<PAGE> 1
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 JUNE 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File No. 0-11160
HOME INTERSTATE BANCORP
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C>
CALIFORNIA 95-3657758
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
2633 CHERRY AVENUE, SIGNAL HILL, CALIFORNIA 90806 - 2033
(address of Principal Executive Offices) (ZIP Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (310) 988-9600
Indicate by check mark whether theRegistrant (1) has filed all
reports required to be filedthe Section 13 or 15(d) of the Securities
Exchange Act of 1934 during thepreceding 12 months (or for such shorter
periodthat the Registrant was required to filesuch 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 outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date.
Common Stock -- Authorized 20,000,000 shares of no par value; issued and
outstanding 4,226,872 at July 31, 1996.
<PAGE> 2
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 June 30, 1996 and December 31, 1995, and the
consolidated statements of income for the six and three months ended
June 30, 1996 and June 30, 1995 and cash flows for the six months ended
June 30, 1996 and June 30, 1995. It is management's opinion that these
statements present fairly, in all material respects, the consolidated
financial condition, result 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
financial statements.
2
<PAGE> 3
HOME INTERSTATE BANCORP AND SUBSIDIARY
--------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------- ------------
<S> <C> <C> <C>
ASSETS: Cash and due from banks $ 41,211 $ 38,797
Federal funds sold 6,000 14,600
--------- ---------
Total of cash and cash equivalents 47,211 53,397
Securities held to maturity
(Approximate market value at
June 30, 1996 and December 31, 1995 were
$29,898,613 and $13,179,412, respectively.) 30,478 13,131
Securities available for sale 98,226 120,755
--------- ---------
Securities, net 128,704 133,886
Loans 236,842 211,223
Less: Allowance for possible loan losses 3,101 3,113
--------- ---------
Loans, net 233,741 208,110
Real estate owned 2,220 4,918
Premises, furniture and equipment, net 14,419 14,366
Accrued interest receivable and other assets 9,064 9,115
--------- ---------
TOTAL ASSETS $ 435,359 $ 423,792
========= =========
LIABILITIES: Deposits:
Demand deposits, non-interest bearing $ 135,613 $ 132,208
Savings and interest bearing demand deposits 153,425 153,891
Time certificates of deposit of $100,000
and over 22,017 18,105
Other time deposits 69,246 64,827
--------- ---------
Total Deposits 380,301 369,031
Securities sold under agreements to repurchase 0 0
Accrued interest payable and other liabilities 2,653 3,345
--------- ---------
TOTAL LIABILITIES 382,954 372,376
--------- ---------
Commitments and contingencies
SHAREHOLDERS' Common stock (no par value)
EQUITY: Authorized 20,000,000 shares; issued and
outstanding 4,221,241 shares in 1996 and
4,187,954 shares in 1995 43,171 42,859
Retained earnings 9,250 7,977
Unrealized gains on securities available for
sale, net of deferred taxes (16) 580
-------- ---------
TOTAL SHAREHOLDERS' EQUITY
52,405 51,416
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 435,359 $ 423,792
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements of
financial condition.
