SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------- -------
Commission file number 0-28696
Home Bancorp of Elgin, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4090333
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 North Spring Street, Elgin, Illinois 60120
(Address of principal executive offices)
(Zip Code)
(847) 742-3800
(Registrant's telephone number including area code)
N/A
------------------------------------
(Former name, former address and former fiscal year,
if changed from last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve 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 .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Outstanding at
Class October 31, 1998
----- ----------------
Common Stock,
par value $.01 6,638,799
<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
-------------------------------
<TABLE>
<CAPTION>
<S> <C>
Item 1. Financial Statements of Home Bancorp of Elgin, Inc.
Consolidated Balance Sheets (Unaudited) -- September 30, 1998
and December 31, 1997 ................................................................................. 1
Consolidated Statements of Earnings (Unaudited) -- Three and nine months ended
September 30, 1998 and 1997 ........................................................................... 2
Consolidated Statements of Cash Flows (Unaudited) -- Three and nine months ended
September 30, 1998 and 1997 ........................................................................... 3
Notes to Unaudited Consolidated Financial Statements .................................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................................................. 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 17
PART II -- OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings .................................................................................... 19
Item 2. Changes in Securities and Use of Proceeds ............................................................ 19
Item 3. Defaults upon Senior Securities ...................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders .................................................. 19
Item 5. Other Information .................................................................................... 19
Item 6. Exhibits and Reports on Form 8-K ..................................................................... 19
Signatures...................................................................................................... 20
</TABLE>
- i -
<PAGE>
Part I - FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
HOME BANCORP OF ELGIN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------- ---------
(In thousands, except
share amounts)
<S> <C> <C>
ASSETS
Cash and due from banks ................................................................. $ 6,193 $ 6,852
Interest-earning deposits ............................................................... 28,898 34,708
Loans receivable, net ................................................................... 338,026 298,661
Government National Mortgage Association
mortgage-backed securities held to maturity ........................................... 63 92
Accrued interest receivable ............................................................. 1,619 1,437
Real estate owned and in judgment, at lower of cost or fair value ....................... 342 286
Federal Home Loan Bank of Chicago stock, at cost ........................................ 2,954 2,606
Office properties and equipment, net .................................................... 6,768 7,113
Prepaid expenses and other assets ....................................................... 1,242 840
--------- ---------
Total assets .......................................................................... $ 386,105 $ 352,595
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits ........................................................................ $ 264,096 $ 248,218
Borrowed funds .......................................................................... 25,000 5,000
Advance payments by borrowers for taxes and insurance ................................... 1,464 2,285
Accrued interest payable and other liabilities .......................................... 2,235 1,877
--------- ---------
Total liabilities ..................................................................... 292,795 257,380
--------- ---------
Stockholders' Equity:
Preferred stock, $.01 par value, 3,000,000 shares
authorized; none outstanding .......................................................... -- --
Common stock, $.01 par value; 12,000,000 shares
authorized, 7,009,250 shares issued ................................................... 70 70
Additional paid-in capital .............................................................. 68,731 68,324
Retained earnings, substantially restricted ............................................. 38,017 38,095
Treasury stock, at cost (350,451 and 153,451 shares at September
30, 1998 and December 31, 1997, respectively) ......................................... (5,549) (2,470)
Common stock acquired by Recognition and Retention Plan ................................. (3,224) (3,898)
Common stock acquired by Employee Stock Ownership Plan .................................. (4,735) (4,906)
--------- ---------
Total stockholders' equity ............................................................ 93,310 95,215
--------- ---------
Total liabilities and stockholders' equity .............................................. $ 386,105 $ 352,595
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- 1 -
<PAGE>
HOME BANCORP OF ELGIN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
------- ------- ------- -------
(In thousands, except
per share amounts)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans secured by real estate ...................................... $ 6,153 $ 5,545 $17,869 $15,928
Other loans ....................................................... 15 14 44 44
Mortgage-backed securities held to maturity ....................... 1 2 4 7
Investment securities held to maturity ............................ -- 454 -- 1,643
Interest-earning deposits ......................................... 435 267 1,620 1,013
Federal Home Loan Bank of Chicago stock ........................... 49 44 139 133
------- ------- ------- -------
Total interest income .......................................... 6,653 6,326 19,676 18,768
INTEREST EXPENSE
Savings deposits .................................................. 2,893 2,613 8,499 7,789
Borrowed funds .................................................... 123 117 139 122
------- ------- ------- -------
Total interest expense ......................................... 3,016 2,730 8,638 7,911
------- ------- ------- -------
Net interest income before provision for loan
losses ............................................................. 3,637 3,596 11,038 10,857
Provision for loan losses ......................................... 30 30 90 90
------- ------- ------- -------
Net interest income after provision for loan losses ............... 3,607 3,566 10,948 10,767
------- ------- ------- -------
NON-INTEREST INCOME
Service fee income ................................................ 319 256 804 751
Gain on sale of real estate owned ................................. 1 -- 14 34
Other income ...................................................... 7 6 22 200
------- ------- ------- -------
Total non-interest income ...................................... 327 262 840 985
NON-INTEREST EXPENSE
Compensation and benefits ......................................... 1,449 1,468 4,518 4,057
Occupancy expense ................................................. 395 401 1,193 1,202
Federal deposit insurance premiums ................................ 63 61 182 156
Advertising and promotion ......................................... 92 107 314 315
Automated teller machines ......................................... 111 107 317 311
Professional services ............................................. 31 134 339 349
Data processing ................................................... 238 225 698 685
Other ............................................................. 303 308 1,012 1,033
------- ------- ------- -------
Total non-interest expense ..................................... 2,682 2,811 8,573 8,108
------- ------- ------- -------
Income before income tax expense .................................. 1,252 1,017 3,215 3,644
Income tax expense ................................................ 486 394 1,247 1,414
------- ------- ------- -------
Net income ..................................................... $ 766 $ 623 $ 1,968 $ 2,230
======= ======= ======= =======
Earnings per share:
Basic ............................................................. $ 0.12 $ 0.10 $ 0.31 $ 0.35
======= ======= ======= =======
Diluted ........................................................... $ 0.12 $ 0.10 $ 0.31 $ 0.35
======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- 2 -
<PAGE>
HOME BANCORP OF ELGIN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income .................................................................... $ 766 $ 623 $ 1,968 $ 2,230
