured troubled debts, respectively.
The ratio of the allowance for losses on loans to non-performing loans
decreased to 69.5% as of September 30, 2002 compared to 230.3% as of December
31, 2001. The decrease in this ratio, which excludes foreclosed assets and
restructured troubled debt, was the result of the increase of $7.5 million in
non-performing loans.
15
The Company classified $5.5 million of its assets as Special Mention, $6.9
million as Substandard and $3.2 million as Loss as of September 30, 2002. No
assets were classified as Doubtful at September 30, 2002. This represents an
increase of $4.0 million in the Special Mention category and a net increase of
$2.8 million in the other categories from the December 31, 2001 totals for
classified assets. The ratio of classified assets to total assets (including
items classified as Special Mention) was 2.84% at September 30, 2002 as compared
to 1.80% at December 31, 2001. The ratio of the allowance for losses on loans to
classified assets increased to 40.3% as of September 30, 2002 compared to 29.3%
as of December 31, 2001.
DISCUSSION ON PROVISION FOR LOSSES ON LOANS
As with many financial institutions, the lagging economy has challenged
many companies, including some of the Bank's customers. The significant
provision for losses on loans of $3.1 million during the third quarter of 2002
was the result of the deterioration of two long-time credit relationships. One
set of credits is with a group of related borrowers in the real estate
development business, an industry that has been negatively affected in the
Bank's market area by the general economic downturn. The second credit is with
another customer in that same industry.
The first set of credits is with a group of related borrowers, primarily
for the acquisition and development of commercial real estate, as well as
approximately $350,000 of unsecured loans made to the lead borrower. The
slowdown in commercial real estate development resulted in cash flow problems
for the borrowers, and the Company was informed by the lead borrower's attorney
of the borrower's intention to file bankruptcy. Notice of the intended filing,
together with a somewhat depressed market in commercial real estate, prompted an
additional review of these loans. The review resulted in recording $1.9 million
in specific reserves related to these loans and an additional $275,000 in
general reserves on commercial loans. The petition for bankruptcy protection
under Chapter 11 was filed on October 18, 2002.
The second credit is for the development of a condominium project. The loan
had been previously reported as both non-performing and substandard. The
collectability of the loan had become dependent on the borrower providing
additional funding to complete the project and extinguish the debt. While the
borrower has agreed to continue making payments, current economic conditions
have negatively impacted the borrower's cash flows. Consequently, the full
collectabilty of the loan became questionable. A reserve of just over $1.0
million was established, which reduced the net balance to the total payments the
Company anticipates receiving over the next 15 to 18 months.
While management has been able to identify the Company's current exposure
under the credits and has increased the allowance for losses on loans
accordingly, it is possible that the Company will have to take future charges in
relation to these loans. Management currently believes that the Company's
maximum additional exposure under these loans is approximately $2.8 million,
however, management has concluded that it is not appropriate at this time to add
additional reserves for this amount. Management is continuing to examine the
loans with these customers to evaluate the best course of action to realize the
maximum recovery from these credits.
16
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
The net loss for the quarter ended September 30, 2002 was $789,000 compared
to net income of $1.0 million for the same period in 2001. This represented a
$1.8 million, or 177.3% decrease. The decrease in net income resulted from an
increase in the provision for losses on loans of $3.1 million, an increase in
other expenses of $122,000 (3.9%) and a decrease in other income of $161,000
(13.0%). These items were partially offset by an increase in net interest income
of $510,000 (14.4%) and a decrease in income tax expense of $969,000 (189.0%).
The basic loss per share was $.67 for the quarter ended September 30, 2002
compared to basic earnings per share of $.84 for the 2001 quarter. The diluted
loss per share was $.67 for the quarter ended September 30, 2002 compared to
diluted earnings per share of $.82 for the comparable 2001 period, representing
a decrease of 181.7%.
Net interest income increased $510,000, or 14.4%, during the quarter ended
September 30, 2002, compared to the quarter ended September 30, 2001.
