<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1996 (NO FEE REQUIRED)
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (NO FEE REQUIRED)
For the transition period from ________ to ________
Commission File Number 0-18284
HOMECORP, INC.
- -----------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-3680814
- ------------------------------- ------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
1107 E. State Street, Rockford, Illinois 61104
- -----------------------------------------------------------------------------
(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code: (815) 987-2200
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
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 requirements for
the past 90 days. YES [X] NO ___
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K (X)
As of March 18, 1997, there were issued and outstanding 1,128,779 shares of the
Registrant's Common Stock.
<PAGE>
1
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of such stock on the
Nasdaq National Market System, as of March 18, 1997 was $16,383,000. (The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the Registrant that such person is an
affiliate of the Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the Annual Report to Stockholders for
the fiscal year ended December 31, 1996.
Part III of Form 10-K - Portions of the Proxy Statement for Annual Meeting of
Stockholders to be held in 1997.
PART I
Item 1. Business
General
- -------
HomeCorp, Inc. (the "Company") is a Delaware corporation formed in 1989 as a
thrift holding company to serve as the holding company for HomeBanc, a federal
savings bank ("HomeBanc" or the "Bank"). The Bank was organized in 1889 as the
Swedish Building and Loan Association. HomeBanc converted to a federally
chartered mutual savings and loan association in 1967 and a federal stock
savings bank in 1990. At December 31, 1996, the Company had $335.8 million of
assets, $311.8 million of deposits and $20.9 million of stockholders' equity.
As a community oriented savings bank, HomeBanc offers a range of retail banking
services through its nine full service offices and one limited service office
located in Winnebago, Stephenson, and Lee Counties, Illinois. Included in the
nine full service offices is a supermarket office in Rockford which opened in
April 1995. HomeBanc is principally engaged in the business of attracting
deposits from the general public and using such deposits, together with
borrowings and other funds, to originate residential mortgage, consumer, and
small business loans. HomeBanc sells the majority of its residential mortgage
originations with servicing retained. The Bank's balance sheet reflects these
sales together with the increasing origination of consumer and small business
loans. The consumer loan portfolio increased $19.5 million, or 35% during 1996
while commercial business loans increased $2.2 million, or 56%. HomeBanc also,
to a lesser extent, originates construction and commercial real estate loans
primarily on properties located in its market area as well as construction and
land loans in the western and northern suburban Chicago markets.
Since 1993 the Bank has purchased participating interests in permanent and
construction loans on multi-family and commercial properties located primarily
in southern Wisconsin. The Bank purchased participating interests in seven loans
totaling $7.2 million during 1996. The Bank intends to continue the purchase of
such participations secured by properties located in
<PAGE>
2
Midwest States. The loans are adjustable rate or short term fixed rate loans.
In current market conditions, non-residential lending activities may be more
profitable than residential. See "Originations, Purchases, Sales, and Servicing
of Real Estate Loans."
In the past, HomeBanc through its subsidiary Home Federal Service Corporation,
made substantial investments in real estate development projects, principally in
the western and northern suburbs of Chicago. As a result of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), HomeBanc
has made no new commitments for real estate development projects since 1989.
See "Subsidiary Activities" and "Regulation". HomeBanc also offers brokerage
and related services through its affiliation with Invest Financial Corporation,
a full-service investment brokerage program.
HomeBanc intends to continue to emphasize consumer and small business lending in
its principal lending markets, as well as its traditional residential lending.
Subject to regulatory restrictions and the volume and mix of construction
activity in the real estate market, the Bank also intends to continue to
emphasize residential construction lending. In addition, the Bank will continue
to manage as well as reduce its existing real estate development investments.
Market Area
- -----------
HomeBanc serves its customers through six full service offices located in the
Rockford, Illinois metropolitan area, two full service offices located in the
Freeport, Illinois area, and one full service and one limited service office
located in Dixon, Illinois. The Rockford metropolitan area has a population of
approximately 348,000, making it the second most highly populated metropolitan
area in the State of Illinois, and is located approximately 55 miles west of the
Chicago suburbs. This market area is characterized by a diverse economic base
that features a variety of manufacturing and service firms. Major corporations
headquartered or having substantial operations in or around the Rockford area
include the Chrysler Corporation, the Newell Company, Sundstrand Corporation,
Ingersoll Milling Machine Company and Clarcor. Motorola opened a repair
facility in Rockford during 1995 and a manufacturing facility in a community
approximately 25 miles from Rockford. Freeport is located approximately 30 miles
west of Rockford and has a manufacturing based economy. Dixon is located 45
miles southwest of Rockford and has a manufacturing and agricultural economy.
Lending Activities - General
- ----------------------------
The principal lending activity has been the origination of fixed and adjustable
rate conventional real estate loans to enable borrowers to pur chase or
refinance owner-occupied homes. In addition, in order to increase the yield and
interest rate sensitivity of its portfolio, the Bank originates and purchases
consumer, commercial real estate, construction, commercial business loans, and
land.
<PAGE>
3
Loan applications are initially approved at various levels of authority,
depending on the type, amount and loan-to-value ratio of the loan. Mortgage
loan commitments of more than $250,000 must be approved by a majority of the
members present at a duly convened meeting of the Bank's Senior Loan Committee.
The Committee is comprised of the President, Executive Vice President, Senior
Vice President-Commercial Lending, Senior Vice President, Residential Lending,
and Vice President-Commercial Credit Administration. At least three Committee
members are required for a quorum.
Commercial business loans of more than $150,000 must be approved by the Bank's
Senior Loan Committee. Such loans in excess of $750,000 must be approved by
the Loan Committee of the Board of Directors, comprised of three outside
Directors and the President.
Specific credit criteria and lending limitations are established for consumer
loan officers. Any deviations from established guidelines require the approval
of the Senior Loan Committee. All loans are ratified by the Board of Directors.
Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Bank's loan portfolio, in dollar amounts and
in percentages (before deductions for unearned discounts, loans in process,
deferred fees and discounts and allowance for loan losses) as of the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994 1993 1992
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Residential $126,108 47.4% $153,986 58.2% $173,698 69.5% $171,089 73.1% $178,081 77.6%
Commercial 40,086 15.1% 38,850 14.7% 38,813 15.5% 27,917 11.9% 18,801 8.2%
Construction 13,482 5.1% 9,354 3.5% 5,548 2.2% 11,379 4.9% 10,210 4.4%
Land 4,415 1.6% 2,335 0.9% 1,611 0.7% 3,361 1.4% 3,386 1.5%
-------- ------ -------- ------ -------- ----- -------- ----- -------- -----
Total R.E. Loans $184,091 69.2% $204,525 77.3% $219,670 87.9% $213,746 91.3% $210,478 91.7%
Other Loans:
Consumer Loans
Automobile 53,249 20.0% 38,687 14.6% 14,602 5.8% 7,341 3.1% 6,806 3.0%
Home Equity and
Improvement 21,168 8.0% 16,268 6.1% 12,297 4.9% 10,238 4.4% 9,668 4.2%
Other 1,374 0.5% 1,293 0.5% 1,213 0.5% 896 0.4% 1,686 0.7%
-------- ------ -------- ------ -------- ----- -------- ----- -------- -----
Total Consumer Lns. $ 75,791 28.5% $ 56,248 21.2% $ 28,112 11.2% $ 18,475 7.9% $ 18,160 7.9%
Commercial
Business Loans $ 6,243 2.3% $ 4,007 1.5% $ 2,211 0.9% $ 1,921 0.8% $ 966 0.4%
-------- ------ -------- ------ -------- ----- -------- ----- -------- -----
Total Other Loans $ 82,034 30.8% $ 60,255 22.7% $ 30,323 12.1% $ 20,396 8.7% $ 19,126 8.3%
-------- ------ -------- ------ -------- ----- -------- ----- -------- -----
Total Loans $266,125 100.0% $264,780 100.0% $249,993 100.0% $234,142 100.0% $229,604 100.0%
------ ------ ----- ----- -----
LESS
Unearned Discount $ 210 $ 270 $ 623 $ 761 $ 1,102
Loans in Process 5,639 2,753 3,343 2,561 1,039
Deferred Fees and
Discount (446) (440) (331) (57) (41)
Allowance for
Loan Losses 1,582 1,175 1,048 956 900
-------- -------- -------- -------- --------
Total Loans Receivable,
Net $259,140 $261,022 $245,310 $229,921 $226,604
======== ======== ======== ======== ========
</TABLE>
<PAGE>
4
The following table shows the fixed and adjustable rate composition of the
Bank's loan portfolio, in dollar amounts and in percentages (before deductions
for unearned discounts, loans in process, deferred fees and discounts and
allowance for loan losses) as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994 1993 1992
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans
Real Estate:
Residential $ 77,679 29.2% $ 93,155 35.2% $107,055 42.8% $111,653 47.7% $103,083 44.9%
Commercial 16,071 6.0% 12,854 4.8% 17,382 7.0% 9,479 4.0% 5,055 2.2%
Construction 400 0.2% 168 0.1% 459 0.2% 0 0.0% 0 0.0%
Land 1,611 0.6% 216 0.1% 74 0.0% 0 0.0% 0 0.0%
-------- ----- -------- ---- -------- ----- -------- ----- -------- --------
Total R.E. Loans 95,761 36.0% 106,393 40.2% 124,970 50.0% 121,132 51.7% 108,138 47.1%
Consumer 61,117 23.0% 44,649 16.8% 18,633 7.4% 9,566 4.1% 9,141 4.0%
Commercial Bus. 3,037 1.1% 2,062 0.8% 1,005 0.4% 844 0.4% 629 0.3%
-------- ----- -------- ---- -------- ----- -------- ----- -------- --------
Total Fixed
Rate Loans 159,915 60.1% 153,104 57.8% 144,608 57.8% 131,542 56.2% 117,908 51.4%
-------- ----- -------- ---- -------- ----- -------- ----- -------- --------
Adjustable Rate Loans
Real Estate:
Residential 48,429 18.2% 60,831 23.0% 66,643 26.7% 59,437 25.4% 74,998 32.7%
Commercial 24,015 9.0% 25,996 9.8% 21,431 8.6% 18,438 7.9% 13,746 6.0%
Construction 13,082 4.9% 9,186 3.5% 5,089 2.0% 11,379 4.9% 10,210 4.4%
Land 2,804 1.1% 2,119 0.8% 1,537 0.6% 3,361 1.4% 3,386 1.5%
-------- ----- -------- ---- -------- ----- -------- ----- -------- --------
Total R.E. Loans 88,330 33.2% 98,132 37.1% 94,700 37.9% 92,615 39.6% 102,340 44.6%
Consumer 14,674 5.5% 11,599 4.4% 9,479 3.8% 8,909 3.8% 9,019 3.9%
Commercial Bus. 3,206 1.2% 1,945 0.7% 1,206 0.5% 1,076 0.4% 337 0.1%
-------- ----- -------- ---- -------- ----- -------- ----- -------- --------
Total Adjustable
Rate Loans 106,210 39.9% 111,676 42.2% 105,385 42.2% 102,600 43.8% 111,696 48.6%
-------- ----- -------- ---- -------- ----- -------- ----- -------- --------
Total Loans 266,125 100.0% 264,780 100.0% 249,993 100.0% 234,142 100.0% 229,604 100.0%
LESS
Unearned Discount 210 270 623 761 1,102
Loans in Process 5,639 2,753 3,343 2,561 1,039
Deferred Fees
and Discounts (446) (440) (331) (57) (41)
Allowance for
Loan Losses 1,582 1,175 1,048 956 900
-------- -------- -------- ----- --------
Total Loans Receivable,
Net $259,140 $261,022 $245,310 $229,921 $226,604
======== ======== ======== ======== ========
</TABLE>
Loan Maturities. The following schedule illustrates the contractual maturity of
the Bank's loan portfolio, at December 31, 1996. Loans which have adjustable or
floating interest rates are shown as maturing in the period during which the
loan is due. This schedule does not reflect the effects of possible prepayments
or enforcement of due-on-sale clauses. Loan maturities are stated at principal
value.
<TABLE>
<CAPTION>
Real Estate
Residential Loans Commercial Construction Land Consumer (1)
------------------ ------------------- --------------------- ----------------- -------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts Due:
Within 1 year $ 334 8.14% $ 1,097 9.42% $10,969 8.93% $1,903 9.31% $ 2,556 8.83%
After 1 year:
1 to 2 years 1,934 6.90% 1,562 8.74% 0 0.00% 0 0.00% 5,346 8.95%
2 to 3 years 3,965 7.76% 3,400 8.89% 106 9.25% 1,272 9.23% 11,619 8.94%
3 to 5 years 6,391 8.16% 4,858 9.06% 0 0.00% 580 9.00% 53,964 8.56%
5 to 10 years 18,961 8.28% 12,087 8.89% 2,000 8.44% 75 7.90% 1,865 10.23%
10 to 15 years 49,644 7.85% 876 9.65% 0 0.00% 59 8.93% 441 11.45%
15 to 25 years 17,461 8.24% 10,251 8.13% 0 0.00% 461 8.99% 0 0.00%
</TABLE>
<PAGE>
5
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Over 25 years 27,418 7.95% 5,955 8.27% 407 7.81% 65 9.07% 0 0.00%
-------- ----- -------- ---- ------- -------- ------ ------- ------- -------
Total $126,108 $ 40,086 $13,482 $4,415 $75,791
======== ======== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
Commercial
Business Total
--------------------- ----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Amounts Due:
Within 1 year $ 3,208 9.02% $ 20,067 8.98%
After 1 year:
1 to 2 years 669 8.73% 9,511 8.48%
2 to 3 years 469 8.48% 20,831 8.71%
3 to 5 years 1,709 8.94% 67,502 8.57%
5 to 10 years 43 10.75% 35,031 8.60%
10 to 15 years 0 0.00% 51,020 7.92%
15 to 25 years 0 0.00% 28,173 8.21%
Over 25 years 145 6.40% 33,990 8.00%
-------- --------
Total $ 6,243 $266,125
======== ========
</TABLE>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
Of the $246.1 million of loans due after December 31, 1997, $156.4 million or
63.6%, have fixed rates of interest and $89.7 million or 36.4%, have adjustable
rates of interest.
The Bank does not maintain a predetermined rollover policy for construction,
land, and other non-amortizing or balloon loans. Individual loans are renewed
at maturity as determined by management on a case-by-case basis after
consideration of the borrower's historical performance and current market
considerations.
Management believes the possible future volume of loan renewals or rollovers
would not significantly impact the maturity information presented above.
One- to Four-Family Residential Real Estate Lending
- ---------------------------------------------------
Historically, HomeBanc originated for retention in its own portfolio fixed rate
loans secured by one- to four-family residential real estate. In order to meet
consumer demand, HomeBanc has continued to originate fixed rate residential
loans. For several years, HomeBanc has sold fixed rate mortgage loans with
maturities of 28 years or more into the secondary loan market. In April, 1993
the Bank amended its sales program in response to the historically low interest
rates to include fixed rate mortgage loans with original maturities of 20 years.
During 1994 the Bank began selling all fixed rate mortgage loans. During 1995,
management began selling certain ARM originations. As of December 31, 1996, the
Bank originated ARMS with initial adjustment periods ranging from six months to
five years for retention. The majority of ARM originations are the Bank's fixed
payment six month ARMs, marketed by the Bank as "Trombone" loans.
HomeBanc originates its Trombone loans based upon fully indexed rates and 30 or
15 year amortization periods. The resulting term to maturity of such loans is
generally between 13 to 30 years. The interest rates on Trombone loans
generally adjust every six months to a margin over six-month U.S.
<PAGE>
6
Treasury Securities and carry 2% annual and 5% to 6% lifetime interest rate
caps; however, the borrower's fixed payment does not change. The Trombone loan
provides borrowers with the predictability of fixed payments while providing
HomeBanc with an interest rate sensitive asset with no negative amortization.
The Trombone loan avoids a common risk to ARM borrowers and lenders. That risk
is the potential for a significant increase in monthly loan payments over time.
As of December 31, 1996, HomeBanc had $36.6 million of fixed payment ARMs in its
portfolio.
At December 31, 1996, loans secured by residential real estate totaled $126.1
million and represented 47.4% of the Bank's total loan portfolio. Of the total
residential loans, $48.4 million had adjustable interest rates. This compares
to $154.0 million of one- to four-family residential mortgage loans at December
31, 1995, with $60.8 million of such loans having adjustable interest rates. In
view of the Bank's expanding consumer and commercial lending, management
anticipates that the residential mortgage loans will continue to decline as a
percentage of the Company's loan portfolio. As of December 31, 1996, most of
HomeBanc's one- to four-family residential real estate loans were secured by
properties located in its primary market area.
ARM rate adjustments are based upon changes in prevailing rates for comparable
term U.S. Treasury securities plus a margin, and are generally limited to 2%
maximum annual adjustments (1% semi-annual adjustments for six month adjustable
rate loans) as well as a maximum aggregate adjustment over the life of the loan
(generally 5% to 6%). Accordingly, the interest rates on these loans are not
necessarily as rate sensitive as the Bank's cost of funds. Generally, the
Bank's ARMs are not convertible into fixed rate loans, do not permit negative
amortization of principal and carry no prepayment penalty. HomeBanc originates
ARMs with terms to maturity of up to 30 years and qualifies its semi-annual and
annual ARM borrowers based on the maximum interest rate to which the loan could
adjust in the second year. The Bank originates ARMS with interest rates fixed
for periods of three to five years. These borrowers are qualified based upon the
starting rates of the loans.
ARMs entail risks resulting from potential increased payment obligations by the
borrower as a result of repricing. Further, non-trombone ARMs offered by
HomeBanc, as well as by many other institutions, sometimes provide for initial
rates of interest below the rates which would prevail were the index used for
pricing applied initially. These loans are subject to increased risk of
delinquency or default as the higher, fully-indexed rate of interest
subsequently comes into effect in replacement of the initial lower rate.
In underwriting one- to four-family residential real estate loans, HomeBanc
evaluates both the borrower's ability to make monthly payments and the value of
the property securing the loan. It is HomeBanc's policy that all loans in
excess of 80% of the appraised value of the property be insured by a private
mortgage insurance company approved by HomeBanc for the amount of the loan in
excess of 80% of the appraised value. In addition, HomeBanc requires borrowers
to obtain title and fire and casualty insurance in an amount not less than the
amount of the loan. HomeBanc also carries mortgage single interest insurance
which protects the Bank against certain types of uninsured property damage.
Real estate loans originated by the Bank generally contain a "due on sale"
clause allowing the Bank to declare the unpaid principal
<PAGE>
7
balance due and payable upon the sale of the security property. The Bank
enforces these due on sale clauses to the extent permitted by law.
Construction and Land Lending
- -----------------------------
The Bank makes construction loans primarily to builders and developers for the
construction of one- to four-family residences and commercial real estate and
the development of one- to four-family lots in the Bank's primary lending areas.
The Bank also makes similar construction loans in the western and northern
suburbs of Chicago. Historically, the Bank primarily originated loans to
builders purchasing developed lots from the Bank's real estate development
subsidiary. The Bank has continued its lending relationships with selected
builders even though the Bank's subsidiary is phasing-out its development
business. At December 31, 1996, loans secured by homes or projects under
construction and land (including loans in process) aggregated $17.9 million, or
6.7% of the Bank's total loan portfolio as compared to $11.7 million, or 4.4% of
the loan portfolio one year earlier. The Bank added a loan officer during 1995
to focus strictly upon construction loan originations. As of December 31, 1996,
the Bank had no loans outstanding to its real estate development subsidiary or
any entity in which the subsidiary participated. The December 31, 1996 loan
balance was comprised primarily of residential construction loans made to non-
affiliated borrowers in the Bank's primary lending market.
Most of the Bank's construction and land loans have been originated with
adjustable rates of interest tied to the prime rate of interest and have terms
of three years or less. Construction and land loans are generally made in
amounts of up to a maximum loan-to-value ratio of 80% (75% in the case of
commercial real estate) based upon an independent appraisal. Many of HomeBanc's
construction and land loans provide an interest reserve for the payment of
interest and fees from the loan proceeds. HomeBanc also obtains personal
guarantees for substantially all of its construction and land loans.
HomeBanc purchased $2.0 million in participating interests in two construction
loans totaling $9.3 million during 1996. The two loans are funding the
construction of two multi-family buildings, one located in eastern Iowa, and one
in southern Wisconsin. Approximately $148,000 was advanced on the two loans at
December 31, 1996. HomeBanc has committed to purchase $2.0 million in
participating interests in the end loans for the multi-family properties. See
"Originations, Purchases, Sales, and Servicing of Real Estate Loans".
HomeBanc's construction loan agreements generally provide that pro rata
principal repayments must be made as individual units are sold to third parties
so that the remaining loan balance is in proportion to the value of the
remaining security. Loan proceeds are disbursed in increments through an
independent title company as construction progresses. The amount of each
disbursement is based on the construction cost estimate of an independent
architect, engineer or qualified fee inspector who inspects the project in
connection with each disbursement request. The Bank periodically reviews the
progress of the underlying construction project.
<PAGE>
8
The application process for construction and land loans includes a submission to
the Bank of plans, specifications and costs of the project to be
constructed/developed. These items are used as a basis to determine the
appraised value of the subject property. Loans are based on the lesser of
current appraised value and/or the cost of construction (land plus building).
The Bank's construction and land loans may involve larger principal balances
than do its one-to four-family residential loans. The maximum amount which
HomeBanc or any institution may lend to any one borrower was reduced, effective
August 9, 1989, from an amount equal to its regulatory capital (which was $25.6
million at September 30, 1989 prior to the implementation of the new capital
requirements) to the greater of 15% of unimpaired capital and surplus or
$500,000. This lower limit significantly reduced HomeBanc's ability to make
large construction, commercial real estate or land loans without selling
participations. The Bank's loans-to-one-borrower limit at December 31, 1996,
was $3.4 million. See - "Commercial Real Estate Lending."
The table below sets forth by type of security property, the number and amount
of HomeBanc's construction and land loans at December 31, 1996.
<TABLE>
<CAPTION>
Outstanding Amount Non-
Number Loan Principal Performing or
of Loans Commitment Balance of Concern
-------- ---------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Land acquisition and
development............. 36 $ 4,415 $ 4,415 $ -
Multi-family............. 2 2,000 148 -
Single family............ 54 11,482 7,815 -
---- ------- ------- ----
Total net construction
and land loans........ 92 $17,897 $12,378 $ -
==== ======= ======= ====
</TABLE>
The following table presents the locations and types of properties securing
HomeBanc's construction and land loans at December 31, 1996. The amounts shown
do not reflect allowances for losses.
<TABLE>
<CAPTION>
Outstanding Amount Non-
Number Loan Principal Performing or
of Loans Commitment Balance of Concern
-------- ---------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Winnebago, Stephenson, Carroll,
Boone, Ogle Counties, IL
Land developments........ 34 $ 4,075 $ 4,075 $ -
Single family............ 49 9,954 6,513 -
Multi-family............. - - - -
---- ------- ------- -----
Total.................. 83 14,029 10,588 -
DuPage, Kane, McHenry,
Lake Counties, IL
Land developments........ 2 340 340 -
Single family............ 5 1,528 1,302 -
Multi-family............. - - - -
---- ------- ------- -----
Total.................. 7 1,868 1,642 -
</TABLE>
<PAGE>
9
<TABLE>
<S> <C> <C> <C> <C>
Southern Wisconsin:
Land developments........ - - - -
Single family............ - - - -
Multi-family............. 1 1,000 74 -
---- ------- ------- -----
Total.................. 1 1,000 74 -
Eastern Iowa:
Land developments........ - - - -
Single family............ - - - -
Multi-family............. 1 1,000 74 -
---- ------- ------- -----
Total.................. 1 1,000 74 -
Total net construction
and land
loans................ 92 $17,897 $12,378 $ -
==== ======= ======= =====
</TABLE>
Construction and land lending generally affords the Bank an opportunity to
receive interest at rates higher than those obtainable from residential lending
and to receive higher origination and other loan fees. In addition,
construction and land loans are generally made with adjustable rates of interest
and for relatively short terms. Nevertheless, construction and land lending is
generally considered to involve a higher level of credit risk than one- to four-
family residential lending due to the concentration of principal in a limited
number of loans and borrowers and the effects of general economic conditions on
development projects, real estate developers and managers. In addition, the
nature of these loans is such that they are more difficult to evaluate and
monitor. The Bank's risk of loss on a construction or land loan is dependent
largely upon the accuracy of the initial estimate of the property's value upon
completion of the project and the estimated cost (including interest) of the
project. If the estimate of construction or development cost proves to be
inaccurate, HomeBanc may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with a project with a value which is insufficient to
assure full repayment. Because HomeBanc usually provides financing for the
entire estimated cost of the project, including anticipated interest, and, in
some cases, an amount intended to cover initial carrying costs until sufficient
units can be sold, defaults in repayment generally do not occur during the
construction or development period and it is therefore difficult to identify
problem loans at an early stage. When loan payments become due, borrowers may
experience cash flow from the property which is not adequate to service total
debt. In such cases, the Bank may be required to modify the terms of the loan.
See "Non-Performing Assets, Loan Delinquencies and Defaults."
HomeBanc intends to continue to emphasize construction and land loans depending
on market conditions, funding limitations and regulatory restrictions.
<PAGE>
Commercial Real Estate Lending
- ------------------------------
The Bank also purchases and originates permanent loans secured by commercial
real estate in order to increase the yield on, and the proportion of interest
rate sensitive loans in, its portfolio. At December 31, 1996, $40.1 million, or
15.1% of the Bank's loan portfolio, consisted of permanent loans secured by
commercial real estate.
The Bank has originated and purchased both adjustable and fixed rate commercial
real estate loans, although $4.5 million of the total $11.7 million in
commercial real estate loans originated and purchased in 1996 had adjustable
rates. Most of its fixed rate commercial real estate loans have terms of 15
years or less. Adjustable rate commercial real estate loans have terms of up to
30 years. Rates on the Bank's adjustable rate commercial real estate loans are
generally tied to a specific treasury rate or to the prime rate of interest.
Some adjust in a manner consistent with the Bank's fixed payment ARMs.
Commercial real estate loans are generally written in amounts of up to 75% of
the appraised value of the underlying property. Appraisals on properties
securing commercial real estate loans originated by the Bank are performed by an
independent appraiser designated by the Bank at the time the loan is made. All
appraisals on commercial real estate loans are reviewed by the Bank's
management. In addition, the Bank's underwriting procedures require
verification of the borrower's credit history, income and financial statements,
banking relationships, references and income projections for the property and
the criteria already discussed for construction and development loans.