3
<PAGE> 4
HOME INTERSTATE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in thousands except for earnings per share)
For the six and three months ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Six months ended Three months ended
------------------- ------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE FROM Interest and fees on loans $11,857 $11,247 $ 6,198 $ 5,892
EARNING Interest on securities:
ASSETS: taxable 3,645 4,382 1,802 2,043
non-taxable 191 179 96 63
Interest on deposits with
financial institutions 0 1 0 1
Interest on Federal funds sold 367 86 181 61
------- ------- ------- -------
TOTAL REVENUE FROM EARNING ASSETS 16,060 15,895 8,277 8,060
------- ------- ------- -------
COST OF FUNDS: Interest on savings and interest bearing
demand deposits 1,684 1,693 834 813
Interest on time certificates of deposit
of $100,000 and over 496 300 258 168
Interest on other time deposits 1,605 1,442 832 745
Interest on securities sold under
agreements to repurchase 5 26 4 15
------- ------- ------- -------
TOTAL COST OF FUNDS 3,790 3,461 1,928 1,741
------- ------- ------- -------
Net revenue from earning assets before
provision for possible loan losses 12,270 12,434 6,349 6,319
Provision for possible loan losses 350 925 50 300
------- ------- ------- -------
Net revenue from earning assets 11,920 11,509 6,299 6,019
------- ------- ------- -------
OTHER Service charges and fees 2,023 1,992 996 1,001
OPERATING Securities gains, net 0 42 0 31
REVENUE Other operating revenue 532 555 258 277
------- ------- ------- -------
TOTAL OTHER OPERATING REVENUE 2,555 2,589 1,254 1,309
------- ------- ------- -------
OTHER Salaries and employee benefits 4,975 5,391 2,677 2,645
OPERATING Occupancy expense, net 1,419 1,509 737 784
EXPENSES: Other operating expenses 4,615 4,829 2,186 2,586
------- ------- ------- -------
TOTAL OTHER OPERATING EXPENSES 11,009 11,729 5,600 6,015
------- ------- ------- -------
Income before provision for
income taxes 3,466 2,369 1,953 1,313
Provision for income taxes 1,475 780 811 447
------- ------- ------- -------
NET INCOME $ 1,991 $ 1,589 $ 1,142 $ 866
------- ------- ------- -------
EARNINGS PER SHARE $ .47 $ .40 $ .27 $ .22
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated statements of
financial condition.
4
<PAGE> 5
HOME INTERSTATE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Six Months Ended June 30, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
CASH FLOWS Net income $ 1,991 $ 1,589
FROM OPERATING -------- --------
ACTIVITIES: Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and amortization 433 438
Provision for possible loan losses 350 925
Amortization of securities premiums 696 854
Accretion of securities discounts (36) (67)
Amortization of deferred loan fees and costs (716) (404)
Net gain on sale of securities 0 (42)
Net (gain) loss on sale of premises,
furniture (9) 31
and equipment
Net loss on real estate owned 622 498
Tax benefit from stock options exercised 9 0
Net decrease in accrued interest receivable
and other assets 51 957
Net decrease in accrued interest payable and
other liabilities (269) (775)
-------- --------
Total adjustments 1,131 2,415
-------- --------
Net cash provided by operating activities 3,122 4,004
-------- --------
CASH FLOWS Proceeds from sales of securities 0 30,339
FROM INVESTING Proceeds from maturities of securities 23,451 8,902
ACTIVITIES: Purchase of securities (19,947) (2,028)
Net increase in loans (25,957) (10,973)
Proceeds from sale of real estate owned 2,768 473
Proceeds from sale of premises, furniture
and equipment 11 4
Purchase of premises, furniture and equipment (488) (1,542)
-------- --------
Net cash provided by (used in) investing
activities (20,162) 25,175
-------- --------
CASH FLOWS Net increase (decrease) in demand deposits
FROM FINANCING non-interest bearing, savings and interest
ACTIVITIES: bearing demand deposits 2,938 (20,045)
Net increase in time certificates of
deposit of $100,000 and over 3,912 2,611
Net increase (decrease) in other time deposits 4,419 (3,746)
Net decrease in securities sold under agreements
to repurchase 0 (100)
Proceeds from stock options exercised 304 0
Cash dividends declared (719) (954)
-------- --------
Net cash provided by (used in) financing
activities 10,854 (22,234)
-------- --------
Net increase (decrease) in cash and cash
equivalents (6,186) 6,945
Cash and cash equivalents at beginning of year 53,397 48,996
-------- --------
Cash and cash equivalents at end of year $ 47,211 $ 55,941
======== ========
</TABLE>
5
<PAGE> 6
HOME INTERSTATE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Continued
(Unaudited)
For the Six Months Ended June 30, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <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 $ 1,018 $ (4,979)
Increase (decrease) in deferred tax
liabilities related to unrealized gains /
losses on securities available for sale (422) 2,068
Increase (decrease) in shareholders' equity
for unrealized gains / losses, net of
deferred taxes (596) 2,911
Real estate acquired in settlement of loans 692 4,224
Supplemental disclosure of cash flow
information
Cash paid during the year for:
Interest expense $ 3,770 $ 3,459
Income taxes 1,330 1,680
</TABLE>
6
<PAGE> 7
HOME INTERSTATE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
Principles of Consolidation
The consolidated financial statements of Home Interstate Bancorp
include the accounts of the Company andits wholly-owned subsidiary, the
Bank. All material intercompany balances and transactions have been
eliminated in the consolidation.