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................................................. 152 153 455 472
Provision for loan losses ..................................................... 30 30 90 90
Accretion of discounts, net ................................................... -- (113) -- (589)
Market adjustment for committed ESOP shares ................................... 61 110 407 261
Cost of ESOP shares released .................................................. -- -- 171 --
Cost of RRP ................................................................... 225 225 675 375
Increase (decrease) in deferred loan fees ..................................... 5 (66) 141 (184)
Gain on sale of real estate owned ............................................. (1) -- (14) (34)
Real estate owned expense ..................................................... (6) -- 2 --
Decrease (increase) in accrued interest receivable ............................ (65) 258 (182) 190
Increase in prepaid expenses and other assets, net ............................ (398) (6) (402) (156)
Increase (decrease) in accrued interest payable and other liabilities, net .... 258 (9) 356 (377)
-------- -------- -------- --------
Net cash provided by operating activities .................................. 1,028 1,205 3,668 2,278
-------- -------- -------- --------
Cash flows from investing activities:
Net increase in loans receivable .............................................. (18,242) (11,188) (39,702) (29,689)
Repayment of mortgage-backed securities held to maturity ...................... 10 14 29 42
Maturities of investment securities held to maturity .......................... -- 34,000 -- 54,374
Purchase of office properties and equipment ................................... (9) (11) (110) (120)
Proceeds from the sale of REO ................................................. -- -- 62 359
Redemption (purchase) of stock in the Federal Home Loan Bank of Chicago ....... -- -- (348) 72
-------- -------- -------- --------
Net cash provided by (used in) investing activities ........................ (18,241) 22,815 (40,069) 25,038
-------- -------- -------- --------
Cash flows from financing activities:
Net increase (decrease) in savings deposits ................................... (3,196) (4,069) 15,878 (6,778)
Increase (decrease) in Federal Home Loan Bank of Chicago advances ............. 25,000 (5,000) 20,000 --
Net decrease in advance payments by borrowers for taxes and insurance ......... (913) (1,252) (821) (1,174)
Purchase of RRP stock ......................................................... -- -- -- (4,498)
Purchase of Treasury stock .................................................... (3,079) -- (3,079) (2,470)
Dividends paid on common stock ................................................ (675) (686) (2,046) (1,387)
-------- -------- -------- --------
Net cash provided by (used in) financing activities ........................... 17,137 (11,007) 29,932 (16,307)
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents .............................. (77) 13,013 (6,470) 11,009
Cash and cash equivalents at beginning of period .............................. 35,168 25,999 41,561 28,003
-------- -------- -------- --------
Cash and cash equivalents at end of period .................................... $ 35,091 $ 39,012 $ 35,091 $ 39,012
======== ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ............................................................... $ 2,999 $ 2,669 $ 8,630 $ 7,848
Income taxes ........................................................... 570 406 1,604 902
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- 3 -
<PAGE>
HOME BANCORP OF ELGIN, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The consolidated financial statements included herein have been prepared by
the Company without audit. In the opinion of management, the quarterly and nine
month unaudited consolidated financial statements include all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the financial position and results of operations at and for the periods
presented. Certain information and footnote disclosures normally included in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The Company believes that the disclosures are adequate to make the
information presented not misleading, however, the results for the periods
presented are not necessarily indicative of results to be expected for the
entire year.
(2) Earnings Per Share
Earnings per share of common stock for the three and nine months ended
September 30, 1998 have been calculated according to the guidelines of Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
Earnings per share for the three and nine months ended September 30, 1997 have
been restated to comply with the provisions of SFAS 128. ESOP shares are only
considered outstanding for earnings per share calculations when they are
released or committed to be released.
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic:
Net Income ..................................................... $ 766,293 $ 622,703 $1,967,794 $2,230,274
Weighted average common shares outstanding ................... 6,260,514 6,309,078 6,340,506 6,402,947
---------- ---------- ---------- ----------
Basic earnings per share ..................................... $ 0.12 $ 0.10 $ 0.31 $ 0.35
========== ========== ========== ==========
Diluted:
Net income ................................................... $ 766,293 $ 622,703 $1,967,794 $2,230,274
Weighted average common shares outstanding ................... 6,260,514 6,309,078 6,340,506 6,402,947
Effect of dilutive stock options outstanding ................. -- 122,613 69,111 54,555
---------- ---------- ---------- ----------
Diluted weighted average common shares
outstanding ................................................ $6,260,514 $6,431,691 $6,409,617 $6,457,502
---------- ---------- ---------- ----------
Diluted earnings per share ................................... $ 0.12 $ 0.10 $ 0.31 $ 0.35
========== ========== ========== ==========
</TABLE>
(3) Definitive Merger Agreement
The Company executed a Definitive Merger Agreement on June 2, 1998 to merge
with State Financial Services Corporation ("State"), a bank holding company
headquartered in Hales Corners, Wisconsin. The organization resulting from the
merger will retain the name of State Financial Services Corporation. The merger
is expected to be accounted for as a pooling of interests and is subject to
several contingencies, including SEC registration, regulatory approval, and
shareholder approval from both the Company and State shareholders. Both
Companies held a special meeting of their respective shareholders on Thursday,
November 5, 1998 to vote on the merger. The shareholders of both Companies
approved the merger agreement. State reported assets of $417.4 million at
September 30, 1998. The Company and State have also entered into a Stock Option
Agreement whereby, subject to certain conditions, the Company would grant to
State an option to acquire up to 19.9% of the Company's outstanding shares. The
merger is expected to close in the fourth quarter of 1998.
(4) Commitments and Contingencies
At September 30, 1998, the Company had outstanding commitments to originate
mortgage loans of $16.1 million, of which $15.7 million were fixed-rate
commitments.
- 4 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
On September 26, 1996, Home Federal Savings and Loan Association of Elgin
("Home Federal" or the "Association") completed its conversion from mutual to
stock form and became a wholly-owned subsidiary of Home Bancorp of Elgin, Inc.
("Home Bancorp" or the "Company"). On such date, the Company sold 7,009,250
shares of its common stock, par value $.01 per share, to the public, at a per
share price of $10.00. The conversion and offering raised $62.4 million in net
proceeds.
Home Bancorp's sole business activity consists of the ownership of the
Association. The Company also invests in short-term investment grade marketable
securities and other liquid investments. The Association's principal business
consists of attracting deposits from the public and investing those deposits,
along with funds generated from operations, primarily in loans secured by
mortgages on one- to four-family residences. The Association's results of
operations are dependent primarily on net interest income, which is the
difference between the interest income earned on its interest-earning assets,
such as loans, interest-earning deposits and securities, and the interest
expense on its interest-bearing liabilities, such as savings deposits and
borrowed funds. The Association also generates non-interest income such as
service charges and other fees. The Association's non-interest expenses
primarily consist of employee compensation and benefits, occupancy expenses,
federal deposit insurance premiums, data processing fees and other operating
expenses. The Association'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 agencies.
- 5 -
<PAGE>
The selected financial ratios and other data of the Company set forth below
is derived in part from, and should be read in conjunction with, the Unaudited
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in this report.