The table presented on page 24 ("Table I"), sets forth an analysis of the
Company's net interest income for the three-month periods ended September 30,
2002 and 2001.
As Table I indicates, interest income decreased $94,000, or 1.1%, to $8.1
million for the three-month period ended September 30, 2002 compared to the $8.2
million for same period in 2001. The decrease in interest income was the result
of a decrease in the yield earned on interest-earning assets to 6.33% during the
2002 period from 7.28% during the 2001 period which was substantially offset by
an increase in the average balance of interest-earning assets to $509.2 million
during the 2002 period from $447.4 million during the 2001 period. The increase
in the average balance of interest-earning assets was due to increases in
balances of loans, mortgage-backed securities and other interest-earning assets,
which were partially offset by a decrease in balances of investment securities
during the quarter. The decrease in the yield earned on interest-earning assets
was the result of decreasing market interest rates during the quarter, which
resulted in lower yields on short term assets and a lower yield on the
reinvestment of principal repayments and prepayments on loans and on newly
originated loans. The increase in average loans was primarily the result of
growth in both commercial real estate and commercial business loans.
Interest expense decreased $604,000, or 12.9%, to $4.1 million during the
third quarter from $4.7 million in the same period in 2001. The decrease in
interest expense was the result of a decrease in the average yield on
interest-bearing liabilities to 3.20% during the 2002 period from 4.27% during
the 2001 period, which was partially offset by an increase in the average
outstanding balance of interest-bearing liabilities to $504.2 million during the
2002 period from $434.1 million during the 2001 period. The increase in average
interest-bearing liabilities resulted from the implementation of a leveraging
strategy, increased use of borrowed funds, and the continuing movement to a
sales oriented operation. The decrease in the average yield on interest-bearing
liabilities resulted from decreasing market interest rates during the last
twenty-one months and an improvement in the deposit mix with a higher ratio of
non-certificate deposit accounts.
The provision for losses on loans totaled $3.1 million during the third
quarter of 2002, compared to $139,000 during the third quarter of 2001.
17
Other income for the three-month period ended September 30, 2002 decreased
$161,000, or 13.0%, to $1.1 million compared to $1.2 million for the same period
in 2001. The decrease was attributable to a decrease of $73,000 (12.2%) in fee
income, and to a non-recurring gain on the sale of securities of $441,000 during
the 2001 period. These decreases were partially offset by increases of $6,000
(24.6%) in insurance commissions, $228,000 (314.7%) in gain on sales of loans
held for sale and $125,000 (138.2%) in other income. The $228,000 increase in
gain on the sale of loans held for sale was the result of an increase in the
volume of loans sold to $14.5 million during 2002, compared to $5.2 million in
the 2001 quarter. The increase in other income was the result of $113,000 in
earnings from the investment in BOLI. The decrease in fee income was the result
of a negative market value adjustment of $169,000 on the value of originated
loan servicing rights during the 2002 period.
Other expenses for the third quarter of 2002 increased $122,000 or 3.9%, to
$3.2 million from $3.1 million for the third quarter of 2001. There were
increases of $16,000 (2.9%) in other expenses, $204,000 (12.7%) in compensation
and benefits, and $28,000 (28.6%) in telephone and postage. These increases were
partially offset by decreases of $22,000 (6.4%) in occupancy costs, $19,000
(19.0%) in advertising, $42,000 (93.3%) in provision for losses on foreclosed
assets and $48,000 (50.9%) in amortization of intangible assets. A significant
contributing factor to the increase in compensation and benefits was the higher
cost of health insurance. Postage expenses increased from the 2001 quarter due
to an increase in postage rates.
