<PAGE>
===============================================================================
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 Quarter ended SEPTEMBER 30, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commision File No. 0-11160
HOME INTERSTATE BANCORP
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 95-3657758
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2633 CHERRY AVENUE, SIGNAL HILL, CALIFORNIA 90806 - 2033
(address of Principal Executive Offices) (ZIP Code)
Registrant's Telephone Number, Including Area Code: (310) 988-9600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed the Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Applicable only to Corporate issuers:
Indicate the number of shares oustanding of each of the issuer's classes
of Common Stock as of the latest practicable date.
Common Stock -- Authorized 20,000,000 shares of non par value; issued and
outstanding 3,980,782 at October 27, 1995.
===============================================================================
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
Following are the unaudited consolidated statements of financial
condition of Home Interstate Bancorp (the "Company") and its wholly owned
subsidiary, Home Bank (the "Bank") as of September 30, 1995, and December 31,
1994, and the consolidated statements of income for the quarters ended
September 30, 1995, and September 30, 1994, and cash flows for the nine
months ended September 30, 1995, and September 30, 1994. It is management's
opinion that these statements present fairly, in all material respects, the
financial condition, results of operations and cash flows of Home Interstate
Bancorp and its subsidiary in conformity with generally accepted accounting
principles. The accompanying notes are considered an integral part of these
consolidated financial statements.
2
<PAGE>
HOME INTERSTATE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 44,415 $ 42,196
Federal funds sold 18,000 6,800
-------- --------
Total of cash and cash equivalent 62,415 48,996
Securities held to maturity
(Approximate market value at
September 30, 1995 was $4,230,000) 4,247 0
Securities available for sale 127,337 167,880
-------- --------
Securities, net 131,584 167,880
Loans 204,710 198,649
Less: Allowance for possible loan losses 3,146 2,818
-------- --------
Loans, net 201,564 195,831
Real estate owned 5,643 2,175
Premises, furniture and equipment, net 14,511 13,534
Accrued interest receivable and other assets 9,703 11,216
-------- --------
TOTAL ASSETS $425,420 $439,632
======== ========
LIABILITIES:
Deposits:
Demand deposits, non-interest bearing $132,138 $135,409
Savings and interest bearing demand deposits 157,031 173,854
Time certificates of deposit of $100,000
and over 16,168 12,652
Other time deposits 66,455 70,354
-------- --------
Total Deposits 371,792 392,269
Securities sold under agreements to repurchase 0 100
Accrued interest payable and other liabilities 3,659 1,609
-------- --------
TOTAL LIABILITIES 375,451 393,978
-------- --------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock (no par value)
Authorized 20,000,000 shares; issued and
outstanding 3,980,782 shares in 1995 and
3,976,722 shares in 1994 40,493 40,454
Retained earnings 9,459 8,156
Unrealized gains (loss) on securities available
for sale, net of deferred taxes 17 (2,956)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 49,969 45,654
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $425,420 $439,632
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements of financial condition.
3
<PAGE>
HOME INTERSTATE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in thousands except for earnings per share)
For the periods ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE FROM EARNING ASSETS:
Interest and fees on loans $16,843 $14,720 $ 5,596 $ 5,235
Interest on securities:
taxable 6,241 4,963 1,859 2,033
non-taxable 230 568 51 177
Interest on Federal funds sold 346 630 259 376
------- ------- ------- -------
TOTAL REVENUE FROM EARNING ASSETS 23,660 20,881 7,765 7,821
------- ------- ------- -------
COST OF FUNDS:
Interest on savings and interest bearing
demand deposits 2,554 2,680 861 1,000
Interest on time certificates of deposit
of $100,000 and over 492 279 192 104
Interest on other time deposits 2,211 1,637 769 650
Interest on securities sold under agreements
to repurchase 27 5 1 0
------- ------- ------- -------
TOTAL COST OF FUNDS 5,284 4,601 1,823 1,754
------- ------- ------- -------
Net revenue from earning assets before
provision for possible loan losses 18,376 16,280 5,942 6,067
Provision for possible loan losses 1,025 450 100 150
------- ------- ------- -------
Net revenue from earning assets 17,351 15,830 5,842 5,917
------- ------- ------- -------
OTHER OPERATING REVENUE:
Service charges and fees 3,017 2,441 1,025 876
Securities gains, net 46 9 4 0
Other operating revenue 832 985 277 288
------- ------- ------- -------
TOTAL OTHER OPERATING REVENUE 3,895 3,435 1,306 1,164
------- ------- ------- -------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 8,016 7,384 2,625 2,503
Occupancy expense, net 2,272 1,902 763 715
Other operating expenses 6,974 6,570 2,145 2,246
------- ------- ------- -------
TOTAL OTHER OPERATING EXPENSES 17,262 15,856 5,533 5,464
------- ------- ------- -------
Income before provision for income taxes 3,984 3,409 1,615 1,617
Provision for income taxes 1,389 980 609 392
------- ------- ------- -------
NET INCOME $ 2,595 $ 2,429 $ 1,006 $ 1,225
======= ======= ======= =======
EARNINGS PER SHARE(1) $ .65 $ .61 $ .25 $ .30
======= ======= ======= =======
</TABLE>
(1) Earnings per share adjusted for a five percent stock dividend issued
in 1994.