Principles of Presentment
The accompanying unaudited consolidated financial statements have
been prepared in condensed formatand, 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 FinancialAccounting Standard
("SFAS") No. 114, "Accountingby Creditors for Impairment of a Loan",as
amended by SFAS No. 118. These standards require that impaired loans be
measuredbased on the present value of expectedfuture 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 Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of ". These
standards requires that impairment losses on long-lived assets to be
recognized when an asset's book value exceeds its expected future cash
flows (undiscounted). The statement was adopted as of January 1, 1996,and
it does not have a material effect on theCompany's financial statements.
The Company adopted SFAS No. 123"Accounting for Stock-Based
Compensation". UnderSFAS No. 123, companies have the option toimplement a
fair value-based accounting method or continue to account for employee
stock options and stock purchase plans as prescribed by Accounting
Principles Board Opinion No. 25"Accounting for Stock Issued to Employees".
The Company hasnot assessed the impact on net income of adopting the new
fair value accounting rules.
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, 4,119,610 at June 30, 1996, 4,177,865 at
December 31, 1995 and 4,175,558 at June 30, 1995.
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
$1,330,000 and $1,680,000 for income taxes and $3,770,000 and $3,459,000
for interest paid on deposit accounts for the periods ended June 30, 1996
and 1995, respectively.
7
<PAGE> 8
ITEM 2. Management Discussion and Analysis of Financial
Condition and Results of Operations
FINANCIAL CONDITION
General
The Company's consolidated assets of $435,359,000 at June 30, 1996
increased 2.73% from December 31, 1995, when consolidated assets totaled
$423,792,000. Cash and cash equivalents decreased 11.58% or $6,186,000.
Securities held to maturity increased 132.11% or $17,347,000 and securities
available for sale, net of unrealized loss decreased 18.66% or $22,529,000.
Loans increased 12.13% or $25,619,000 while the allowance for loan losses
decreased .39% or $12,000. Real estate owned decreased 54.86% or $2,698,000.
Deposits increased 3.05% or $11,270,000 when comparing the same periods. The
increase in deposits was primarily due to an increase in yields on interest
bearing deposits and partially utilized in the funding of loans. During the six
months of 1996 loan demand increased slightly from December 31, 1995.
Mergers and Acquisitions
On January 10, 1996, the Company entered into a definitive agreement to
merge with and into CU Bancorp, a California corporation and parent of
California United Bank, National Association. Under the terms of the
definitive agreement, shareholders of the Company will receive 1.409 shares of
CU Bancorp stock for each share of CU Bancorp's stock. The definitive
agreement received shareholder and regulatory approval during July 1996 and the
merger is expected to be completed mid August 1996. At June 30, 1996, CU
Bancorp had total assets of $381,072,000 and total shareholders' equity of
$38,820,000.
In February 1996, the Bank consummated a deposit purchase agreement with
Southern California Bank in which the Bank purchased the deposits of Southern
California Bank's Signal Hill branch office. The deposits purchased in the
transaction totaled in aggregate $1,656,000, which reflects less than 1% of
total deposits and assets of the Bank.