Federal income taxes decreased $969,000 to a benefit of $456,000 for the
three-month period ended September 30, 2002, compared to an expense of $513,000
for the same period in 2001. The primary reason for this decrease was the
pre-tax loss for the quarter.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Net income for the nine months ended September 30, 2002 was $1.0 million
compared to $2.4 million for the same period in 2001. This represented a $1.4
million, or 56.3%, decrease. The decrease in net income resulted from an
increase of $3.6 million in provision for losses on loans and an increase of
$847,000 in other expenses. These items were partially offset by increases of
$1.7 million in net interest income and $525,000 in other income, and by a
decrease of $857,000 in income tax expense.
Basic earnings per share were $.87 for the nine months ended September 30,
2002 compared to $1.96 for the 2001 period. Diluted earnings per share were $.86
for the nine months ended September 30, 2002 compared to $1.92 for the
comparable 2001 period, representing a decrease of 55.2%.
Net interest income increased $1.7 million, or 16.4%, during the nine
months ended September 30, 2002, compared to the nine months ended September 30,
2001.
The table presented on page 25 ("Table II") sets forth an analysis of the
Company's net interest income for the nine-month periods ended September 30,
2002 and 2001.
As Table II indicates, interest income decreased $450,000, or 1.8%, to
$24.2 million for the nine-month period ended September 30, 2002 from $24.7
million for the same period in 2001. The decrease in interest income was the
result of a decrease in the yield earned on interest-earning assets to 6.56%
during the 2002 period from 7.50% during the 2001 period, which was
18
partially offset by an increase in the average balance of interest-earning
assets to $493.4 million during the 2002 period from $439.4 million during the
2001 period. The decrease in the yield earned on interest-earning assets was the
result of decreasing market interest rates during 2001. Market rates have
remained relatively low during the first nine months of 2002, resulting in lower
rates on newly originated or purchased assets and on the reinvestment of
maturing and prepaying assets. The increase in the average balance of
interest-earning assets was primarily due to increases in balances of loans,
mortgage-backed securities and other interest-earning assets, which were
partially offset by a decrease in balances of investment securities during the
period.
Interest expense decreased $2.1 million, or 14.9%, to $12.2 million during
the first nine months of 2002 from $14.3 million in the same period in 2001. The
decrease in interest expense was the result of a decrease in the average yield
on interest-bearing liabilities to 3.38% during the 2002 period from 4.51%
during the 2001 period, which was partially offset by an increase in the average
outstanding balance of interest-bearing liabilities to $483.8 million during the
2002 period from $425.6 million during the 2001 period. The decrease in the
average yield on interest-bearing liabilities resulted from decreasing market
rates during 2001 and an improvement in the deposit mix with a higher ratio of
non-certificate deposit accounts. The increase in average interest-bearing
liabilities resulted from the implementation of a leveraging strategy, increased
use of borrowed funds and the continuing movement to a sales oriented operation.
The provision for losses on loans totaled $3.8 million during the first
nine months of 2002, compared to $194,000 during the first nine months of 2001.
Other income for the nine-month period ended September 30, 2002 increased
$525,000, or 20.0%, to $3.2 million compared to $2.6 million for the same period
in 2001. The increase was attributable to increases of $98,000 (5.8%) in fee
income, $268,000 (92.6%) in other income, $600,000 (533.0%) in gain on the sale
of loans held for sale and $16,000 (64.3%) in net gain on the sale of real
estate held for sale. These increases were partially offset by decreases of
$16,000 (22.5%) in insurance commissions and $441,000 in net gain on the sale of
securities available-for-sale. The increase in fee income was primarily the
result of an increase in checking accounts subject to fees. The increase in gain
on the sale of loans held for sale was the result of an increase in the volume
of loans sold to $40.6 million for the nine month period of 2002 from $10.3
million for the comparable 2001 period. The increase in other income was
primarily the result of $239,000 in earnings from the first quarter 2002
investment in BOLI.