Borrowers are generally personally liable for all or a portion of most of the
Bank's commercial real estate loans.
At December 31, 1996, the Bank had five commercial real estate loans to one
borrower with indebtedness in excess of $3.4 million, the Bank's legal lending
limit. All the loans were grandfathered under the applicable regulations. The
borrower had total loans outstanding of $4.0 million, all of which were current
as of December 31, 1996. There were ten other commercial real estate borrowers
with loans in excess of $1.0 million as of December 31, 1996, all of which were
participating interests in multi-family and commercial real estate loans
acquired by the Bank during the past four years. At December 31, 1996 all of
these loans were performing in accordance with their respective terms.
The table below sets forth by type of security property the number and amount of
HomeBanc's commercial real estate loans including $24.9 million of purchased
participations at December 31, 1996. All of the loans in the table below
originated by the Bank are secured by property located in the Bank's primary
lending areas.
<TABLE>
<CAPTION>
Outstanding Amount Non-
Number Principal Performing or
of Loans Balance of Concern
-------- ----------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
Small business facilities......... 64 $ 9,259 972
Apartments and condominiums....... 64 24,874 2,495
</TABLE>
<PAGE>
11
<TABLE>
<S> <C> <C> <C>
Office buildings.................. 6 2,402 -
Industrial real estate............ 6 779 -
University and church properties.. 1 15 -
Hotels............................ 1 1,820 -
Shopping Centers.................. 1 937 -
--- ------- --------
Total commercial real estate
loans......................... 143 $40,086 3,467
=== ======= ========
</TABLE>
The hotel loan totaling $1.8 million was repaid shortly after year end.
Commercial real estate loans generally present a higher level of risk than loans
secured by one- to four-family residences. This greater risk is due to several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by multi-family and
commercial real estate is typically dependent upon the successful operation of
the related real estate project. If the cash flow from the project is reduced
(for example, if leases are not obtained or renewed), the borrower's ability to
repay the loan may be impaired. Commercial real estate loans also involve many
of the same risks discussed above regarding construction and land loans.
The Bank intends to continue its origination of commercial real estate loans.
Such loans or participating interests in such loans may be purchased in the
future based upon the volume of Bank originations.
Consumer Lending
- ----------------
Management considers consumer lending to be a significant component of its
strategic plan. Specifically, consumer loans generally have shorter terms to
maturity and/or adjustable rates, thus reducing HomeBanc's exposure to changes
in interest rates, and carry higher rates of interest than do residential
mortgage loans. In addition, management believes that the offering of consumer
loan products helps to expand and create stronger ties to its existing customer
base. For these reasons, HomeBanc has increased its emphasis on consumer
lending in recent periods. Originations of consumer loans totaled $54.2
million, $50.0 million, and $20.5 million during the years ended December 31,
1996, 1995, and 1994, respectively. The increases are primarily the result of
higher automobile loan originations. The vast majority of the increase was the
result of loans originated indirectly through local automobile dealers with whom
the Bank maintains ongoing relationships. While individual loans are referred
through automobile dealers, every loan is underwritten and approved by a
HomeBanc loan officer.
Although origination volumes have increased substantially, management remains
committed to maintaining the Bank's asset quality standards. The consumer loan
portfolio delinquency rate declined to 0.1% at December 31, 1996 from 0.4% at
December 31, 1995. Net consumer charge-offs were $69,000 during 1996 and
$24,000 during 1995.
<PAGE>
12
HomeBanc offers a variety of secured consumer loans, including automobile loans,
home equity loans and lines of credit. In addition, HomeBanc also offers home
improvement loans and unsecured consumer loans. Consumer loans totaled $75.8
million at December 31, 1996, or 28.5% of the Bank's total loan portfolio.
During 1993, the Bank implemented a home improvement loan program which allows
customers to borrow up to one-hundred percent of the value of their
improvements. The Bank is insuring its loan balances against principal loss
with an independent insurance company. Insurance premiums are paid by the Bank
based upon the aggregate outstanding principal balance insured. If an insured
loan becomes delinquent, the insurance company will purchase it at face value
from the Bank. A total of $1.1 million of such loans were outstanding as of
December 31, 1996. Two loans have required repurchase by the independent
insurance company since the inception of this program.
The Bank initiated targeted home improvement and home equity loan promotions
during 1995. In 1996 and 1995 the Bank promoted the loans to existing Bank
mortgage customers without a second mortgage. The programs have been successful
in building outstanding balances of the second mortgages, with home equity and
improvement loans totaling $21.1 million, $16.3 million, and $12.2 million at
December 31, 1996, 1995, and 1994, respectively. Management intends to continue
promotional programs targeting the loan products.
The Bank's automobile loans are fixed rate, while the equity line interest rates
adjust on a monthly basis, and are based on the six month Treasury securities or
the prime rate plus a margin.
The underwriting standards employed by the Bank for consumer loans include a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is of primary consideration,
the underwriting process also includes a comparison of the value of the
security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be affected by adverse personal circumstances. Furthermore, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. Although the level of delinquencies in the Bank's consumer loan
portfolio has generally been low there can be no assurance that delinquencies
will not increase in the future.
In the future, HomeBanc will continue to emphasize consumer lending, especially
automobile loans and equity lines of credit.
<PAGE>
13
Commercial Business Lending
- ---------------------------
A formal commercial, or small business, lending program was initiated by the
Bank in 1991. This program was expanded during 1995 as a part of the Bank's
community banking focus. At December 31, 1996, the Bank's commercial business
loan portfolio totaled $6.2 million. HomeBanc's commercial business lending
activities encompass loans with a variety of purposes and security, including
loans to finance accounts receivable, inventory and equipment. The Bank focused
its loan origination efforts upon local manufacturing and related businesses
during 1996. The Bank had one borrower with an outstanding loan balance in
excess of $400,000 at December 31, 1996. Total indebtedness of this borrower
was $404,000. All of HomeBanc's commercial business loans outstanding as of
December 31, 1996, have been to borrowers in its primary lending areas.
In addition to the outstanding loan balance, the development of commercial
business relationships has provided other benefits to the Bank. Checking and
other deposit products have been generated from borrowers. Also, the Bank has
been able to offer commercial loan products to its commercial deposit customers
who previously had not considered the Bank for their business borrowing needs.
Commercial business loan net charge-offs were $13,000 for the year ended
December 31, 1996. There were three delinquent business loans totaling $31,000
as of December 31, 1996.
The underwriting standards employed by the Bank for commercial business loans
concentrate upon loan investigation and credit analysis. Loan investigation
procedures include, but are not limited to, a review of credit bureau inquiries,
state and county lien searches and/or verification of indebtedness. Credit
analysis procedures include the review of financial information, including
financial statements, cash flow analysis, comparison to specific industry
operating statistics and other information as deemed appropriate considering the
size and structure of the desired credit.
Originations, Purchases, Sales and Servicing of Real Estate Loans
- -----------------------------------------------------------------
The Bank originates real estate loans through commissioned internal loan
production personnel located in the Bank's branch offices. Walk-in customers
and referrals from real estate brokers and builders are also important sources
of loan originations.
HomeBanc has purchased and sold whole real estate loans and participation
interests in real estate loans to and from the FHLMC and FNMA as well as private
investors, such as thrift institutions and banks. During 1993 the Bank began
purchasing participating interests in multi-family and commercial real estate
mortgage loans from Midwest thrift institutions familiar to management of the
Bank. The underwriting standards and procedures of the Bank are applied in the
purchase of the participations. The Bank purchased
<PAGE>
14
seven loan participations totaling $7.2 million from two Wisconsin based thrifts
during 1996.
Management intends to continue its purchase program, concentrating upon
adjustable rate and short term (three to five years) fixed rate loans.
Management prefers to purchase participations in loans secured by multi-family
properties, although office buildings and other commercial properties would be
accepted if the borrowers and properties have a demonstrated history of
performance. To date, the properties securing the loans have been located
primarily in southern Wisconsin. The potential risks associated with out of
market area lending include the Bank's lack of control over loan servicing and
its inability to closely monitor the properties. Borrowers have established
credit histories with the lead lending institutions. Management intends to
limit participation purchases to properties located in the Midwest. One
participation was non-performing and two were greater than 90 days delinquent
and still accruing at December 31, 1996. See "Non-Performing Assets, Classified
Assets, Loan Delinquencies and Defaults."
The Bank has sold its originations of 30 year fixed rate residential mortgage
loans for many years. Beginning in 1994, the Bank began selling originations of
15 year fixed rate residential mortgage loans. During 1995, the Bank began
selling some of the adjustable rate residential mortgage loans originated.
Approximately 96% of the residential mortgage loan originations were sold into
the secondary market during 1996 as compared to approximately 80% during 1995.
The Bank originated $28.4 million of adjustable rate mortgage loans during 1996,
of which $11.3 million were sold. During the fourth quarter of 1996, management
determined that adjustable mortgage loans would be originated for portfolio.
The determination of whether ARMs are originated for sale or portfolio is based
upon consideration of the Bank's liquidity position, its calculated exposure to
interest rate risk and the consumer demand for ARM products. The Bank
originated $5.2 million of ARMS for portfolio during the fourth quarter of 1996.
Management intends to utilize ARM originations to supplement the mortgage
portfolio during 1997. As most loans are sold with servicing retained, the
Bank's mortgage loans servicing portfolio increased to $162.9 million at
December 31, 1996 from $125.8 million at December 31, 1995. Gross fee revenue
from the servicing of mortgage loans increased to $481,000 for the twelve months
ended December 31, 1996 as compared to $362,000 for the twelve months ended
December 31, 1995. The future growth of the Bank's servicing portfolio will
depend not only upon the level of loan originations and sales, but also upon the
rate of prepayments experienced within the servicing portfolio. Management
intends to continue the sale of the majority of residential mortgage loan
originations.
The Company adopted Statement of Financial Accounting Standard Number 122,
"Accounting for Mortgage Servicing Rights" on January 1 1996. Statement No. 122
requires that an allocation of costs be made between loans and their related
servicing rights for loans originated with a definitive plan to sell with
servicing rights retained. The impact of this process is to recognize a
separate asset for servicing rights which will increase the gain on sale of
loans when the servicing rights are retained. The servicing rights, once
established, are amortized as an offset to servicing income. Amortization of
servicing rights totaled $71,000 during 1996, which reduced the gross revenue
generated from the servicing function. The servicing rights established on
<PAGE>
15
the balance sheet subject the reported earnings from loan servicing to greater
volatility based upon the rate of repayment of the underlying loans. Capitalized
servicing rights totaled $534,000 at December 31, 1996. While management
intends to continue the sale of loans with servicing retained during 1997, the
impact of servicing rights upon the reported operating earnings of the Company
will be reviewed regularly to determine whether continued growth of the
servicing portfolio is desirable given the administrative costs and potential
volatility of the servicing asset established.
The Bank sold a $1.0 million participating interest in a commercial real estate
loan during 1995. The loan was sold to provide additional lending authority to
the borrower, with whom the Bank has made various real estate related loans.
Management does not anticipate the sale of additional commercial real estate
loans or participations unless it is deemed necessary to continue the Bank's
lending relationship with a borrower.
The following table shows the loan origination, purchase, sale and repayment
activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
LOANS ORIGINATED
Adjustable Rate:
Real estate:
Residential............................. $ 28,364 $ 24,302 $28,668 $ 6,108 $ 28,908
Commercial.............................. 276 218 239 237 98
Construction............................ 15,503 12,031 5,947 1,411 2,094
Land.................................... 1,624 1,061 432 2,235 1,758
Non-Real Estate:
Consumer................................ 11,582 9,192 3,551 6,030 7,734
Commercial Business..................... 2,827 2,594 1,372 1,004 345
-------- -------- -------- -------- --------
Total adjustable rate................. 60,176 49,398 40,209 17,025 40,937
Fixed rate:
Real estate:
Residential............................. 33,469 45,272 26,926 108,032 65,254
Commercial.............................. 4,225 1,989 3,817 1,534 1,719
Construction............................ 1,338 2,591 582 --- ---
Land.................................... 1,649 35 17 --- ---
Non-Real Estate:
Consumer................................ 42,649 40,778 16,956 7,215 3,676
Commercial business..................... 2,711 1,124 544 627 605
-------- -------- -------- -------- --------
Total fixed rate....................... 86,041 91,789 48,842 117,408 71,254
Total loans originated................. 146,217 141,187 89,051 134,433 112,191
LOANS PURCHASED
Real estate:
Commercial.............................. 5,202 7,205 7,547 7,470 ---
Construction............................ 2,000 3,408 1,044 2,027 ---
-------- -------- -------- -------- --------
Total loans purchased.................. 7,202 10,613 8,591 9,497 ---
Total additions........................ 153,419 151,800 97,642 143,930 112,191
</TABLE>
<PAGE>
16
<TABLE>
<S> <C> <C> <C> <C> <C>
LOANS SOLD
Residential real estate loans 59,444 55,782 20,050 43,916 29,476
Commercial real estate loans............. --- 1,000 --- --- ---
Student loans............................ --- --- --- 1,055 926
-------- -------- -------- -------- --------
Total loans sold....................... 59,444 56,782 20,050 44,971 30,402
Principal repayments........................ 92,630 80,231 61,628 95,618 100,220
-------- -------- -------- -------- --------
Total reductions....................... 152,074 137,013 81,678 140,589 130,622
Net increase (decrease)in other items (2,820) 1,052 (483) 32 178
Net increase (decrease)..................... $ (1,475) $ 15,839 $15,481 $ 3,373 $(18,253)
======== ======== ======== ======== ========
</TABLE>
Non-Performing Assets, Classified Assets, Loan Delinquencies and Defaults
- -------------------------------------------------------------------------
When a borrower fails to make a required payment on a loan, the Bank attempts to
cause the delinquency to be cured by contacting the borrower. If the
delinquency continues for a period of 90 days, the Bank usually institutes
appropriate action to foreclose on the property.
The following table sets forth information concerning delinquent mortgage and
other loans at December 31, 1996, in dollar amount and as a percentage of the
Bank's total loan portfolio. The amounts presented represent the total
outstanding principal balances of the related loans, rather than the actual
payment amounts which are overdue.
<TABLE>
<CAPTION>
Residential Commercial
Real Estate Real Estate Construction and Land
-------------------------- ------------------------- -----------------------
Percent Percent Percent
of of of
Total Total Total
Number Amount Loans Number Amount Loans Number Amount Loans
------ ------ ----- ------ ------ ----- ------ ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days 48 $1,169 0.5% 2 $ 135 0.1% 1 $ 39 0.0%
60-89 days 3 48 0.0% 1 68 0.0% 0 0 0.0%
90 days and over 7 237 0.1% 4 3,269 1.2% 0 0 0.0%
-- ------ --- -- ------ --- -- ------ ---
Total delinquent
loans 58 $1,454 0.6% 7 $3,472 1.3% 1 $ 39 0.0%
== ====== === == ====== === == ====== ===
</TABLE>
<TABLE>
<CAPTION>
Consumer Commercial Business TOTAL
-------------------------- ------------------------- -----------------------
Percent Percent Percent
of of of
Total Total Total
Number Amount Loans Number Amount Loans Number Amount Loans
------ ------ ----- ------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-50 days 25 $ 267 0.1% 2 $ 22 0.0% 78 $1,632 0.6%
60-89 days 4 17 0.0% 1 9 0.0% 9 142 0.1%
90 days and over 22 85 0.0% 0 0 0.0% 33 3,591 1.3%
-- ------ --- -- ------ --- --- ------ ---
Total delinquent
loans 51 $ 369 0.1% 3 $ 31 0.0% 120 $5,365 2.0%
== ====== === == ====== === === ====== ===
</TABLE>
<PAGE>
17
HomeCorp, Inc. classifies loans and other assets such as debt and equity
securities considered to be of lesser quality as "substandard," "doubtful" or
"loss" assets. For the portion of assets classified as "loss," the Company
either establishes a specific allowance of 100% of the amount classified or
charges such amount off its books. In addition, management may establish a
general allowance for losses based on assets classified as "substandard" and
"doubtful" or based on the general quality of the asset portfolio of the Bank.
The Bank's significant classified assets are described below. As of December
31, 1996, there were $13.4 million of assets classified pursuant to this policy.
The table below sets forth the amounts and categories of the Bank's non-
performing assets. Loans are generally placed on non-accrual status when the
loan becomes 90 days contractually delinquent or when the collection of
principal and/or interest otherwise becomes doubtful. For all years presented,
the Bank had no troubled debt restructurings, which involve forgiving a portion
of interest or principal on any loans or making loans at a rate materially less
than that of market rates.
In addition to the non-performing loans, there were two loans totaling $1.4
million representing participating interests in multi-family mortgage loans that
were 90 days delinquent at December 31, 1996 but which continued on an accrual
basis. The participating interests represent interests in loans to a single
borrower. The properties, located in southern Wisconsin, had been sold on
contract by the borrower and the contract buyer filed for bankruptcy protection
under Chapter 11. Cash flow from the properties is currently diverted to a
bankruptcy trustee for distribution. It is anticipated that funds will be
released to the participating banks as senior secured creditors and that such
funds will return the loans to a current status and maintain scheduled payments.
Based upon the current and historical lease performance of the buildings, their
current physical condition and the economic condition of the area in which the
buildings are located, accrual status was considered appropriate. There were no
troubled debt restructurings.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-Accruing Loans:
Residential.................. $ 237 $ 11 $ 339 $ 377 $ 398
Construction................. - - - - -
Land......................... - - - 452 630
Commercial real estate....... 1,824 - 99 211 -
Consumer..................... 85 26 109 18 28
------- ------- ------ ------ ------
Total...................... 2,146 37 547 1,058 1,056
------- ------- ------ ------ ------
Accruing Past Due Loans:
Commercial real estate....... 1,445 - - - -
------- ------- ------ ------ ------
Foreclosed Assets:
Residential.................. - 49 59 142 23
Commercial real estate....... 5,617 5,638 - - -
Land......................... 4,681 4,553 3,994 3,306 3,553
------- ------- ------ ------ ------
Total...................... 10,298 10,240 4,053 3,448 3,576
------- ------- ------ ------ ------
</TABLE>
<PAGE>
18
<TABLE>
<CAPTION>
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total......................... $13,339 $10,277 $4,600 $4,506 $4,632
======= ======= ====== ====== ======
Total non-accruing loans and
foreclosed real estate as a
percentage of total assets... 3.54% 3.04% 1.39% 1.35% 1.39%
======= ======= ====== ====== ======
Unallocated allowance for
losses...................... $ 2,132 $ 1,625 $1,498 $1,406 $1,350
======= ======= ====== ====== ======
</TABLE>
For the year ended December 31, 1996, accrued interest receivable which would
have been recorded with respect to non-accruing loans, had such loans been
current in accordance with their original terms, amounted to approximately
$126,000. The amount that was included in interest income on such loans for the
year ended December 31, 1996, was approximately $101,000.
The December 31, 1996 non-performing loan total consisted primarily of two
loans. The loans had balances of $1,050,000 and $774,000. The $1.1 million
loan represented a participating interest in a mortgage loan originated in
December 1993 for a senior housing facility located in central Wisconsin. The
Borrower experienced cash flow problems; however, an entity unrelated to the
borrower that had purchased federal tax credits generated by the facility
returned the loan to current status after year end. Management believes the tax
credit purchaser will maintain the loan in a current status. Originated in
March 1994, the $774,000 loan is secured by a commercial building which has been
renovated and is being leased to retail businesses. The lease-up has progressed
more slowly than anticipated, although new tenants are being obtained. This
borrower has a $197,000 loan with the Bank in addition to the delinquent loan.
The $197,000 loan was current at December 31, 1996 and was considered an
impaired loan based upon the repayment history of the borrower. A reserve of
$45,000 had been established for this borrower at December 31, 1996. Management
does not anticipate any further loss beyond the reserve amount.
The remaining balance of non-performing loans at December 31, 1996 consisted
primarily of single family mortgages secured by properties within the Bank's
primary lending area.
The December 31, 1996 real estate owned balance of $9.6 million consisted of two
properties. A $5.4 million shopping center loan was transferred to real estate
owned during 1995. The center is located in the Bank's primary market area and
was approximately 97% leased at December 31, 1996. The center generated
$471,000 of net operating income during 1996. Management is actively marketing
the center for sale and will continue to operate the center until its sale.
The other significant asset in real estate owned represents a 50% interest in a
land acquisition loan to a Michigan limited partnership. The Bank's interest at
December 31, 1996 had a balance of $4.2 million. The parcel, a former quarry,
consists of 364 acres of undeveloped land located near Northville, Michigan.
The property has been restored from its use as a quarry and is listed for sale.
<PAGE>
19
Regulations governing the operation of a mining property require appropriate
restoration before residential development is allowed. A dispute arose with the
prior owners regarding the proper restoration of the land. Consequently, the
Bank and its partner determined to undertake mass earthwork sufficient to remedy
the condition. The Bank made an additional investment of $1.2 million in the
property during 1995 related to the earthwork project. Approximately $675,000
has been escrowed by the prior property owners to assure proper restoration of
the property. HomeBanc and its partner believe they are entitled to the escrow
deposit and have filed a lawsuit to obtain reimbursement of earthwork costs.
Management continues to negotiate the sale of the property. Management
believes the Bank has adequate allowances to absorb any loss that may occur as a
result of the disposition of this property.
Allowances for Losses on Loans and Foreclosed Real Estate
- ---------------------------------------------------------
Allowances are established when management determines that it is probable that
the Bank will not collect all principal and interest on a loan. Based upon this
continuing analysis, a total of $565,000 was recorded as provision for loan
losses during 1996. The allowance for loan losses is maintained at an amount
considered adequate to provide for potential losses.
Although management believes that it uses the best information available to make
such determinations, future adjustments to the allowance for losses on loans may
be necessary, and net earnings could be significantly affected, if circumstances
differ substantially from the assumptions used in making the initial
determinations. At December 31, 1996, HomeBanc had an allowance for losses on
loans of $1.6 million.
Real estate properties acquired through foreclosure are initially recorded at
the lower of the related loan balance, net of any allowance for loss (charge-off
at time of transfer), or fair value at the date of foreclosure. Valuations are
periodically updated by management and an allowance for losses is established by
a charge to operations if the carrying value of a property exceeds its fair
value less estimated selling costs.
A total of $100,000 was recorded as provision for losses on foreclosed real
estate during 1996. The allowance, totaling $550,000 at December 31, 1996, is
maintained at a level believed adequate to provide for potential losses.
The following table sets forth an analysis of the Bank's allowance for losses on
loans. There has been no loan loss activity on construction, financial, or
agricultural loans.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....... $1,175 $1,048 $ 956 $ 900 $ 668
Charge-Offs:
Residential......................... 76 102 141 115 69
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Commercial.......................... 13 103 - - -
Consumer............................ 74 36 18 84 139
------ ------ ------ ----- -----
Total charge-offs................. 163 241 159 199 208
Recoveries:
Residential......................... - - 2 - 10
Consumer............................ 5 8 9 5 15
------ ------ ------ ----- -----
Total recoveries.................. 5 8 11 5 25
Net charge-offs...................... 158 233 148 194 183
Provision for losses on loans........ 565 360 240 250 415
------ ------ ------ ----- -----
Balance at end of period............. $1,582 $1,175 $1,048 $ 956 $ 900
====== ====== ====== ===== =====
Ratio of net charge-offs during the
period to average loans
outstanding during the period....... .06% .09% .06% .09% .09%
==== === ==== ==== ====
</TABLE>
The allowance for losses on loans as of the dates indicated allocated by type of
loan is summarized below with the percent of loans in each category to total
loans:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Real Estate:
Residential.............. $ 128 47.4% $ 193 58.2% $ 225 69.5% $ 301 73.1% $ 528 77.6%
Commercial............... 261 15.1 139 14.6 179 15.5 183 11.9 74 8.2
Construction & Land...... 179 6.7 72 4.5 42 2.9 179 6.3 34 5.9
----- ----- ----- ----- -----
568 404 446 663 636
Consumer................... 853 28.5 659 21.2 452 11.2 235 7.9 235 7.9
Commercial Business....... 161 2.3 112 1.5 150 .9 58 .8 29 .4
----- ----- ----- ----- -----
$1,582 $1,175 $1,048 $ 956 $ 900
====== ====== ====== ===== =====
</TABLE>
Mortgage-Backed and Investment Securities
- -----------------------------------------
The Bank has used mortgage-backed securities to supplement loan originations and
as a means of addressing asset liability management objectives. The mortgage-
backed securities included in the held to maturity portfolio totaled $18.9
million at December 31, 1996, a reduction of $5.6 million from the December 31,
1995 balance. The portfolio was approximately 44% adjustable rate and 56% fixed
rate securities as of December 31, 1996. All of the adjustable securities are
indexed to short term treasuries. Included in fixed rate securities are
$701,000 of collateralized mortgage obligations which, based upon their
anticipated cash flow characteristics, have a weighted average life of three to
five years. No mortgage-backed securities were purchased for the held to
maturity portfolio during 1996 or 1995. Management intends to continue to
redeploy cash flows from the mortgage-backed securities portfolio into the loan
portfolio.
<PAGE>
21
Approximately $2.6 million of mortgage-backed securities were in the available
for sale portfolio at December 31, 1996. There were no purchases of mortgage-
backed securities for the available for sale portfolio during 1996, although the
Bank securitized $2.1 million of adjustable mortgage loans that were recorded in
available for sale. Approximately $1.5 million in mortgage-backed securities
were sold from the available for sale portfolio during 1996. The sales were
lower balance FHLMC balloon pools with 1997 maturities.
Certain mortgage-backed securities can serve as collateral for borrowings and,
through repayments, as a source of liquidity. Investments in mortgage-backed
securities can also compensate for reduced loan demand. HomeBanc's mortgage-
backed securities available for sale portfolio is recorded at its fair value.
The held to maturity portfolio is included in the financial statements at
amortized cost. For information regarding the carrying and market values of
HomeBanc's mortgage-backed securities, see Notes 3 and 4 of the Notes to
Consolidated Financial Statements in the Annual Report.
Under the Bank's risk-based capital requirement, most mortgage-backed securities
have a risk weight of 20% in contrast to the 50% risk weight carried by
residential loans. See "Regulation". See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Regulatory Capital
Requirements" in the Annual Report.
The Bank's mortgage-backed securities portfolio contained no corporate
securities rated below investment grade or derivative securities. Additionally,
as of December 31, 1996, the mortgage-backed securities portfolio contained no
securities of any issuer, excluding the United States Government or its
agencies, with an aggregate book value in excess of 10% of the Company's
stockholders' equity.