Capital Resources
The Company's internal growth rate of capital was 1.92% while assets
increased by 2.73% from year-end December 31, 1995. The following schedule
reflects specific capital-related information and ratios:
<TABLE>
<CAPTION>
(dollars in thousands) June 30, 1996 December 31, 1995 % Change
------------- ----------------- --------
<S> <C> <C> <C>
Ending total capital $52,405 $51,416 1.92
Risk based capital-to-assets
ratios: Regulatory
Requirement
-----------
Tier 1 capital 16.51 16.96 4.00
Total capital 17.57 18.09 8.00
Leverage ratio 11.30 11.05 3.00 -- 5.00
</TABLE>
8
<PAGE> 9
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, reduction 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 increase in loan demand and a
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) June 30, 1996 December 31, 1995 % Change
------------- ----------------- --------
<S> <C> <C> <C>
Gross loans $236,842 $211,223 12.13
Total deposits $380,301 $369,031 3.05
Gross loan-to-deposit ratio 62.28 57.24
Gross loan-to-total assets
ratio 54.40 49.84
Cash and cash equivalent
assets as a percentage
of total assets 10.84 12.60
</TABLE>
Securities Portfolio
The Company complies with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The Company holds securities
in two categories, available for sale and held to maturity. Securities
available for sale may be held for indefinite periods of time and may be
sold in response to changes in interest rates and/or other economic
conditions. These securities are, in the aggregate, carried at market
value. Unrealized gains or losses are calculated based on adjusted cost as
described below. Unrealized gains or losses, net of deferred taxes, are
recorded as a separate component of shareholders' equity. 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.
The Company's calculation of cost is increased by accretion of
discounts and decreased by amortization of premiums,which are computed on
the straight-line method that approximates the effective interest method.
Such amortization and accretion are reflected in interest on securities.
Realized gains or losses recognized on the sales of securities are based
upon the adjusted cost and computed on the specific identification method
and are classified in other operating revenue, securities gains or losses,
net.
The unrealized gains (losses) on securities available for sale,
net of deferred taxes, were ($67,000) at June 30, 1996, compared to
$580,000 at December 31, 1995. The activity in the available for sale
portfolio had securities matured/called of $22,201,000 and purchased
$1,146,000 during the six months ended June 30, 1996. The proceeds from
these securities were used primarily to fund the purchase of securities
held to maturity and fund new loans during the same period. There were no
gains or losses recognized from the proceeds of these securities and no
purchases were added to the available for sale portfolio during the same
period.
9
<PAGE> 10
The activity in the held to maturity portfolio during the six months ended
June 30, 1996, consisted of $1,250,000 matured/called and $18,801,000
purchased. There were no gains or losses recognized from the proceeds of these
securities.
Nonperforming Loans and Real Estate Owned
<TABLE>
<CAPTION>
(dollars in thousands) June 30, 1996 December 31, 1995 % Change
------------- ----------------- --------
<S> <C> <C> <C>
Non-accrual loans $ 495 $ 3,232 (84.68)
Loans 90 days past due 43 106 (59.43)
Real estate owned 2,220 4,918 (54.86)
</TABLE>
The Bank's non-accrual loans showed a decrease of 84.68% for the six months
ended June 30, 1996. Of the $3,232,000 at December 31, 1995, $284,000 was
charged off, $692,000 was transferred to real estate owned, $1,950,000 was
received in payments and $79,000 was brought current and removed from
non-accrual status. Additions to non-accrual since December 31, 1995 total
$269,000. Of the $495,000 in non-accrual loans at June 30, 1996, $482,000 is
secured by deeds of trust and $13,000 is secured by other collateral. The
largest group of loans in non- accrual status is to one borrower and its
related entities and total in aggregate $246,000 of which all are secured by
real estate, having an approximate loan to value ratio of 98%. Management has
set a specific reserve of $25,000 on the $246,000 and it is believed to be
sufficient to absorb any anticipated loss. The next largest non-accrual loan
had a balance of $236,000 and is secured by real estate and has a loan to value
ratio of approximately 58%. This loan has a specific reserve of $47,000.
Management feels that the current allowance for loan loss is adequate.
The Company considers a loan to be nonperforming when any one of the
following events occur: (a) any installment of principal or interest is 90 days
past due; or (b) the loan is placed on non-accrual status. The Company's
policy is to classify loans which are delinquent in interest or principal for
a period of 90 days as non-accrual loans unless management determines that the
loan is adequately collateralized and in the process of collection or other
circumstances exist which would justify the treatment of the loan as fully
collectable. 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. 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.