The accompanying notes are an integral part of these consolidated
statements of financial condition.
4
<PAGE>
HOME INTERSTATE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,595 $ 2,429
-------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and amortization 676 528
Provision for possible loan losses 1,025 450
Amortization of securities premiums 1,247 971
Accretion of securities discounts (84) (62)
Amortization of deferred loan fees and costs (646) (768)
Net gain on sale of securities (46) (9)
Net (gain) loss on sale of premises, furniture
and equipment 26 (3)
Net (gain) loss on real estate owned 564 443
Net (increase) decrease in accrued interest
receivable and other assets 1,513 (3,654)
Net increase (decrease) in accrued interest
payable and other liabilities (62) 2,986
-------- --------
Total adjustments 4,213 882
-------- --------
Net cash provided by operating activities 6,808 3,311
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities 30,337 102
Proceeds from maturities of securities 19,555 20,572
Purchase of securities (9,626) (85,873)
Net (increase) decrease in loans (6,112) 556
Proceeds from sale of real estate owned 2,668 1,909
Acquisition of real estate owned (6,700) (1,227)
Proceeds from sale of premises, furniture
and equipment 11 3
Purchase of premises, furniture and equipment (1,691) (1,275)
-------- --------
Net cash provided by (used in) investing
activities 28,442 (65,233)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits
non-interest bearing, savings and interest
bearing demand deposits (20,094) 63,930
Net decrease in time certificates of
deposit of $100,000 and over 3,516 1,023
Net increase (decrease) in other time deposits (3,899) 11,947
Net decrease in securities sold under
agreements to repurchase (100) (3,900)
Proceeds from stock options exercised 39 0
Cash dividends declared (1,293) (1,137)
-------- --------
Net cash provided by (used in) financing
activities (21,831) 71,863
-------- --------
Net increase (decrease) in cash and cash
equivalents 13,419 9,941
Cash and cash equivalents at beginning
of year 48,996 49,449
-------- --------
Cash and cash equivalents at end of year $ 62,415 $ 59,390
======== =======
</TABLE>
5
<PAGE>
HOME INTERSTATE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
CONTINUED
(UNAUDITED)
FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Supplemental disclosure of non-cash
investing and financing activities:
Adjustment of FASB 115:
(Increase) decrease in unrealized gains/
losses on securities available for sale $ (5,086) $ 5,112
Increase (decrease) in deferred tax
liabilities related to unrealized
gains/losses on securities
available for sale 2,112 (2,267)
Increase (decrease) in shareholders'
equity for unrealized gains/
losses, net of deferred taxes 2,974 (2,845)
Supplemental disclosure of cash
flow information
Cash paid during the year for:
Interest expense $ 5,245 $ 4,490
Income taxes 1,945 657
</TABLE>
6
<PAGE>
HOME INTERSTATE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(Unaudited)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Home Interstate Bancorp include
the accounts of the Company and its wholly owned subsidiary, the Bank. All
material intercompany balances and transactions have been eliminated in
consolidation.
PRINCIPLES OF PRESENTMENT
The accompanying unaudited consolidated financial statements have been
prepared in condensed format and, therefore do not contain all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation have been
reflected in the financial statements.
ACCOUNTING CHANGES
The Company adopted Statement of Financial Accounting Standard ("SFAS")
No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by
SFAS No. 118. These standards require that impaired loans be measured based
on the present value of expected future cash flows, the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. The statement was adopted as of January 1, 1995. The initial
impact to the provision for possible loan losses in the first quarter of 1995
was an addition of $150,000. Additional adjustments to the provision for
possible loan losses were not made during the second and third quarters of
1995. The aggregate total provision for loan loss at September 30, 1995, was
$1,025,000.
EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of shares
outstanding during each period. The affect of stock options outstanding are
not materially diluting and are not, therefore, included for the purpose of
earnings per share calculations. The average weighted number of shares used
was, 3,976,722 at September 30, 1995, 3,976,388 at December 31, 1994, and
3,976,271 at September 30, 1994.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and Federal funds sold. Generally, Federal funds are
sold for one-day periods. The Company made cash payments of $5,245,000 and
$4,490,000 for interest paid on deposit accounts and $1,945,000 and $657,000
for income taxes for the periods ended September 30, 1995, and 1994,
respectively.
7
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
GENERAL
The Company's consolidated assets of $425,420,000 at September 30, 1995,
decreased 3.23% from December 31, 1994, which had consolidated assets of
$439,632,000. Cash and cash equivalents increased 27.39% or $13,419,000, of
which $11,200,000 was related to an increase in federal funds sold.