<TABLE>
<CAPTION>
At or For the At or For the
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(Dollars in thousands, except
shares and per share amounts)
(Unaudited)
<S> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS(1):
PERFORMANCE RATIOS:
Return on average assets .............................. 0.81% 0.70% 0.71% 0.84%
Return on average equity .............................. 3.27 2.65 2.76 3.05
Average interest rate spread(2) ....................... 2.78 3.01 2.98 3.05
Net interest margin(3) ................................ 3.97 4.19 4.12 4.23
Average interest-earning assets to average
interest-bearing liabilities ......................... 136.11 137.14 135.42 138.35
Non-interest expense to average assets ................ 2.83 3.17 3.08 3.04
CAPITAL RATIOS(1):
Average equity to average assets ...................... 24.73 26.50 25.55 27.45
Consolidated equity to total assets at end of .........
period ............................................... 24.17 27.56 24.17 27.56
Tangible capital(4) ................................... 19.43 21.10 19.43 21.10
Core capital(4) ....................................... 19.43 21.10 19.43 21.10
Total risk-based capital(4) ........................... 32.50 38.39 32.50 38.39
ASSET QUALITY RATIOS AND OTHER DATA(1):
Total non-performing loans(5) ......................... $ 597 $ 940 $ 597 $ 940
Real estate owned, net ................................ 342 264 342 264
Non-performing loans to total loans(6) ................ 0.18% 0.32% 0.18% 0.32%
Non-performing assets to total assets ................. 0.24 0.35 0.24 0.35
Allowance for loan losses to:
Non-performing loans ................................. 192.85 110.16 192.85 110.16
Total loans(6) ....................................... 0.34 0.35 0.34 0.35
Number of shares outstanding .......................... 6,658,799 6,855,799 6,658,799 6,855,799
Book value per share .................................. $ 14.01 $ 13.77 $ 14.01 $ 13.77
</TABLE>
- ---------------------------
(1) With the exception of end-of-period ratios, all ratios are based on average
monthly balances during the indicated periods and are annualized where
appropriate. Capital Ratios and Asset Quality Ratios And Other Data are
end-of-period ratios and data.
(2) The average interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted-average
cost of interest-bearing liabilities.
(3) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
(4) These regulatory capital ratios are for Home Federal Savings and Loan
Association of Elgin only.
(5) Non-performing loans consist of non-accrual loans; the Company did not have
any loans that were 90 days or more past due and still accruing at any of
the dates referred to in the table above.
(6) Total loans represents gross loans less deferred loan fees and loans in
process.
- 6 -
<PAGE>
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income depends upon the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
The following table sets forth certain information relating to the
Company's statements of financial condition and the statements of operations for
the three and nine months ended September 30, 1998 and 1997, and reflects the
average yield on assets and average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the periods
shown. Average balances are derived from average monthly balances. The yields
and costs include fees which are considered adjustments to yields.
- 7 -
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
----------------------------------------
1998 1997
---------------------------------- -----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Real estate loans(1) ............................. $330,094 $6,153 7.46% $287,378 $5,545 7.72%
Other loans ...................................... 653 15 9.19 599 14 9.35
Mortgage-backed securities ....................... 66 1 6.06 103 2 7.77
Investment securities ............................ -- -- -- 32,258 454 5.63
Interest-earning deposits ........................ 32,567 435 5.34 20,416 267 5.23
FHLB of Chicago stock ............................ 2,954 49 6.64 2,606 44 6.75
-------- -------- ---- --------- -------- ----
Total interest-earning assets ................. 366,334 6,653 7.26% 343,360 6,326 7.37%
-------- -------- ---- --------- -------- ----
Allowance for loan losses ....................... (1,141) (1,025)
Non-interest earning assets ..................... 14,259 12,581
-------- ---------
Total asset ............................... $379,452 $354,916
======== =========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW/Super NOW accounts ........................ $ 42,415 $ 229 2.16% $ 41,759 $ 222 2.13%
Money market accounts ......................... 16,456 130 3.16 16,243 132 3.25
Passbook accounts ............................. 60,143 466 3.10 61,134 476 3.11
Certificates of deposit ....................... 141,872 2,068 5.83 123,349 1,783 5.78
Borrowed funds ................................ 8,261 123 5.96 7,880 117 5.94
-------- -------- ---- --------- -------- ----
Total interest-bearing liabilities .......... 269,147 3,016 4.48% 250,365 2,730 4.36%
-------- -------- ---- --------- -------- ----
Non-interest bearing NOW accounts ............... 6,829 5,693
Other non-interest-bearing liabilities .......... 9,632 4,792
-------- ---------
Total liabilities ......................... 285,608 260,850
-------- ---------
Stockholders' equity .......................... 93,844 94,066
--------- ---------
Total liabilities and stockholders' equity. $ 379,452 $ 354,916
========= =========
Net interest income.............................. $ 3,637 $ 3,596
======= ==========
Interest rate spread(2).......................... 2.78% 3.01%
==== ====
Net interest margin(3)........................... 3.97% 4.19%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities................... 136.11% 137.14%
====== ======
</TABLE>
- ---------------------------
(1) In computing the average balance of loans, non-accrual loans have been
included.
(2) Interest rate spread represents the difference between the average yield
earned on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
- 8 -
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
------------------------------------------------------------------------------------
1998 1997
---------------------------------------- ----------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Real estate loans(1) ...................... $314,168 $ 17,869 7.58% $274,121 $ 15,928 7.75%
Other loans ............................... 644 44 9.11 634 44 9.25
Mortgage-backed securities ................ 75 4 7.11 120 7 7.78
Investment securities ..................... -- -- -- 38,905 1,643 5.63
Interest-earning deposits ................. 39,277 1,620 5.50 25,921 1,013 5.21
FHLB of Chicago stock ..................... 2,838 139 6.53 2,630 133 6.74
-------- -------- ---- -------- -------- ----
Total interest-earning assets.......... 357,002 19,676 7.35% 342,331 18,768 7.31%
-------- -------- ---- -------- -------- ----
Allowance for loan losses.................. (1,112) (995)
Non-interest earning assets................ 15,798 14,372
-------- --------
Total assets........................... $371,688 $355,708
======== ========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW/Super NOW accounts................. $ 43,031 $ 683 2.12% $42,118 $674 2.13%
Money market accounts.................. 15,987 386 3.22 16,512 394 3.18
Passbook accounts...................... 60,237 1,388 3.07 62,400 1,439 3.07
Certificates of deposit................ 141,223 6,042 5.70 123,653 5,282 5.70
Borrowed funds......................... 3,150 139 5.88 2,755 122 5.90
-------- -------- ---- -------- -------- ----
Total interest-bearing liabilities..... 263,628 8,638 4.37% 247,438 7,911 4.26%
-------- -------- ---- -------- -------- ----
Non-interest bearing NOW accounts.......... 6,654 5,698
Other non-interest-bearing liabilities..... 6,454 4,923
-------- --------
Total liabilities.......................... 276,736 258,059
-------- --------
Stockholders' equity....................... 94,952 97,649
-------- --------
Total liabilities and stockholders' equity. $371,688 $355,708
======== ========
Net interest income........................ $ 11,038 $ 10,857
========= ========
Interest rate spread(2).................... 2.98% 3.05%
==== ====
Net interest margin(3)..................... 4.12% 4.23%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities........... 135.42% 138.35%
====== ======
</TABLE>
- ---------------------------
(1) In computing the average balance of loans, non-accrual loans have been
included.