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 its calculations smaller balance, homogeneous
loans such as consumer installment loans, lines of credit, and direct finance
leases. In determining whether a loan is impaired or not, the Bank applies its
normal loan review procedures. Loans which the Bank expects to collect in full
and for which an insignificant delay, i.e., 45 days past due, or an
insignificant shortfall in amount of payments is anticipated are not considered
impaired. 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.
At June 30, 1996, the Bank had $246,000 in impaired loans and a related
loss allowance of $25,000. Of the $246,000 of impaired loans, $0 was measured
using the present value method and $246,000 was measured using the fair value
of collateral. The approximate average balance of impaired loans for the
period ended June 30, 1996 was $1,377,000. No income was recognized during the
period on impaired loans.
Loans that are 90 days or more past due decreased 59.43% during the three
months ended June 30, 1996. The total comprises one installment loan in the
amount of $3,000 and 27 overdraft protection lines totaling $40,000.
10
<PAGE> 11
The Bank's total real estate owned decreased 54.86% to $2,220,000
at June 30, 1996, from $4,918,000 at December 31, 1995. Four related
properties were foreclosed and added to real estate owned in the aggregate
amount of $222,000 and subsequently sold in April 1996. No gains or losses
were recognized on this one transaction. Two other properties were added to
real estate owned in the amounts of $220,000 and $250,000. A 60 unit
manufactured housing complex closed escrow in May 1996 with proceeds of
$2,133,000. One of the two theaters closed escrow in June 1996 with
proceeds of $235,000. The commercial property in Lawndale, Ca and the
condominium in Lomita, Ca. also closed escrow in May 1996 with proceeds of
$78,000 and $100,000, respectively. Other real estate owned properties
total in the aggregate $2,220,000 and consist of 161 acres of unimproved
land in Orange County, a gasstation in Chino, Ca., one theater in
Oceanside, Ca., an auto repair facility in Compton, Ca. and a commercial
building in Long Beach, Ca. Reductions in real estate owned during the six
months ended June 30, 1996 came from the writedowns of $622,000 recognized
due to additional anticipated closing costs. 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
The equities markets and mutual funds continue to attract customer
deposits, however, a more attractive rate environment for time deposits
have provided an increase of 21.61% of time deposit of $100,000 or more and
6.82% in other time deposits from December 31, 1995. The following schedule
reflects specific deposit information and percentage change:
<TABLE>
<CAPTION>
(dollars in thousands) June 30, 1996 December 31, 1995 % Change
------------- ----------------- --------
<S> <C> <C> <C>
Demand deposits, non-interest
bearing $135,613 $132,208 2.58
Savings and interest bearing
demand deposits 153,425 153,891 (.30)
Time certificates of deposit of
$100,000 and over 22,017 18,105 21.61
Other time deposits 69,246 64,827 6.82
--------- ---------
Total deposits $380,301 $369,031 3.05
</TABLE>
11
<PAGE> 12
RESULTS OF OPERATIONS
Net Income
Net income increased 25.30% or $402,000 for the six months ended June 30,
1996 and increased 31.87% or $276,000 for the three months ended June 30, 1996
compared to the same period in 1995. Revenue from earning assets increased
$165,000 for the six months ended June 30, 1996 and $217,000 for the three
months ended June 30, 1996 compared to the same period in 1995. The annualized
yield increased from 8.755 to 8.865 comparing the six months periods and
remained relatively unchanged at 9.01% to 9.005 for the three month periods.