Securities held to maturity purchased during the nine months ended September
30, 1995, totaled $4,247,000 and $0 at December 31, 1994. Securities
available for sale, net of unrealized gains / (losses) decreased 24.15% or
$40,543,000 and loans increased 3.05% or $6,061,000 when comparing September
30, 1995, to December 31, 1994. Deposits decreased 5.22% or $20,477,000 when
comparing the same periods. The reduction in securities available for sale
was partially utilized in the funding of a contraction in deposits, primarily
in the area of savings and interest bearing demand deposits as deposit
customers sought alternatives for higher yields on their investment dollars.
The reduction in securities available for sale also replenished overnight
federal funds that had experienced a drop earlier in the year as a result of
the contraction in deposits. Management utilizes overnight federal funds as a
vehicle that allows immediate funding for loan commitments and potentially
large deposit withdrawals while earning interest income.
In October 1995, the Bank entered into a deposit purchase agreement with
Southern California Bank to purchase the deposits of their Signal Hill
office, subject to regulatory approval. The transaction would be
approximately one percent of the Bank's total deposits and less than one
percent of total assets. The transaction is expected to be completed in the
first quarter of 1996.
The Bank has applied for membership in the Federal Reserve System.
Approval of this application was received in the fourth quarter and is
expected to be finalized by the end of November 1995. As a member of the
Federal Reserve System, the Bank will be subject to supervision, periodic
examination and regulation by the Board of Governors of the Federal Reserve
System. The deposits of the Bank will continue to be insured under the Bank
Insurance Fund ("BIF") of the FDIC.
ACQUISITIONS OF FAILED FINANCIAL INSTITUTIONS
In April and July of 1994, the Bank entered into Purchase and Assumption
Agreements ("P & A Agreements") with the Federal Deposit Insurance
Corporation ("FDIC"). Under the terms of the P & A Agreement for the
Mechanics National Bank ("MNB") and the FDIC Consortium Agreement effective
April 1, 1994, the Bank was named as lead bank. Two branch operations of MNB
were acquired creating a new Paramount office facility. The Bank then merged
its existing Paramount office into the new Paramount office facility. The MNB
Torrance office was merged into the Bank's existing Torrance office. The Bank
purchased approximately $21,700,000 of certain assets consisting principally
of cash and cash equivalents, securities and Fed funds sold and assumed
approximately $17,100,000 of certain liabilities consisting of insured
deposit liabilities and accrued interest from the FDIC. The Bank's old
Paramount office is currently being used as a warehouse facility and the Bank
opted not to keep the Torrance Facility of MNB.
Under the terms of the P & A Agreement for the Bank of San Pedro
effective July 15, 1994, the Bank was the sole institution involved. The Bank
of San Pedro originally had six branch locations of which the Bank opted to
keep two facilities open and merged the other four into other offices. Some
of the employees of the Bank of San Pedro were hired to staff the two new
locations. The Bank purchased $12,884,000 of certain assets consisting
principally of loans, cash and cash equivalents and investment securities,
and assumed approximately $74,200,000 of certain liabilities consisting of
insured deposit liabilities and accrued interest from the FDIC.
8
<PAGE>
CAPITAL RESOURCES
The Company's strategic plan centers around continued growth where
conservative opportunities present themselves. Capital strength is a
prerequisite for such growth. The Company's internal growth rate of capital
was 9.45% while assets decreased by 3.23% from year-end December 31, 1994.
The increase in ending total capital reflects the improvement in
unrealized gains (losses) on securities available for sale, net of deferred
taxes from a loss of $2,956,000 at December 31, 1994 to a gain of $17,000 at
September 30, 1995. The following schedule reflects specific capital related
information and ratios:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) SEPTEMBER 30, 1995 DECEMBER 31, 1994 % CHANGE
------------------ ----------------- ---------
<S> <C> <C> <C>
Ending total capital $49,969 $45,654 9.45
Risk based capital-to-assets
ratios:
REGULATORY
REQUIREMENT
-----------
Tier 1 capital 16.82 16.25 4.00
Total capital 17.99 17.30 8.00
Leverage ratio 10.81 10.17 3.00 -- 5.00
</TABLE>
LIQUIDITY AND BALANCE SHEET MANAGEMENT
The asset/liability management process determines the size and
composition of the balance sheet and focuses on the management of liquidity
and interest rate exposures. The purpose of liquidity and balance sheet
management is to reflect the Company's ability to provide funds for
day-to-day operations, meet customer needs, take advantage of interest rate
market opportunities and meet the financial commitments of the Company.