The following table sets forth the contractual maturities of HomeBanc's
mortgage-backed securities that were held to maturity at December 31, 1996.
<TABLE>
<CAPTION>
Principal Payment Due In
----------------------------------------------------------------------------------------
December 31,
6 Months 6 Months 1 - 3 3 - 5 5 - 10 10 - 20 Over 20 1996 Balance
or less to 1 Yr. Years Years Years Years Years Outstanding
-------- ---------- ----- ----- ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation $ -- $ -- $3,016 $ 7 $ 776 $ 663 $1,705 $6,167
Weighted Average Yield 5.58% 7.75% 6.50% 6.85% 7.20% 6.28%
Federal National
Mortgage Association -- -- -- 1,178 2,793 -- 2,530 6,501
Weighted Average Yield 6.36% 5.97% 7.32% 6.57%
Government National
Mortgage Association -- -- -- 37 -- -- 3,663 3,700
Weighted Average Yield 7.10% 6.93% 6.93%
Small Business
Administration -- -- -- -- -- 1,398 -- 1,398
Weighted Average Yield 6.64% 6.64%
Agency for Inter-
National Development -- -- -- -- 23 -- -- 23
Weighted Average Yield 7.50% 7.50%
Collateralized
Mortgage Obligations -- -- -- -- -- 701 369 1,070
Weighted Average Yield 5.89% 7.32% 6.39%
</TABLE>
<PAGE>
22
<TABLE>
----- ----- ------ ------ -------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL $ -- $ -- $3,016 $1,222 $ 3,592 $2,762 $8,267 $18,859
===== ===== ====== ====== ======== ====== ====== =======
WEIGHTED AVG. YIELD (1) -- -- 5.58% 6.39% 6.09% 6.50% 7.12% 6.54%
===== ===== ====== ====== ======== ====== ====== =======
</TABLE>
(1) Yields have been computed based upon historical amortized cost.
The following table sets forth the contractual maturities of HomeBanc's
mortgage-backed securities that were available for sale at December 31, 1996.
<TABLE>
<CAPTION>
Principal Payment Due In
-------------------------------------------------------------------------------------
December 31,
6 Months 6 Months 1 - 3 3 - 5 5 - 10 10 - 20 Over 20 1996 Balance
or less to 1 Yr. Years Years Years Years Years Outstanding
-------- -------- ----- ----- ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation $ -- $ -- $ -- $ -- $ -- $ -- $2,044 $2,044
Weighted Average Yield 7.26% 7.26%
Federal National
Mortgage Association -- -- 545 -- -- -- -- 545
Weighted Average Yield 5.78% 5.78%
----- ------ ------ ----- ----- ------ ------ ------
TOTAL $ -- $ -- $ 545 $ -- $ -- $ -- $2,044 $2,589
===== ====== ====== ===== ===== ====== ====== ======
WEIGHTED AVG. YIELD (1) -- -- 5.78% -- -- -- 7.26% 6.95%
===== ====== ====== ===== ===== ====== ====== ======
</TABLE>
(1) Yields have been computed based upon historical amortized cost.
The $12.5 million available for sale portfolio contained $8.6 million in debt
securities, $1.2 million in mutual fund shares and $15,000 in equity securities
in addition to mortgage-backed securities noted above.
Based on historical experience, HomeBanc believes that its mortgage-backed
securities will be prepaid significantly in advance of the date of maturity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset Liability Management" in the Annual Report.
As a savings bank, HomeBanc must maintain minimum levels of investments that are
liquid assets as specified by OTS. Liquidity may increase or decrease depending
upon the availability of funds and comparative yields on investments in relation
to the return on loans. Historically, the Bank has maintained its liquid assets
above the minimum requirements imposed by the regulations and at a level
believed adequate to meet requirements of normal daily activities, repayment of
maturing debt and potential deposit outflows. The majority of the Bank's
interest bearing assets are amortizing loans that provide regular cash flows.
Cash flow projections are regularly reviewed and updated to assure that adequate
liquidity is maintained. As of December 31, 1996, the Bank's liquidity ratio
(liquid assets as a percentage of net withdrawable savings and current
borrowings) was 8.2%. See "Regulation -Liquidity".
<PAGE>
23
The amortized cost and fair values of investment securities classified as held-
to-maturity at the dates indicated are summarized as follows:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------
1996 1995 1994
----------------- --------------- ----------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------ ------- ------ ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
United States Treasury and
Federal agency obligations.. $5,502 $5,471 $6,504 $6,412 $ 9,494 $ 8,844
Other securities............ -- -- -- -- 3,181 3,147
------ ------ ------ ------ ------- -------
TOTAL................ $5,502 $5,471 $6,504 $6,412 $12,675 $11,991
====== ====== ====== ====== ======= =======
</TABLE>
The amortized cost and fair values of investment and mortgage-backed securities
available for sale as of December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
------------------ ---------------- ----------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage.. $ 2,044 $ 2,105 $2,061 $2,051 $3,143 $3,033
Federal National Mortgage... 545 539 669 662 2,994 2,860
Mutual Fund Shares.......... 1,253 1,228 1,253 1,223 1,187 1,129
Investment Securities....... 8,619 8,625 4,376 4,375 - -
------- ------- ------ ------ ------ ------
TOTAL................. $12,461 $12,497 $8,359 $8,311 $7,324 $7,022
======= ======= ====== ====== ====== ======
</TABLE>
The following table presents the contractual maturities and weighted average
yields of investment securities held to maturity at December 31, 1996. The
yields contained in the table below have been computed on a tax equivalent
basis.
<TABLE>
<CAPTION>
Maturity Distribution
---------------------------------------------------------------------------
Within One Over One to Over Five to Over Ten
Year Five Years Ten Years Years Total
--------------- ------------- ------------- ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
----- ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States
Treasury and
Federal agency
obligations... -- -- $5,502 5.41% -- -- -- -- $5,502 5.41%
</TABLE>
<PAGE>
24
The Bank's investment securities portfolio at December 31, 1996 contained no
securities of any issuer, excluding the United States Government or its
agencies, with an aggregate book value in excess of 10% of the Company's
stockholders' equity. The Bank's investment securities portfolio also contained
no corporate securities rated below investment grade or derivative securities.
The Bank intends to maintain a held-to-maturity and available for sale
investment securities portfolio comprised of adjustable rate and short term
fixed rate securities as a means of complying with current regulatory liquidity
requirements.
Sources of Funds
- ----------------
General
- -------
Deposit accounts have traditionally been the principal source of the Bank's
funds for use in lending and for other general business purposes. In addition
to deposits, the Bank obtains funds through loan repayments, loan sales, and
cash flows generated from operations (including interest credited to deposit
accounts), and net deposit inflows. Scheduled loan payments are a relatively
stable source of funds, while loan prepayments and deposit inflows and outflows
are significantly influenced by general interest rates and money market
conditions. The Bank intends to continue to sell the majority of its residential
mortgage originations.
Deposits
- --------
The Bank attracts both short-term and long-term deposits from the general public
by offering a wide variety of accounts and rates. In recent years, the Bank has
relied increasingly on short-term accounts and other deposit alternatives that
are more responsive to market interest rates than the passbook accounts and
regulated fixed interest rate, fixed-term certificates that were the Bank's
primary source of deposits prior to 1978. The Bank offers regular passbook
accounts, checking accounts, NOW accounts, various money market accounts, and
fixed interest rate certificates with varying maturities.
The composition of the Bank's deposits at the end of recent periods is set forth
in Note 9 of the Notes to Consolidated Financial Statements in the Annual
Report.
The Bank utilized Federal Home Loan Bank advances for approximately five months
during 1996 and may use short term advances in the future to compensate for
seasonal fluctuations in deposit and certain loan balances.
<PAGE>
25
The following table sets forth the dollar amount of savings deposits, by
interest rate range, in the various types of deposit programs offered by the
Bank at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1996 1995 1994
------------------ ------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
Certificate Accounts:
--------------------
<S> <C> <C> <C> <C> <C> <C>
1.00- 1.99............ $ 100 0.1% 0 0.0% 0 0.0%
2.00- 3.99............ 0 0.0 3,243 1.0 28,190 9.2
4.00- 4.99............ 18,797 6.0 21,560 6.9 49,846 16.2
5.00- 7.99............ 203,236 65.1 202,049 64.3 142,105 46.2
8.00- 9.99............ 1,805 0.6 3,538 1.1 6,846 2.2
-------- ----- -------- ----- -------- -----
Total Certificate
Accounts........... $223,938 71.8% $230,390 73.3% $226,987 73.8%
-------- ----- -------- ----- -------- -----
Other Accounts:
--------------
Passbook Accounts...... 22,167 (1) 7.1 23,443 7.4 24,103 7.9
Money Market Accounts 30,805 (2) 8.1 28,566 9.1 28,073 9.1
NOW & Checking Accts... 34,844 13.0 31,895 10.2 28,442 9.2
-------- ----- -------- ----- -------- -----
Total Other
Accounts........... $ 87,816 28.2% $ 83,904 26.7% $ 80,618 26.2%
-------- ----- -------- ----- -------- -----
Total Deposits..... $311,754 100.0% $314,294 100.0% $307,605 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
(1) The Bank's interest rate on passbook accounts was 1.75% as of December 31,
1996.
(2) The Bank's interest rates on money market deposit accounts varied from
1.78% to 3.70% based upon account balance, as of December 31, 1996.
The following table allocates the Bank's deposit types by weighted average rate
and average amount for the years indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ----------------------------- ------------------------------
Weighted Weighted Weighted
Average Percent Average Average Percent Average Average Percent Average
Balance of Total Rate Balance of Total Rate Balance of Total Rate
-------- --------- --------- -------- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate
accounts $225,519 72.4% 5.9% $231,376 74.3% 5.9% $218,066 72.2% 5.1%
Passbook
accounts 23,710 7.6 1.8 23,880 7.7 1.8 25,777 8.5 1.8
Money Market
accounts 27,858 9.0 3.1 27,247 8.8 2.9 30,668 10.2 2.4
NOW accounts 25,144 8.1 0.9 23,414 7.5 0.8 22,562 7.5 0.8
Non interest
bearing deposits 9,109 2.9 0.0 5,400 1.7 0.0 4,732 1.6 0.0
-------- ----- ---- -------- ----- --- -------- ----- ---
TOTAL $311,340 100.0% $311,317 100.0% $301,805 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
<PAGE>
26
The following table sets forth the savings flows at the Bank during the periods
indicated. Net decrease refers to the amount of deposits during a period less
the amount of withdrawals during the period. While total deposits declined in
1996 as compared to 1995, core deposits, comprised of checking, NOW, money
market, and passbook savings, experienced an increase. Management continues to
focus upon building the core deposit base of the Bank and undertook extensive
staff sales training during 1996. The training will be ongoing throughout the
Bank and will promote not only original sales of Bank products, but also
additional product sales to established customers. Management followed a
generally conservative pricing strategy throughout 1996 for time deposits. The
focus of the Bank for 1997 will be to obtain continued growth of core deposit
relationships and may place greater emphasis upon such relationships than growth
of the deposit base in the aggregate. Much of the 1995 deposit growth came in
core deposits, with NOW and checking account growth resulting from a checking
account marketing campaign focused upon an expanded offering of checking
accounts, increased cross-selling of the Bank's commercial borrower base and the
operation of the Bank's in-store supermarket office, which opened in April 1995.
Management followed a generally conservative pricing strategy during 1994
although special pricing promotions were offered on selected deposit products
throughout the year. Additionally, management believed the increase in market
interest rates experienced throughout 1994 generated renewed interest in deposit
products as opposed to mutual funds and other alternative investments.
Deposit flows at savings institutions may also be influenced by external factors
such as governmental credit policies and, particularly in recent periods,
depositors' perceptions of the adequacy of federal insurance of accounts.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance.............. $ 314,294 $ 307,605 $ 307,586
Deposits..................... 610,950 525,105 501,593
Withdrawals.................. (623,853) (528,696) (510,169)
Interest credited............ 10,363 10,280 8,595
--------- --------- ---------
Ending balance............... $ 311,754 $ 314,294 $ 307,605
========= ========= =========
Net increase (decrease)...... $ (2,540) $ 6,689 $ 19
========= ========= =========
Percent increase (decrease).. (0.81)% 2.17% .01%
</TABLE>
The Bank has become more susceptible to short-term fluctuations in deposit
flows, as customers have become more interest rate conscious. The Bank manages
the pricing of its deposits in keeping with its asset/liability management and
profitability objectives. Based on its experience, the Bank believes that its
passbook and certificate accounts are relatively stable sources of deposits.
However, the ability of the Bank to attract and
<PAGE>
27
maintain deposits, and the rates paid on these deposits, have been and will
continue to be significantly affected by market conditions.
The following table sets forth the time remaining until maturity of the Bank's
certificates of deposit as of December 31, 1996.
<TABLE>
<CAPTION>
Maturity
-------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------- -------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Certificates of
deposit (less than
$100,000)........... $36,388 $31,631 $23,399 $104,216 $195,634
Certificates of
deposit ($100,000
or more)............ 6,836 4,005 4,500 12,963 28,304
-------- -------- -------- --------- --------
Total certificates
of deposit.......... $43,224 $35,636 $27,899 $117,179 $223,938
======== ======== ======== ========= ========
</TABLE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1996
<TABLE>
<CAPTION>
1.00- 5.00- 7.00- 8.00- 10.00- Percent
4.99% 6.99% 7.99% 9.99% 10.99% Total of Total
----- ----- ----- ----- ------ ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate Accounts
Maturing in
Quarter Ending:
March 31, 1997................... $10,327 $ 26,173 $ 6,603 $ 121 $ - $ 43,224 19.30%
June 30, 1997.................... 4,534 26,619 4,482 1 - 35,636 15.91
September 30, 1997............... 640 13,063 194 48 - 13,945 6.23
December 31, 1997................ 160 13,506 159 129 - 13,954 6.23
March 31, 1998................... 963 13,922 1,588 186 - 16,659 7.44
June 30, 1998.................... 448 20,831 56 443 - 21,778 9.73
September 30, 1998............... 125 8,350 - 336 - 8,811 3.94
December 31, 1998................ 912 9,642 11 172 - 10,737 4.79
March 31, 1999................... 720 8,230 - 107 - 9,057 4.04
June 30, 1999.................... - 3,589 - 98 - 3,687 1.65
September 30, 1999............... - 4,288 - 28 - 4,316 1.93
December 31, 1999................ 39 5,278 4,971 18 - 10,306 4.60
Thereafter....................... 29 8,704 22,977 118 - 31,828 14.21
Total....................... $18,897 $162,195 $41,041 $1,805 $ - $223,938 100.00%
</TABLE>
<PAGE>
28
Borrowings
- ----------
HomeBanc's other sources of funds have included advances from the FHLBank of
Chicago as well as other borrowings. As a member of the FHLBank of Chicago, the
Bank is required to own capital stock in the FHLBank of Chicago and is
authorized to apply for advances from the FHLBank of Chicago. Each FHLBank
credit program has its own interest rate, which may be fixed or variable, and
range of maturities. The FHLBank of Chicago may prescribe the acceptable uses
for these advances, as well as limitations on the size of the advances and
repayment provisions.
The Bank utilized short term advances during 1996 as a means of funding the
seasonal growth of the construction loan portfolio and the purchase of
participating interests in multi-family and commercial mortgage loans. The
advances were repaid through the seasonal reduction of the construction loan
portfolio, the sale of residential mortgage loans, and the repayment of
participating interests purchased in prior years. Management may utilize
advances in the future in similar circumstances or if it is believed the
advances represent a more cost effective means of funding asset growth.
FHLBank advances were utilized during 1995 primarily as a means of funding the
purchase of participating interests in multi-family and commercial mortgage
loans. The advances were repaid through the sale of residential mortgages and
deposit growth.
The following table sets forth the maximum and average month-end balances of
FHLBank advances and other borrowing during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1995 1994
-------- -------- --------
(Dollars In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLBank advances....... $14,100 $13,850 $2,400
Other.................. - - 237
Average Balance:
FHLBank advances....... $ 2,408 $ 1,581 $ 26
Other.................. - - 219
Weighted average
interest rate of
FHLBank advances........ 5.69% 6.14% 4.49%
Weighted average
interest rate of other
borrowing............... -% -% 7.76%
</TABLE>
There were no FHLBank advances outstanding at December 31, 1996, 1995, or 1994.
<PAGE>
29
Subsidiary Activities
- ---------------------
In order to benefit from the strength of the western and northern suburban
Chicago economy and real estate market, and to increase its non-interest income,
in the early 1980s, HomeBanc began to increase its real estate development
activities in that market. At December 31, 1996, HomeBanc's total investment in
real estate developments as presented in the consolidated balance sheet was $5.1
million. These developments have been operated through Home Federal Service
Corporation, a wholly owned direct subsidiary of HomeBanc, and consist of
unconsolidated joint ventures owned 50% by HomeBanc.
Under the terms of HomeBanc's development agreements, HomeBanc (and its
subsidiary) generally provided funds to acquire and develop the real estate in
exchange for a percentage (generally 35%-50%) of the profits thereon. A
developer or builder acted operating manager of the development. Fees and
profits due to the operating manager are negotiated on a case-by-case basis and
may not be paid to the manager until HomeBanc has been reimbursed for its
investment in the development. Home Federal Service Corporation realized net
income of $431,000 for the year ended December 31, 1996.
HomeBanc has historically participated in loans to the unconsolidated joint
ventures generally in an amount equal to its ownership interest. HomeBanc
recognized interest income on its participation loan balance at the rate
provided for in the joint venture agreements. During 1996, 1995, and 1994,
HomeBanc recognized $-0-, $-0-, and $665,000 in interest income on loans to the
unconsolidated joint ventures. HomeBanc had no loans outstanding to its
unconsolidated joint ventures as of December 31, 1996.
Interest capitalization on the real estate projects is discontinued upon
completion of the development phase, or during the development phase when
HomeBanc determines market conditions indicate collectability of such interest
is uncertain. See Notes 1 and 7 of the Notes to Consolidated Financial
Statements in the Annual Report.
The following table sets forth information concerning all the Bank's investments
in real estate developments at December 31, 1996.
<TABLE>
<CAPTION>
Units Sold
Origination Description of the or Under
Location of Development Date Property Contract
- ----------------------- ----------- ------------------- ------------
<S> <C> <C> C>
Geneva, Illinois 07/89 (3) 533 single family 355
lots,37 acres 16
commercial and
a championship golf
course
Naperville, Illinois 11/85 279 single family 279
lots
85 acres commercial 83
real estate
Naperville, Illinois 05/86 300 single family 300
lots,
680 multi-family 680
units
32 acres commercial 29
real estate
</TABLE>
HomeBanc Total Remaining
Location of Development Investment (1) Commitment Commitment (2)
- ----------------------- ------------- ------------ ---------------
(Dollars in Thousands)
<PAGE>
30
<TABLE>
<S> <C> <C> <C>
Geneva, Illinois $4,879 $12,058 $223
Naperville, Illinois 95 -
Naperville, Illinois 121 - -
------ -------- -----
$5,095 $12,058 $223
====== ======= =====
</TABLE>
(1) Amounts presented on a consolidated basis. The Bank offsets cash balances
on deposit in excess of loans and deferred revenues from its investment in
real estate figures.
(2) Includes amounts which may be funded by the Bank incrementally as
construction and development progresses, amounts to guarantee satisfactory
performance which may never ben funded on the specific projects and amounts
representing profits which have been recognized by the Bank but have not
been distributed to the Bank in cash. These profit amounts are included, on
a consolidated basis, in the $5.1 million investment in real estate.
(3) Investment was committed to prior to April 12, 1989.
Real estate development activities involve each of the risks described above
with respect to real estate development lending. See "Construction and Land
Lending". In addition, real estate developments typically produce negative cash
flow during the early stages thereof. Most of HomeBanc's real estate
developments have also been in the same market, the western and northern suburbs
of Chicago, and are therefore subject to the risk that this market could become
overbuilt or that real estate values in this market could decline. Finally, as
an equity investor rather than a lender on a real estate project, HomeBanc is
required to share in any losses on a project rather than require the borrower to
absorb the losses thereon.
Federal thrift institutions generally may invest up to 2% of their assets in
subsidiaries, plus an additional 1% if such investment is for community
purposes. The Bank's permissible investment in its subsidiary under this
regulation at December 31, 1996, was $6.7 million. On the same date, its
investment (including loans as well as direct investments) in its subsidiary was
$699,000.
Competition
- -----------
HomeBanc faces strong competition both in originating real estate and other
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from other savings institutions, commercial banks and mortgage
bankers making loans secured by real estate located in the Bank's market areas.
Commercial banks and finance companies provide vigorous competition in consumer
lending. The Bank competes for real estate and other loans principally on the
basis of the interest rates and loan fees it charg es, the types of loans it
originates and the quality of services it provides to borrowers.
The Bank faces substantial competition in attracting deposits from other savings
institutions, commercial banks, money market funds, credit unions and other
investment vehicles. The Bank attracts a significant amount of deposits through
its branch offices primarily from the communities in which those branch offices
are located; therefore, competition for those deposits is principally from other
savings institutions and commercial banks located in the same communities. The
Bank competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours, and convenient branch locations
with interbranch deposit and withdrawal privileges at each. HomeBanc opened its
first supermarket branch during
<PAGE>
31
April 1995. Not only does this location provide an entry into supermarket
banking, but it also provides HomeBanc with an office location in an area of
Rockford that is experiencing rapid growth both from a residential and business,
primarily retail, perspective.
Management considers its primary market area to be the Rockford, Freeport and
Dixon metropolitan areas. HomeBanc has also directed a portion of its real
estate development lending and investment activity to the western and northern
Chicago suburbs. Although HomeBanc has developed relationships with a number of
developers, builders and lenders in the market, HomeBanc's overall lending
volume in this market has not constituted a significant percentage of the total
lending activity in this large market.
The authority to offer money market deposits and the expanded lending and other
powers authorized for thrift institutions by federal and state legislation have
resulted in increased competition for both deposits and loans between thrift
institutions and other financial institutions such as commercial banks.
Employees
- ---------
At December 31, 1996, the Company and its subsidiary had a total of 205 em
ployees, including 40 part-time employees. None of the employees of the Company
and its subsidiary are represented by any collective bargaining group.
Management considers its employee relations to be good.
Executive Officers of the Company and the Bank
- ----------------------------------------------
The following information as to the business experience during the past five
years is supplied with respect to the executive officers of the Company and the
Bank who do not serve on the Company's Board of Directors. Executive officers
of the Company are elected annually to serve until their successors are elected
or until they resign or are removed by the Board of Directors. There are no
arrangements or understandings between the persons named and any other person
pursuant to which such officers were elected.
Marsha A. Abramson, age 46. Mrs. Abramson is Senior Vice President-Deposit
Services of the Bank. She has held this position since 1984.
Dirk J. Meminger, age 37. Mr. Meminger has been Treasurer of the Bank since 1986
and has served as Treasurer of the Company since 1990. Prior to joining the
Bank, Mr. Meminger was employed as an auditor with a local office of an
international accounting firm. He is also a certified public accountant.
Robert R. Bennehoff, age 57. Mr. Bennehoff is Senior Vice President-Residential
Lending of the Bank. Mr. Bennehoff joined the Bank in 1977 and has held
positions including Vice President/Loan Servicing and Vice President/Customer
Service.
Peter T. Roche, age 50. Mr. Roche is Senior Vice President-Commercial Lending
of the Bank. He joined the Bank in May 1994. Mr. Roche has 16 years of banking
experience including officer positions responsible for mortgage and commercial
business lending.
<PAGE>
32
REGULATION
- ----------
General
- -------
The Bank is a federally chartered savings bank, the deposits of which are
federally insured and backed by the full faith and credit of the United States
Government. Accordingly, the Bank is subject to broad federal regulation and
oversight extending to all its operations. The Bank is a member of the FHLB of
Chicago and is subject to certain limited regulation by the Board of Governors
of the Federal Reserve System ("Federal Reserve Board"). As the savings and
loan holding company of HomeBanc, the Company also is subject to federal
regulation and oversight. The purpose of the regulation of the Company and
other holding companies is to protect institutions. The Bank is a member of the
Savings Association Insurance Fund ("SAIF"), which together with the Bank
Insurance Fund (the "BIF") are the two deposit insurance funds administered by
the FDIC, and the deposits of the Bank are insured by the FDIC. As a result,
the FDIC has certain regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed below or
elsewhere in this document.
Federal Regulation of Savings Institutions
- ------------------------------------------
The OTS has extensive authority over the operations of savings institutions. As
part of this authority, the Bank is required to file periodic reports with the
OTS and is subject to periodic examinations by the OTS and the FDIC. The last
regular OTS examination of the Bank was as of March 31, 1996. The last regular
FDIC Examination was as of April 30, 1995. Under agency scheduling guidelines,
it is likely that another OTS examination will be initiated in the near future.
When these examinations are conducted, the examiners may require the Bank to
provide for higher general or specific loan loss reserves. All savings
institutions are subject to a semi-annual assessment, based upon the savings
institution's total assets, to fund the operations of the OTS. The Bank's OTS
assessment for the fiscal year ended December 31, 1996 was $86,000.
The OTS also has extensive enforcement authority over all savings institutions
and their holding companies, including the Bank and the Company. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. Except under certain
circumstances, public disclosure of final enforcement actions by the OTS is
required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws, and it is prohibited from engaging in any
<PAGE>
33
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal institutions in loans secured by non-
residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings institutions are also generally authorized
to branch nationwide. The Bank is in compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower is equal
to the greater of $500,000 or 15% of unimpaired capital and surplus (except for
loans fully secured by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus). At December 31,
1996, the Bank's lending limit under this restriction was $3.4 million. On
December 31, 1996, the Bank had five loans, totaling $4.0 million to one
borrower in excess of such amount. All of these loans, however, were originated
by the Bank prior to the implementation of this limitation and are unaffected by
this regulation. Since the implementation of this rule, HomeBanc has not
originated any loans exceeding the specified maximum.
The OTS, as well as the other federal banking agencies, has adopted guidelines
establishing safety and soundness standards on such matters such as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to
comply with an approved plan will subject the institution to further enforcement
action.