Other expenses for the first nine months of 2002 increased $847,000, or
9.3%, to $10.0 million from $9.1 million during the 2001 period. There were
increases of $605,000 (12.7%) in compensation and benefits, $20,000 (6.4%) in
telephone and postage, $16,000 (5.5%) in data processing services, and $501,000
(30.9%) in other expenses. These increases were partially offset by decreases of
$38,000 (4.0%) in occupancy costs, $51,000 (10.3%) in furniture and equipment
expense, $39,000 (14.3%) in advertising, $23,000 (28.5%) in provision for losses
on foreclosed assets and $143,000 (50.9%) in amortization of intangible assets.
The increase in compensation and benefits was due in large part to cost
increases in employee benefits, such as health insurance. The increase in other
expenses was primarily due to additional costs related to a proxy contest in
connection with the 2002 annual meeting.
Federal income taxes decreased $857,000 to $342,000 for the nine-month
period ended September 30, 2002, compared to $1.2 million for the same period in
2001. The primary reason for this increase was the decrease in pre-tax income.
19
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a certain level of cash and other liquid assets to
fund normal volumes of loan commitments, deposit withdrawals and other
obligations. The Office of Thrift Supervision (the "OTS") regulations currently
require each savings association to maintain sufficient liquidity to ensure its
safe and sound operation.
The Company's primary sources of funds are deposits and proceeds from
payments of principal and interest on loans and the sale or maturity of
investment securities and mortgage-backed securities. Management considers
current liquidity and additional sources of funds adequate to meet outstanding
liquidity needs.
Federally insured savings banks, such as the Bank, are required by federal
law and OTS regulations to maintain minimum levels of regulatory capital. The
OTS has established the following minimum capital requirements: a risk-based
capital ratio, a core capital ratio and a tangible capital ratio. In addition to
these minimum regulatory capital requirements, another provision of federal law
grants the OTS broad power to take prompt corrective action to resolve the
problems of undercapitalized institutions. The OTS regulations implementing this
statutory authority (the "prompt corrective action regulations") establish other
capital thresholds which determine whether an institution will be deemed to be
"well capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" or "critically undercapitalized". The capital category to
which an institution is assigned in turn determines the actions the OTS may take
to address the institution's undercapitalization. The capital regulations of the
OTS exclude the effect of accumulated other comprehensive income for the purpose
of calculating regulatory capital.
The capital regulations currently require tangible capital of at least 1.5%
of adjusted total assets (as defined by regulation). Under the prompt corrective
action regulations, however, an institution with a ratio of tangible capital to
total assets below 2.0% is deemed to be "critically undercapitalized" and, as
such, will be subject to a variety of sanctions under the prompt corrective
action regulations, including, without limitation, limits on asset growth,
restrictions on activities and, ultimately, the appointment of a receiver.
Tangible capital generally includes common stockholders' equity and retained
income and certain non-cumulative perpetual preferred stock and related income
less intangible assets (other than specified amounts of mortgage servicing
rights) and certain non-includable investments in subsidiaries.
The capital regulations also currently require core capital equal to at
least 3.0% of adjusted total assets (as defined by regulation). Under the prompt
corrective action regulations, however, an institution with a ratio of core
capital to adjusted total assets of 3.0% will be deemed to be "adequately
capitalized" only if the institution also has a composite rating of "1" under
the Uniform Financial Institutions Rating System ("UFIRS"). All other
institutions must maintain a minimum ratio of core capital to adjusted total
assets of 4.0% in order to be deemed to be "adequately capitalized", and an
institution, regardless of its UFIRS rating, will be deemed to be "well
capitalized" only if it maintains a ratio of core capital to adjusted total
assets of at least 5.0%. If an institution fails to remain at least "adequately
capitalized", the OTS may impose one or more of a variety of sanctions on the
institution to address its undercapitalized condition, including, without
limitation, requiring the submission of a capital plan, restricting growth and
restricting the payment of capital distributions (such as dividends). Core
capital generally consists of tangible capital plus specified amounts of certain
intangible assets.