Funding of loan requests and commitments, purchase of attractive securities
opportunities, providing for liability outflow, and management of interest
rate risk requires continuous analysis in order to match the maturities of
categories of loans and securities with the maturities of deposits and bank
related borrowings. The Company's ability to obtain funds to replace maturing
liabilities and to finance asset growth depends upon its reputation as well
as the diversity and liquidity of the markets in which it participates. The
Company's liquidity is normally viewed in terms of the nature and composition
of the Company's sources and uses of funds. Cash, maturing securities,
reductions in Federal funds sold and loan maturities and repayments provide
liquidity. Purchase of Federal funds, sale of securities, sale of loan
participations or sale of the Company's loans on the secondary market and
utilization of other short-term borrowing facilities are all available to
provide additional liquidity vehicles. Liquid assets are comprised of cash
and cash equivalent assets (cash, cash due from other financial institutions
and Federal funds sold), U. S. Treasury securities and U. S. Government
agencies securities. The increase in cash and cash equivalents was due to the
sale of some securities available for sale to subsidize the contraction in
deposits which management believes was due to customers seeking alternatives
for higher yields on their investment dollars (see "General" herein). The
following schedule reflects specific liquidity information and ratios:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) SEPTEMBER 30, 1995 DECEMBER 31, 1994 % CHANGE
------------------ ----------------- --------
<S> <C> <C> <C>
Gross loans $204,710 $198,649 3.05
Total deposits $371,792 $392,269 (5.22)
Gross loan-to-deposit ratio 55.06 50.64
Gross loan-to-total assets ratio 48.12 45.19
Cash and cash equivalent
assets as a percentage
of total assets 14.67 11.14
</TABLE>
9
<PAGE>
SECURITIES
The portfolio is made up of U. S. Treasury securities, obligations of other
U.S. Government agencies, obligations of state and political subdivisions, and
other debt and equity securities. Under the terms of FASB 115 these securities
are required to be classified as held to maturity, available for sale or
trading. The Company does not maintain a trading account and classifies
securities as either held to maturity or available for sale.
Securities that the Company has the positive intent and ability to hold to
maturity are classified as held to maturity and accounted for at cost, adjusted
for amortization of premium and accretion of discount. During 1995, $4,247,000
of securities were purchased and added to the held to maturity portfolio.
Under the terms of FASB 115, securities classified available for sale are
required to be marked to market. Due to the improved market valuations and
changes in volume of outstanding securities, the unrealized gains (losses) on
these securities, net of deferred taxes, were $17,000 at September 30, 1995,
compared to ($2,956,000) at December 31, 1994. The activity in the available
for sale portfolio had securities sold of $30,337,000 and securities
matured/called of $19,555,000 during the first nine months ended September 30,
1995. The proceeds from these securities were used to fund the decrease in
deposits during the same period. The net gains on these securities were
$46,000. Purchases added to the available for sale portfolio were $5,379,000
during the same period.
NONPERFORMING LOANS AND REAL ESTATE OWNED
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) SEPTEMBER 30, 1995 DECEMBER 31, 1994 % CHANGE
------------------ ----------------- --------
<S> <C> <C> <C>
Non-accrual loans $4,875 $6,593 (26.06)
Loans 90 days past due 232 52 346.15
Real estate owned 5,643 2,175 159.45
</TABLE>
The Bank's non-accrual loans showed a decrease of 26.06% for the nine
months ended September 30, 1995. Of the $6,593,000 at December 31, 1994,
$478,000 was charged off, $3,437,000 was transferred to real estate owned and
$1,345,000 was received in payments. The $4,875,000 in non-accrual on
September 30, 1995, includes $3,542,000 added since December 31, 1994. Of the
$4,875,000 in non-accrual loans $4,606,000 is secured by deeds of trust,
$54,000 is secured by other collateral and one loan in the amount of $215,000
is unsecured. The largest group of loans in non-accrual status are to related
entities and total in aggregate $2,668,000 of which $2,399,000 is secured by
real estate, having an approximate loan to value of 81%. Management has set a
specific reserve of $729,000 on the $2,668,000 and it is believed to be
sufficient to absorb any anticipated loss. The next largest non-accrual loan
had a balance of $925,000 at September 30, 1995, which was paid down from
$1,576,000 at year end December 31, 1994. This loan is secured by real estate
and has a loan to value ratio of approximately 95%. This loan has a specific
reserve of $102,000 and is expected to be paid in full by December 31, 1995.
Management feels that the current allowance for loan loss is adequate for the
recognizable losses in the nonperforming loans.
Under the provisions of SFAS No. 114, a loan is considered impaired when,
based on current information and events, it is probable that a creditor will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. Creditors are required to measure impairment of a loan based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent.
The Bank has defined Impaired Loans as individual loans or relationships
of $250,000 or more and not currently accruing interest. As permitted by these
standards, the Bank excludes from their calculations smaller balance,
homogenous loans such as consumer installment loans, lines of credit, direct
finance leases and loans on which it expects to collect all amounts of
principal and interest. The Bank measures impairment on a loan-by-loan basis
using either the present value of expected future cash flows discounted at the
loan's effective interest rate, or the fair value of the collateral if the loan
is collateral dependent.