Insurance of Accounts and Regulation by the FDIC
- ------------------------------------------------
The Bank is a member of the SAIF, which is administered by the FDIC. Deposits
are insured up to applicable limits by the FDIC and such insurance is backed by
the full faith and credit of the United States Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the SAIF or the BIF. The FDIC
also has the authority to initiate enforcement actions against savings
institutions, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based system,
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums based upon their level of capital and
supervisory evaluation. Under the system, institutions classified as well
capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or
core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least
6% and a risk-based capital ratio of at least 10%) and considered healthy pay
the lowest premium while institutions that are less
<PAGE>
34
than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of
less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. Risk classification of
all insured institutions is made by the FDIC for each semi-annual assessment
period.
The FDIC is authorized to increase assessment rates, on a semi-annual basis, if
it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Regulatory Capital Requirements" in the
Annual Report to Stockholders.
Regulatory Capital Requirements
- -------------------------------
Federally insured savings institutions, such as the Bank, are required to
maintain a minimum level of regulatory capital. The OTS has established capital
standards, including a tangible capital requirement, a leverage ratio (or core
capital) requirement and a risk-based capital requirement applicable to such
savings institutions. These capital requirements must be generally as stringent
as the comparable capital requirements for national banks. The OTS is also
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). Tangible capital generally includes
common stockholders' equity and retained income, and certain noncumulative
perpetual preferred stock and related income. In addition, all intangible
assets, other than a limited amount of purchased mortgage servicing rights, must
be deducted from tangible capital for calculating compliance with the
requirement.
The OTS regulations establish special capitalization requirements for savings
institutions that own subsidiaries. In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for
national banks or engaged in certain other activities solely as agent for its
customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the institution's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. The Bank's subsidiary is an excludable subsidiary. At
December 31, 1996, the regulatory investment in this subsidiary was $4.9
million.
At December 31, 1996, the Bank had tangible capital of $15.9 million, or 4.81%
of adjusted total assets, which is approximately $10.9 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.
<PAGE>
35
The capital standards also require core capital equal to at least 3% of adjusted
total assets. Core capital generally consists of tangible capital plus certain
intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings institution must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. As of December 31, 1996,
the Bank had no intangibles subject to these tests.
At December 31, 1996, the Bank had core capital equal to $15.9 million, or 4.81%
of adjusted total assets, which is $6.0 million above the minimum leverage ratio
requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings institutions to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
The OTS is also authorized to require a savings institution to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1996, the Bank had
$1.6 million of capital instruments (consisting of general loss reserves) that
qualify as supplementary capital which was less than 1.25% of risk-weighted
assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had no such
exclusions from capital and assets at December 31, 1996.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to
100%, based on the risk inherent in the type of asset. For example, the OTS has
assigned a risk weight of 50% for prudently underwritten permanent one- to four-
family first lien mortgage loans not more than 90 days delinquent and having a
loan to value ratio of not more than 80% at origination unless insured to such
ratio by an insurer approved by the Federal National Mortgage Association
("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC").
OTS regulations also require that every savings association with more than
normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net
portfolio value of a savings institution, greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and off-
balance sheet contracts. The rule will not become
<PAGE>
36
effective until the OTS evaluates the process by which savings institutions may
appeal an interest rate risk deduction determination. It is uncertain as to
when this evaluation may be completed. Any savings institutions with less than
$300 million in assets and a total capital ratio in excess of 12% is exempt from
this requirement unless the OTS determines otherwise. Based upon OTS
calculations through December 31, 1996, the Bank's capital calculation has not
been impacted by the interest rate risk component.
On December 31, 1996, the Bank had total capital of $17.5 million (including
$15.9 million in core capital and $1.6 million in qualifying supplementary
capital) and risk weighted assets of $210.4 million (including $3.2 million in
converted off-balance sheet assets); or total capital of 8.29% of risk-weighted
assets. This amount was $.6 million above the 8% requirement in effect on that
date.
The OTS and the FDIC are authorized and, under certain circumstances required,
to take certain actions against institutions that fail to meet their capital
requirements. The OTS is generally required to take action to restrict the
activities of an "undercapitalized institution" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital
ratio or an 8% risk-based capital ratio). Any such institution must submit a
capital restoration plan and until such plan is approved by the OTS may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The
OTS is authorized to impose the additional restrictions that are applicable to
significantly undercapitalized institutions.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized institution must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings institution that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the institution. An institution that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized institutions. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized institution is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or receiver.
The OTS is also generally authorized to reclassify an association into a lower
capital category and impose the restrictions applicable to such category if the
institution is engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
<PAGE>
37
The imposition by the OTS or the FDIC of any of these measures on the Bank may
have a substantial adverse effect on the Bank's operations and profitability.
Company shareholders do not have preemptive rights, and therefore, if the
Company is directed by the OTS or the FDIC to issue additional shares of Common
Stock, such issuance may result in the dilution in the percentage of ownership
of the Company.
Limitations on Dividends and Other Capital Distributions
- --------------------------------------------------------
OTS regulations impose various restrictions on savings associations with respect
to their ability to make distributions of capital, which include dividends,
stock redemptions or repurchases, cash-out mergers and other transactions
charged to the capital account. OTS regulations also prohibit a savings
association from declaring or paying any dividends or from repurchasing any of
its stock if, as a result, the regulatory capital of the association would be
reduced below the amount required to be maintained for the liquidation account
established in connection with its mutual to stock conversion.
Generally, savings institutions, such as the Bank, that before and after the
proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
institution's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an institution deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Bank may pay dividends in accordance with this general authority. The Bank,
however, did not pay dividends to the Company during 1996. Savings institutions
proposing to make any capital distribution need only submit written notice to
the OTS 30 days prior to such distribution. Savings institutions that do not, or
would not meet their current minimum capital requirements following a proposed
capital distribution, however, must obtain OTS approval prior to making such
distribution. The OTS may object to the distribution during that 30-day period
notice based on safety and soundness concerns. See "- Regulatory Capital
Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings institution may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings institutions that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings institution may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a
<PAGE>
38
result of, such a distribution. As under the current rule, the OTS may object
to a capital distribution if it would constitute an unsafe or unsound practice.
No assurance may be given as to whether or in what form the regulations may be
adopted.
Liquidity
- ---------
All savings institutions, including the Bank, are required to maintain an
average daily balance of liquid assets equal to a certain percentage of the sum
of its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. For a discussion of what the Bank includes in
liquid assets, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources" in the Annual
Report. This liquid asset ratio requirement may vary from time to time (between
4% and 10%) depending upon economic conditions and savings flows of all savings
institutions. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the institution's average daily balance
of net withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon institutions for violations of either liquid asset ratio
requirement. At December 31, 1996, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 8.2% and a short-term liquid
assets ratio of 4.5%.
Accounting
- ----------
An OTS policy statement applicable to all savings institutions clarifies and re-
emphasizes that the investment activities of a savings institution must be in
compliance with approved and documented investment policies and strategies, and
must be accounted for in accordance with GAAP. Under the policy statement,
management must support its classification of and accounting for loans and
securities (i.e., whether held for investment, sale or trading) with appropriate
documentation. The Bank is in compliance with these amended rules.
OTS accounting regulations, which may be made more stringent than GAAP by the
OTS, require that transactions be reported in a manner that best reflects their
underlying economic substance and inherent risk and that financial reports must
incorporate any other accounting regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test
- ----------------------------
All savings institutions, including the Bank, are required to meet a qualified
thrift lender ("QTL") test to avoid certain restrictions on their
<PAGE>
39
operations. This test requires a savings institution to have at least 65% of
its portfolio assets (as defined by regulation) in qualified thrift investments
on a monthly average for nine out of every twelve months on a rolling basis. As
an alternative, the savings institution may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At December 31, 1996, the Bank met the test and has always met
the test since its inception.
Any savings institution that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an institution does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an institution has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings institution and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
institution is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such institution
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
institution that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "-Holding Company Regulation."
Community Reinvestment Act
- --------------------------
Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has
a continuing and affirmative obligation consistent with safe and sound banking
practices to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with the examination of the Bank, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications, such
as a merger or the establishment of a branch, by the Bank. An unsatisfactory
rating may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the CRA
regulations and the methodology for determining an institution's compliance with
the CRA. Due to the heightened attention being given to the CRA in the past few
years, the Bank may be required to devote additional funds for investment and
lending in its local community. The Bank was examined for CRA compliance in
June 1994 and received a rating of "satisfactory".
<PAGE>
40
Transactions with Affiliates
- ----------------------------
Generally, transactions between a savings institution or its subsidiaries and
its affiliates are required to be on terms as favorable to the institution as
transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the
institution's capital. Affiliates of the Bank include the Company and any
company which is under common control with the Bank. In addition, a savings
institution may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates. The
Bank's subsidiaries are not deemed affiliates, however; the OTS has the
discretion to treat subsidiaries of savings institutions as affiliates on a case
by case basis.
Certain transactions with directors, officers or controlling persons are also
subject to conflict of interest regulations enforced by the OTS. These conflict
of interest regulations and other statutes also impose restrictions on loans to
such persons and their related interests. Among other things, such loans must
be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation
- --------------------------
The Company is a unitary thrift holding company subject to regulatory oversight
by the OTS. As such, the Company is required to register and file reports with
the OTS and is subject to regulation and examination by the OTS. In addition,
the OTS has enforcement authority over the Company and its non-savings
institution subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution.
As a unitary thrift holding company, the Company generally is not subject to
activity restrictions. If the Company acquires control of another savings
institution as a separate subsidiary, it would become a multiple thrift holding
company, and the activities of the Company and any of its subsidiaries (other
than the Bank or any other SAIF-insured thrift) would become subject to such
restrictions unless such other institutions each qualify as a QTL and were
acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of the OTS
prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
thrift holding companies or their subsidiaries. In addition, within one year of
such failure the Company must register as, and will become subject to, the
restrictions applicable to bank holding companies.
The activities authorized for a bank holding company are more limited than are
the activities authorized for a unitary or multiple thrift holding company. See
"Qualified Thrift Lender Test."
<PAGE>
41
The Company must obtain approval from the OTS before acquiring control of any
other SAIF-insured institution. Such acquisitions are generally prohibited if
they result in a multiple thrift holding company controlling savings
institutions in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings institution.
Federal Securities Law
- ----------------------
The stock of the Company is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject
to the information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers, directors
and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System
- ----------------------
The Federal Reserve Board requires all depository institutions to maintain non-
interest bearing reserves at specified levels against their transaction accounts
(primarily checking, NOW and Super NOW checking accounts). At December 31,
1996, the Bank was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the OTS.
See "Liquidity."
Savings institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require institutions to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
- -----------------------------
The Bank is a member of the FHLB of Chicago, which is one of 12 regional FHLBs,
that administers the home financing credit function of savings institutions.
Each FHLB serves as a reserve or central bank for its members within its
assigned region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB, which are subject to the oversight of the Federal Housing
Finance Board. All advances from the FHLB are required to be fully secured by
sufficient collateral as determined by
<PAGE>
42
the FHLB. In addition, all long-term advances are required to provide funds for
residential home financing.
As a member, the Bank is required to purchase and maintain stock in the FHLB of
Chicago. At December 31, 1996, the Bank had $2.1 million in FHLB stock, which
was in compliance with this requirement. In past years, the Bank has received
substantial dividends on its FHLB stock. Over the past five calendar years such
dividends have averaged 6.24% and were 6.72% for calendar year 1996. For the
year ended December 31, 1996, dividends paid by the FHLB of Chicago to the Bank
totaled $143,000.
Under federal law the FHLBs are required to provide funds for the resolution of
troubled savings institutions and to contribute to low- and moderately priced
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have affected adversely the level of FHLB dividends paid and could
continue to do so in the future. These contributions could also have an adverse
effect on the value of FHLB stock in the future. A reduction in value of the
Bank's FHLB stock may result in a corresponding reduction in the Bank's capital.
Impact of New Accounting Standards
- ----------------------------------
In June 1996, the Financial Accounting Standards Board issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and extinguishments
of Liabilities," which provides new accounting and reporting standards for
sales, securitization, and servicing of receivables and other financial assets
and extinguishments of liabilities. The provisions of the Statement are to be
applied to transactions occurring after December 31, 1996. Management does not
believe the Company will be significantly impacted by the adoption of Statement
No. 125.
<PAGE>
Item 2. Properties
- -------------------
The following table sets forth certain information concerning the main office
and each branch office of the Bank at December 31, 1996. The aggregate net book
value of HomeBanc's premises and equipment was approximately $3.9 million at
December 31, 1996.
<TABLE>
<CAPTION>
Lease Expiration
Year (Including Any
Location Opened Owned or Leased Renewal Option)
- ------------------------- ------- --------------- -----------------
<S> <C> <C> <C>
Main Office
- -----------
1107 E. State Street
Rockford, IL 61104-2259 1962 Owned ---
Full Service Branch Offices
- ---------------------------
3210 Eleventh Street
Rockford, IL 61109-2204 1978 Owned ---
2641 North Mulford Road
Rockford, IL 61111-5670 1983 Leased March 31, 1998
Five Yr. Renew Opt.
5629 North Second Street
Loves Park, IL 61111-4664 1988 Owned ---
Cherry Vale Mall-H42C
Rockford, IL 61112-1009 1975 Leased June 13, 2001
5875 East Riverside Blvd.
Rockford, IL 61114 1995 Leased April 1, 2000
205 West Stephenson Street
Freeport, IL 61032-4300 1988 Owned ---
1550 West Galena Avenue
Freeport, IL 61032-3104 1988 Owned ---
98 Galena Avenue
Dixon, IL 61021-0305 1983 Owned ---
Limited Service Branch Offices
- ------------------------------
122 West Boyd
Dixon, IL 61021-0305 1983 Owned ---
ATM-Building Only
1340 N. Galena Avenue
Dixon, IL 61021-0305 1987 Bldg./Owned Monthly
Land/Leased
</TABLE>
<PAGE>
Computer Equipment
- ------------------
The Bank maintains depositor and borrower customer files on an on-line basis
with FiServ, Milwaukee, Wisconsin.
Item 3. Legal Proceedings
- --------------------------
The Company, HomeBanc and its subsidiary are involved as plaintiff or defendant
in various legal actions arising in the normal course of their businesses.
While the ultimate outcome of the various legal proceedings involving the
Company, HomeBanc and its subsidiary cannot be predicted with certainty, it is
the opinion of management, after consultation with counsel, that the resolution
of these legal actions should not have a material effect on the Company's
consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended December 31, 1996.
PART II
- -------
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
- -----------------------------------------------------------------------------
Page 41 of the attached 1996 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Selected Financial Data
- --------------------------------
Page 3 of the attached 1996 Annual Report to Stockholders is herein incorporated
by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -----------------------------------------------------------
Pages 4 through 13 of the attached 1996 Annual Report to Stockholders are herein
incorporated by reference.
<PAGE>
Item 8. Financial Statements Supplementary Data
- ------------------------------------------------
Pages 15 through 39 of the attached 1996 Annual Report to Stockholders are
herein incorporated by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
Previous independent accountants:
A. On February 21, LLP ("KPMG") 1995, the Company dismissed KPMG Peat
Marwick, as its independent. accountants.
B. The reports of KPMG on the consolidated financial statements for the past
two fiscal years did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope,
or accounting principles.
C. The change of independent accountants was recommended by the Audit
Committee and subsequently approved by the Board of Directors.
D. In connection with its audits for the two most recent fiscal years and
through February 21, 1995, there have been no disagreements with KPMG on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope of procedure, which disagreements, if not
resolved to the satisfaction of KPMG, would have caused them to make
reference thereto in their report on the consolidated financial statements
for such years.
E. During the two most recent fiscal years and through February 21, 1995,
there have bee no reportable events (as defined in Regulation S-K Item
304(a)(1)(v)) with KPMG.
F. The Company requested that KPMG furnish a letter addressed to the
Securities and Exchange Commission stating whether it agrees with the
above statements, and if not, stating the respects in which they do not
agree. A copy of such letter dated February 28, 1995, is filed as Exhibit
16 to the Form 8-K/A dated March 6, 1995 filed with the SEC.
New independent accountants:
A. On March 9, 1995, the Company engaged the firm of Ernst & Young LLP as
independent accountants for the fiscal year December 31, 1995.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Information concerning Directors of the Registrant is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Information regarding executive officers of the Company and the Bank included in
Part I of this Form 10-K is incorporated herein by reference.
Item 11. Executive Compensation
- --------------------------------
Information concerning executive compensation (other than the report of the
compensation committee and the performance graph) is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1997, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
PART IV
- -------
Item 14. Financial Statements, Exhibits File, and Reports on Form 8-K
- ----------------------------------------------------------------------
(a) (1) Financial Statements
The following information appearing in HomeCorp's Annual Report to Stockholders
for the year ended December 31, 1996, is incorporated by reference in this
Annual Report on Form 10-K as Exhibit 13.
<PAGE>
Pages 15 through 41 of the attached 1996 Annual Report to Stockholders are
herein incorporated by reference.
(a) (2) Financial Statement Schedules
Except as set forth below, all financial statement schedules have been omitted
as the required information is inapplicable or has been included in the Notes to
Consolidated Financial Statements.
Independent Auditors' Report dated January 22, 1997.
(a) (3) Exhibits
<TABLE>
<CAPTION>
Reference to
Prior filing
or Exhibit
Regulation Number
S-K Exhibit Attached
Number Document Here To
- ----------- ------------------------------------- ------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3(a) Articles of Incorporation (a)
3(b) By-Laws (a)
4 Instruments defining the rights of security (a)
holders, including debentures
9 Voting Trust Agreement None
10 Executive Compensation Plans and Arrangements:
1. Employee Stock Ownership Plan (a)
2. Stock Option and Incentive Plan (b)
3. Employment Contract of C. Steven Sjogren (a)
4. Employment Agreement of John R. Perkins (a)
5. Employment Agreement of Marsha A. Abramson (a)
6. Employment Agreement of Dirk J. Meminger (a)
7. Employment Agreement of Robert R. Bennehoff (a)
8. 1996 Premium Price Stock Option and (b)
Incentive Plan
9. Restoration Benefit Plan 10.9
11 Statement re: computation of per (c)
share earnings
12 Statement re: computation of ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountants (d)
18 Letter re: change in accounting principles (e)
21 Subsidiaries of Registrant 21
22 Published report regarding matters None
submitted to vote of security holders
23 Consents of Experts and Counsel 23
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
24 Power of Attorney Not required
27 Financial Data Schedule 27
99 Additional exhibits None
</TABLE>
(a) Filed as exhibits to the HomeCorp's Form S-1 registration statement filed
on November 24, 1989 (File No. 33-32284) pursuant to Section 5 of the Securities
Act of 1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-K.
(b) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of Regulation S-K.
(c) See Note 1(r) of Notes to Consolidated Financial Statements included in the
Annual Report under Exhibit 13.
(d) Filed as Exhibit 16 to the Company's Current Report on Form 8-K/A, dated
March 6, 1995, filed pursuant to the Securities Exchange Act of 1934, as amended
(the "1934 Act"), which is hereby incorporated by reference herein in accordance
with Item 601 of Regulation S-K. The Company filed a Current Report on Form 8-
K/A, dated March 10, 1995, with the SEC pursuant to the 1934 Act to report the
retention of Ernst & Young LLP as its independent auditor, which report is
hereby incorporated by reference herein pursuant to Item 601 of Regulation S-K.
(e) Filed as Exhibit 18 to the Company's Annual Report on Form 10-K for the
Year Ended December 31, 1994, filed pursuant to the Securities Exchange Act of
1934, as amended, which is hereby incorporated herein by reference.
(b) Reports on Form 8-K
- ------------------------
A report on Form 8-K was filed on October 30, 1996, announcing the results of
operations for the three and nine month periods ended September 30, 1996.
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed by
the undersigned, thereunto duly authorized.
HOMECORP, INC.
Date: March 28, 1997 By: /s/ C. Steven Sjogren
- --------------------- ---------------------------
Duly Authorized Representative
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of HomeCorp, Inc. and
in the capacities and on the date indicated.
By: /s/ Karl H. Erickson By: /s/ C. Steven Sjogren
- ------------------------- ---------------------------
Chairman of the Board Director, President,
Chief Executive Officer
(Principal Executive Officer)
Date: March 28, 1997 Date: March 28, 1997
By: /s/ John R. Perkins By: /s/ Dirk J. Meminger
- ----------------------- ------------------------------
Director, Executive Vice Treasurer,
Executive Vice President, Chief Accounting Officer
Chief Financial Officer (Principal Accounting Officer)
(Principal Financial Officer)
Date: March 28, 1997 Date: March 28, 1997
By: /s/ Wesley E. Lindberg By: /s/ Adam A. Jahns
- -------------------------- ----------------------------
Secretary and Director Vice Chairman and Director
Date: March 24, 1997 Date: March 24, 1997
By: /s/ Robert C. Hauser By: Larry U. Larson
- ------------------------- ----------------------------
Director Director
Date: March 28, 1997 Date: March 28, 1997
By: /s/ Richard W. Malmgren By: /s/ David R. Rydell
- ---------------------------- ---------------------------
Director Director
Date: March 28, 1997 Date: March 28, 1997
<PAGE>
INDEX TO EXHIBITS
- -----------------
Exhibit Number
- --------------
10.9 Restoration Benefit Plan
11 Statement re computation per share earnings
(See Note 1(r) of the Notes to Consolidated
Financial Statements continued in the Annual Report
filed as Exhibit 13 hereto.)
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
23 Consents of Experts
27 Financial Data Schedule
(The Schedule contains summary financial information
extracted from the financial statements contained in
the Annual Report on Form 10-K for the year ended
December 31, 1996 and is qualified in its entirety
by reference to such financial statements.)
<PAGE>
EXHIBIT 10.9
RESTORATION BENEFIT PLAN
- ------------------------
effective as of June 1, 1996
ARTICLE I
ESTABLISHMENT OF PLAN
1.1 Purpose of Plan
---------------
This HomeBanc, fsb Restoration Benefit Plan (the "Plan") is adopted by
HomeBanc, fsb (the "Employer" or the "Company") for selected key executive
employees.
The purpose of the Plan is to provide selected key executive employees
whose benefits under the HomeBanc, fsb - Pension Trust (the "Pension Plan")
or the HomeCorp, Inc. Employee Stock Ownership and 401(k) Plan (the "Basic
Plan") are limited by certain Nondiscrimination Restrictions, described
herein, of the Internal Revenue Code of 1986, as amended with supplemental
retirement income and to accumulate deferred compensation which cannot be
accumulated under the Basic Plan because of said Nondiscrimination
restrictions.
1.2 Not a Plan or Trust
-------------------
This Plan shall not constitute a trust or plan under the Internal Revenue
Code, ERISA, state law, or any other law. Participants shall have only the
unsecured promise of the Company to pay the amounts accumulated and payable
under the Plan provisions. The Plan shall be unfunded and neither the
Participants nor their beneficiaries will have any claim to the amounts
accumulated in the Plan until the time for payment under the Plan, and then
only as general unsecured creditors of the Company.
1.3 Effective Dates
---------------
The Company establishes the Plan effective June 1, 1996.
ARTICLE II
DEFINITIONS
The following definitions shall govern the construction of this Plan. Unless
some other meaning or intent is apparent from the context, the plural shall
include the singular and the singular shall include the plural, and
<PAGE>
masculine, feminine and neuter words shall be used interchangeably.
2.1 Accounts
--------
Accounts means either collectively or individually a Participant's Deferral
Account, Matching Account or ESOP Account maintained on the books of the
Company for the benefit of a Participant.
2.2 Administrator
-------------
Administrator means the Board or its designee as duly appointed by the
Board.
2.3 Basic Plan
----------
Basic Plan means the qualified defined contribution ESOP and 401(k)
retirement plan sponsored by the Company, named the HomeCorp, Inc. Employee
Stock Ownership and 401(k) Plan, or its successor plan, as it may be
amended from time to time.
2.4 Basic Plan Deferrals
--------------------
Basic Plan Deferrals means the amounts, authorized by the Participant, to
be deferred from Compensation into the Basic Plan.
2.5 Beneficiary
-----------
Beneficiary means any person or persons so designated by a Participant in
accordance with the provisions of this Plans.
2.6 Board
-----
Board means the Board of Directors of the Company.
2.7 Company or Employer
-------------------
Company or Employer means HomeBanc, fsb and its successors and assigns
unless otherwise herein provided, or any other corporation or business
organization which, with the consent of HomeBanc, fsb or its successors or
assigns, assumes the Employer's obligations hereunder, or any other
corporation or business organization which agrees, with the consent of
HomeBanc, fsb, to become a party to the Plan, or becomes a successor as a
result of merger, consolidation, liquidation, transfer of assets or other
reorganization.
2.8 Company Pension Benefit
-----------------------
Company Pension Benefit shall mean the supplemental pension benefit that is
payable from this Plan to the Participant or Beneficiary as determined
under the provisions of Article IV.
<PAGE>
2.9 Compensation
------------
Compensation means the total of all salary, wages, bonuses, car allowances,
or other form of direct compensation paid to or accrued for a Participant
by the Company for services rendered during each calendar year.
Compensation shall exclude extraordinary pay such as moving expenses,
moving allowances, and other non-service related pay. In every case the
Administrator shall have the authority to rule on special circumstances as
to the inclusion or exclusion of compensation not specifically mentioned
within this definition.
2.10 Deferral Account
----------------
Deferral Account means with respect to each Participant, the account
established by the Company to reflect the Deferral Amounts of the
Participant adjusted by Earnings as determined under this Plan.
2.11 Deferral Agreement
------------------
Deferral Agreement means the agreement signed by the Participant
authorizing the deferral of Compensation and consenting to the terms and
conditions of the Plan, as if a signatory hereto.
2.12 Deferral Amount
---------------
Deferral Amount means the amount which a Participant authorizes to be
deferred from Compensation in accordance with the provisions of the Plan
and pursuant to the Deferral Agreement.
2.13 Earnings
--------
Earnings means the interest, dividends, capital gains or losses (realized
or unrealized) and other accumulations on amounts credited to the
Participant's Accounts determined hereunder.
2.14 ESOP Account
------------
ESOP Account means with respect to each Participant, the account
established by the Company to reflect the Company ESOP contribution
credited to the Participant by the Company adjusted by Earnings in
accordance with the provisions of this Plan.
2.15 Matching Account
----------------
Matching Account means with respect to each Participant, the account
established by the Company to reflect the matching amounts credited to the
Participant by the Company adjusted by Earnings as determined under this
Plan.