(2) Interest rate spread represents the difference between the average yield
earned on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
- 9 -
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
TOTAL ASSETS. Total assets increased $33.5 million or 9.5% from $352.6
million at December 31, 1997 to $386.1 million at September 30, 1998. The
increase in total assets was primarily due to funds received from the $15.9
million increase in savings deposits and the $20.0 million increase in borrowed
funds, which were used to fund a net increase in loans receivable of
$39,365,000.
CASH AND DUE FROM BANK. Cash and due from banks decreased $659,000 or 9.6%
from $6.9 million at December 31, 1997 to $6.2 million at September 30, 1998.
This decrease was primarily due to the use of funds for the increase in loans
receivable.
INTEREST-EARNING DEPOSITS. Interest-earning deposits decreased $5.8 million
or 16.7% from $34.7 million at December 31, 1997 to $28.9 million at September
30, 1998. This decrease was primarily due to use of funds for the increase in
loans receivable and the purchase of treasury stock.
LOANS RECEIVABLE. Loans receivable increased $39,365,000 or 13.2% from
$298,661,000 at December 31, 1997 to $338,026,000 at September 30, 1998. This
increase was primarily due to the strength of the local economy and the impact
of the lower interest rate environment.
SAVINGS DEPOSITS. Savings deposits increased $15.9 million or 6.4% from
$248.2 million at December 31, 1997 to $264.1 million at September 30, 1998.
This increase was primarily due to the offering of a special rate short-term
certificate of deposit. The proceeds were used primarily to fund the increase in
loans receivable.
BORROWED FUNDS. Borrowed funds, represented by FHLB advances, increased
$20.0 million from $5.0 million at December 31, 1997 to $25.0 million at
September 30, 1998. The proceeds were used to fund the increase in loans
receivable.
STOCKHOLDERS' EQUITY. Stockholders' equity decreased $1.9 million or 2.0%
from $95.2 million at December 31, 1997 to $93.3 million at September 30, 1998.
Additional paid-in capital increased $407,000 or 0.6% from $68,324,000 at
December 31, 1997 to $68,731,000 at September 30, 1998, primarily due to market
value adjustments on Employee Stock Ownership Plan (the "ESOP") shares released.
Common stock acquired by the Recognition and Retention Plan ("RRP") decreased
$674,000 or 17.3% from $3,898,000 at December 31, 1997 to $3,224,000 at
September 30, 1998 due to RRP amortization expense. Common stock acquired by the
ESOP decreased $171,000 or 3.5% from $4.9 million at December 31, 1997 to $4.7
million at September 30, 1998 due to the release of stock to plan participants.
Retained earnings decreased $78,000 or 0.2% from $38.1 million at December 31,
1997 to $38.0 million at September 30, 1998. This decrease was due to $2,046,000
in dividends paid on common stock, which was offset by $1,968,000 in net income
for the nine months ended September 30, 1998. Treasury stock increased $3.1
million or 124.7% from $2.5 million at December 31, 1997 to $5.5 million at
September 30, 1998. This increase was due to the purchase of stock at an average
price of $15.63 per share under the Company's stock repurchase program.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
AND 1997
GENERAL. Net income increased $143,000 or 23.0% from $623,000 or $0.10
diluted earnings per share for the three months ended September 30, 1997 to
$766,000 or $0.12 diluted earnings per share for the three months ended
September 30, 1998. The increase was primarily due to an increase of $41,000 in
net interest income, a $65,000 increase in noninterest income and a $129,000
decrease in noninterest expense, which was partially offset by an increase of
$92,000 in income tax expense.
INTEREST INCOME. Interest income increased $327,000 or 5.2% from $6,326,000
for the three months ended September 30, 1997 to $6,653,000 for the three months
ended September 30, 1998. This increase was primarily due to an increase in the
average balance of interest-earning assets of $22,974,000 or 6.7% from
$343,360,000 for the three months ended September 30, 1997 to $366,334,000 for
the three months ended September 30, 1998, which was partially offset by a
decrease in the average yield on interest-earning assets of 11 basis points from
7.37% for the three months ended September 30, 1997 to 7.26% for the three
months ended September 30, 1998. The decrease in the average yield on
interest-earning assets was primarily due to the decrease in the average yield
on real estate loans of 26 basis points from 7.72% for the three months ended
September 30, 1997 to 7.46% for the three months ended September 30, 1998.
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INTEREST EXPENSE. Interest expense increased $286,000 or 10.5% from
$2,730,000 for the three months ended September 30, 1997 to $3,016,000 for the
three months ended September 30, 1998. This increase was primarily due to a 12
basis point increase in the cost of average interest-bearing liabilities from
4.36% for the three months ended September 30, 1997 to 4.48% for the three
months ended September 30, 1998 and a $18,782,000 or 7.5% increase in the
average balance of interest-bearing liabilities from $250,365,000 for the three
months ended September 30, 1997 to $269,147,000 for the three months ended
September 30, 1998. The 12 basis point increase in the cost of average
interest-bearing liabilities was primarily due to higher costing certificates of
deposit. The increase in the average balance of interest-bearing liabilities was
primarily due to the Association's offering of a special rate short-term
certificate of deposit.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income
before provision for loan losses increased $41,000 or 1.1% from $3,596,000 for
the three months ended September 30, 1997 to $3,637,000 for the three months
ended September 30, 1998. This increase was primarily due to a $22,974,000 or
6.7% increase in the average balance of interest-earning assets from
$343,360,000 for the three months ended September 30, 1997 to $366,334,000 for
the three months ended September 30, 1998, which was partially offset by a
decrease of 11 basis points in the average yield from 7.37% for the three months
ended September 30, 1997 to 7.26% for the three months ended September 30, 1998.