10
<PAGE>
Accrual of interest on loans and leases is discontinued when management
believes, after considering economic and business conditions, and collection
efforts, that the borrower's financial condition is such that collection of
interest is doubtful; whereas, loans are considered impaired when it is
probable that the Bank will be unable to collect all amounts due, including
principal and interest, according to the contractual terms of the loan
agreement. Interest income is subsequently recognized on non-accrual loans only
to the extent cash payments are received or until, in management's judgment,
the borrower's ability to make periodic interest and principal payments is no
longer doubtful, in which case the credit is returned to accrual status.
At September 30, 1995, the Bank had $4,598,000 in impaired loans and a
related loss allowance of $1,077,000. Of the $4,598,000 of impaired loans,
$1,242,000 was measured using the present value method and $3,356,00 was
measured using the fair value of collateral.
Loans that are 90 days or more past due increased by 346.15% during the
nine months ended September 30, 1995. The total comprises one commercial loan
in the amount of $174,000, an installment loan in the amount of $9,000 and
29 overdraft protection lines totaling $49,000.
The Bank's total real estate owned increased 159.45% to $5,643,000 at
September 30, 1995, from $2,175,000 at December 31, 1994. The increase is
primarily due to the foreclosure of five properties. Two of these foreclosure
actions resulted in properties representing 59% of the total real estate owned
balance at September 30, 1995. One is a 60 unit manufactured housing complex
valued at $2,300,000 and the other is made up of three theaters valued at
$1,008,000. The 60 unit manufactured housing complex and one of the three
theaters are in escrow. Both are expected to close escrow by the end of the
year. Reductions in real estate owned during the third quarter came from the
sale of a four unit condominium project in Venice Beach and an auto repair
facility in San Pedro which resulted in a net gain of approximately $8,700.
Writedowns of $550,000 were recognized for the nine months ended September 30,
1995, due to deterioration in value of certain properties. Other real estate
owned properties in the amount of $2,335,000 consists of 161 acres of
unimproved land in Orange County, a commercial property in Lawndale, Ca., a gas
station in Chino, Ca. and a single family residence in Westchester, Ca. The
commercial property in Lawndale and the single family residence in Westchester
are in escrow and are expected to close escrow prior to year end. Real estate
owned is carried at the lower of cost or fair market value less estimated
carrying costs and costs of disposition. Cost is determined at the date of
acquisition as the result of a foreclosure sale and is equal to the receivable
balance at that date. If the cost (plus any liabilities assumed at foreclosure)
exceeds the appraised value, the carrying value of the property is written down
to its fair value. During the time the property is held, all related carrying
costs and losses on revaluation are expensed as incurred. Gains or losses on
sales are recorded in conformity with standards that apply to the accounting
for sales of real estate.
DEPOSITS
Strong rallies in the equities markets and related strength in the mutual
funds markets has continued to attract customer deposits away from financial
institutions as evidenced by the significant outflow of funds from savings and
interest bearing demand deposits. The Bank offered slightly higher rates in
time certificate of deposits of $100,000 and over which was attractive to
some deposit customers. The following schedule reflects specific deposit
information and percent change:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) SEPTEMBER 30, 1995 DECEMBER 31, 1994 % CHANGE
------------------ ----------------- --------
<S> <C> <C> <C>
Demand deposits, non-interest
bearing $132,138 $135,409 (2.42)
Savings and interest bearing
demand deposits 157,031 173,854 (9.68)
Time certificates of deposit
of $100,000 and over 16,168 12,652 27.79
Other time deposits 66,455 70,354 (5.54)
-------- --------
Total deposits $371,792 $392,269 (5.22)
</TABLE>
11
<PAGE>
RESULTS OF OPERATIONS
NET INCOME
Net income increased 6.83% or $166,000 for the nine months ended
September 30, 1995, and decreased 17.88% or $219,000 for the three months
ended September 30, 1995, compared to the same periods in 1994. Revenue from
earning assets increased $2,779,000 for the nine months ended September 30,
1995, compared to the same period in 1994 (see "Interest Income" herein) and
was the primary reason for the increase in net income, however, revenue from
earning assets decreased $56,000 for the three months ended September 30,
1995, compared to the same period in 1994. The annualized yield increased
from 7.86% for the nine months ended September 30, 1994, to 8.71% for the
nine months ended September 30, 1995, and increased from 7.96% for the three
months ended September 30, 1994, to 8.62% for the three months ended
September 30, 1995. During the nine months ended September 30, 1995, the
Company provided $1,025,000 for possible loan losses compared to $450,000
during the nine months ended September 30, 1994, and provided $100,000 for
possible loan losses during the three months ended September 30, 1995,
compared to $150,000 during the three months ended September 30, 1994 (see
"Provision for Loan Losses" herein). Interest expense increased $683,000 for
the nine months ended September 30, 1995, and $69,000 for the three months
ended September 30, 1995, compared to the same periods in 1994 and other
operating expenses increased $1,406,000 for the nine months ended September
30, 1995, and $69,000 for the three months ended September 30, 1995, when
comparing the same periods in 1994 (see "Interest Expense" and "Other
Expense" herein). Provision for income taxes increased $217,000 for the three
months ended September 30, 1995, compared to the same period in 1994, and was
a contributing factor for the decrease in net income during this period (see
"Provision for Income Taxes" herein).