2.16 Nondiscrimination Restrictions
------------------------------
Nondiscrimination Restrictions means the nondiscrimination provisions
promulgated by the Internal Revenue Code Section 402(g) (for the maximum
dollar limit on 401(k) deferrals for a calendar year), Section 401(k)
<PAGE>
(for the nondiscrimination of 401(k) deferrals into a qualified plan),
Section 401(m) (for the nondiscrimination of Company matching contributions
to a qualified plan), Section 415 (for restricting the maximum amount of
annual additions which a Participant may receive in a single Plan Year or
the maximum amount of pension benefit a Participant may receive), and
Section 401(a)(17) (for restricting the amount of Compensation that can be
recognized under a qualified plan).
2.17 Participant
-----------
Participant means an employee of the Company who has been approved by the
Board for participation in this Plan.
2.18 Payment Election Agreement
--------------------------
Payment Election Agreement means the the election agreement signed by the
Participant electing a form (or forms) of distribution in accordance with
provisions of this Plan.
2.19 Pension Plan
------------
Pension Plan means the qualified defined benefit retirement plan sponsored
by the Company, named the HomeBanc, fsb - Pension Trust, or its successor
plan, as it may be amended from time to time.
2.20 Pension Plan Benefit
--------------------
Pension Plan Benefit shall mean the monthly benefit which is payable to the
Participant or his Beneficiary from the Pension Plan after the adjustments
for form of payment and any commencement date elections made under the
Pension Plan.
2.21 Plan
----
Plan means this HomeBanc, fsb Restoration Benefit Plan, as amended from
time to time.
2.22 Plan Year
---------
Plan Year means the twelve (12) month period ending on December 31 or
each year during which the Plan is in effect.
ARTICLE III
ADMINISTRATION AND RECORDS
3.1 Administration
--------------
The Administrator shall be responsible for all aspects of administration of
the Plan. The Administrator shall interpret the Plan provisions and apply
all interpretations in a consistent manner for all Participants unless the
Board has approved by resolution to do otherwise. A
<PAGE>
Participant may request that the Board review any interpretation provided
by the Administrator if the Administrator is a designee of the Board rather
than the Board.
The Administrator shall maintain the Deferral Agreements and Payment
Election Agreements signed by the Participants, and shall have the
responsibility of operating the Plan in accordance with these agreements.
The Administer shall have the responsibility to operate the Plan,
including, without limiting thegenerality of the foregoing, the power,
duty and responsibility to:
A. Resolve and determine all disputes or questions arising under the Plan,
including the power to determine the rights of Participants and
Beneficiaries, and their respective benefits, and to remedy any
ambiguities, inconsistencies or omissions in the Plan.
B. Adopt such rules of procedure and regulations as in its opinion may be
necessary for the proper and efficient administration of the Plan and
as are consistent with the Plan.
3.2 Records of Accounts
-------------------
The Administrator shall maintain the record of Accounts for each
Participant in accordance with the provisions of the Plan. The
Administrator shall provide for payment of benefits when benefits are due
and payable under the provisions of the Plan, and the Administrator shall
provide the required tax notifications to the participant as part of the
administration duties.
ARTICLE IV
CONTRIBUTIONS, DEFERRALS, AND BENEFITS
4.1 Participant Deferral Elections
------------------------------
For each Plan Year a Participant will be provided the opportunity to defer
a minimum of 2% and a maximum of 25% (increasing in increments of 1%) of
his Compensation into this Deferral Account. The election to defer shall be
made in writing pursuant to the Deferral Agreement provided by the
Administrator. Except for the first Plan Year a Participant is allowed to
participate in the Plan, the election to defer shall be made in the month
of December preceding the Plan Year of applicability. Such Deferral Amounts
shall be effective on the later of January 1 or the first day of the
payroll period specified within the Deferral Agreement. The election to
defer shall be irrevocable for the Plan Year for which it is applicable.
<PAGE>
For Plan Years in which the Participant is first approved for
Participation, the election must be made within four weeks (28 days) of the
date the Administrator provides written notification to the Participant of
the opportunity to make Deferral Amounts. Such Deferral Amounts shall be
effective on the first day of the month immediately following the date the
Deferral Agreement is signed or if later, the first day of the payroll
period specified within the Deferral Agreement.
A Participant's Deferral Amount shall be credited to his Deferral Account
as of each pay date he would have received the deferred Compensation except
for the Deferral Agreement in effect for the Plan Year.
4.2 Company Matching Contributions
------------------------------
A. Eligibility
-----------
The Participant shall have his Match Account credited with a Company
match under the Plan for each pay period in which the following
conditions have been met:
1. The Participant has made Basic Plan Deferrals, or has Deferral
Amounts pursuant to the provisions of this Plan, and
2. The Company matching contribution made by the Company into the
Basic Plan for the pay period on the Participant's behalf is less
than the amount which would have been made had the matching
provisions of the Basic Plan been equally applicable to both the
Basic Plan and this Plan as a single plan, and had the Basic Plan
not been subject to any of the Nondiscrimination Restrictions in
the determination of the matching contribution amounts for the
Basic Plan.
B. Amount
------
The amount of the Company matching contributions to be credited to the
Participant's Matching Account for a pay period in which the
requirements of Section 4.2(A) above have been met shall be determined
as the difference of (1 and 2) below:
1. The amount determined by applying the matching contribution
provisions of the Basic Plan (without regard to any
Nondiscrimination Restrictions applicable to the Basic Plan) to the
sum of the Participant's Basic Plan Deferrals and the Deferral
Amounts under this Plan for the pay period, while applying
Compensation as defined in this Plan.
2. The amount of Company matching contribution made to the Basic Plan
on behalf of the Participant for the pay period
<PAGE>
and allocated to the Participant's Basic Plan matching
account after adjustment for distributions, if any, of
excess aggregate contributions or forfeiture of matching
contributions as determined under the provisions of the
Basic Plan.
4.3 Deemed Contribution Date
------------------------
A. Eligibility
-----------
A Participant shall have his ESOP Account credited with a Company ESOP
contribution for each Plan Year in which the Participant received a
Company ESOP contribution under the Basic Plan, and:
1. The amount of such Company ESOP contribution to the Basic Plan for
the Plan Year was restricted by the Nondiscrimination Restrictions,
or
2. The amount of such Company ESOP contribution to the Basic Plan was
determined by using a definition of compensation which was less
than the Compensation as defined within this Plan.
B. Amount
------
The amount of Company ESOP contribution credited to a Participant's
ESOP Account for a Plan Year in which the requirements of Section 4.3
above have been met shall be determined as the difference of (1 and 2)
below:
1. The amount of Company ESOP contribution which would have been made
to the Basic Plan on behalf of the Participant for the Plan Year
had the Basic Plan utilized the definition of Compensation of the
Plan, and further had the contribution been determined for the
participant without regard to the Nondiscrimination Restrictions
applicable to the Basic Plan.
2. The amount of Company ESOP contribution actually made to the Basic
Plan on behalf of the Participant for the Plan Year.
C. Deemed Contribution Date
------------------------
The Company ESOP contribution determined hereunder shall be credited to
the Participant's ESOP Account as of the last day of the applicable
Plan Year.
<PAGE>
4.4 Company Pension Benefit
-----------------------
A Participant who retires or terminates from employment with the Employer
shall be entitled to receive a Company Pension Benefit equal to (a) the
Pension Plan Benefit which would have been payable under the provisions of
the Pension Plan, if the Pension Plan were administered without regard to
the Nondiscrimination Restrictions, less (b) the amount of the Pension Plan
Benefit which is payable under the Pension Plan.
The provision of this Section 4.4 shall be equally applicable to all
Pension Plan Benefits whether they are payable to the Participant or the
Beneficiary.
ARTICLE V
ACCOUNTS
- --------
5.1 Account Maintenance
-------------------
The Administrator shall establish and maintain as applicable a Deferral
Account, a Matching Account, and an ESOP Account for each Participant. Each
Participant shall be advised from time to time, but at least once at the
end of each calendar year, as to the value of his Accounts.
Each Participant's Accounts shall be maintained on the books of the Company
until the Accounts have been fully distributed to the Participant (or the
Participant's designated Beneficiaries, if applicable). The Company may,
but shall not be required to, segregate funds for the Accounts of this
Plan. Any funds segregated shall be subject to claims of the Company's
creditors as general assets of the Company.
5.2 Investment Return
-----------------
Each Participant's Accounts shall be adjusted with Earnings as if the
accounts were fully invested in the Investment Funds, as defined in Section
5.3, from the date credited to the Accounts to the date distributed from
the Accounts. Earnings shall be credited to the Account of this Plan i the
same manner with the same returns as if they had been invested in the funds
of the Basic Plan. It is intended that the returns if the respective funds
of the Basic Plan will be reflected as the returns for the respective
Accounts within this Plan, including the ESOP account.
<PAGE>
5.3 Investment Funds
----------------
The Plan shall maintain the same investment fund options and alternatives
that are available within the Basic Plan. The Administrator shall rely upon
the Participant's Basic Plan investment elections for purposes of
determining the Earnings to be credited to a Participant's Deferral Account
and Matching Account.
Deferral Amounts and Company matching contributions to this Plan shall be
deemed to be invested in the same investment funds and in the same
proportions as the Participant's Basic Plan Deferrals and respective
matching contributions being invested within the Basic Plan.
Company ESOP contributions to this Plan shall be deemed to be fully
invested in Company stock.
ARTICLE VI
VESTING
6.1 Deferral and Matching Accounts
------------------------------
Each participant's Deferral Account and Matching Account shall be 100%
vested at all times.
6.2 ESOP Accounts
-------------
Each Participant's ESOP Account shall be subject to the vesting schedule
that is applicable in the Basic Plan. The provisions of the Basic Plan
related to a Participant's vesting percentage in the Basic Plan shall be
incorporated herein for purposes of this Plan.
ARTICLE VII
DISTRIBUTIONS
7.1 Time of Account Distributions
-----------------------------
Distributions of a Participant's Accounts shall commence within 30 days
following a Participant's date of termination of employment with the
Company, including termination through the death of the Participant.
7.2 Account Distribution Elections
------------------------------
<PAGE>
A. Distribution Method
-------------------
Distributions from the vested portion of the Accounts shall be paid
in one of the following methods as selected by the Participant
pursuant to the Payment Election Agreement:
1. Substantially equal quarterly installments over a period of five (5)
years.
2. Substantially equal quarterly installments over a period of ten (10)
years.
3. Fifty percent (50%) in the form of a lump-sum, and the remaining
portion to be paid in accordance with either (1 or 2) above.
4. One hundred percent (100%) in the form of a lump-sum.
In the event no election had been made by the Participant, the
Administrator shall make distributions under this Plan as if the
Participant had elected the one hundred percent (100%) lump-sum option.
The quarterly amount of distribution under this Plan for each
applicable Plan Year shall be determined as the value of the Accounts
on the tenth business day preceding the first payment due date for that
Plan Year divided by the number of quarterly payments remaining in the
payment period. The last quarterly payment in an elected payment period
shall be the residual balance of all vested Accounts of the
Participant.
Notwithstanding the provisions of Section 7.2(B) below, only one method
of distribution shall be applicable to the Accounts of a Participant.
The execution of the Payment Election Agreement shall be made as soon
as practical after becoming an active participant in this Plan.
B. Death Benefit Election
----------------------
A Participant may elect a separate distribution method from any one of the
distribution methods described above in Section 7.2(A) to become applicable
in the event of the death of the Participant prior to the total
distribution of the Accounts. The distribution method elected under the
provisions of this Section 7.2(B) shall be applicable to the Accounts at
the time of the death of the Participant. The death benefit election shall
be made as part of the Payment Election Agreement, however, the Participant
may change his death benefit election at any time through written
notification to the Administrator. In the event a death benefit election
had not been made by the Participant, the Administrator shall make the
distributions under this Plan to the Participant's beneficiary
<PAGE>
utilizing the same method of distribution the Participant had elected for
payment of his own benefit.
7.3 Withholding
-----------
The Administrator may withhold from any payment income tax or other
amounts as required by law.
7.4 Beneficiaries
-------------
Account distributions to Beneficiaries from this Plan shall be made in
the following order of priority:
A. To the beneficiary designated by the Participant in writing to the
Administrator, or if none
B. To the Participant's surviving spouse, or if none
C. To the Participant's descendants, per stirpes, or if none
D. To the Participant's estate.
7.5 Company Pension Benefits
------------------------
Payment of Company Pension Benefits shall be made in the same form and
manner as provided under the Pension Plan and will be paid to the same
beneficiaries as determined by the provisions and elections made for
the Pension Plan.
ARTICLE VIII
AMENDMENTS AND TERMINATION
8.1 Amendments
----------
Except as noted in this Article, the Company may amend this Plan at any
time after a thirty (30) day notice to the Participants. An amendment may
not be made without the consent of the majority of the Participants if the
amendment would modify Plan provisions which affect, for those Accounts and
Company Pension Benefits earned or in existence on the effective date of
the amendment, the credited Earnings or distribution provisions and
elections.
<PAGE>
8.2 Termination
-----------
The Company may terminate this Plan at any time after a thirty (30) day
notice to the Participants. On termination of the Plan the following shall
apply:
A. Deferral Agreements shall terminate as of the effective date of the
Plan termination.
B. Each Participant's Accounts as of the effective date of termination of
the Plan shall become payable pursuant to the payment Election
Agreements as if each Participant had terminated employment on the
effective date of the the Plan termination.
C. For those accounts which are not distributed in a lump-sum, the
Accounts shall continue to be maintained and shall be credited with
interest as of the last day of each month at a rate equal to the thirty
(30) day U.S. Treasury Bill rate which was applicable as of the first
day of that month.
D. Company Pension Benefits shall be determined as of the date of
termination as if the Participant had elected retirement as of the date
of termination, and shall be paid in a single lump-sum determined under
the Actuarial Equivalent provisions of the Pension Plan as of the
effective date of the Plan termination.
ARTICLE IX
CLAIMS PROCEDURE
9.1 Original Claim
--------------
Any Participant or Beneficiary claiming a benefit, requesting an
interpretation or ruling under the Plan, or requesting information under
the Plan shall present the request in writing to the Administrator which
shall respond in writing as soon as practicable, but within sixty (60)
days.
9.2 Denial
------
If the claim or request is denied, the written notice of denial shall
state:
A. The reasons for denial, with specific reference to the Plan
provisions on which the denial is based.
B. A description of any additional material or information required
and an explanation of why it is necessary.
<PAGE>
C. An explanation of the Plan's claim review procedure.
9.3 Request for Review
------------------
Any person whose claim or request is denied or who has not received a
response within sixty (60) days may request review by notice given in
writing to the Board. The claim or request shall be reviewed by the Board
or a designated committee of the Board which may, but shall not be required
to, have the claimant appear before it. On review, the claimant may have
representation, examine pertinent documents, and submit issues and comments
in writing.
9.4 Final Decision
--------------
The decision of review shall normally be made within ninety (90) days. If
an extension is required for a hearing or other special circumstances the
claimant status shall be so notified and the time limit shall be one
hundred twenty (120) days the decision shall be in writing and shall state
the reasons and the relevant Plan provision. All decisions on review shall
be final and bind all parties concerned.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 No Assignment
-------------
The rights of a Participant under this Plan are personal. A Participant's
rights to benefit payments under this Plan are not subject in any manner to
anticipation alienation, sale, transfer, assignment, pledge, encumbrance,
attachment or garnishment by creditors of the Participant or the
Participant's Beneficiary.
10.2 Mergers and Acquisitions
------------------------
If the Company merges, consolidates, or otherwise reorganizes, or its
assets or business are acquired by another company, this Plan shall
continue with respect to all Participants.
<PAGE>
HomeCorp, Inc. and Subsidiary
[graphic]TO OUR SHAREHOLDERS
-------------------
Our strategic focus on community banking served the Company well during
1996. Bank earnings, consumer loans and household account relationships
all continued to grow for fiscal 1996, rewarding our long-term plan to
prioritize the growth of HomeBanc's community banking services as a
means of creating a stream of consistent, expanding income.
A significant event for all savings banks during 1996 was the recapitalization
of the Saving Association Insurance Fund (SAIF) of the Federal Deposit Insurance
Corporation (FDIC). This recapitalization included a special one-time
assessment that cost the Company $1.2 million ($1.06 per share) on an
after-tax basis in fiscal 1996, but will result in significantly lower FDIC
insurance premiums starting in 1997. The lower deposit insurance premium rate
will enable HomeBanc to compete more effectively with commercial banks, which
have had much lower premiums than SAIF members for the past several years.
I am pleased to report that net income for the year, excluding the special
assessment, increased 33% to $1,605,025 or $1.36 per share compared to
$1,207,482 or $1.03 per share last year. Including the special assessment,
however, HomeCorp reported earnings for the full year 1996 of $358,831 or $0.30
per share.
The Bank's continued focus on growth in community banking, supported by
our ongoing sales training, database marketing and other sales and marketing
initiatives, enabled HomeBanc to achieve gains in key business segments. Core
deposit balances increased 5.0% over fiscal 1995; the number of household
relationships increased more than 6.0%; and loan originations increased 3.5% in
1996 when compared to the prior year. While real estate loan originations
remained relatively constant on a year to year basis, steady growth continued in
consumer and commercial business loans.
The Company's earnings for 1996 were also favorably impacted by gains in
loan fees and service charges as well as income from real estate development.
Loan fees and service charges increased 16.7% over the prior year to $1.7
million for the full year 1996. Income from real estate development activities
totaled $861,175 during 1996 as a result of real estate closings, reversing a
negative impact on earnings from this segment of our business in fiscal 1995.
This performance is consistent with the Company's ongoing plan to reduce its
involvement in real estate development activities.
The Company's net interest income for the year was negatively impacted by
the transfer of a significant earning asset to real estate owned, due to the
fact that earnings on real estate owned are reported as non-interest income. Net
interest income, exclusive of the transfer, would have increased 5.1% from the
year earlier. The Bank's net interest margin increased to 3.04% during 1996 from
2.98% a year earlier.
The Bank's allowance for loan losses totaled approximately $1.6 million at
December 31, 1996, representing .61% of total loans. The Bank also recorded a
$100,000 provision for loss on foreclosed real estate and a $246,000 provision
for costs associated with termination of the Bank's position as a credit
enhancer.
The Company had total assets of $335.8 million, total deposits of $311.8
million and net loans receivable of $259.1 million at December 31, 1996.
Stockholder's Equity at the fiscal year end was $20.9 million. Book value rose
to $18.48 per share from $18.13 at December 31, 1995.
We are convinced that our focus on community banking is on target. We
will continue to enhance our product line, focusing on profitable segments and
customer relationships. Through our ongoing customer service training programs,
cross-marketing and development of a "customer first" corporate culture, we will
continue to strive for even greater customer satisfaction. We are confident
that building our core banking operation on local, community orientation,
relevant products that meet the needs of our customers and responsive,
personalized service holds the opportunity for added earnings for the company
while reducing interest rate risk.
We will continue to strive to increase shareholder value while remaining
committed to providing quality service to our customers. Thank you for your
continued support.
Sincerely,
/s/ C. Steven Sjogren
C. Steven Sjogren
President & Chief
Executive Officer
1
<PAGE>
HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Focused on Community Banking
HomeBanc continued its efforts in 1996 to build shareholder value by focusing on
its proven strategies:
.Community banking with a strong local orientation
.An emphasis on personal service
.Ongoing development of an internal sales culture
.Small business and commercial services
.Targeted database marketing
.High-touch and high-tech banking supported by powerful information systems
Allocating marketing dollars away from inefficient mass media advertising to
more direct forms of communication with customers has achieved positive results.
The Bank's most valuable asset - our current customers - are being cost-
effectively reached and better served by applying the powerful database
information available through our new Marketing Customer Information Files
(MCIF) system. This proprietary system gives us an improved set of tools to
communicate with customers and provide a higher level of personalized service in
close alignment with their needs. With MCIF, we can track factors such as:
.Which customers hold multiple account relationships
.Which product combinations are the most popular
.Time-sensitive data such as CD maturity dates, seasonal trends, when to
promote specific products
.Which customers are the likeliest candidates for additional services, and
more
Implemented in fiscal 1995, MCIF provides the HomeBanc customer service, sales
and marketing staffs with an opportunity to target the financial needs of our
customers on pace with their life cycles and lifestyles - e.g., just as older
customers often have a higher level of interest in investment products, younger
individuals typically have greater borrowing needs. MCIF now gives us the
capability to more precisely identify the varied needs of individuals and to
respond by matching them to attractive, appropriate products and services.
For example, customers who have only one or two basic accounts, such as
passbook savings, a CD, or a home mortgage, may not be aware of the many other
beneficial products and services offered by HomeBanc. By recognizing their
needs, we can offer and inform them about products which allow for managing
personal finances more easily and simply, provide greater convenience and
flexibility, and help them systematically build personal financial worth.
On the other hand, customers with multiple account relationships tend to be
more financially aware, frequent "shoppers" for new products and services. They
continually look for ways to enhance their personal financial management and
convenience. These customers welcome financial information and useful financial
tools, such as the popular home equity loan or line of credit introduced in
recent years, which allows customers to deduct loan interest on their tax
returns.
With MCIF, we can make more effective use of marketing dollars, track
results, fine-tune internal programs and serve individual customers better.
In addition, we are working to extend HomeBanc's high level of service and
develop an effective sales culture through a continued emphasis on employee
selling. A program of ongoing staff sales training in cross-selling of asset and
lending products, tied to performance objectives, helps front-line staff people
identify and clarify a customer's financial needs and objectives and to
recommend product solutions.
As we move forward into a new and exciting year, HomeBanc will continue to
build value by building stronger relationships with our customers...offering the
very best in customer-friendly products and services...and leveraging our
knowledge, resources and valuable customer base in dynamic, effective ways.
- --------------------------------------------------------------------------------
HomeBanc's Marketplace
----------------------
- --------------------------------------------------------------------------------
[MAP APPEARS HERE]
HomeBanc's community service area reaches from Rockford, the state's second-
largest city, to Freeport, 30 miles west and Dixon, 40 miles south. Ten offices,
including our Eagle Food Centers supermarket branch, extend our market area
throughout much of northwest Illinois. The area has a strong economy and
benefits from a base of diverse industries, including retailing, manufacturing,
service and agriculture.
2
<PAGE>
Selected Consolidated Financial Information HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dollars in thousands At December 31,
Selected Balance Data Sheet 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Total assets $335,824 $338,027 $330,412 $333,837 $333,901
Loans receivable, net 259,140 261,022 244,860 229,471 226,155
Mortgage-backed securities 18,859 24,488 28,431 21,299 40,284
Investment securities held to maturity 5,502 6,504 12,674 14,831 16,284
Investment securities available for sale 12,497 8,311 7,022 -- --
Investment in real estate 5,095 4,060 4,375 3,177 8,386
Goodwill -- -- -- 5,148 5,610
Deposits 311,754 314,294 307,605 307,586 309,516
Total borrowings -- -- -- 237 328
Stockholders' equity $ 20,858 $ 20,424 $ 19,029 $ 22,926 $ 21,262
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Dollars in thousands Year ended December 31,
Selected Operating Data 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Total interest income $24,381 $24,436 $21,521 $22,415 $26,292
Total interest expense 14,885 15,065 12,496 13,876 17,291
Net interest income 9,496 9,371 9,025 8,539 9,001
Provision for loan losses 565 360 240 250 415
Net interest income after provision
for loan losses 8,931 9,011 8,785 8,289 8,586
Loan fees and services charges 1,699 1,456 1,486 1,157 1,273
Income (loss) from real estate developments 861 (54) 445 205 232
Gain (loss) on sale of loans, investments
and mortgage-backed securities 933 297 (18) 516 362
REO operations 471 115 -- -- --
Other noninterest income 166 129 167 113 171
SAIF special assessment 2,043 -- -- -- --
Noninterest operating expenses 10,110 9,004 8,496 7,851 7,615
Amortization of goodwill -- -- 808 462 482
Provision for loss on foreclosed real estate 100 -- -- -- --
Provision for credit enhancement costs 246 -- -- -- --
Income before income taxes
and cumulative effect of change in
accounting principle 562 1,950 1,561 1,967 2,527
Provision for income taxes 203 743 933 801 886
Income before cumulative effect of
change in accounting principle 359 1,207 628 1,166 1,641
Cumulative effect of change in
accounting principle -- -- (4,340) 440 --
Net income (loss) $ 359 $ 1,207 $(3,712) $ 1,606 $ 1,641
</TABLE>
3
<PAGE>
Management's Discussion and Analysis
HomeCorp, Inc. and Subsidiary of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
General
- --------------------------------------------------------------------------------
HomeCorp, Inc. (Company) is the holding company for HomeBanc, a federal
savings bank (HomeBanc or Bank). HomeBanc is a federally chartered stock savings
bank. The Company has no business operations independent of the Bank.
The Bank operates from ten offices in a three county area in northern
Illinois, and offers traditional banking services to consumers and businesses.
As a community-oriented institution, the Company offers products
including residential and commercial mortgages, consumer, construction and
commercial business loans, and a broad assortment of deposit products and
services. Through a subsidiary, the Bank offers a full line of securities and
brokerage services through INVEST Financial Corporation.
Changes in Financial Condition
- --------------------------------------------------------------------------------
The Company's December 31, 1996 balance sheet reflects the continuing focus
upon community banking. The consumer loan portfolio increased $19.5 million, or
35% during 1996 while the commercial business loan portfolio increased $2.2
million, or 56%. Consumer growth is largely due to the origination of indirect
automobile loans. All such loans are underwritten and approved by HomeBanc loan
officers. Strong growth was also generated in home equity and improvement loans,
an area of specific focus for the Bank. The Bank's involvement with the small
business community continued to provide steady growth in the business loan
portfolio. Relationships established through small business lending generally
result in the Bank providing additional services as well, such as checking and
related services.
The mortgage loan portfolio declined $26.6 million, or 14% during 1996.
Included with mortgages is the Bank's construction portfolio. Construction
lending is another focus area of the Bank experiencing growth. Construction
loans increased $6.1 million, or 67% during 1996. The decline within the
remaining mortgage loan portfolio was the result of repayments on the Bank's
residential mortgages. The Bank continues to sell all fixed interest rate
residential mortgage loans originated as well as certain adjustable rate loans.
Investment in real estate developments increased $1.0 million during 1996.
The Company and its partner (each with a 50% interest) are funding the operating
expenses of one real estate development venture, allowing the venture to utilize
net cash flows to repay indebtedness. The Company's $5.1 million investments in
real estate developments at December 31, 1996 was comprised of three
developments in suburban Chicago. The remaining property is residential and
commercial lots in substantially completed projects.