Interest expense increased $329,000 with the annualized cost of funds
increasing from 2.87% to 3.16% for the six months ended June 30, 1996 and
interest expense increased $187,000 with the annualized cost of funds
increasing from 2.97% to 3.19% for the three months ended June 30, 1996
compared to the same periods in 1995. Provision for loan losses decreased
62.16% or $575,000 for the six months ended June 30, 1996 and decreased 83.33%
or $250,000 for the three months ended June 30, 1996 when comparing the same
periods in 1995. Total other expenses decreased 6.14% or $720,000 and 6.88% or
$414,000, and provision for income taxes increased 89.10% or $695,000 and
81.43% or $364,000 comparing the six and three months ended June 30, 1996 to
the same periods in 1995, respectively.
Interest Income
Interest income increased 1.04% while the annualized yield on average
earning assets increased to 8.86% form 8.75% when comparing the six months
ended June 30, 1996 to June 30, 1995. Interest income increased 2.69% while
the annualized yield on average earning assets remained virtually unchanged at
9.00% and 9.01% when comparing the three months ended June 30, 1996 to June 30,
1995. The average earning assets reflect a slight decrease of .51% for the six
months ended June 30, 1996 to June 30, 1995 and reflect an increase of 3.02%
for the three months ended June 30, 1996 to June 30, 1995. Interest and fees
on loans increased 5.42% and 5.19% comparing the six months and three months
ended June 30, 1996 to June 30, 1995, respectively. Interest income on
securities decreased 15.90% and 9.88% comparing the same periods. as maturing
securities were utilized to purchase held to maturity securities and fund new
loans. Interest income on federal funds sold increased $281,000 for the six
months ended June 30, 1996 and $120,000 for the three months ended June 30,
1996 compared to the same periods in 1995, due to the increase in the average
balance of federal funds sold. The following schedule provides specific
information regarding the components of interest income from earning assets:
<TABLE>
<CAPTION>
(Dollars in thousands) Six months ended Three months ended
------------------------------------ ------------------------------------
June 30, June 30, June 30, June 30,
1996 1995 % Change 1996 1995 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Average earning assets $364,555 $366,417 (.51) $369,856 $358,999 3.02
Interest income $ 16,060 $ 15,895 1.04 $ 8,277 $ 8,060 2.69
Annualized yield on average
earning assets 8.86% 8.75% 9.00% 9.01%
</TABLE>
12
<PAGE> 13
Interest Expense
Interest expense increased 9.51% for the six months ended June
30,1996 and 10.74% for the three months ended June 30, 1996 compared to the
same periods in 1995. These increases reflect the increase in volume during
the three months ended June 30, 1996 coupled with an increase in the cost of
funds. Average time deposits of $100,000 and over was the primary area of
growth when comparing these periods. The percent of lower cost non-interest
bearing demand deposits, savings deposits and interest bearing demand
deposits to total deposits at June 30, 1996 was 77.25% compared to 77.94%
at June 30, 1995. The Bank continues to maintain a favorable net
interest margin. The following schedule provides specific information
regarding the components of interest expense derived from interest-bearing
liabilities:
<TABLE>
<CAPTION>
Six months ended Three months ended
----------------------------------- ------------------------------------
(Dollars in thousands) June 30, June 30, June 30, June 30,
1996 1995 % Change 1996 1995 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Average interest-bearing
liabilities $241,333 $242,955 (.67) $242,809 $236,322 2.74
Interest expense $ 3,790 $ 3,461 9.51 $ 1,928 $ 1,741 10.74
Annualized cost of funds
for average interest-bearing
liabilities 3.16% 2.87% 3.19% 2.95%
Net interest margin 6.77% 6.84% 6.90% 7.06%
(net interest income divided
by average earning assets)
</TABLE>
13
<PAGE> 14
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 (including watch
credits). As of June 30, 1996, the problem loan list contained loans totaling
$11,144,000 compared to $13,338,000 at June 30, 1995. 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 class of 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 status and 90 days or more past due) are
contained in the problem loan list. As of March 31, 1996, the allowance for
loan loss represented 576% of nonperforming loans and 28% of total problem
loans as compared to 45% and 27% at June 30, 1995, respectively (see
"Nonperforming Loans and Real Estate Owned" herein).