INTEREST INCOME
Interest income increased 13.31% during the nine months ended September
30, 1995, compared the same period in 1994 and decreased .72% during the
three months ended September 30, 1995 compared to the same period in 1994.
The yield on average earning assets increased for both periods, largely due
to increases in the yield on loans and the yield on the securities portfolio.
The yield on loans was 10.90% for the nine months ended September 30, 1995,
compared to 9.86% for the nine months ended September 30, 1994, and 10.76%
for the three months ended September 30, 1995, compared to 10.43% for the
three months ended September 30, 1994. The increase in the loan yield
resulted from an increase in interest and fees on loans of $2,123,000 for the
nine months ended September 30, 1995, and $361,000 for the three months ended
September 30, 1995, when comparing the same periods in 1994. The yield on the
securities portfolio resulted from an increase in interest on securities of
$940,000 for the nine months ended September 30, 1995, however the securities
volume decrease resulted in a decrease in interest on securities of $300,000
for the three months ended September 30, 1995, when comparing the same
periods in 1994. Interest income on federal funds sold decreased $285,000 for
the nine months ended September 30, 1995 and decreased $177,000 for the three
months ended September 30, 1995, compared to the same periods in 1994. The
decrease in interest on federal funds sold was specifically due to the
average volume decrease during these periods. The average earning assets
increased 2.24% for the nine months ended September 30, 1995, compared to
1994 as a result of the purchase and assumption of two banks (see
"Acquisitions of Failed Financial Institutions" herein.) However, due to
reduction in securities available for sale (see "Securities" herein) average
earning assets decreased 8.31% for the three months ended September 30, 1995,
compared to same period in 1994. The following schedule provides specific
information regarding the components of interest income from earning assets:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) NINE MONTHS ENDED THREE MONTHS ENDED
---------------------------------- ------------------------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 1995 30, 1994 % CHANGE 30, 1995 30, 1994 % CHANGE
---------- ---------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Average earning assets $363,324 $355,356 2.24 $357,239 $389,631 (8.31)
Interest income $ 23,660 $ 20,881 13.31 $ 7,765 $ 7,821 (.72)
Annualized yield on average
earning assets 8.71% 7.86% 8.62% 7.96%
</TABLE>
12
<PAGE>
INTEREST EXPENSE
Interest expense increased 14.85% for the nine months ended September 30,
1995, and 3.93% for the three months ended September 30, 1995, compared to
the same periods in 1994. These increases were mostly due to an increase in
the time deposit interest rates. The increase in interest expense on time
deposits for the nine months ended September 30, 1995, was $787,000 and for
the three month period ended September 30, 1995, was $207,000 compared to the
same periods in 1994. The percent of lower cost non-interest bearing demand
deposits, savings deposits and interest bearing demand deposits to total
deposits at September 30, 1995, was 77.78% compared to 79.25% at September
30, 1994, while the percent of time deposits to total deposits at September
30, 1995, was 22.22% compared to 20.75% at September 30, 1994. Cost of funds
increased to 2.93% for the nine months ended September 30, 1995, compared to
2.53% for the nine months ended September 30, 1994, and to 3.04% for the
three months ended September 30, 1995, compared to 2.58% for the three months
ended September 30, 1994. The average interest-bearing liabilities decreased
for both the nine months and three months ended September 30, 1995 compared
to 1994. This is a result of a contraction of deposits experienced earlier
this year (see "Deposits" herein.) The Bank maintains a favorable net
interest margin as a result of the increase in the annualized yield in
average earning assets which more than offsets the increase in cost of funds
for average interest-bearing liabilities. The following schedule provides
specific information regarding the components of interest expense from
interest-bearing liabilities:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
--------------------------------- ----------------------------------
(DOLLARS IN THOUSANDS) SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 19995 30, 1994 % CHANGE 30, 1995 30, 1994 % CHANGE
--------- --------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Average interest-bearing
liabilities $241,335 $242,783 (.60) $238,073 $269,940 (11.81)
Interest expense $ 5,284 $ 4,601 14.85 $ 1,823 $ 1,754 3.93
Annualized cost of funds
for average interest-
bearing liabilities 2.93% 2.53% 3.04% 2.58%
Net interest margin
(net interest income divided
by average earning assets) 6.76% 6.13% 6.60% 6.18%
</TABLE>
13
<PAGE>
PROVISION FOR LOAN LOSSES
The purpose of the provision for possible loan losses is to maintain
reserves at a level sufficient to cover possible future loan losses.