Core deposits of the Bank, defined as checking, NOW, Money Market and
passbook savings, increased 5% during 1996, representing $3.9 million. This is
the result of promotional efforts and a focus of Bank employees upon the
generation of core banking relationships. The Bank will continue to strive for
growth in core deposits and shorter term certificates of deposit. The decline in
deposits in 1996 was noted in longer term, 24 months and greater, certificates
of deposit and jumbo deposits.
The Bank's suit in the United States Court of Federal Claims against the
United States for breach of contract with regard to the utilization as capital
of the supervisory goodwill, which was created when the Bank acquired failing
institutions in the 1980s, has been stayed pending the outcome of an appeal in
another case that was heard by the U.S. Supreme Court. While the Supreme Court
ruled favorably on the issue in the other case, the Company's suit has yet to be
heard. As the other case involved facts that were somewhat different than the
Company's, there can be no assurance as to the outcome when it is heard.
4
<PAGE>
Management's Discussion and Analysis
HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Average Balances - Interest Rates and Yields
- --------------------------------------------------
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. The table does
not reflect any effect of income taxes. All average balances are monthly
averages. The yields and costs include the fees which are considered adjustments
to yield.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------------------------------------------------
Dollars in thousands 1996 1995 1994
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net $267,857 $21,788 8.13% $262,097 $21,316 8.13% $238,958 $18,198 7.62%
Mortgage-backed securities 21,415 1,241 5.80% 26,694 1,534 5.75% 29,551 1,621 5.49%
Investment securities
held to maturity 7,844 454 5.79% 13,827 848 6.13% 16,250 842 5.18%
Investments securities
available for sale 10,590 662 6.25% 6,471 380 5.87% 9,631 497 5.16%
Federal funds & interest-bearing deposits 4,420 236 5.34% 5,883 358 6.09% 8,692 363 4.18%
Total interest-earning assets 312,126 24,381 7.81% 314,972 24,436 7.76% 303,082 21,521 7.10%
Non-interest earning assets 26,933 21,993 21,648
Total assets $339,059 $336,965 $324,730
Liabilities:
Interest-bearing checking & MMDA $ 41,885 $ 694 1.66% $ 38,299 $ 609 1.59% $ 39,732 $ 582 1.46%
Savings deposits 34,827 785 2.25% 36,242 775 2.14% 39,275 782 1.99%
Other time deposits 225,519 13,269 5.88% 231,326 13,584 5.87% 218,066 11,115 5.10%
Borrowed funds 2,408 137 5.69% 1,581 97 6.14% 276 17 7.76%
Total interest-bearing liabilities 304,639 14,885 4.89% 307,448 15,065 4.90% 297,349 12,496 4.20%
Other liabilities 13,598 9,783 8,590
Total liabilities $318,237 $317,231 $305,939
Stockholders' equity 20,822 19,734 18,791
Total liabilities and
stockholders' equity $339,059 $336,965 $324,730
Net interest income/interest
rate spread 9,496 2.92% 9,371 2.90% 9,025 2.90%
Net earning assets/net yield on
average interest-earning assets $ 7,487 3.04% $ 7,524 2.98% $ 5,733 2.98%
Average interest-earning assets to
average interest-bearing liabilities 102.46% 102.45% 101.93%
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE>
HomeCorp, Inc. and Subsidiary Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Rate/Volume Analysis
- --------------------------------------------------------------------------------
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities for the periods shown. For each category in
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in rate (i.e., changes in rate
multiplied by old volume) and (ii) changes in volume (i.e., changes in volume
multiplied by old rate). For purposes of this table, changes attributable to
both rate and proportionately to volume which cannot be segregated have been
allocated proportionately to volume and to rate.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Dollars in thousands Rate Volume (Decrease) Rate Volume (Decrease)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable $ 0 $ 472 $ 472 $1,274 $1,844 $3,118
Mortgage-backed securities 13 (306) (293) 75 (162) (87)
Investment securities (45) (349) (394) 142 (136) 6
Investment held for sale 26 256 282 62 (179) (117)
Federal funds and interest-bearing deposits (40) (82) (122) 133 (138) (5)
Total interest-earning assets (46) (9) (55) 1,686 1,229 2,915
Interest-Bearing Liabilities:
Interest-bearing checking & MMDA 27 58 85 49 (22) 27
Savings deposits 40 (30) 10 56 (63) (7)
Other time deposits 23 (338) (315) 1,762 707 2,469
Borrowed funds (7) 47 40 (4) 84 80
Total interest-bearing liabilities 83 (263) (180) 1,863 706 2,569
Net interest income $(129) $ 254 $ 125 $ (177) $ 523 $ 346
</TABLE>
- --------------------------------------------------------------------------------
Results of Operations -
1996 Compared to 1995
-----------------------------
The Company's 1996 earnings were impacted by Congressional legislation
which provided for a special assessment on all institutions insured under the
Savings Association Insurance Fund (SAIF). HomeCorp's special assessment totaled
$2.0 million which resulted in a net after tax reduction in net income of $1.2
million, or $1.06 per share. Excluding this special assessment, HomeCorp's 1996
earnings were $1.6 million, or $1.36 per share. This represents a 33% increase
in net earnings from the 1995 total of $1.2 million, or $1.03 per share.
Net Interest Income
- --------------------------------------------------------------------------------
Net interest income totaled $9.5 million for 1996, an increase from $9.4
million in the prior year. The Company's net interest margin improved to 3.04%
during 1996 from 2.98% during 1995. The asset yield increased to 7.81% from
7.76% while the Company's cost of funds decreased to 4.89% from 4.90%. The
increased asset yield resulted from the continuing shift of assets into the loan
portfolio from the investment and mortgage-backed securities portfolios. The
average outstanding balance of the consumer loan portfolio increased $25.1
million in 1996 as compared to 1995. The decline in cost of funds is largely
the result of the shift within the deposit base into core deposits from longer
term certificates of deposit. The cost of the Company's time deposits remained
practically unchanged at 5.88%, as compared to 5.87% in 1995.
6
<PAGE>
HomeCorp, Inc. and Subsidiary Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Provision For Loan Losses
- --------------------------------------------------------------------------------
The Company established provisions for loan losses of $565,000 during 1996,
an increase from $360,000 in 1995. The increase during 1996 is due to the
continuing growth in the loan portfolio as well as the increasing proportion of
the portfolio consisting of consumer and commercial loans. Net charge-offs
actually decreased during 1996 from 1995, totaling $158,000 as compared to
$233,000. The allowance represented .61% of net outstanding loans at December
31, 1996, an increase from .45% at December 31, 1995.
Non-Interest Income
- --------------------------------------------------------------------------------
The Company experienced growth within all areas of non-interest income in
1996 as compared to 1995. Loan fees and service charges increased $244,000, or
16.7% between 1996 and 1995. The increase was due largely to the growth
experienced in the number of retail and business checking accounts, which
provided increased service charge revenue. Loan fees benefited from the
increased mortgage loan servicing portfolio. Loans serviced for others increased
$37.1 million during 1996 to a total of $162.9 million at December 31, 1996. The
Company continued to sell the majority of residential mortgage loan originations
on a servicing retained basis during 1996. The majority of the servicing
portfolio balance at December 31, 1996 consisted of fixed rate loans.
Gains from the sale of mortgage loans, mortgage-backed and investment
securities increased to $933,000 from $297,000 between 1996 and 1995. A total of
$58.9 million of mortgage loans were sold during 1996, an increase of $3.1
million from 1995.
The Company adopted Statement of Financial Accounting Standard Number 122,
"Accounting for Mortgage Servicing Rights," on January 1, 1996. Statement No.
122 requires that an allocation of costs be made between loans and their related
servicing rights for loans originated with a definitive plan to sell with
servicing rights retained. The impact of this process is to recognize a separate
asset for servicing rights which will increase the gain on sale of loans when
the servicing rights are retained. Gain on sale increased $582,000 as a result
of the adoption of this accounting pronouncement, which represents the servicing
rights recognized from loans sold during 1996. The servicing rights, once
established, are amortized as an offset to servicing income.
Income from real estate developments increased to $861,000 for the year
ended December 31, 1996 from a loss of $54,000 during 1995. The 1996 income is
due primarily to the sale of commercial land parcels from two of the
partnerships in which the Bank's subsidiary is a partner. Single family lot
sales also increased in 1996 over the prior year. As of December 31, 1996, the
real estate developments in which the Bank's subsidiary maintains an interest
contained approximately 23 acres of developed commercial land and 183 single
family lots, all but 90 of which were fully developed.
Operations of real estate owned represent the net operating income from a
shopping center foreclosed upon by the Bank late in the third quarter of 1995.
The increase in operating income for 1996, totaling $356,000, represents an
additional nine months of operations during 1996 as compared to 1995. The
shopping center is listed for sale.
Non-Interest Expenses & Income Taxes
- --------------------------------------------------------------------------------
Operating expenses, excluding the special SAIF assessment, increased $1.1
million in 1996 from 1995. Compensation and benefits increased $580,000, which
reflects the impact of additional lending personnel and increased pension costs.
Data processing costs increased $76,000 during the twelve months ended December
31, 1996 as compared to the twelve months ended December 31, 1995. The increase
is the result of the Bank's increasing customer base, particularly in the core
deposit area, which tend to be the higher transaction volume accounts. The
increase in the number of loans serviced, for the Bank's portfolio and for
others, contributed to the increase as well. Other operating expenses increased
$282,000 in 1996 compared to 1995. The largest increase within other expenses
was REO expense, which increased $123,000 primarily due to costs associated with
the Michigan land parcel. The costs are predominately legal fees incurred in
pursuing the damage claim against the prior owners of the parcel. The Bank and
its 50% partner are claiming damages of $1.8 million, which is the cost of soil
work performed on the property to prepare it for sale.
7
<PAGE>
HomeCorp, Inc. and Subsidiary Management's Discussion and Analysis
- --------------------------------------------------------------------------------
The Company established a provision of $246,000 for costs to be incurred in
the resolution of a $2.0 million credit enhancement. The enhancement involves an
apartment building which has fallen short of original cash flow projections. The
Company agreed to incur this loss in order to enable the borrower to refinance
the property with an unrelated lender, thereby releasing the enhancement.
Income tax expense declined in both amount and as a percentage of pre-tax
book income in 1996 as compared to 1995. Total expense declined $540,000 between
1996 and 1995. Tax expense for 1996 represented 36.1% of pre-tax income compared
to 38.1% for 1995. The decline in the effective tax rate is due largely to an
increase in interest revenues of U.S. Government and Agency securities, which is
not taxable for state tax purposes.
Results of Operations -
1995 Compared to 1994
------------------------
The Company generated net income of $1.2 million, or $1.03 per share for
1995 compared to $628,000 in 1994 prior to the recognition of the
accounting change recording the elimination of goodwill. A change in accounting
for goodwill during 1994 resulted in a $4.3 million charge against earnings,
generating a net loss of $3.7 million for 1994. The 1994 loss is also net of
approximately $808,000 of goodwill amortization that was recorded in addition to
the impact of the accounting change.
Net Interest Income
- --------------------------------------------------------------------------------
Net interest income increased $346,000 between 1995 and 1994, representing
a 3.8% increase. Interest revenues increased $2.9 million, or 13.5%, for the
year ended December 31, 1995 compared to the prior year. This increase was
primarily the result of the Company's increased loan portfolio. The average
balance of the loan portfolio increased $23.1 million, or 9.7%, during 1995.
The consumer loan portfolio increased $28.1 million, or 100.0% during 1995.
Interest revenue from consumer loans correspondingly increased $1.9 million, or
109.4% between 1995 and 1994. All non-loan interest-bearing asset catergories
declined in average outstanding balance during 1995 as funds were redeployed
into loan originations and participation purchases.
The average portfolio yield increased to 8.13% from 7.62% due to the
origination during 1995 of higher yielding consumer and commercial loans, the
purchase of participating interests in mortgage loans, and the upward repricing
of some of the Company's adjustable rate loans. The Company's adjustable rate
loans are primarily based upon Treasury indices or prime rate.
The yield on all interest-bearing assets increased to 7.76% during 1995
from 7.10% for 1994.
Interest expense increased $2.6 million, or 20.6% during 1995 compared to
1994. The cost of deposits increased due to the upward repricing of the time
deposit base in the earlier months of 1995. During the first several months of
1995, certificate of deposit customers moved predominately into longer term,
higher rate accounts, thereby increasing the overall cost of deposits. The
Company utilized short term Federal Home Loan Bank of Chicago advances
throughout the year primarily as a means of funding the purchase of loan
participations. The average outstanding balance of borrowings was $1.5 million,
with a cost of 6.14%. There were no outstanding advances as of December 31,
1995.
Provision and Allowance for Loan Losses
- --------------------------------------------------------------------------------
A total of $360,000 was recorded as provision for loan losses during 1995,
an increase from $240,000 during 1994. The provision was increased in
consideration of the increased loan portfolio as well as increased percentage of
the portfolio in consumer and commercial balances. Net charge-offs were $233,000
during 1995, providing for an increase of $127,000 in the allowance for loan
losses. The allowance represented .45% of net outstanding loans at December 31,
1995, an increase from .43% as of December 31, 1994.
8
<PAGE>
Management's Discussion and Analysis HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Non-Interest Income
- --------------------------------------------------------------------------------
Loan fees and service charges declined between 1995 and 1994. During 1994,
the Company recognized approximately $185,000 in deferred fee amortization on a
single real estate development loan. Excluding this single item, loan fees and
service charges increased $154,000, or 11.8% during the twelve months ended
December 31, 1995 compared to the year earlier period. Loan fees increased
$134,000 or 24.3%, between years, due largely from fees generated from increased
mortgage loan originations and from mortgage loan servicing income. The
Company's mortgage loan servicing portfolio increased to $125.5 million at
December 31, 1995 from $83.7 million at December 31, 1994. The majority of
residential mortgage originations were being sold with servicing rights retained
as of December 31, 1995.
Service charges increased $80,000 or 13.5%, between calendar 1995 and 1994,
primarily the result of the expansion of the core deposit base. The Company
began marketing an expanded selection of checking accounts during 1995. The
increased number of accounts have generated increased fee income in connection
with the various services and charges related to the accounts. Also, the
continued growth of the commercial business relationship base contributed to an
increase in related deposit account service fee income.
Fees generated by the Company's brokerage service declined $98,000 in 1995
compared to 1994 due to a decrease in personnel.
A total of $297,000 in net sales gains were generated during the year ended
December 31, 1995 compared to a net loss of $18,000 during the year ended
December 31, 1994. As noted earlier, there was an increase in mortgage loan
sales during 1995 compared to 1994. A loss of $278,000 was recognized during the
first quarter of 1994 due to a sudden rise in interest rates. A sales management
system was implemented thereafter in order to reduce risk. The Company sold
$10.2 million of adjustable rate single family mortgages during 1995 at a gain
of $12,000. The proceeds were reinvested in higher yielding multi-family
participations. A gain of approximately $4,000 was realized on the sale of
available for sale securities during 1995.
The Company experienced a loss of $54,000 from real estate developments
during 1995 as compared to income of $445,000 during 1994. During 1995, the
Company sold a golf course from one of its developments at a loss of $180,000.
Additionally, all the carrying costs of real estate operations were expensed
during 1995. A portion of such costs had been capitalized in prior periods. The
1994 gains were generated largely by commercial lot sales, which have
historically generated higher profit margins than the sale of single-family
lots. There was less commercial property sold during 1995 than in 1994.
Non-Interest Operating Expense & Income Taxes
- ---------------------------------------------
Non-interest operating expenses increased $508,000, or 6.0% during 1995.
Other operating expenses increased $268,000, or 17.7% between the years ended
December 31, 1995 and 1994. The largest component of this increase was loan
related expenses, which increased $137,000 in 1995 to a total of $320,000. The
increase was primarily due to promotional costs associated with consumer loan
programs as well as other loan promotions. Advertising, also a component of
other operating expense, increased $52,000 to $334,000 during the year ended
December 31, 1995. Increased promotional efforts were noted in the checking
area, both through direct mailings and media advertising.
Data processing expense increased $60,000, or 9.1% in 1995 as compared to
1994. The Bank opened its supermarket office in April of 1995, which added to
processing costs for the year. Costs were incurred to expand the information
processing and reporting capabilities in the mortgage loan area in order to
facilitate increased origination and sales volumes. Also, the number of loan and
deposit customers serviced increased in 1995 resulting in increased monthly
transaction costs.
Income tax expense decreased $189,000 to $743,000 for the year ended
December 31, 1995. Tax expense as a percentage of pre-tax income was 38.1% for
1995. The comparable 1994 rate was 39.4%, after considering the fact that
goodwill amortization of $808,000 was not deductible for tax purposes.
9
<PAGE>
HomeCorp, Inc. and Subsidiary Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Liquidity
- --------------------------------------------------------------------------------
Liquidity is generally regarded as the ability to generate sufficient cash
flow to meet all present and future funding commitments. The Bank's primary
sources of funds, or liquidity, are deposits, amortization and repayment of loan
principal (including mortgage-backed and certain investment securities),
operations and to a lesser extent, maturities of investment securities and the
sale of available for sale securities.
Operating activities provided $3.3 million in cash during 1996 as compared
to the use of $2.9 million in cash during the year ended December 31, 1995. The
largest difference between the years was the change in the balance of mortgage
loans held for sale. Mortgages held for sale declined $2.9 million during 1996
while increasing $4.6 million during 1995. The volume of held for sale loans
generally declines near year end from the seasonal nature of home mortgage
lending.
Investing activities provided $3.7 million in cash during 1996. The same
activities used $11.3 million in cash during 1995. Principal payments and
repayments on loans exceeded originations by $310,000 during 1996. Originations
exceeded repayments and prepayments by $10.9 million during 1995. The Bank's
residential mortgage and consumer loan portfolios continued to season and
correspondingly generated increased principal cash flows from normal
amortization and prepayments. Management anticipates continued increases in loan
cash flows, particularly from the shorter term consumer loan portfolio. The
Bank's mortgage-backed securities portfolio also experienced increased
repayments during 1996 as compared to 1995. The 1996 repayments totaled $5.5
million while the 1995 repayments totaled $3.8 million. There were no purchases
of mortgage-backed securities during 1996 or 1995. Also, $6.7 million of
adjustable rate mortgage loans were sold during 1996. The loans had interest
rates that adjusted every three years. Based upon the interest rates on the
loans, the rates to which the loans would be adjusting and the current interest
rates available for mortgage loans, it was determined the funds committed to
these specific loans could best be utilized by the Bank by selling the loans,
retaining the servicing and providing funding for additional lending.
A total of $7.2 million in participations were purchased during 1996, a
decrease of $3.4 million from 1995. The 1996 purchases, consistent with prior
years, were for multi-family and commercial real estate loans secured primarily
by properties located in southern Wisconsin and northern Illinois.
Financing activities used $3.3 million in cash during 1996 as compared
to $6.6 million of cash provided during 1995. The Bank experienced a decrease of
$2.5 million in deposits during 1996 compared to an increase of $6.7 million
during 1995. The focus for 1996 was the increase of core deposits more so than
the increase of the deposit base in the aggregate. The Bank used Federal Home
Loan Bank advances throughout 1996 as a funding alternative to deposits.
Management intends to continue to use advances as needed as an alternative to
long term certificate of deposit funding. The focus will remain upon continuing
to build the Bank's core deposit base, which increased $3.8 million during 1996.
The Bank had commitments to originate $5.6 million in mortgage loans as of
December 31, 1996. Additionally, the Bank had outstanding letters of credit
totaling $626,000. Management believes the Bank has adequate resources to fund
its commitments to the extent required.
Federal regulations require the Bank to maintain liquid assets at a level
of 5.0% of deposits and certain borrowings due within one year. Liquid assets
for purposes of this requirement include cash, certain time deposits, U.S.
Government and other securities generally having remaining maturities to less
than five years. The Bank's liquidity ratios were 8.2% and 7.7% at December 31,
1996 and 1995, respectively.
Management is unaware of any current recommendations of the Office of
Thrift supervision (OTS) that, if implemented, would have a material impact upon
liquidity, capital resources, or operations of the Bank.
Asset/Liability Management
- --------------------------------------------------------------------------------
The objective of management's asset/liability program is to maximize the
Company's interest margin over a range of interest rate environments without
exposing the Company to undue interest rate risk. Interest rate risk is
represented by the sensitivity of an institution's earnings and net asset values
to interest rate changes. Management manages this risk not only through its
pricing of assets and liabilities, but also through the mix of asset and
liability maturities and cash flow characteristics and regularly monitors and
evaluates the trade-off between increased interest rate risk and enhanced
earnings. The OTS currently measures interest rate sensitivity of an institution
based upon a discounted cash flow approach under various interest rate
scenarios. The interest rate scenarios are generally determined as instantaneous
and permanent changes in the Treasury curve of plus and minus 100, 200, 300, and
400 basis points, or a total of eight scenarios.
10
<PAGE>
Management's Discussion and Analysis HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Based upon the estimated prepayment characteristics and decay rates of an
institution's loans, securities and deposits, a series of discounted cash flows
calculations are performed to estimate the volatility of an institution's
capital base (net portfolio value or NPV) and net interest earnings. Off balance
sheet cash flows from assets, liabilities and other contracts are included in
the computations.
The table below was prepared utilizing assumptions regarding loan and
mortgage-backed security repayment and deposit decay ratios which were estimated
by management based upon past experience and are believed by management to
reasonably represent the expected future repricing, maturity, or amortization
of interest-bearing assets and liabilities. Prepayment assumptions are applied
to both mortgage and consumer loans.
- --------------------------------------------------------------------------------
Net Portfolio Value Net Interest Income
- --------------------------------------------- ---------------------------------
Change
Interest Rate Estimated Amount of Net Interest Amount of
(basis points) NPV Change Percent Income Change Percent
- -------------- --------- --------- ------- ------------ --------- -------
(Dollars in Thousands)
+400 $25,106 $(7,235) (22.4)% $ 9,117 $ (823) (8.3)%
+300 27,291 (5,050) (15.6) 9,659 (281) (2.8)
+200 29,323 (3,018) (9.3) 10,142 202 2.0
+100 31,323 (1,018) (3.2) 10,141 201 2.0
0 32,341 - - 9,940 - -
-100 37,297 4,956 15.3 9,644 (296) (3.0)
-200 37,204 4,863 15.0 9,151 (789) (7.9)
-300 37,358 5,017 15.5 8,931 (1,009) (10.2)
-400 34,469 2,128 6.6 7,907 (2,033) (20.5)
- --------------------------------------------------------------------------------
The annual prepayment assumptions used in this table range from 4% to 38%
for fixed rate mortgages, mortgage-backed securities, and consumer loans and 4%
to 26% for adjustable rate mortgages and mortgage-backed securities based upon
the interest rates of the assets. No prepayments are assumed for adjustable
consumer loans and all commercial business loans. For deposit accounts, it has
been assumed that fixed maturity deposits are not withdrawn prior to maturity.
Other deposits display attrition at the following rates:
1 Yr 1-3 3-5 Over 5
or Less Years Years Years
Passbook Savings 51% 15% 10% 24%
Money market 68% 15% 9% 16%
NOW and Checking 64% 14% 4% 18%
The prepayment and attrition rates are selected after considering the current
interest rate environment, industry asset, and liability price tables developed
by the OTS, and the Company's historical experience. All other interest-earning
assets and interest-bearing liabilities are shown based on their contractual
maturity or repricing date.
In the event the rate changes designated above were accompanied by a
change in the shape of the yield curve, the changes to the NPV and net interest
income could differ significantly from those noted here.
Based upon the analysis noted, the Bank would not be considered to have
more than "normal" interest rate risk under OTS regulations. The most recent
evaluation performed by the OTS was as of December 31, 1996. The analysis
indicated a lower level of interest rate risk than the computations performed by
management.
Management believed that the fundamental business strategy of selling
longer term fixed rate mortgage loans an investing in shorter term consumer and
commercial loans and adjustable rate mortgage, consumer, construction, and
commercial loans has reduced the Bank's level of interest rate risk over the
past several years.
<PAGE>
HomeCorp, Inc. and Subsidiary Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Non-Performing Assets
- --------------------------------------------------------------------------------
On a monthly basis, management reviews the Bank's loan portfolio and the
most recent data available for any loans of concern. Additionally, management
ascertains whether circumstances warrant closer monitoring of any performing
loans. Management reviews and discusses the status of all borrowers with
$500,000 or more of indebtedness to the Bank as a means of ascertaining a
downturn in performance prior to the onset of delinquency problems.
Loans are placed on non-accrual status when they become 90 days delinquent
and when, in the judgment of management, the probability for collection of the
remaining balances are deemed to be insufficient to warrant further accrual. A
loan remains on non-accrual status until the factors which indicated uncertain
or doubtful collectability no longer exist or foreclosure or repossession
occurs, at which time the lesser of the loan balance or the fair value of the
collateral is reflected in the applicable asset account of the Bank.
Effective January 1, 1995, the Bank adopted Financial Accounting Standards
Board Statement No. 114, "Accounting by Creditors for Impairment of a Loan" and
Statement No. 118, "Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures," which is an amendment to Statement No. 114.
Under the new standard, a loan is classified as "impaired" at such time as it
is likely that the loan will not perform in accordance with its original terms.
The designation is to be made independent of whether a loan is placed onto
non-accrual status. The new standard requires the allowance for loan losses
related to impaired loans to be based upon discounted cash flows using the
loan's initial effective interest rate or the fair value of the collateral for
collateral dependent loans.
The classification of a loan as non-performing or impaired does not
necessarily indicate that loan principal and interest ultimately will be
uncollectable. Following is a summary of non-performing assets at the dates
indicated.
December 31, December 31,
1996 1995
Non-performing loans $ 2,146,331 $ 36,626
Real estate acquired in
settlement of loans 10,197,661 10,240,004
Total $12,343,992 $10,276,630
Non-performing loans as
percentage of total loans .81% .01%
Non-performing assets as a
percentage of total assets 3.68% 3.04%
Allowances for loan and
foreclosed real estate
losses as a percentage of
non-performing assets 17.27% 15.81%
In addition to the non-performing loans noted above, there were two loans
totaling $1.4 million representing participating interests in multi-family
mortgage loans that were 90 days delinquent at December 31, 1996 but which
continued on an accrual basis. The participating interests represent interests
in loans to a single borrower. The properties, located in southern Wisconsin,
had been sold on contract by the borrower and the contract buyer filed for
bankruptcy protection under Chapter 11. Cash flow from the properties is
currently diverted to a bankruptcy trustee for distribution. It is anticipated
that funds will be released to the participating banks as senior secured
creditors and that such funds will return the loans to a current status and
maintain scheduled payments. Based upon the current and historical lease
performance of the buildings, their current physical condition and the economic
condition of the area in which the buildings are located, accrual status was
considered appropriate.