SFAS No. 114, which was adopted January 1, 1995, requires that certain
calculations be prepared with respect to impaired loans. No additional
provision was required under SFAS No. 114 during the six months of 1996. The
aggregate total provision for loan loss on impaired loans was $25,000 for the
six months ending June 30, 1996.
Management decreased the provision for possible loan losses during the
first and second quarters of 1996 compared to the same periods in 1995 due to
an adequate and improved coverage ratio of nonperforming loans at June 30, 1996
(see "Nonperforming Loans and Real Estates Owned" herein). Gross loan loss
recoveries for the six months and three months ended June 30, 1996 totaled
$163,000 and $137,000 with gross loan charge offs totaling $525,000 and
$294,000 resulting in net charge offs of $362,000 and $157,000, respectively.
The following schedule provides more specific information relative to the
provision and allowance for possible loan loss:
<TABLE>
<CAPTION>
Six months ended Three months ended
----------------------------------- ------------------------------------
(Dollars in thousands) June 30, June 30, June 30, June 30,
1996 1995 .% Change 1996 1995 .% Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Net charge-offs/(recoveries) $ 362 $ 179 102.23 $ 157 $ 435 (63.91)
Provision for possible
loan losses $ 350 $ 925 (62.16) $ 50 $ 300 (83.33)
Allowance for possible loan $ 3,101 $ 3,565 (13.02) $ 3,101 $ 3,565 (13.02)
losses
Allowance for possible loan
losses as a percentage
of gross loans 1.31% 1.73% 1.31% 1.73%
Allowance for possible loan
losses as a percentage of
nonperforming loans 576.39% 44.79% 576.39% 44.79%
Provision as a percentage
of net interest income 2.85% 7.44% 2.85% 4.75%
</TABLE>
14
<PAGE> 15
The following table displays the stratification of the $3,101,000
contained in Allowance for possible loan losses at June 30, 1996:
<TABLE>
<CAPTION>
(dollars in thousands)
Loan Category June 30, 1996
------------- -------------
<S> <C>
Real estate - construction and other $ 608
Commercial 542
Installment 75
General loan reserves 1,876
--------
Total $ 3,101
=======
</TABLE>
Other Revenue
Other operating revenue is comprised of income from service charges
and other types of fees on deposit accounts, net gains on the sale of
securities available for sale, gross gains on the sale of real estate
owned, and fees on non-deposit account services. The following schedule
reflects the composition of other income and its percent of change from the
same period in 1995:
<TABLE>
<CAPTION>
Six months ended Three months ended
----------------------------------- ------------------------------------
(Dollars in thousands) June 30, June 30, June 30, June 30,
1996 1995 % Change 1996 1995 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Service charges and fees $ 2,023 $ 1,992 1.56 $ 996 $ 1,001 (.50)
Securities gains 0 42 (100.00) 0 31 (100.00)
Other operating revenue 532 555 (4.14) 258 277 (6.86)
---------- ---------- ---------- ----------
Total other revenue $ 2,555 $ 2,589 (1.31) $ 1,254 $ 1,309 (4.20)
========== ========== ========== ==========
</TABLE>
Other Expenses
Other 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, gross losses
on real estate owned and various other operating expenses. Salaries and
benefits decreased due to the restructuring program designed to improve
productivity which took place in September 1995. The Bank eliminated 41
full time positions and the result is a 7.72% decrease in salaries and
employee benefits. Occupancy expenses, net, decreased 5.96% due to a
decrease in furniture, fixture and equipment repairs and furniture, fixture
and equipment not capitalized. Other operating expenses decreased 4.43%
primarily due to the federal deposit insurance premiums decrease of $425,000
due to the new rate schedule set during the end of 1995. A voluntary
severance package was offered to long term employees during the second
quarter of 1996, due to the upcoming merger. At June 30, 1996 a total of
$250,000 was accrued in anticipation of employees that may elect to take
the severance package. In July 1996 an additional $196,000 was accrued