20
The OTS risk-based requirement currently requires associations to have
total capital of at least 8.0% of risk-weighted assets. In order to be
considered "well capitalized" under the prompt corrective action regulations,
however, an institution must maintain a ratio of total capital to total
risk-weighted assets of at least 10.0% and a ratio of core capital to total
risk-weighted assets of at least 6.0%. Total capital consists of core capital
plus supplementary capital, which consists of, among other things, maturing
capital instruments, such as subordinated debt and mandatorily redeemable
preferred stock, and a portion of the Bank's general allowance for losses on
loans.
As of September 30, 2002, the Bank exceeded all current minimum regulatory
capital standards and was deemed to be "well capitalized" for purposes of the
OTS's prompt corrective action regulations. At September 30, 2002, the Bank's
tangible capital was $34.3 million, or 6.4%, of adjusted total assets, which
exceeded the 1.5% requirement by $26.2 million and exceeded the 2.0% "critically
undercapitalized" threshold by $23.6 million. In addition, at September 30,
2002, the Bank had core capital of $34.3 million, or 6.4%, of adjusted total
assets, which exceeded the 4.0% requirement by $12.9 million and exceeded the
5.0% "well capitalized" threshold by $7.5 million. The Bank had risk-based
capital of $37.4 million at September 30, 2002, or 10.8%, of risk-adjusted
assets, which exceeded the minimum risk-based capital requirement by $9.8
million and exceeded the 10.0% "well capitalized" threshold by $2.9 million.
Additionally, the Bank's $34.3 million of core capital equaled 10.0% of total
risk-weighted assets, which exceeded the 6.0% "well capitalized" threshold by
$13.6 million.
STOCK REPURCHASE
During the quarter ended September 30, 2002, the Company repurchased 15,420
shares of common stock at a total cost of $568,000 under its current stock
repurchase program. During the first nine months of 2002, the Company
repurchased 83,612 shares of common stock at a total cost of $3.2 million.
Through September 30, 2002, a total of 753,119 shares of common stock of the
Company had been purchased under the current and previous repurchase programs at
a total cost of $17.6 million. As of September 30, 2002, the Company held
584,119 shares of its common stock as treasury stock. During the period from
September 30, 2002 through November 1, 2002, no additional shares of common
stock were repurchased.
STOCK OPTIONS
During the third quarter of 2002, no options on shares of common stock were
exercised. Between September 30, 2002 and November 1, 2002, no options on shares
of common stock were exercised. Through November 1, 2002, no notice was received
from the one remaining holder of options of the intention to exercise options.
DIVIDENDS
On October 8, 2002, a cash dividend of $.15 per share was declared, payable
on November 27, 2002 to stockholders of record as of November 12, 2002. The
Company has paid a dividend every quarter since the dividend program was
instituted in the first quarter of 1995. Future dividends will depend primarily
upon earnings, financial condition and need for funds, as well as restrictions
imposed by regulatory authorities regarding dividend payments and capital
requirements.
21
CONTROLS AND PROCEDURES
Based upon an evaluation within the 90 days prior to the filing date of
this report, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the date of the evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This document (including information incorporated by reference) contains,
and future oral and written statements of the Company and its management may
contain, forward-looking statements, within the meaning of such term in the
Private Securities Litigation Reform Act of 1995, with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of the Company. Forward-looking statements, which may be based upon
beliefs, expectations and assumptions of the Company's management and on
information currently available to management, are generally identifiable by the
use of words such as "believe," "expect," "anticipate," "plan," "intend"
"estimate," "may," "will," "would," "could," "should" or other similar
expressions. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and the
Company undertakes no obligation to update any statement in light of new
information or future events.
The Company's ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Factors which could have a material
adverse effect on the operations and future prospects of the Company and its
subsidiaries include, but are not limited to, the following:
. The strength of the United States economy in general and the
strength of the local economies in which the Company conducts its
operations which may be less favorable than expected and may
result in, among other things, a deterioration in the credit
quality and value of the Company's assets.