That increase was partially offset by a $18,782,000 or 7.5% increase in the
average balance of interest-bearing liabilities from $250,365,000 for the three
months ended September 30, 1997 to $269,147,000 for the three months ended
September 30, 1998 and a 12 basis point increase in the average cost of funds
from 4.36% for the three months ended September 30, 1997 to 4.48% for the three
months ended September 30, 1998.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $30,000 for
each period. Management determined that keeping the provision for loan losses at
the same level was appropriate in light of its current review of the
Association's loan portfolio, asset quality, delinquent and non-performing
loans, the historically low loan loss experience and the national and regional
economies. Non-performing loans were $596,683 and $939,501 at September 30, 1998
and 1997, respectively. Loan chargeoffs were $510 for the three months ended
September 30, 1998 and there were no loan chargeoffs for the three months ended
September 30, 1997. The ratio of the allowance for loan losses to non-performing
loans was 192.85% and 110.16% at September 30, 1998 and 1997, respectively, and
the ratio of the allowance for loan losses to total loans was 0.34% and 0.35% at
such respective dates. Management believes that the allowance for loan losses is
reasonable and adequate to cover any known losses and any losses reasonably
expected in the existing loan portfolio. While management estimates loan losses
using the best available information, such as independent appraisals on
collateral, no assurance can be given that future additions to the allowance
will not be necessary based on changes in economic and real estate market
conditions, further information obtained regarding known problem loans,
identification of additional problem loans, regulatory examinations and other
factors, both within and outside of management's control.
NONINTEREST INCOME. Noninterest income increased $65,000 or 24.8% from
$262,000 for the three months ended September 30, 1997 to $327,000 for the three
months ended September 30, 1998. This increase was primarily due to a $63,000
increase in service fee income as a result of changes in service charges and the
institution of an ATM surcharge.
NONINTEREST EXPENSE. Noninterest expense decreased $129,000 or 4.6% from
$2.8 million for the three months ended September 30, 1997 to $2.7 million for
the three months ended September 30, 1998. This decrease was primarily due to a
decrease in compensation and benefits expense, advertising and promotion expense
and professional services expense which was partially offset by an increase in
data processing expense. Compensation and benefits expense decreased $19,000 or
1.3% from $1,468,000 for the three months ended September 30, 1997 to $1,449,000
for the three months ended September 30, 1998. This decrease was primarily due
to a decrease in ESOP expense due to a smaller market value adjustment because
of the decrease in the Company's average stock price for the three months ended
September 30, 1998, as compared to the three months ended September 30, 1997.
Advertising and promotion expense decreased $15,000 or 14.0% from $107,000 for
the three months ended September 30, 1997 to $92,000 for the three months ended
September 30, 1998. Professional services decreased $103,000 or 76.9% from
$134,000 for the three months ended September 30, 1997 to $31,000 for the three
months ended September 30, 1998. This decrease was primarily due to using
professional services for a special meeting of stockholders and evaluation of
strategic business options during the three months ended September 30, 1997.
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Although the Company has incurred costs of a similar nature in preparation for
its special stockholder's meeting on November 5, 1998, such costs are being
deferred as merger related expenses.
INCOME TAX EXPENSE. Income tax expense increased $92,000 or 23.3% from
$394,000 for the three months ended September 30, 1997 to $486,000 for the three
months ended September 30, 1998. This increase was primarily due to an increase
in taxable income. The effective tax rate was 38.7% and 38.8% for the three
months ended September 30, 1997 and 1998, respectively.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
1997
GENERAL. Net income decreased $262,000 or 11.7% from $2,230,000 or $0.35
diluted earnings per share for the nine months ended September 30, 1997 to
$1,968,000 or $0.31 diluted earnings per share for the nine months ended
September 30, 1998. The $262,000 decrease was primarily due to a decrease of
$145,000 in noninterest income and a $465,000 increase in noninterest expense.
These were offset, in part, by a $181,000 increase in net interest income before
provision for loan losses and a $167,000 decrease in income tax expense.
INTEREST INCOME. Interest income increased $908,000 or 4.8% from $18.8
million for the nine months ended September 30, 1997 to $19.7 million for the
nine months ended September 30, 1998. This increase was primarily due to an
increase in the average yield on interest-earning assets of 4 basis points from
7.31% for the nine months ended September 30, 1997 to 7.35% for the nine months
ended September 30, 1998 and an increase in the average balance of
interest-earning assets of $14.7 million or 4.3% from $342.3 million for the
nine months ended September 30, 1997 to $357.0 million for the nine months ended
September 30, 1998. The increase in the average yield was primarily due to a
change in the composition of interest-earning assets. The average balance of
real estate loans increased $40.0 million, which is a higher yielding asset,
while investment securities and interest-earning deposits decreased $25.5
million, which are lower yielding assets. The increase in the average balance
was primarily due to receipt of the proceeds from the increase in savings
deposits.
INTEREST EXPENSE. Interest expense increased $727,000 or 9.2% from
$7,911,000 for the nine months ended September 30, 1997 to $8,638,000 for the
nine months ended September 30, 1998. This increase was primarily due to an 11
basis point increase in the cost of average interest-bearing liabilities from
4.26% for the nine months ended September 30, 1997 to 4.37% for the nine months
ended September 30, 1998 and a $16.2 million or 6.5% increase in the average
balance of interest-bearing liabilities from $247.4 million for the nine months
ended September 30, 1997 to $263.6 million for the nine months ended September
30, 1998. The 11 basis point increase in the cost of average interest-bearing
liabilities was primarily due to the $17.6 million increase in higher costing
certificates of deposit. The increase in the average balance of interest-bearing
liabilities was primarily due to the Association's offering of a special rate
short-term certificate of deposit.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income
before provision for loan losses increased $181,000 or 1.7% from $10,857,000 for
the nine months ended September 30, 1997 to $11,038,000 for the nine months
ended September 30, 1998. This increase was primarily due to a $14.7 million or
4.3% increase in the average balance of interest-earning assets from $342.3
million for the nine months ended September 30, 1997 to $357.0 million for the
nine months ended September 30, 1998 and an increase of 4 basis points in the
average yield from 7.31% for the nine months ended September 30, 1997 to 7.35%
for the nine months ended September 30, 1998. These increases were partially
offset by a $16.2 million or 6.5% increase in the average balance of
interest-bearing liabilities from $247.4 million for the nine months ended
September 30, 1997 to $263.6 million for the nine months ended September 30,
1998, and an 11 basis point increase in the average cost of funds from 4.26% for
the nine months ended September 30, 1997 to 4.37% for the nine months ended
September 30, 1998.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $90,000 for
each period. Management determined that keeping the provision for loan losses at
the same level was appropriate in light of its current review of the
Association's loan portfolio, asset quality, delinquent and non-performing
loans, the historically low loan loss experience and the national and regional
economies. Non-performing loans were $596,683 and $939,501 at September 30, 1998
and 1997, respectively. Loan chargeoffs were $3,325 and $435 for the nine months
ended September 30, 1998 and 1997, respectively. The ratio of the allowance for
loan losses to non-performing loans was 192.85% and 110.16% at September 30,
1998 and 1997, respectively, and the ratio of the
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allowance for loan losses to total loans was 0.34% and 0.35% at such respective
dates. Management believes that the allowance for loan losses is reasonable and
adequate to cover any known losses and any losses reasonably expected in the
existing loan portfolio. While management estimates loan losses using the best
available information, such as independent appraisals on collateral, no
assurance can be given that future additions to the allowance will not be
necessary based on changes in economic and real estate market conditions,
further information obtained regarding known problem loans, identification of
additional problem loans, regulatory examinations and other factors, both within
and outside of management's control.