after the final number of employees electing to take the package was
confirmed. The following schedule reflects the composition of other
expenses and its percent of change from the same period in 1995:
<TABLE>
<CAPTION>
Six months ended Three months ended
----------------------------------- -----------------------------------
(Dollars in thousands) June 30, June 30, June 30, June 30,
1996 1995 % Change 1996 1995 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits $ 4,975 $ 5,391 (7.72) $ 2,677 $ 2,645 1.21
Occupancy, net 1,419 1,509 (5.96) 737 784 (5.99)
Other operating expenses 4,615 4,829 (4.43) 2,186 2,586 (15.47)
-------- -------- -------- --------
Total other expenses $ 11,009 $ 11,729 (6.14) $ 5,600 $ 6,015 (6.90)
======== ======== ======== ========
</TABLE>
15
<PAGE> 16
Provision for Income Taxes
The provision for income taxes increased 89.10% and 81.43% during the six
and three months ended June 30, 1996 compared to the same period in 1995,
respectively. The increased effective tax rate for the six and three months
ended June 30, 1996 was 42.56% and 41.53% compared to 32.93% and 34.04% in
1995, respectively. This increase is due to the nondeductible expenses related
to merger costs and tax exempt income reductions as a percent of pretax net
income from 6.75% in 1995 to 5.00% in 1996. The following schedule provides
specific information on the provision for income taxes:
<TABLE>
<CAPTION>
Six months ended Three months ended
------------------------------------ -----------------------------------
(Dollars in thousands) June 30, June 30, June 30, June 30,
1996 1995 % Change 1996 1995 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes $ 1,475 $ 780 89.10 $ 811 $ 447 81.43
Net income before $ 3,466 $ 2,369 46.31 $ 1,953 $ 1,313 48.74
provision
Effective tax rate 42.56% 32.93% 41.53% 34.04%
</TABLE>
Performance Ratios
There are three key ratios that are indications of earnings performance,
those ratios are presented as follows:
<TABLE>
<CAPTION>
Six months ended
June 30, 1996 June 30, 1995
------------------------------ ------------------------------
Annualized Period to date Annualized Period to date
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Return on average assets .93% .46% .75% .37%
Return on average equity 7.71% 3.83% 6.85% 3.40%
Dividends as a percentage
of net income -- 36.11 -- 60.04%
</TABLE>
<TABLE>
<CAPTION>
Three months ended
June 30, 1996 June 30, 1995
------------------------------ -------------------------------
Annualized Period to date Annualized Period to date
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Return on average assets 1.06% .26% .83% .21%
Return on average equity 8.81% 2.19% 7.28% 1.81%
Dividends as a percentage
of net income -- 31.35% -- 36.72%
</TABLE>
16
<PAGE> 17
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 10. Exhibits
Not applicable.
17
<PAGE> 18
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 August 8, 1996 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>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 41,211
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 98,226
<INVESTMENTS-CARRYING> 30,478
<INVESTMENTS-MARKET> 29,898
<LOANS> 236,842
<ALLOWANCE> 3,101
<TOTAL-ASSETS> 435,359
<DEPOSITS> 380,301
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,653
<LONG-TERM> 0
0
0
<COMMON> 43,171
<OTHER-SE> 9,234
<TOTAL-LIABILITIES-AND-EQUITY> 435,359
<INTEREST-LOAN> 11,857
<INTEREST-INVEST> 3,836
<INTEREST-OTHER> 367
<INTEREST-TOTAL> 16,060
<INTEREST-DEPOSIT> 3,790
<INTEREST-EXPENSE> 3,790
<INTEREST-INCOME-NET> 12,270
<LOAN-LOSSES> 350
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,009
<INCOME-PRETAX> 3,466
<INCOME-PRE-EXTRAORDINARY> 3,466
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,991
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
<YIELD-ACTUAL> 3.37
<LOANS-NON> 495
<LOANS-PAST> 43
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 10,160
<ALLOWANCE-OPEN> 3,113
<CHARGE-OFFS> 525
<RECOVERIES> 163
<ALLOWANCE-CLOSE> 3,101
<ALLOWANCE-DOMESTIC> 3,101
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,876
</TABLE>