. The economic impact of the terrorist attacks that occurred on
September 11th, as well as any future threats and attacks, and the
response of the United States to any such threats and attacks.
. The effects of, and changes in, federal, state and local laws,
regulations and policies affecting banking, securities, insurance
and monetary and financial matters.
. The effects of changes in interest rates (including the effects of
changes in the rate of prepayments of the Company's assets) and
the policies of the Board of Governors of the Federal Reserve
System.
. The ability of the Company to compete with other financial
institutions as effectively as the Company currently intends due
to increases in competitive pressures in the financial services
sector.
. The inability of the Company to obtain new customers and to retain
existing customers.
. The timely development and acceptance of products and services,
including products and services offered through alternative
delivery channels such as the Internet.
22
. 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.
23
TABLE I
NET INTEREST INCOME ANALYSIS (UNAUDITED)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
Three Months Ended September 30,
--------------------------------
2002 2001
---- ----
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
(Dollars in Thousands)
Interest-earning assets:
Loans (1) $398,835 $ 6,867 6.83% $378,830 $ 7,196 7.54%
Mortgage-backed securities (2) 41,758 601 5.71% 13,197 228 6.85%
Investment securities (3) 38,752 530 5.43% 42,265 616 5.78%
Other interest-earning assets 27,187 87 1.17% 10,738 135 4.99%
FHLB stock 2,698 34 5.00% 2,397 37 6.12%
-------- ------- -------- -------
Total interest-earning assets 509,230 8,119 6.33% 447,427 8,212 7.28%
-------- ------- -------- -------
Other assets 39,901 29,337
-------- --------
Total assets $549,131 $476,764
======== ========
Interest-bearing liabilities:
Certificate accounts $254,665 2,508 3.91% $252,649 3,469 5.45%
Savings deposits 73,401 349 1.89% 64,442 423 2.60%
Demand and NOW deposits 100,518 379 1.50% 89,257 467 2.08%
Borrowings 75,650 827 4.34% 27,750 308 4.40%
-------- ------- -------- -------
Total interest-bearing liabilities 504,234 4,063 3.20% 434,098 4.667 4.27%
-------- ------- -------- -------
Other liabilities 3,803 2,798
-------- --------
Total liabilities 508,037 436,896
-------- --------
Stockholders' equity 41,094 39,868
-------- --------
Total liabilities and stockholders' equity $549,131 $476,764
======== ========
Net interest income $ 4,056 $ 3,545
======= =======
Net interest rate spread 3.13% 3.01%
===== ====
Net earning assets $ 4,996 $ 13,329
======== ========
Net yield on average interest-earning
assets (net interest margin) 3.16% 3.14%
===== ====
Average interest-earning assets to
average interest-bearing liabilities 100.99% 103.07%
======= =======
(1) Calculated including loans held for sale, and net of deferred loan fees,
loan discounts, loans in process and the allowance for losses on loans.
(2) Calculated including mortgage-backed securities available-for-sale.
(3) Calculated including investment securities available-for-sale and
certificates of deposit.