The December 31, 1996 non-performing loan total consisted primarily of two
loans. The loans had balances of $1,050,000 and $774,000. The $1.1 million loan
represented a participating interest in a mortgage loan for a senior housing
facility. The Borrower experienced cash flow problems; however, an entity
unrelated to the borrower that had purchased federal tax credits generated by
the facility returned the loan to current status after year end. Management
believes the tax credit purchaser will maintain the loan in a current status.
The $774,000 loan is secured by a commercial building which has been renovated
and is being leased to retail businesses. The lease-up has progressed more
slowly than anticipated, although new tenants are being obtained. This
borrower has a $197,000 loan with the Bank in addition to the delinquent loan.
The $197,000 loan was current at December 31, 1996 and was considered an
impaired loan. A reserve of $45,000 had been established for this borrower at
December 31, 1996. Management does not anticipate any further loss beyond the
reserve amount.
The remaining balance of non-performing loans at December 31, 1996
consisted primarily of single family mortgages secured by properties within the
Bank's primary lending area.
Foreclosed real estate was comprised primarily of two properties at
December 31, 1996. A $5.4 million shopping center loan was transferred to real
estate owned during 1995. The center is located in the Bank's primary market
area and was approximately 97% leased at December 31, 1996. The center was being
operated by the Bank and generated $471,000 in net operating income during 1996.
Management is actively marketing the center for resale and will continue to
operate the center until its sale.
12
<PAGE>
Management's Discussion and Analysis HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
The other significant asset in real estate owned, totaling $4.3 million,
represents a 50% interest in a land acquisition loan to a Michigan limited
partnership. The parcel, formally a quarry, consists of 364 acres of undeveloped
land located near Northville, Michigan.
Regulations governing the operation of a mining property require
appropriate restoration before residential development is allowed. A dispute
arose with the prior owners regarding the proper restoration of the land.
Consequently, the Bank and its partner determined to undertake mass earthwork
sufficient to remedy the condition. The Bank made an additional investment of
$1.2 million in the property during 1995. Approximately $675,000 has been
escrowed by the prior property owners pending the outcome of a lawsuit in which
the Bank and its partner are seeking reimbursement of restoration costs.
HomeBanc and its partner believe they are entitled to the amount based upon the
work completed during 1995. Management continues to negotiate the sale of the
property and believes the ultimate sale, together with funds available from the
prior owners, will not result in a loss.
Regulatory Capital Requirements
- --------------------------------------------------------------------------------
The Bank currently meets all regulatory requirements, Current OTS
regulations measure a savings institution's regulatory capital against three
standards, a tangible requirement, a leverage or core requirement, and a risk
based requirement. Unrealized gains and losses reflected as a component of
stockholders' equity in compliance with SFAS No. 115 are not considered by the
OTS in calculating regulatory capital.
The following table presents the Bank's compliance with the capital
requirements as of December 31, 1996.
Percent
Dollars in thousands Amount of Assets
Tangible Capital:
Bank $15,870 4.81%
Requirement 4,950 1.50
Excess 10,920 3.31
Core Capital:
Bank 15,870 4.81
Requirement 9,901 3.00
Excess 5,969 1.81
Current Risk-Based Capital:
Bank 17,452 8.29
Requirement 16,833 8.00
Excess $ 619 .29%
Impending Change in Accounting Principle
- --------------------------------------------------------------------------------
In June 1996, the Financial Accounting Standards Board issued Statement No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which provides new accounting and reporting
standards for sales, securitization, and servicing of receivables and other
financial assets and extinguishments of liabilities. The provisions of the
Statement are to be applied to transactions occurring after December 31, 1996.
Management does not believe the Company will be significantly impacted by the
adoption of Statement No. 125.
- --------------------------------------------------------------------------------
Capital Ratio
Years Ended December 31
1992 1993 1994 1995 1996
7%
6% 5.41% 5.76% 6.04% 6.21%
5% 4.77%
4%
3%
2%
1%
0
*excluding goodwill
13
<PAGE>
HomeCorp, Inc. and Subsidiary Independent Auditor's Report
- --------------------------------------------------------------------------------
Board of Directors
HomeCorp, Inc.
We have audited the accompanying consolidated balance sheets of HomeCorp, Inc.
and subsidiary (the Company) as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated statements of
operations, stockholders' equity and cash flows of HomeCorp, Inc. and subsidiary
for the year ended December 31, 1994 were audited by other auditors whose report
dated February 24, 1995 expressed an unqualified opinion on those statements and
included an explanatory paragraph that disclosed the change in the Company's
method of accounting for goodwill discussed in Note 1 to these financial
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1996 and 1995 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
HomeCorp, Inc. and subsidiary at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
As disclosed in Note 1 to the consolidated financial statements, in 1996 the
Company changed its method of accounting for mortgage servicing rights.
/s/ Ernst & Young LLP
Chicago, Illinois
January 22, 1997
14
<PAGE>
Consolidated Balance Sheets HomeCorp, Inc. and Subsidiary
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1996 1995
Assets
<S> <C> <C>
Cash and cash equivalents:
Cash on hand and noninterest-bearing deposits $ 13,959,409 $ 7,633,563
Interest-bearing deposits 181,083 388,208
Federal funds sold - 2,389,798
Total cash and cash equivalents 14,140,492 10,411,569
Investment securities held to maturity
(approximate fair value of $5,471,000
in 1996 and $6,412,000 in 1995) 5,502,353 6,504,355
Investment securities available for sale, at fair value 12,496,885 8,311,118
Mortgage-backed securities held to maturity
(approximate fair value of $18,577,000
in 1996 and $24,146,000 in 1995) 18,858,630 24,487,509
Federal Home Loan Bank Stock, at cost 2,079,000 2,279,400
Loans receivable, net 259,139,564 261,021,836
Mortgage loans held for sale 1,872,513 4,741,405
Foreclosed real estate, net 9,647,661 9,790,004
Investments in real estate developments 5,094,960 4,059,899
Premises and equipment 3,869,381 3,629,608
Accrued interest receivable 1,823,540 1,850,490
Other assets 1,299,495 939,404
Total assets $335,824,474 $338,026,597
Liabilities and Stockholders' Equity
Liabilities:
Deposits $311,754,446 $314,293,883
Advance payments by borrowers for taxes and insurance 1,329,965 2,075,471
Other liabilities 1,881,807 1,233,743
Total liabilities 314,966,218 317,603,097
Stockholders' equity:
Preferred stock, $.01 par value; authorized 1,000,000 shares;
no shares outstanding
Common stock, $.01 par value; authorized 5,000,000 shares;
1,128,779 and 1,126,371 shares issued and outstanding
in 1996 and 1995, respectively 11,287 11,264
Additional paid-in capital 6,492,542 6,465,178
Retained earnings 14,332,532 13,973,701
Unrealized gain (loss) on securities available for sale,
net of taxes 21,895 (26,643)
Total stockholders' equity 20,858,256 20,423,500
Total liabilities and stockholders' equity $335,824,474 $338,026,597
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
15
<PAGE>
HomeCorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Interest Income:
Loans receivable $21,788,251 $21,316,412 $18,198,107
Investment securities and other 1,352,273 1,585,403 1,702,218
Mortgage-backed securities 1,240,782 1,534,009 1,620,717
Total interest income 24,381,306 24,435,824 21,521,042
Interest expense:
Deposits 14,748,617 14,967,400 12,470,895
Borrowed funds 136,610 97,198 25,304
Total interest expense 14,885,227 15,064,598 12,496,199
Net interest income 9,496,079 9,371,226 9,024,843
Provision for loan losses 565,000 360,000 240,000
Net interest income after provision for
loan losses 8,931,079 9,011,226 8,784,843
Noninterest income:
Loan fees and service charges 1,699,220 1,455,525 1,486,466
Gain (loss) on sale of:
Loans receivable 943,573 292,588 (145,208)
Securities available for sale (10,259) 4,458 126,720
Income (loss) from real estate
developments 861,175 (53,673) 445,079
Operations of real estate owned 471,109 115,573 --
Other 165,512 129,370 166,721
Total noninterest income 4,130,330 1,943,841 2,079,778
Noninterest expense:
Compensation and benefits 5,122,278 4,542,135 4,380,316
Office occupancy and equipment 1,223,133 1,171,536 1,090,900
Data processing 902,811 727,200 666,717
Federal deposit insurance premium 860,153 843,495 896,704
Savings Association Insurance Fund
special assessment 2,042,942 -- --
Other 2,002,153 1,719,914 1,461,734
Amortization of goodwill -- -- 807,603
12,153,470 9,004,280 9,303,974
Provision for loss on foreclosed real
estate 100,000 -- --
Provision for credit enhancement costs 246,000 -- --
Total noninterest expense 12,499,470 9,004,280 9,303,974
Income before income taxes and cumulative
effect of change in accounting principle 561,939 1,950,787 1,560,647
Income taxes 203,108 743,305 932,600
Income before cumulative effect of change
in accounting principle 358,831 1,207,482 628,047
Cumulative effect of change in accounting
for goodwill -- (4,340,424)
Net income (loss) $ 358,831 $ 1,207,482 $(3,712,377)
Earnings per common and common
equivalent share:
Income before cumulative effect of
change in accounting principle $0.30 $1.03 $ 0.54
Cumulative effect of change in
accounting for goodwill -- -- (3.75)
Net income (loss) $0.30 $1.03 $(3.21)
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
16
<PAGE>
Consolidated Statements of Stockholders' Equity Homecorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
[CAPTION]
<TABLE>
Additional Unrealized Total
Years ended December 31, 1996, Common paid-in Retained gain (loss) stockholders'
1995, and 1994. stock capital earnings on securities equity
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 11,220 6,435,874 16,478,596 - 22,925,690
Implementation of change in
accounting for investment
securities, net of tax effect
of $74,151 - - - 115,981 115,981
Change in unrealized gain for
investment securities available
for sale, net of tax effect
of $(192,109) - - - (300,479) (300,479)
Net loss - - (3,712,377) - (3,712,377)
Balance at December 31, 1994 11,220 6,435,874 12,766,219 (184,498) 19,028,815
Stock options exercised 44 29,304 - - 29,348
Change in unrealized loss for
investment securities available
for sale, net of tax effect
of $97,026 - - - 157,855 157,855
Net income - - 1,207,482 - 1,207,482
Balance at December 31, 1995 11,264 6,465,178 13,973,701 (26,643) 20,423,500
Stock options exercised 23 27,364 - - 27,387
Change in unrealized loss for
investment securities available
for sale, net of tax effect
of $34,629 - - - 48,538 48,538
Net income - - 358,831 - 358,831
Balance at December 31, 1996 $11,287 $6,492,542 $14,332,532 $21,895 $20,858,256
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
17
<PAGE>
HomeCorp, Inc. and Subsidiary Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 358,831 $ 1,207,482 $ (3,712,377)
Adjustment to reconcile net income to net cash
provided (used) by operating activities:
Amortization of:
Goodwill - - 807,603
Premiums and discounts on loans, mortgage-backed
securities and investment securities 141,605 160,149 134,825
(Income) loss from real estate developments (861,175) 53,673 (445,079)
Provision for loan losses 565,000 360,000 240,000
Provision for loss on foreclosed real estate 100,000 - -
Provision for credit enhancement costs 246,000 - -
Net (gain) loss on sale of:
Loans receivable (943,573) (292,588) 145,208
Mortgage-backed and investment securities 10,259 (4,458) (126,720)
Depreciation and amortization of premises & equipment 461,730 457,276 420,516
Decrease (increase) in loans held for sale 2,868,892 (4,629,485) 1,714,697
Cumulative effect of change in accounting principle - - 4,340,424
Increase (decrease) in cash flows due to changes in:
Accrued interest and other assets (333,141) 160,906 1,907,572
Other liabilities 648,064 (361,304) 453,447
Total adjustments $ 2,903,661 $ (4,095,831) $ 9,592,493
Net cash provided (used) by operating activities $ 3,262,492 $ (2,888,349) $ 5,880,116
Cash flows from investing activities:
Loan originations, net of principal payments on loans 309,786 (10,939,715) (11,755,120)
Purchase of:
Loans receivable (7,201,609) (10,613,318) (8,591,011)
Mortgage-backed and investment securities (1,500,000) (7,000,000) (7,458,988)
Securities available for sale (6,997,032) (1,986,456) (68,154)
Certificates of deposit (7,000,000) (11,000,000) (10,000,000)
Premises and equipment (701,503) (416,736) (177,429)
Investment in foreclosed real estate (24,271) (1,199,982) -
Investment in real estate developments (1,245,828) (1,214,254) (2,254,538)
Principal payments on mortgage-backed securities 5,484,928 3,821,207 6,449,575
Principal repayments of securities available for sale 1,415,939 1,536,713 2,766,946
Proceeds from sales of:
Mortgage loans 6,679,881 - 3,936,160
Securities available for sale 1,481,140 2,554,366 -
Real estate developments 67,500 267,000 362,854
Foreclosed real estate 291,145 717,794 414,391
</TABLE>
Continued next page
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
18
<PAGE>
Consolidated Statements of Cash Flows
HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Proceeds from maturities of:
Certificates of deposit 7,000,000 13,000,000 9,000,000
Investment securities 2,500,000 10,000,000 4,000,000
Securities available for sale 1,986,456 - -
Redemption of FHLB stock 200,400 - 91,400
Distributions of income on real estate partnerships 1,004,442 1,208,682 1,139,149
Net cash provided (used) by investing activities $ 3,751,374 $(11,264,699) $(6,014,657)
Cash flows from financing activities:
Net increase (decrease) in deposits (2,539,437) 6,688,797 18,586
Repayment of borrowings - - (237,175)
Net increase (decrease) in advance payments
by borrowers for taxes and insurance (745,506) (107,492) 237,405
Net cash provided (used) by financing activities $(3,284,943) $ 6,581,305 $ 18,816
Net increase (decrease) in cash and cash equivalents 3,728,923 (7,571,743) (115,725)
Cash and cash equivalents at beginning of year $10,411,569 $17,983,312 $18,099,037
Cash and cash equivalents at end of year $14,140,492 $10,411,569 $17,983,312
Supplemental Information
Cash payment during the period for:
Interest $14,877,972 $15,061,696 $12,470,018
Taxes 195,000 640,400 629,000
Non-cash investing activity
Transfer of laons to real estate owned $ 294,531 $ 5,841,292 $ 782,691
Loans held for sale:
Origination $51,706,526 $60,411,504 $14,399,386
Sales 54,575,418 55,782,019 16,114,083
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to coonsolidated financial statements.
19
<PAGE>
[LOGO HomeCorp, Inc.] Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
The following comprise the significant accounting policies which HomeCorp, Inc.
and Subsidiary (Company) follows in preparing and presenting its consolidated
financial statements:
(a) HomeCorp, Inc. is a savings bank holding company and owns all the
outstanding capital stock of HomeBanc, a federal savings bank (Bank). The
Company has no business operations independent of the Bank.
As a community oriented savings bank, HomeBanc offers a range of retail
banking services through its ten offices located in Winnebago, Stephenson, and
Lee Counties, Illinois. HomeBanc is principally engaged in the business of
attracting deposits from the general public and using such deposits, together
with borrowings and other funds, to originate residential and commercial
mortgage loans, consumer loans, construction loans, and commercial
business loans. Through a subsidiary, the Bank also offers a full line of
securities brokerage services.
(b) The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(c) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
HomeCorp, Inc., its wholly owned subsidiary, HomeBanc, fsb, and the Bank's
wholly owned subsidiary, Home Federal Service Corporation. All significant
intercompany transactions and balances have been eliminated in consolidation.
(d) Cash and Cash Equivalents
The Company's interest-bearing deposits are available upon demand. Federal
funds are sold for one day periods.
(e) Investment Securities Held to Maturity
Investment securities are carried at cost, adjusted for amortization of premium
and accretion of discount using the interest method. It is management's
intention and their opinion that they have the ability to hold these securities
to maturity. Amortization of premiums and accretion of discounts is recognized
in interest income over the estimated lives of the respective securities using
the interest method. Gains and losses on the sale of investment securities are
determined using the specific identification method.
(f) Investment Securities Available For Sale
Investment securities available for sale are carried at estimated fair value
with fluctuations from amortized cost refected, net of tax, as a component of
stockholders' equity.
(g) Mortgage-Backed Securities
Mortgage-backed securities represent participating interests in pools of first
mortgage loans originated and serviced by the issuers of the securities and are
generally backed by agencies of the federal government. These securities are
carried at current unpaid principal balances, adjusted for premiums and
discounts as it is management's intention and their opinion that they have the
ability to hold them to maturity. Amortization of premiums and accretion of
discounts is recognized in interest income over the estimated lives of the
respective securities using the interest method.
Gains and losses on the sale of mortgage-backed securities are determined
using the specific identification method.
Amortization of premiums and accretion of discounts are recognized as
interest income using the interest method over the estimated lives of the
securities.
Gains and losses on the sales of securities are determined using the
specific identification method.
20
<PAGE>
Notes to Consolidated Financial Statements HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
(h) Loans Receivable and Allowance for Loan Losses
Loans are stated at their outstanding unpaid principal balances net of any
deferred fees or costs, or unamortized premiums or discounts on purchased loans.
Interest income is accrued on the unpaid principal balance. Discounts and
premiums are amortized to income using the interest method. Loan origination
fees net of certain direct origination costs are deferred and recognized as an
adjustment of the yield of the related loans.
Generally, a loan is classified as nonaccrual when the contractual payment
of principal or interest has become 90 days past due or management has serious
doubts about collectibility of principal or interest. When a loan is placed on
nonaccrual status, unpaid interest credited to income in the current year is
reversed. Interest received on nonaccrual loans generally is either applied
against principal or reported as interest income, according to management's
judgment as to the collectibility of principal.
Generally, loans are restored to accrual status when the obligation is
brought current, has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt.
The allowance for loan losses is established through provisions for loan
losses charged against income. Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any are
credited to the allowance.
A loan is impaired when, based upon current information and events, it is
probable that the Bank will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Management regularly reviews
delinquent loans, significant loans and potential problem loans (based upon
information available to management) to determine if the impairment criterion
has been met.
A loan is automatically classified as impaired when it reaches 90 days
delinquent. Applicable loans less than 90 days delinquent are evaluated and
classified as impaired on a case by case basis. Once classified as impaired, the
necessity for an impairment reserve is based upon one of three methodologies:
the present value of expected future cash flows discounted using the loan's
initial effective interest rate, a loan's observable market price, or the fair
value of the collateral.
Management determines the appropriate method on a case by case basis. The
Bank charges-off principal of impaired loans when a total loss of principal has
been deemed to have occurred or when collection efforts have ceased.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable loan losses. Management's periodic
evaluation of the adequacy of the allowance is based on the Company's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, composition of the loan portfolio, current economic
conditions, and other relevant factors. This evaluation is inherently subjective
as it requires estimates of the amounts and timing of future cash flows expected
to be received on impaired loans.
(i) Mortgage Loans Held for Sale
Mortgage loans held for sale are stated at the lower of aggregate cost or market
value. Deferred loan origination fees and expenses on these loans are not
amortized and are recorded as income or expense when the loans are sold.
(j) Mortgage Service Rights
On January 1, 1996, the Company adopted Financial Accounting Standards Board
Statement No. 122, "Accounting for Mortgage Servicing Rights," which requires
that an allocation of costs be made between loans and their related servicing
rights for loans originated with a definitive plan to sell with servicing rights
retained. The recognition of a separate asset for servicing rights increases the
gain on sale of loans. The cost of mortgage servicing rights is allocated based
on the relative fair value of the mortgage servicing rights and the sold loans.
The asset is then amortized to expense over the life of the loan using the level
yield amortization method.
Amortization of servicing rights is calculated based upon the level yield
method over the estimated life of the estimated net servicing income. Impairment
of mortgage servicing rights is determined periodically based on fair value
estimates of the rights utilizing current estimates of prepayments and other
variables.
The adoption of this statement resulted in increased after tax income of
$326,000 for the year ended December 31, 1996. Servicing rights capitalized in
accordance with this accounting pronouncement totaled $534,000 at December 31,
1996. Total amortization for the period amounted to $71,400.
21
<PAGE>
[LOGO OF HOMECORP, INC.] Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(k) Foreclosed Real Estate
Foreclosed real estate is comprised of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure and loans classified
as in-substance foreclosure. A loan is classified as in-substance foreclosure
when the Company has taken possession of the collateral regardless of whether
formal foreclosure proceedings have taken place.
Foreclosed real estate initially is recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of cost or fair value minus estimated costs to sell. Revenue and expenses from
operations are included in real estate owned (REO) operations.
(l) Investments in Real Estate Developments
Investments in real estate developments are carried at the lower of cost,
adjusted for the Bank's share of undistributed earnings, or net realizable
value. Development and holding costs, including interest incurred during the
development phase are capitalized. No interest was capitalized to real estate
projects for the three years in the period ended December 31, 1996.
There were no loans outstanding from the Bank to any of the unconsolidated
joint ventures during 1996 or 1995. Interest income recognized on loans
receivable from the unconsolidated joint ventures amounted to approximately
$711,000 for the year ended December 31, 1994.
(m) Premises and Equipment
Land is carried at cost. Office properties and equipment are recorded at cost
less depreciation, which is accumulated on a straight-line basis over the
estimated useful lives of the related assets. Estimated lives are 25 to 50
years for the office buildings and 3 to 25 years for equipment and other
properties. Leasehold improvements are recorded at cost less accumulated
amortization computed on a straight-line basis over the term of the lease or the
life of the asset, whichever is shorter.
(n) Excess of Cost Over Fair Value of Net Assets Acquired
The Company's excess of cost over fair value of net assets acquired was the
result of the acquisition of two separate financial institutions. The Company
adopted SFAS No. 72, "Accounting for Certain Acquisitions of Banking and Thrift
Institutions" effective January 1, 1994 for the portion of goodwill not
previously accounted for under the statement. The cumulative effect of adoption
was $4.3 million.
(o) Pension Plan
Pension expense for the Bank's defined benefit plan is determined by the
projected unit credit method for measuring net periodic pension cost over the
employee's service life. The Bank's funding policy is to contribute annually an
amount calculated under the entry-age-normal method.
(p) Stock Compensation Plans
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed in footnote
No. 14, the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals or is less than the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
(q) Income Taxes
Deferred income tax assets and liabilities are adjusted regularly to amounts
estimated to be receivable or payable based on current tax law and the Company's
tax status. Consequently, tax expense in future years may be impacted by
changes in tax rates and tax return limitations.
22
<PAGE>
Notes to Consolidated Financial Statements HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
(r) Earnings per Share
Earnings per share for the year ended December 31, 1996 was computed by dividing
net income by 1,175,379, the average number of common and common equivalent
shares (using the treasury share method) outstanding at the end of the year. The
Company's equivalent shares consist entirely of stock options.
Earnings per share for the year ended December 31, 1995 was computed by
dividing net income by 1,168,613, the average number of common and common
equivalent shares (using the treasury share method) outstanding at the end of
the year. The Company's equivalent shares consist entirely of stock options.
Earnings per share before the change in accounting principle and the per
share impact of the change in accounting principle for the year ended December
31, 1994 were computed by dividing these amounts by 1,153,512, the weighted
average number of shares outstanding during the year as adjusted for the
dilutive effect of common stock options.
(s) Reclassifications
Certain prior-year balances have been reclassified to conform to the current
year's presentation.
- --------------------------------------------------------------------------------
(2) Investment Securities Held to Maturity
A summary of investment securities held to maturity at
December 31 follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1996
Debt securities:
U.S. Government and agency obligations $5,502,353 $ 3,277 $ (34,630) $5,471,000
Total investment securities $5,502,353 $ 3,277 $ (34,630) $5,471,000
1995
Debt securities:
U.S. Government and agency obligations $6,504,355 $15,315 $(107,670) $6,412,000
Total investment securities $6,504,355 $15,315 $(107,670) $6,412,000
</TABLE>
23
<PAGE>
HomeCorp, Inc. And Subsidiary Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
There were no sales of investment securities during 1996, 1995, 1994. Debt
securities held at December 31, 1996 are due after one year through five years.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
================================================================================
<TABLE>
<CAPTION>
(3) Investment Securities Available for Sale Gross Gross Estimated
Amortized unrealized unrealized fair
A summary of securities available for sale at Cost gains losses value
December 31 follows: ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996
Debt Securities $ 8,613,202 $ 33,579 $(36,362) $ 8,610,419
Other 5,904 9,146 - 15,050
Mutual Fund Shares 1,252,819 - (25,095) 1,227,724
Mortgage-Backed Securities:
Federal Home Loan Mortgage Corporation 2,043,965 60,828 - 2,104,793
Federal National Mortgage Association 545,102 - (6,203) 538,899
Total Mortgage-Backed Securities 2,589,067 60,828 (6,203) 2,643,692
Total investment securities available for sale $12,460,992 $103,553 $(67,660) $12,496,885
Gross Gross Estimated
Amortized unrealized unrealized fair
Cost gains losses value
----------- ----------- ----------- -----------
1995
Debt Securities $ 4,370,387 $ 2,319 $(29,674) $ 4,363,032
Other 5,904 6,096 - 12,000
Mutual Fund Shares 1,252,818 - (30,142) 1,222,676
Mortgage-Backed Securities:
Federal Home Loan Mortgage Corporation 2,060,442 7,075 (16,663) 2,050,854
Federal National Mortgage Association 669,142 - (6,586) 662,556
Total Mortgage-Backed Securities 2,729,584 7,075 (23,249) 2,713,410
Total investment securities available
for sale $ 8,358,693 $ 35,490 $(83,065) $ 8,311,118
</TABLE>
- --------------------------------------------------------------------------------
24
<PAGE>
Notes to Consolidated Financial Statements HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
The amortized cost and estimated fair value of available for sale investment
securities at December 31, 1996 by contractual maturity are shown by the
following. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amortized Estimated
cost fair value
--------- ----------
<S> <C> <C>
Due in one year or less $ 1,322,389 $ 1,305,923
Due after one year through five years 7,948,981 7,928,372
Due after five years through ten years 89,689 90,249
Due after ten years 3,099,933 3,172,341
Total available for sale investment
securities $12,460,992 $12,496,885
</TABLE>
- --------------------------------------------------------------------------------
Proceeds from sales of investment securities available for sale during
1996, 1995, and 1994 were $1,481,140, $2,554,366, and $6,130,108 respectively.
The 1996 and 1995 sales generated gross gains/(losses) of $(10,259) and $4,458,
respectively.