NONINTEREST INCOME. Noninterest income decreased $145,000 or 14.7% from
$985,000 for the nine months ended September 30, 1997 to $840,000 for the nine
months ended September 30, 1998. This decrease was primarily due to the $178,000
or 89.0% decrease in other income from $200,000 for the nine months ended
September 30, 1997 to $22,000 for the nine months ended September 30, 1998. This
decrease was due to the receipt of $182,000 in excess funds from the liquidation
of the Association's pension plan in 1997 in connection with the Association's
conversion to stock form in September 1996, a non-recurring item. There was also
a decrease of $20,000 in gain on real estate owned. These decreases were offset
by a $53,000 or 7.1% increase in service fee income from $751,000 for the nine
months ended September 30, 1997 to $804,000 for the nine months ended September
30, 1998. This increase was primarily due to changes in service charges and the
institution of an ATM surcharge.
NONINTEREST EXPENSE. Noninterest expense increased $465,000 or 5.7% from
$8.1 million for the nine months ended September 30, 1997 to $8.6 million for
the nine months ended September 30, 1998. This increase was primarily due to
increases in compensation and benefits and federal deposit insurance premiums,
which were partially offset by a decrease in other expense. Compensation and
benefits expense increased $461,000 or 11.4% from $4,057,000 for the nine months
ended September 30, 1997 to $4,518,000 for the nine months ended September 30,
1998. The increase was primarily related to additional RRP expense of $300,000
recorded as the RRP was in existence for the entire nine months ended September
30, 1998; the RRP was not in existence in the first four months of 1997. The
increase was also due to an additional $135,000 of ESOP expense due to the
market value adjustment for shares released through the ESOP trustee's repayment
of principal on the ESOP loan from plan earnings; there was no such repayment in
the nine months ended September 30, 1997.
INCOME TAX EXPENSE. Income tax expense decreased $167,000 or 11.8% from
$1,414,000 for the nine months ended September 30, 1997 to $1,247,000 for the
nine months ended September 30, 1998. This decrease was primarily due to a lower
level of taxable income. The effective tax rate was 38.8% for the nine months
ended September 30, 1997 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are savings deposits, principal and
interest payments on loans and securities and, to a limited extent, borrowings
from the FHLB of Chicago. While maturities and scheduled amortization of loans
and securities provide an indication of the timing of the receipt of funds,
changes in interest rates, economic conditions and competition strongly
influence mortgage prepayment rates and savings deposit flows, reducing the
predictability of the timing of sources of funds.
The Association is required to maintain an average daily balance of liquid
assets as a percentage of net withdrawable savings deposit accounts plus
short-term borrowings, as defined by the regulations of the OTS. The minimum
required liquidity ratio is currently 4.0%. At September 30, 1998, the
Association's liquidity ratio was 6.72%. The levels of the Association's liquid
assets are dependent on the Association's operating, financing and investing
activities during any given period. Management believes it will have adequate
resources to fund all commitments on a short-term and long-term basis in
accordance with its business strategy.
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The primary investing activities of the Company are the origination of
mortgage and other loans and, to a much more limited extent, the purchase of U.
S. Government or U. S. Government agency securities. See the "Consolidated
Statements of Cash Flows" in the unaudited consolidated financial statements
included in this Form
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10-Q for the sources and uses of cash flows for operating activities, investing
activities and financing activities for the three and nine month periods ended
September 30, 1998 and 1997.
The Company has other sources of liquidity if a need for additional funds
arises, including the ability to obtain FHLB of Chicago advances of up to $59.0
million based on the Association's current investment in FHLB of Chicago stock.
There were $25 million in advances outstanding at September 30, 1998.
At September 30, 1998, the Association had outstanding loan origination
commitments of $16.1 million, undisbursed loans in process of $884,000 and
unused lines of consumer credit of $252,000. The Association anticipates that it
will have sufficient funds available to meet its current origination and other
lending commitments. Certificates of deposit scheduled to mature in one year or
less from September 30, 1998 totaled $86.9 million. Based upon the Association's
most recent experience and pricing strategy, management believes that a
significant portion of such deposits will remain with the Association.
At September 30, 1998, the Association exceeded all of its regulatory
capital requirements with a tangible capital level of $71.9 million, or 19.43%
of total adjusted assets, which is above the required level of $5.5 million or
1.5%; core capital of $71.9 million, or 19.43% of total adjusted assets, which
is above the required level of $11.1 million or 3.0%; and total risk-based
capital of $73.0 million, or 32.50% of risk-weighted assets, which is above the
required level of $18.0 million, or 8.0%.
At September 30, 1998, the total stockholders' equity of Home Bancorp was
$93.3 million, and the ratio of stockholders' equity to total assets was 24.17%.
THE YEAR 2000 PROBLEM
The "Year 2000 Problem" centers on the inability of computer systems to
recognize the Year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Company and the Association may be
significantly affected by the Year 2000 Problem due to the nature of financial
information. Furthermore, if computer systems are not adequately changed to
identify the Year 2000, many computer applications could fail or create
erroneous results.
In order to address the Year 2000 issue and to minimize its potential
adverse impact, management has begun a process to identify areas that will be
affected by the Year 2000 Problem, assess its potential impact on the operations
of the Association, monitor the progress of third party software vendors in
addressing the matter, test changes provided by these vendors and develop
contingency plans for any critical systems that are not effectively
reprogrammed. To accomplish this, the Company has incorporated the Federal
Financial Institutions Examination Council ("FFIEC") recommended five management
phases.
Awareness Phase - The inability of most computer programs to distinguish
the year 1900 from the year 2000 poses substantial risks to all financial
institutions. The majority of computer operating systems and programs currently
in use have six-digit date fields (MMDDYY), which represent, for example,
December 31, 1999, by 123199. And the six-digit field, with only two digits for
the year, is the basis for all date-related calculations within most computer
systems today, particularly mainframes.
The fundamental problem posed for these systems by the arrival of the Year
2000 is that such systems have no way of expressing a date past year-end 1999:
010100 will be interpreted by these systems as January 1, 1900.