24
TABLE II
NET INTEREST INCOME ANALYSIS (UNAUDITED)
KANKAKEE BANCORP, INC. AND SUBSIDIARY
Nine Months Ended September 30,
-------------------------------
2002 2001
---- ----
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
(Dollars in Thousands)
Interest-earning assets:
Loans (1) $396,899 $20,923 7.05% $361,639 $21,136 7.81%
Mortgage-backed securities (2) 32,570 1,414 5.80% 14,491 765 7.06%
Investment securities (3) 37,414 1,520 5.43% 45,484 2,028 5.96%
Other interest-earning assets 23,945 260 1.45% 15,508 624 5.38%
FHLB stock 2,602 98 5.04% 2,290 112 6.54%
-------- ------- -------- -------
Total interest-earning assets 493,430 24,215 6.56% 439,412 24,665 7.50%
-------- ------- -------- -------
Other assets 36,244 29,424
-------- --------
Total assets $529,674 $468,836
======== ========
Interest-bearing liabilities:
Certificate accounts $252,621 8,013 4.24% $250,050 10,709 5.73%
Savings deposits 72,219 1,089 2.02% 61,058 1,185 2.59%
Demand and NOW deposits 98,998 1,140 1.54% 87,503 1,476 2.26%
Borrowings 60,010 1,992 4.44% 27,000 999 4.95%
-------- ------- -------- -------
Total interest-bearing liabilities 483,848 12,234 3.38% 425,611 14,369 4.51%
-------- ------- -------- -------
Other liabilities 4,496 3,833
-------- --------
Total liabilities 488,344 429,444
-------- --------
Stockholders' equity 41,330 39,392
-------- --------
Total liabilities and stockholders' equity $529,674 $468,836
======== ========
Net interest income $11,981 $10,296
======= =======
Net interest rate spread 3.18% 2.99%
===== =====
Net earning assets $ 9,582 $ 13,801
======== ========
Net yield on average interest-earning
assets (net interest margin) 3.25% 3.13%
===== =====
Average interest-earning assets to
average interest-bearing liabilities 101.98% 103.24%
======= =======
(1) Calculated including loans held for sale, and net of deferred loan fees,
loan discounts, loans in process and the allowance for losses on loans.
(2) Calculated including mortgage-backed securities available-for-sale.
(3) Calculated including investment securities available-for-sale and
certificates of deposit.
25
KANKAKEE BANCORP, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - There are no material pending legal proceedings to
which the Company or the Bank is a party other than ordinary routine
litigation incidental to their respective businesses.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits - 99.1 - Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
b. Reports on Form 8-K
On July 19, 2002, the Company filed a report on Form 8-K stating
under Item 5 that the Company had, on July 19, 2002 issued a news
release announcing its earnings for the quarter ended June 30,
2002, as well as other recent corporate events.
On August 30, 2002, the Company filed a report on Form 8-K
stating under Item 5 that the Company had, on August 30, 2002,
issued a news release announcing that it had issued a letter to
stockholders in connection with the payment of its second quarter
dividend.
On October 4, 2002, the Company filed a report on Form 8-K
stating under Item 5 that the Company on October 4, 2002 issued a
news release announcing that it took a nonrecurring after-tax
charge of approximately $2.17 million, or approximately $1.85 per
diluted share, to its third quarter earnings.
On October 10, 2002, the Company filed a report on Form 8-K
stating under Item 5 that the Company, on October 10, 2002 issued
a news release announcing the signing of a definitive agreement
by its wholly-owned subsidiary, Kankakee Federal Savings Bank, to
sell its banking office in Hoopeston, Illinois to Capstone Bank,
N.A., of Watseka, Illinois.
On October 22, 2002, the Company filed a report on Form 8-K
stating under Item 5 that the Company had, on October 22, 2002
issued a news release announcing its earnings for the quarter
ended September 30, 2002, as well as other recent corporate
events.
26
KANKAKEE BANCORP, INC.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KANKAKEE BANCORP, INC.
Registrant
Date: November 6, 2002 /s/ LARRY D. HUFFMAN
---------------------------- --------------------------------
President and CEO
Date: November 6, 2002 /s/ RONALD J. WALTERS
----------------------------- --------------------------------
Vice President and Treasurer
(Principal Financial
And Accounting Officer)
27
I, Larry D. Huffman, President and Chief Executive Officer of the
Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kankakee Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 6, 2002
/s/ Larry D. Huffman
--------------------------------------
President and CEO
28
I, Ronald J. Walters, Vice President and Treasurer and Principal
Financial Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kankakee Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 6, 2002
/s/ Ronald J. Walters
--------------------------------------------
Vice President and Treasurer
(Principal Financial and Accounting Officer)
29