Management exercises its judgment in establishing loss reserves for loans
which borrowers may not be able to repay in the future. The Bank's current
provision for loan losses reflects an ongoing detailed evaluation of the
known risks in the portfolio and the risks inherent in the present general
economic outlook. The Bank maintains a problem loan list in order to better
monitor these risks. This list includes those loans that are identified as
having varying degrees of risk in excess of loans having a normal amount of
risk. As of September 30, 1995, the problem loan list contained loans
totaling $12,973,000 compared to $14,355,000 as of September 30, 1994.
Management has a grading system that designates a grade for each loan
depending on the degree of risk and possibility of loss inherent in each
loan. This grading system drives the loan loss reserve calculations. A
percentage allocation of each loan balance is reserved depending on the
designated grade. Nonperforming loans (those loans on non-accrual or 90 days
or more past due) are contained in the problem loan list. As of September 30,
1995, the allowance for loan loss reserve represented 62% of nonperforming
loans and 24% of total problem loans as compared to 47% and 21% at September
30, 1994, respectively.
SFAS No. 114, which was adopted January 1, 1995, and required certain
calculations be prepared on impaired loans, resulted in an additional
$150,000 to the provision for loan loss during the first quarter of 1995. No
addition for SFAS No. 114 was required for the second and third quarters of
1995. The aggregate total provision for possible loan loss was $1,025,000 for
the nine months ended September 30, 1995. Management felt the increase in the
provision was necessary in light of the activity in non-accrual loans (see
"Nonperforming Loans and Real Estates Owned" herein), charged off loans and
problem loans. Gross loan loss recoveries for the nine months ended September
30, 1995, totaled $655,000 with gross loan charge offs totaling $1,352,000
resulting in net loan charge offs of $697,000. Gross loan loss recoveries for
the quarter ending September 30, 1995, totaled $55,000 with gross loan charge
offs totaling $573,000 resulting in net loan charge offs of $518,000.
The following schedule provides more specific information relative to the
provision and allowance for possible loan loss:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
----------------------------------- ----------------------------------
(DOLLARS IN THOUSANDS) SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 1995 30, 1994 % CHANGE 30, 1995 30, 1994 % CHANGE
---------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net charge-offs/(recoveries) $ 697 $ 992 (29.74) $ 518 $ 375 38.13
Provision for possible loan losses $1,025 $ 450 127.78 $ 100 $ 150 (33.33)
Allowance for loan losses $3,146 $3,031 3.79 $3,146 $3,031 3.79
Allowance for loan losses as a
percentage of gross loans 1.54% 1.52% 1.54% 1.52%
Allowance for loan losses as a
percentage of nonperforming loans 61.60% 46.80% 61.60% 46.80%
Provision as a percentage
of net interest income 5.58% 2.76% 1.68% 2.47%
</TABLE>
The following table displays the stratification of the $3,146,000
contained in Allowance for possible loan losses at September 30, 1995:
(DOLLARS IN THOUSANDS)
LOAN CATEGORY SEPTEMBER 30, 1995
------------- ------------------
Real estate - construction and other $1,047
Commercial 521
Installment 72
General loan reserves 1,506
------
Total $3,146
======
14
<PAGE>
OTHER REVENUE
Other operating revenue is comprised of income from service charges and
other types of fees on deposit accounts, net gains and losses on the sale of
securities, net gains and losses on the sale of real estate owned, and fees
on non-deposit account services. Service charges and fees increased due to an
increase in the charges assessed on certain deposit account activities. Other
operating revenues had increases in other non-deposit account service charges
and safe deposit box fees as well as a decrease in insurance commissions
earned. The following schedule reflects the composition of other income and
its percent of change from the same period in 1994:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
------------------------------------- -----------------------------------
(DOLLARS IN THOUSANDS) SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 1995 30, 1994 % CHANGE 30, 1995 30, 1994 % CHANGE
--------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service charges and fees $3,017 $2,441 23.60 $1,025 $ 876 17.01
Securities gains 46 9 411.11 4 0
Other operating revenue 832 985 (15.53) 277 288 (3.82)
------ ------ ------ -----
Total other revenue $3,895 $3,435 13.39 $1,306 $1,164 12.20
====== ====== ====== ======
</TABLE>
OTHER EXPENSES
Other operating expenses are primarily non-interest expenses and are
comprised of several major categories: salaries and employee benefits, net
occupancy expense, furniture, fixtures and equipment expense and various
other operating expenses. Salaries and benefits increased as well as
occupancy, net due to the addition of two offices from the purchase and
assumption of two banks in 1994 (see "Acquisitions of Failed Financial
Institutions" herein). During September the Bank completed a restructuring
program designed to improve productivity. Through further centralization of