Assessment Phase - The Company will assess the size and complexity of
the problem and detail the magnitude of the effort necessary to address Year
2000 issues. This phase will identify all hardware, software, networks,
automated teller machines, other various processing platforms, and customer and
vendor
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interdependencies affected by the Year 2000 date change. The assessment will go
beyond information systems and include environmental systems that are dependent
on embedded microchips, such as the security and telephone systems. The
assessment phase will incorporate the following course of action:
o Develop a complete inventory of all vendor-supplied hardware and
software. Identify interdependencies with other vendor-supplied or
proprietary hardware and software.
o Contact the vendors to request specific information on their plans for
Year 2000 compliance.
o Rank the products to identify which are the most critical or sensitive
to the on-going operation of the Company.
o Identify non-compliant products, the date that the products are
scheduled to be compliant, and finding replacement products based on
the responses the Company may receive from its vendors.
o Install and thoroughly test products vendors have certified as
compliant to make sure that all interfaces with the Company's hardware
and software work and that the software operates as stated by its
vendors.
o Develop contingency plans for any problems encountered, and develop a
strategy for unanticipated problems that occur at the last minute.
The Company will also evaluate the Year 2000 effect on other strategic
business initiatives. This assessment will consider the potential effect that
mergers and acquisitions, major system development, corporate alliances, and
system interdependencies will have on existing systems and/or potential Year
2000 issues that may arise from acquired systems.
The Company's assessment will identify resource needs, establish time
frames and sequencing of Year 2000 efforts. Resource needs may include
contractors, vendor support, budget allocations, and hardware capacity. This
phase will include the reporting, monitoring and notification to software and
hardware vendors. Finally, contingency plans will be developed to cover
unforeseen obstacles during the renovation and validation phases and include
plans to deal with lesser priority systems that would be fixed later in the
renovation phase.
Renovation Phase - This phase includes code enhancements, hardware and
software upgrades, system replacement, vendor certification and other associated
changes. Work will be prioritized based on information gathered during the
assessment phase. In that the Company relies on outside servicers or third-party
hardware and software providers, it will have ongoing discussions and monitoring
of their progress.
Validation Phase - Testing is a multifaceted process that is critical to
the Year 2000 project and inherent in each phase of the project management plan.
This process includes the testing of incremental changes to hardware and
software components. In addition to testing upgraded components, connections
with other systems must be verified, and all changes should be accepted by
internal and external users. The Company will assure the effective and timely
completion of all hardware and software testing prior to final implementation.
As with the renovation phase, the Company will have ongoing discussions with
outside servicers or third-party hardware and software providers on the success
of their validation efforts.
Implementation Phase - In this phase, the Company's systems will be
certified as Year 2000 compliant by the Company's vendors. For any system
failing certification, the effect will be assessed clearly and its Year 2000
contingency plans will be implemented. Any potentially noncompliant
mission-critical system will be brought to the attention of the Company's
compliance committee for immediate resolution. In addition, this phase will
ensure that any new system or subsequent changes to verified systems are
compliant with Year 2000 requirements.
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The Company has completed the awareness and assessment phases and
anticipates completion of the renovation phase in the fourth quarter of 1998.
Because the Company outsources its data processing and item processing
operations, a significant component of the Year 2000 plan is working with
external vendors to test and certify their systems as Year 2000 compliant. The
Company's external vendors have surveyed their programs to inventory the
necessary changes and have begun correcting the applicable computer programs and
replacing equipment so that the Company's information systems will be Year 2000
compliant prior to December 31, 1998. The Company will begin the validation
phase in November 1998 by testing its hardware and software with its primary
provider Fiserv, Inc. Final testing and completion of the implementation phase
is expected to be completed by June 30, 1999. At that time, the Company's
systems will be certified by vendors as Year 2000 compliant.
The Company is preparing a written Year 2000 contingency plan, which
addresses operational and specific event issues. In November 1998, the Company
will test its service bureau's core applications and peripheral systems for Year
2000 compliance. Additionally, the service bureau is replicating the Company's
applications, systems and files at their other regional offices that will allow
access by the Company's platform software via dial backup modems. These
additional sites will be available for processing data should there be a failure
at the Company's normal location. This will form the basis of the Company's
application processing contingency plan.
In addition, monitoring and managing the Year 2000 project will result in
additional direct and indirect costs to the Company and the Association. The
Company currently estimates that the aggregate direct and indirect costs will be
approximately $250,000 and does not believe that such costs will have a material
effect on its results of operations. Both direct and indirect costs of
addressing the Year 2000 Problem will be charged to earnings as incurred. The
Company has realized $56,000 of these costs to date.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those plans. In
addition, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segment of an Enterprise and Related Information" (Statement 131) which
establishes standards for the way public business enterprises are to report
information about operating segments in annual financial statements and requires
those enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. Statement 131 is effective for
financial periods beginning after December 15, 1997 and is not expected to have
a material impact on the Company.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits" (Statement No. 132) which
amends the disclosure requirements of Statements No. 87, "Employers' Accounting
for Pensions" (Statement No. 87), No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination Benefits"
(Statement No. 88), and No. 106, "Employers' Accounting Postretirement Benefits
Other Than Pensions" (Statement No. 106).
This Statement standardizes the disclosure requirements of Statements No.
87 and No. 106 to the extent practicable and recommends a parallel format for
presenting information about pensions and other postretirement benefits.
Statement No. 132 only addresses disclosure and does not change any of the
measurement of recognition
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provisions provided for in Statements No. 87, No. 88, or No. 106. Statement 132
is effective for fiscal years beginning after December 15, 1997 and is not
expected to have a material impact on the Company.
In June 1998, the FASB issued Statement 133, "Accounting for Derivative
Instruments and Hedging Activities". Statement 133 standardizes the accounting
for derivative instruments, including certain derivative instruments imbedded in
other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value. The
accounting for the changes in fair value of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and, if so, on the reason for holding it. The gain or loss due to changes in
fair value is recognized in earnings or as other comprehensive income in the
statement of shareholders' equity, depending on the type of instrument and
whether or not it is considered a hedge. Statement No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. The Company
has not yet determined the impact this new statement may have on its future
financial condition or its results of operations.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, an amendment of FASB Statement
No. 65" (Statement 134). Statement No. 134 amends Statement No. 65, "Accounting
for Certain Mortgage Banking Activities" to conform the subsequent accounting
for securities retained after the securitization of mortgage loans by a mortgage
banking enterprise with the subsequent accounting for securities retained after
the securitization of other types of assets by a nonmortgage banking enterprise.
Statement No. 134 is effective for the first quarter beginning after December
15, 1998 and is not expected to have a material impact on the Company.