repetitive tasks the Bank eliminated 41 full time equivalent positions of the
277 full time equivalent positions at December 31, 1994. Approximately
$1,500,000 in annual salaries and employee benefits savings are projected for
1996, with a restructuring cost of less than $250,000 taken in the third
quarter of 1995. Other operating expenses increased 6.15% from the nine
months ended September 30, 1994, and decreased 4.50% from the three months
ended September 30, 1994, due to several factors. Contributing factors for
the nine month period were: costs on real estate owned, the backroom
outsourcing contract, postage expense and losses on capital assets. The
losses on capital assets were directly related to the new Torrance facility
that opened in January of this year and required obsolete assets from the old
Torrance facility to be disposed. A retroactive refund on FDIC's insurance
premiums was received in the third quarter of 1995. This was a result of the
FDIC's BIF becoming fully funded this year. The BIF refunded overpayments to
financial institutions based on their reduced premium rates. The Bank's
insurance premium rates went from 23 cents per $100 on deposit to 4 cents per
$100 on deposit. The following schedule reflects the composition of other
expenses and its percent of change from the same period in 1994:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
------------------------------------- -----------------------------------
(DOLLARS IN THOUSANDS) SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 1995 30, 1994 % CHANGE 30, 1995 30, 1994 % CHANGE
--------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits $ 8,016 $ 7,384 8.56 $2,625 $2,503 4.87
Occupancy, net 2,272 1,902 19.43 763 715 6.71
Other operating expenses 6,974 6,570 6.15 2,145 2,246 (4.50)
------- ------- ------- ------
Total other expenses $17,262 $15,856 8.87 $5,533 $5,464 1.26
======= ======= ======= ======
</TABLE>
15
<PAGE>
PROVISION FOR INCOME TAXES
The following schedule provides specific information on the provision for
income taxes:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
------------------------------------- -----------------------------------
(DOLLARS IN THOUSANDS) SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 1995 30, 1994 % CHANGE 30, 1995 30, 1994 % CHANGE
--------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes $1,389 $ 980 41.74 $ 609 $ 392 55.36
Net income before provision $3,984 $3,409 16.87 $1,615 $1,617 (.12)
Effective tax rate 34.86% 28.75% 37.71% 24.24%
</TABLE>
PERFORMANCE RATIOS
There are several key ratios that are indications of performance, a few
of these ratios are presented as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
------------------------------ ----------------------------
ANNUALIZED PERIOD TO DATE ANNUALIZED PERIOD TO DATE
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Return on average assets .82% .61% .77% .58%
Return on average equity 7.28% 5.44% 6.94% 5.19%
Dividends as a percentage
of net income -- 49.83% -- 46.81%
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
SEPTEMBER 30, 1994 SEPTEMBER 30, 1994
------------------------------ ----------------------------
ANNUALIZED PERIOD TO DATE ANNUALIZED PERIOD TO DATE
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Return on average assets .94% .24% 1.05% .26%
Return on average equity 8.06% 2.03% 10.29% 2.59%
Dividends as a percentage
of net income -- 33.60% -- 23.27%
</TABLE>
16
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDING
Due to the nature of the business of Home Interstate Bancorp and its
subsidiary it is subject to legal actions threatened or filed which arise
from the normal course of business. Management believes that the eventual
outcome of all currently pending legal proceedings against the Bancorp or its
subsidiary will not be material to the Company's or the subsidiary's
financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
Not applicable.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this form to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated NOVEMBER 10, 1995 HOME INTERSTATE BANCORP (Registrant)
By /S/ KEITH W. BARNES
----------------------------
Keith W. Barnes
Senior Vice President and
Chief Financial Officer
Chief Accounting Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 44,415
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 18,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 127,337
<INVESTMENTS-CARRYING> 4,247
<INVESTMENTS-MARKET> 4,230
<LOANS> 204,710
<ALLOWANCE> 3,146
<TOTAL-ASSETS> 425,420
<DEPOSITS> 371,792
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,659
<LONG-TERM> 0
<COMMON> 40,493
0
0
<OTHER-SE> 9,476
<TOTAL-LIABILITIES-AND-EQUITY> 425,420
<INTEREST-LOAN> 16,843
<INTEREST-INVEST> 6,471
<INTEREST-OTHER> 346
<INTEREST-TOTAL> 23,660
<INTEREST-DEPOSIT> 5,257
<INTEREST-EXPENSE> 5,284
<INTEREST-INCOME-NET> 18,376
<LOAN-LOSSES> 1,025
<SECURITIES-GAINS> 46
<EXPENSE-OTHER> 17,262
<INCOME-PRETAX> 3,984
<INCOME-PRE-EXTRAORDINARY> 3,984
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,595
<EPS-PRIMARY> .65
<EPS-DILUTED> .65
<YIELD-ACTUAL> 5.06
<LOANS-NON> 4,875
<LOANS-PAST> 232
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 7,866
<ALLOWANCE-OPEN> 2,818
<CHARGE-OFFS> 1,352
<RECOVERIES> 655
<ALLOWANCE-CLOSE> 3,146
<ALLOWANCE-DOMESTIC> 3,146
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,506
</TABLE>