OTHER
The Office of Thrift Supervision ("OTS") approved a Stock Repurchase
Program ("Repurchase Program"), that was adopted by the Board of Directors of
the Company. The Stock Repurchase Program was intended to replace the Stock
Repurchase Program which was originally announced on May 1, 1997 and was not
completed in its entirety prior to expiration. The Repurchase Program authorizes
the Company to repurchase up to 342,789 shares, or five percent, of its
6,855,799 outstanding common shares. The Repurchase Program is authorized to
continue for a period up to twelve months. The Company has repurchased 197,000
shares at a cost of $3.1 million or $15.63 per share under the program.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The OTS requires all regulated thrift institutions to calculate the
estimated change in the institution's net portfolio value ("NPV") assuming
instantaneous, parallel shifts in the Treasury yield curve of 100 to 400 basis
points either up or down in 100 basis point increments. The NPV is defined as
the present value of expected cash flows from existing assets less the present
value of expected cash flows from existing liabilities plus the present value of
net expected cash inflows from existing off-balance sheet contracts.
The OTS provides all institutions that file a schedule entitled the
Consolidated Maturity/Rate schedule ("CMR") as a part of their quarterly Thrift
Financial Report with an interest rate sensitivity report of NPV. The OTS
simulation model uses a discounted cash flow analysis and an option-based
pricing approach to measuring the interest rate sensitivity of NPV. The OTS
model estimates 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 100 to 400 basis points in 100
basis point increments. The OTS allows thrifts with under $500 million in total
assets to use the results of the OTS' interest rate sensitivity model, which is
based on information provided by the institution, to estimate the sensitivity of
NPV. Since the Association had less than $500 million in total assets at
September 30, 1998, the results discussed in this section were provided by the
OTS analysis.
- 18 -
<PAGE>
The OTS model utilizes an option-based pricing approach to estimate the
sensitivity of mortgage loans. The most significant embedded option in these
types of assets is the prepayment option of the borrowers. The OTS model uses
various price indications and prepayment assumptions to estimate sensitivity of
mortgage loans.
In the OTS model, the value of deposit accounts appears on the asset and
liability side of the NPV analysis. In estimating the value of certificates of
deposit (the "CD") account, the liability portion of the CD is represented by
the implied value when comparing the difference between the CD face rate and
available wholesale CD rates. On the asset side of the NPV calculation, the
value of the "customer relationship" due to the rollover of retail CD deposits
represents an intangible asset in the NPV calculation.
Other deposit accounts such as transaction accounts, money market deposit
accounts, passbook accounts, and noninterest bearing accounts also are included
on the asset and liability side of the NPV calculation in the OTS model. The
accounts are valued at 100% of the respective account balances on the liability
side. On the assets side of the analysis, the value of the "customer
relationship" of the various types of deposit accounts is reflected as a deposit
intangible.
The NPV sensitivity of borrowed funds is estimated by the OTS model based
on a discounted cash flow approach. The cash flows are assumed to consist of
monthly interest payments with principal paid at maturity.
The OTS model is based only on the Association's balance sheet. The assets
and liabilities at the Parent Company level are short-term in nature, primarily
cash and equivalents, and were not considered in the analysis because they would
not have a material effect on the analysis of NPV sensitivity. The following
table sets forth the Association's interest rate sensitivity of NPV as of
September 30, 1998.
<TABLE>
<CAPTION>
*** INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV) ***
NET PORTFOLIO VALUE NPV AS % OF PV OF ASSETS
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
--------------- -------- -------- -------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
+400 bp 47,609 -34,281 -42% 13.92% -754 bp
+300 bp 56,989 -24,902 -30% 16.16% -530 bp
+200 bp 66,521 -15,370 -19% 18.30% -316 bp
+100 bp 75,281 -6,509 -8% 20.15% -131 bp
0 bp 81,891 21.45%
-100 bp 84,581 2,690 3% 21.90% +45 bp
-200 bp 86,710 4,820 6% 22.21% +76 bp
-300 bp 90,058 8,168 10% 22.75% +130 bp
-400 bp 93,553 11,662 14% 23.31% +185 bp
</TABLE>
- 19 -
<PAGE>
Part II -- OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On November 5, 1998, the Company held a Special Meeting of Stockholders at
which the stockholders voted on the Agreement and Plan of Merger, dated as of
June 1, 1998, between the Company and State Financial Services Corporation
("Merger Agreement"), which provides, among other things, for the merger of the
Company with and into State Financial. The Company's stockholders approved the
merger agreement with the following vote:
Votes
-----
For 4,008,357
Against 491,212
Abstained 42,409
Broker Non-Votes 59,557
The Merger Agreement was also approved by the shareholders of State
Financial Services Corporation at a Special Meeting of Shareholders held on
November 5, 1998 in Franklin, Wisconsin.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 -- Financial Data Schedule*
(b) Reports on Form 8-K
- -----------------------
*Submitted only with filing in electronic format.
- 20 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Home Bancorp of Elgin, Inc.
-----------------------------------
(Registrant)
By: /s/Lyle N. Dolan
-----------------------------------
Lyle N. Dolan
Executive Vice President and Chief
Financial and Accounting Officer
November 12, 1998
- 21 -
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and the statements of income of Home Bancorp of
Elgin, Inc. and Subsidiary and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0001016325
<NAME> HOME BANCORP OF ELGIN, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1.0000
<CASH> $6,192,514
<INT-BEARING-DEPOSITS> 28,898,480
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 62,763
<INVESTMENTS-MARKET> 64,069
<LOANS> 341,505,479
<ALLOWANCE> 1,150,716
<TOTAL-ASSETS> 386,104,157
<DEPOSITS> 264,095,571
<SHORT-TERM> 25,000,000
<LIABILITIES-OTHER> 3,698,935
<LONG-TERM> 0
0
0
<COMMON> 70,093
<OTHER-SE> 93,239,558
<TOTAL-LIABILITIES-AND-EQUITY> 386,104,157
<INTEREST-LOAN> 17,912,897
<INTEREST-INVEST> 1,762,948
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 19,675,845
<INTEREST-DEPOSIT> 8,499,150
<INTEREST-EXPENSE> 8,638,061
<INTEREST-INCOME-NET> 11,037,784
<LOAN-LOSSES> 90,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,572,787
<INCOME-PRETAX> 3,214,741
<INCOME-PRE-EXTRAORDINARY> 1,967,794
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,967,794
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
<YIELD-ACTUAL> 4.12
<LOANS-NON> 596,683
<LOANS-PAST> 0
<LOANS-TROUBLED> 285,209
<LOANS-PROBLEM> 466,917
<ALLOWANCE-OPEN> 1,064,041
<CHARGE-OFFS> 3,325
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,150,716
<ALLOWANCE-DOMESTIC> 1,150,716
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>