The 1994 sales generated gross gains of $144,490 and gross losses of
$17,770.
A total of $2,383,931 of debt securities and $5,904 of equity securities
were transferred from held to maturity to available for sale during December
1995 pursuant to the transition provisions of the Financial Accounting Standards
Board Special Report on SFAS No. 115. The investment securities had a net
unrealized gain of $6,741 at the time of transfer.
- --------------------------------------------------------------------------------
4) Mortgage-Backed Securities Held to Maturity
A summary of mortgage-backed securities held to maturity at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
Amortized Estimated Amortized Estimated
Cost fair value Cost fair value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 3,570,178 $ 3,659,000 $ 4,301,911 $ 4,381,000
Small Business Administration 1,368,562 1,350,000 1,442,448 1,446,000
Federal Home Loan Mortgage Corporation 6,055,755 6,083,000 8,706,976 8,769,000
Federal National Mortgage Association 6,376,573 6,419,000 7,739,609 7,811,000
Agency for International Development 22,983 23,000 44,216 44,000
Collateralized Mortgage Obligations 1,051,572 1,043,000 1,695,391 1,695,000
Total mortgage-backed securities, gross $18,445,623 $18,577,000 $23,930,551 $24,146,000
Add:
Unamortized premium 413,007 556,958
Total mortgage-backed securities
held to maturity, net $18,858,630 $24,487,509
</TABLE>
- --------------------------------------------------------------------------------
25
<PAGE>
HomeCorp, Inc. and Subsidiary Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The collateralized mortgage obligations represent pools of securities issued by
agencies of the federal government. The amortized cost and approximate value of
mortgage-backed securities at December 31 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1996 $18,858,630 $ 7,946 $(289,576) $18,577,000
1995 $24,487,509 $15,263 $(356,772) $24,146,000
</TABLE>
- --------------------------------------------------------------------------------
(5) Loans Receivable
A summary of loans receivable at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Conventional first
mortgage loans $168,847,672 $195,422,934
Short-term construction
and land loans 15,242,660 9,102,103
Commercial business loans 6,242,571 4,007,156
Auto loans 53,325,499 38,686,836
Home equity and
improvement loans 21,167,683 16,268,139
Other consumer loans 1,298,502 1,293,286
Total loans
receivable, gross 266,124,587 264,780,454
Less:
Loans in process 5,638,590 2,753,743
Deferred loan origination
costs (445,917) (440,064)
Unearned discount,
principally on loans
purchased 210,248 269,761
Allowance for
loan losses 1,582,102 1,175,178
Total loans receivable,
net $259,139,564 $261,021,836
</TABLE>
- --------------------------------------------------------------------------------
Adjustable-rate loans totaled $100,888,000 and $109,548,000 at December 31, 1996
and 1995, respectively. The Bank serviced first mortgage loans for other
institutions approximating $162,856,000 and $125,796,000 at December 31, 1996
and 1995, respectively.
- --------------------------------------------------------------------------------
The following summarizes activity in the allowance for loan losses at
December 31:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning
of year $1,175,178 $1,048,105 $ 956,105
Charge-offs (162,991) (241,203) (158,940)
Recoveries 4,915 8,276 10,940
Provision for
loan losses 565,000 360,000 240,000
Balance at end of year $1,582,102 $1,175,178 $1,048,105
</TABLE>
- --------------------------------------------------------------------------------
Impaired loans totaled $3,789,000 and $1,020,000 at December 31, 1996 and 1995,
respectively. The impaired totals included $2,146,000 and $37,000 of
non-performing loans at the respective year end dates.
Included in impaired loans at December 31, 1996 were two participating
interests totaling $1,445,000 that were 90 days delinquent but which continued
on an accrual basis. Based upon their current physical condition and the
economic condition of the area in which the buildings are located, accrual
status was considered appropriate.
The average recorded investment in impaired loans during the years ended
December 31, 1996 and 1995 was approximately $1,891,000 and $4,252,000,
respectively. The Bank recognized interest income on impaired loans of $226,000
and $424,000 for the years ended December 31, 1996 and 1995, respectively.
- --------------------------------------------------------------------------------
26
<PAGE>
Notes to Consolidated Financial Statements HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
(6) Foreclosed Real Estate
Foreclosed real estate is presented net of a valuation allowance for possible
losses. Activity in the allowance for losses on foreclosed real estate is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 1995 $450,000
Provision charged to income -
Charge-offs, net of recoveries -
Balance at December 31, 1995 450,000
Provision charged to income 100,000
Charge-offs, net of recoveries -
-------
Balance at December 31, 1996 $550,000
</TABLE>
- --------------------------------------------------------------------------------
(7) Investments in Real Estate Developments
The Bank and its wholly owned subsidiary have direct investments in real estate
projects and participate in unconsolidated joint ventures with third parties
engaged in the purchase of undeveloped land for improvement, subdivision, and
subsequent sale. The investments in unconsolidated real estate joint ventures
represent 50 percent interest in the projects involved and are accounted for on
the equity method. These developments are summarized at December 31 as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Investment in real estate
project $ - $ 33,600
Investment in
unconsolidated
real estate
joint ventures 5,094,960 4,026,299
Total investment
in real estate
developments $5,094,960 $4,059,899
</TABLE>
- --------------------------------------------------------------------------------
Income from real estate developments is summarized as follows for the year ended
December 31;
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Loss of
real estate projects $(73,117) $ (76,967) $(213,991)
Equity in earnings (loss)
of unconsolidated real
estate joint ventures 530,278 (214,399) 502,766
Fees received less
expenses incurred
related to unconsolidated
real estate joint
ventures 404,014 237,693 156,304
Total income (loss)
from real estate
developments $861,175 $ (53,673) $ 445,079
</TABLE>
- --------------------------------------------------------------------------------
Combined statements of financial condition, operations, and partners' capital of
the unconsolidated real estate joint ventures follow.
Combined Statements of Financial Condition
as of December 31,
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Assets
Cash $ 47,475 $ 26,480
Land and development
costs 15,459,094 21,006,807
Other assets 887,376 1,016,613
Total assets $16,393,945 $22,049,900
Liabilities:
Borrowings 3,662,623 10,177,867
Other liabilities 2,541,402 3,919,630
Total liabilities $ 6,204,025 $14,097,497
Partners' capital:
Wholly owned subsidiary
of Bank 5,094,960 3,976,202
Co-venturer 5,094,960 3,976,201
Total partners' capital 10,189,920 7,952,403
Total liabilities and
partners' capital $16,393,945 $22,049,900
</TABLE>
- --------------------------------------------------------------------------------
27
<PAGE>
HomeCorp, Inc. and Subsidiary Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Combined Statements of Operations
for the years ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Sales of real estate $10,042,533 $9,293,475 $7,366,404
Cost of sales (5,966,373) (7,243,804) (4,317,866)
Gross profit 4,076,160 2,049,671 3,048,538
Management fees (927,127) 319,625 (677,185)
Other expense (2,088,477) (2,798,095) (1,365,821)
Net income (loss) $ 1,060,556 $ (428,799) $1,005,532
</TABLE>
================================================================================
Combined Statements Of Partners' Capital
<TABLE>
<CAPTION>
Wholly owned
subsidiary of Co-
Bank Venturer Total
<S> <C> <C> <C>
Balance at
Dec. 31, 1993 $4,681,712 $4,681,712 $ 9,363,424
Capital contributions 154,000 154,000 308,000
Capital withdrawals (1,139,149) (1,139,150) (2,278,299)
Net income 502,766 502,766 1,005,532
Balance at
Dec. 31, 1994 4,199,329 4,199,328 8,398,657
Capital contributions 1,314,236 1,314,237 2,628,473
Capital withdrawals (1,322,964) (1,322,964) (2,645,928)
Net loss (214,399) (214,400) (428,799)
Balance at
Dec. 31, 1995 3,976,202 3,976,201 7,952,403
Capital contributions 1,592,922 1,592,922 3,185,844
Capital withdrawals (1,004,442) (1,004,441) (2,008,883)
Net income 530,278 530,278 1,060,556
Balance At
Dec. 31, 1996 $5,094,960 $5,094,960 $10,189,920
</TABLE>
================================================================================
A reconciliation of partners' capital per the joint venture financial statements
to Bank records at December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Partners' capital per joint
venture financial statements $5,094,960 $3,976,202
Deferred income and partner-
ship cash held by the Bank -- 50,097
Investment in unconsolidated
real estate joint ventures $5,094,960 $4,026,299
</TABLE>
================================================================================
(8) Premises And Equipment
Premises and equipment at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $1,311,124 $ 723,509
Office buildings 3,201,006 3,189,077
Furniture, fixtures and
equipment 2,928,401 2,914,806
Parking lots and
drive-through facility 921,421 921,421
Leasehold improvements 360,878 360,878
8,722,830 8,109,691
Less accumulated
depreciation and
amortization 4,853,449 4,480,083
Premises & equipment $3,869,381 $3,629,608
</TABLE>
- --------------------------------------------------------------------------------
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
(9) Deposits
A summary of deposit accounts at December 31 follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
------------ ------------
Account
<S> <C> <C>
Non-interest-bearing demand
deposit accounts $ 8,870,879 $ 6,822,512
Negotiable order of withdrawal (NOW) 25,972,892 25,072,580
Passbook 22,167,353 23,442,492
Money market 30,805,437 28,566,474
Certificates of deposit:
Original balances of less than or
equal to $100,000 195,633,979 201,808,483
Original balances of greater than
$100,000 28,303,989 28,581,342
Total certificates of deposit 223,937,968 230,389,825
Total deposit accounts $311,754,446 $314,293,883
</TABLE>
- --------------------------------------------------------------------------------
The following sets forth the scheduled maturities of certificates of deposit at
December 31, 1996:
Maturing:
Within 12 months $106,758,921
Between 12 months and 2 years 57,984,665
Between 2 years and 3 years 27,366,599
Between 3 years and 4 years 25,920,539
Between 4 years and 5 years 5,633,240
Beyond 5 years 274,004
Total certificates of deposit $223,937,968
- --------------------------------------------------------------------------------
The bank had approximately $6,325,000 and $6,716,000 of U.S. Government and
agency obligations pledged to secure certain deposits at December 31, 1996 and
1995, respectively.
A summary of interest on deposits as shown in the consolidated statements of
operations at December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
NOW $ 215,701 $ 187,337 $ 179,109
Passbook 416,637 418,297 458,862
Money market 846,776 779,050 726,128
Certificates of
deposit 13,269,503 13,582,716 11,106,796
Total interest
on deposits $14,748,617 $14,967,400 $12,470,895
</TABLE>
- --------------------------------------------------------------------------------
29
<PAGE>
HomeCorp, Inc. and Subsidiary Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) Borrowed Funds
Federal Home Loan Bank advances were utilized throughout 1996 and 1995 as a
short term funding source for the Bank. The Bank had approximately $1.2 million
in mortgage-backed securities pledged to the Federal Home Loan Bank of Chicago
as collateral for outstanding letters of credit at December 31, 1996.
The Company had no borrowings at December 31, 1996 or 1995.
- --------------------------------------------------------------------------------
(11) Income Taxes
Components of applicable income taxes are as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $(437,840) $622,866 $640,409
State (127,989) 135,494 121,689
Total current (563,829) 758,360 762,098
Deferred:
Federal 624,803 4,334 104,443
State 142,134 (19,389) 66,059
Total deferred 766,937 (15,055) 170,502
Total income taxes $ 203,108 $743,305 $932,600
</TABLE>
- --------------------------------------------------------------------------------
A reconciliation of income taxes computed at the statutory federal income tax
rate of 34% in 1996, 1995, and 1994 to the actual income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Tax at statutory rate $191,059 $663,268 $ (945,124)
Effect of purchase accounting adjustments - - 1,750,329
State taxes, net of federal effect 10,656 76,629 93,713
Other, net 1,393 3,408 33,682
Total income taxes $203,108 $743,305 $ 932,600
</TABLE>
- --------------------------------------------------------------------------------
Retained earnings at December 31, 1996 and 1995 includes approximately
$3,426,000 for which no federal income tax liability has been provided. This
amount represents allocations of income to bad debt deductions for tax purposes
only. Reductions of amounts so allocated for purposes other than tax bad debt
losses will create taxable income, which will be subject to the then current
corporate income tax rate.
Following is a breakdown of the significant individual temporary
differences that give rise to the Company's deferred tax assets and liabilities
as of December 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred Tax Assets:
Financial statement allowance for loan losses $ 612,888 $ 629,574
Book vs tax basis in real estate partnerships - 169,036
Securities available for sale market value adjustment - 20,724
Book vs tax basis in fixed assets 42,596 -
Other 69,094 41,192
Sub-Total $ 724,578 $ 860,526
Less: Valuation allowance - (29,472)
Total Deferred Tax Assets $ 724,578 $ 831,054
Deferred Tax Liabilities:
Excess of tax loan loss allowance over base year amount (88,601) (143,365)
Book vs tax basis in mortgage servicing rights (206,773) -
Book vs tax basis in real estate partnerships (419,313) -
Securities available for sale market value adjustment (13,905) -
Book vs tax basis in fixed assets - (28,312)
Book vs tax basis in FHLB stock (133,468) (133,468)
Deferred fee income (191,418) (89,755)
Other (36,512) -
Total Deferred Tax Liabilities $(1,089,990) $(394,900)
Net Deferred Tax (Liabilities) Assets $ (365,412) $ 436,154
</TABLE>
- --------------------------------------------------------------------------------
The valuation allowance for deferred tax assets as of December 31, 1995 was
$29,472 and was related to the state benefit recognized on the difference in the
Company's real estate partnerships and capital loss carryforward. Based upon the
reduction in the book-tax difference in real estate partnerships and the
utilization of capital loss carryforwards, the reserve was eliminated.
- --------------------------------------------------------------------------------
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
(12) PENSION PLAN
The Bank has a qualified, noncontributory defined benefit plan covering
substantially all employees who are at least 20-1/2 years of age and have at
least six months of service. Benefits are based on years of service and the
average of the five highest consecutive years of compensation.
The following table sets forth the status of the plan as of December 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested $1,730,802 $1,599,730
Nonvested 88,546 76,345
Total accumulated benefit obligation 1,819,348 1,676,075
Projected benefit obligation 2,622,865 2,366,786
Plan assets at fair value, primarily certificates of
deposit at HomeBanc 2,298,660 1,976,521
Funded status-plan assets less than projected benefits
obligation (324,205) (390,265)
Items to be recognized in earnings in future periods:
Unrecognized prior service cost 150,395 163,566
Unrecognized net loss 7,983 76,343
Unrecognized net asset at January 1, 1987 being
amortized over 15 years (7,769) (9,323)
Accrued pension cost $ (173,596) $ (159,679)
</TABLE>
- --------------------------------------------------------------------------------
Total pension expense for the plan was $214,917, $113,066, and $97,569, for
1996, 1995 and 1994, respectively. Pension expense included the following
components:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Service cost benefits earned during the period $ 193,245 $ 112,496 $109,002
Interest cost on projected benefit obligation 173,384 135,294 131,825
Actual return on plan assets (257,200) (206,534) (77,835)
Net amortization and deferrals 105,488 71,810 (65,423)
Total pension expense $ 214,917 $ 113,066 $ 97,569
</TABLE>
- --------------------------------------------------------------------------------
The weighted assumed discount rate used to determine the projected benefit
obligation was 7.50% for 1996 and 1995 and 8.00% for 1994. The expected long-
term rate of return on plan assets was 8.50% for 1996 and 1995 and 8.00% for
1994. The plan assumed a 4.75% salary progression in 1996 and 1995 and 5.00% in
1994.
(13) SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Bank has a non-qualified, noncontributory supplemental executive retirement
plan covering employees earning in excess of the maximum compensation amount
that can be considered under the Pension Plan. Benefits are based on years of
service and the average.
The following table sets forth the status of the plan as of December 31,
1996:
<TABLE>
<S> <C>
Actuarial present value of benefit obligation:
Vested $ 92,571
Nonvested -
Total accumulated benefit obligation 92,571
Projected benefit obligation 224,175
Plan assets at fair value -
Funded status-plan assets in excess of (less than) projected
benefits obligation (224,175)
Item to be recognized in earnings in future periods:
Unrecognized prior service cost 184,645
Adjustment to recognize minimum liability (53,041)
Accrued pension cost $ (92,571)
</TABLE>
- --------------------------------------------------------------------------------
Total pension expense for the plan was $39,530 for 1996. Pension expense
included the following components:
<TABLE>
<S> <C>
Service cost benefits earned during the period $ 9,161
Interest cost on projected benefit obligation 15,001
Net amortization and deferrals 15,368
Total pension $39,530
</TABLE>
- --------------------------------------------------------------------------------
The weighted assumed discount rate used to determine the projected benefit
obligation was 7.50% for 1996. The expected long-term rate of return on plan
assets was 8.50% for 1996. The plan assumed a 4.75% salary progression in 1996.
- --------------------------------------------------------------------------------
(14) OFFICER, DIRECTOR, AND EMPLOYEE PLANS
Effective January 1, 1994, the Company implemented a profit sharing and savings
plan under Section 401(k) of the Internal Revenue Code covering substantially
all full-time employees. Under the 401(k) plan, employee contributions were
partially matched by the Company during 1996, 1995, and 1994.
- --------------------------------------------------------------------------------
31
<PAGE>
HomeCorp, Inc. and Subsidiary Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
The Company will make an annual determination whether to continue the
employer match. It is the Company's intent to continue the match during 1997.
Additionally, the Company may allocate a portion of net profits to the
employees' accounts in the 401(k) plan.
The Company incurred expense of $73,356, $68,279, and $67,500 to fund the
ESOP and 401(k) plans for the years ended December 31, 1996, 1995, and 1994,
respectively.
Pursuant to the Company's 1990 Incentive Stock Option and Incentive Plan
(1990 Plan), 110,436 shares of the Company's Common Stock were reserved for
issuance by the Company. The exercise price for the purchase of shares subject
to a stock option at the date of grant may not be less than 100 percent of the
market value of the shares covered by the option at that date.
Pursuant to the Company's 1996 Premium Price Stock Option and Incentive
Plan (1996 Plan), 70,000 shares of the Company's Common Stock were reserved for
issuance by the Company. The exercise price for the purchase of shares subject
to a stock option at the date of grant cannot be less than 120 percent of the
market value of the shares covered by the option at that date.
The Plans provide awards in the form of stock options, stock appreciation
rights (SARs), incentive stock options and restricted stock. Each award will be
on such terms and conditions, consistent with the Plans, as the Stock Option
Committee (Committee) administering the Plans may determine. The term of stock
options in both plans will not exceed ten years from the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995; risk-free interest rates of 6.48% and 6.67%; no
dividends for either year; volatility factors of the expected market price of
the Company's common stock of .095 and .290; and a weighted-average expected
life of the options of 10 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
Pro forma net income $152,320 1,053,645
Pro forma earnings
per share $0.12 $0.89
</TABLE>
- --------------------------------------------------------------------------------
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
- --------------------------------------------------------------------------------
A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- -------- --------------
<S> <C> <C> <C>
Outstanding-Beginning
of year 93,656 $ 9.50 70,251 $ 7.00 66,251 $ 6.67
Granted 45,500 21.00 30,029 14.75 4,000 12.38
Exercised (200) 14.75 (6,608) 6.67 - -
Forfeited (200) 14.75 (16) 6.67 - -
Outstanding-end
of year 138,756 $13.26 93,656 $ 9.50 70,251 $ 7.00
Exercisable at end
of year 138,756 $13.26 93,656 $ 9.50 70,251 $ 7.00
Weighted-average
fair value of options
granted during year $ 7.38 $ 8.33 $ 6.53
</TABLE>
32
<PAGE>
Notes to Consolidated Financial Statements
HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
The Company's stock price was $17.875 at the time the 1996 options were granted.
The options have an exercise price of $21.00. All prior options were granted
with exercise prices equal to the Company's stock price on the date of grant.
The following table summarizes information about fixed stock options at December
31, 1996:
<TABLE>
<CAPTION>
Range of Number Weighted-Average Weighted-Average
Exercise Prices Outstanding Remaining Life Exercise Price
<S> <C> <C> <C>
$ 6.67 59,627 3.5 years $ 6.67
$12.375 to 14.75 33,629 8.3 14.47
$21.00 45,500 9.3 21.00
138,756 6.6 13.26
</TABLE>
The Company has an Employee Stock Ownership Plan (ESOP). The ESOP covers
substantially all employees with more than one year of employment who have
attained the age of 21. Contributions to the ESOP are determined annually by the
Board of Directors. The ESOP owned 27,398 shares of the Company's common stock
as of December 31, 1996, all of which were allocated.
- --------------------------------------------------------------------------------
(15) Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to risk-
weighted assets (as defined) and of Tier 1 capital (as defined) to adjusted
total assets (as defined). Management believes as of December 31, 1996, that the
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Office of
Thrift Supervision (OTS) categorized the Bank as adequately capitalized under
the regulatory framework for prompt corrective action. To be categorized as
adequately capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table below. There
are no conditions or events since that notification that management believes
have changed the institution's category.
33
<PAGE>
HomeCorp, Inc. and Subsidiary Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Bank's actual capital amounts and ratios are presented in the table below
(dollars in thousands):
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital to risk-weighted assets
Consolidated $17,479 8.29% $16,865 8.00% NA NA
Subsidiary Bank 17,452 8.29% 16,833 8.00% 21,042 10.00%
Tier 1 capital to risk-weighted assets
Consolidated 15,897 7.54% 8,433 4.00% NA NA
Subsidiary Bank 15,870 7.54% 8,417 4.00% 12,625 6.00%
Tier 1 capital to adjusted total assets
Consolidated 15,897 4.81% 13,217 4.00% NA NA
Subsidiary Bank 15,870 4.81% 13,201 4.00% 16,502 5.00%
As of December 31, 1995:
Total Capital to risk-weighted assets
Consolidated 19,294 9.47% 16,302 8.00% NA NA
Subsidiary Bank 19,202 9.42% 16,301 8.00% 20,377 10.00%
Tier 1 capital to risk-weighted assets
Consolidated 17,669 8.67% 8,151 4.00% NA NA
Subsidiary Bank 17,577 8.63% 8,151 4.00% 12,226 6.00%
Tier 1 capital to adjusted total assets
Consolidated 17,669 5.27% 13,413 4.00% NA NA
Subsidiary Bank 17,577 5.24% 13,412 4.00% 16,765 5.00%
</TABLE>
- --------------------------------------------------------------------------------
Applicable rules and regulations of the OTS impose limitations on dividends
by the Bank. Within those limitations, certain "safe harbor" dividends are
permitted, subject to providing the OTS at least 30 days advance notice. The
safe harbor amounts are based upon an institution's regulatory capital level.
Thrift institutions which have capital in excess of all capital requirements
before and after the proposed dividend are permitted to make capital
distributions during any calendar year up to the greater of (1) 100% of net
income to date during the calendar year, plus one-half of the surplus over such
institution's capital requirements at the beginning of the calendar year, or (2)
75% of net income over the most recent four-quarter period. Additional
restrictions would apply to an institution which does not meet its capital
requirement before or after a proposed dividend. Under the frame work, the
Bank's capital levels do not allow the Bank to accept brokered deposits. The
Bank relies upon its community deposit base and Federal Home Loan Bank
borrowings as primary funding sources.
Unlike the Bank, the Company is not subject to regulatory restrictions on
the payment of dividends to its shareholders. However, the source of its future
dividends may depend upon dividends from the Bank.
As part of the Conversion process to a public company, the Bank established
a liquidation account for the benefit of eligible depositors as of March 31,
1989, the eligibility record date, who continue to maintain deposits in the Bank
following the Conversion. The initial balance of the liquidation account was
$9,011,252, the retained earnings of the Bank as of April 30, 1990. The balance
in this account decreases each year in which deposit balances of eligible
depositors decline. The account balance approximated $2,667,000 at December 31,
1996. In the unlikely event of a complete liquidation, each eligible depositor
who has continued to maintain deposits in the Bank following the Conversion,
will be entitled to receive a liquidation distribution from the liquidation
account prior to any distributions to stockholders. Dividends cannot be paid
from retained earnings allocated to the liquidation account.
34
<PAGE>
Notes to Consolidated Financial Statements HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
(16) Concentrations of Credit Risk, Financial Instruments with Off-Balance-Sheet
Risk, Commitments and Contingencies
Substantially all of the Bank's conventional first mortgage loans are secured by
single-family homes in the Northern Illinois area. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The borrower's ability to
repay the loans is generally dependent upon the economic environment of the
Northern Illinois area.
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract amounts of those instruments reflect
the extent of involvement the Bank has in particular classes of financial
instruments.
Letters of credit are issued by the Company and the Bank to guarantee the
completion of certain real estate developments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established of any condition
established in the contract. Commitments are made at adjustable and fixed rates.
Fixed rate commitments generally expire within sixty days with adjustable rate
commitments made for up to 60 days. At December 31, 1996 fixed rate commitments
for the origination of fixed and variable rate mortgage loans were $2,379,000
and ranged from 6.125% to 8.50%.
All of the Bank's loan sales have been without recourse. Virtually all of
the Bank's servicing responsibilities are to the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association under standard
servicing agreements.
As of December 31, 1996 and 1995, the Bank has contingent liabilities
under surety agreements (credit enhancements) with third parties aggregating
$2,000,000 and $5,800,688, respectively. Fees are received for the Bank's
guarantee, with other financial institutions, of certain multifamily housing
revenue bonds.
Mortgage-backed and U.S. Government and agency obligations with carrying
values of approximately $1,185,000 and $8,979,000 at December 31, 1996 and 1995
respectively, have been pledged to secure these agreements.
The Company and its subsidiary use the same credit policies in making
commitments and conditional obligations as on-balance-sheet instruments. At
December 31, 1996 and 1995 such commitments and conditional obligations are as
follows:
<TABLE>
<CAPTION>
December 31
1996 1995
---------- ----------
<S> <C> <C>
Standby letters of credit $ 626,000 $ 262,000
Conventional first mortgage
loan commitments 5,630,000 9,110,000
Total commitments
to extend credit $6,256,000 $9,372,000
</TABLE>
Because of the nature of its activities, the Company and Bank are subject
to pending and threatened legal actions which arise in the normal course of
business.
In the opinion of management, based on advise of legal counsel, the
disposition of any known pending current legal actions will not have a material
adverse effect on the financial position of the Company.
- --------------------------------------------------------------------------------
(17) Fair Values of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" requires
disclosures of estimated values of financial instruments. Fair value estimates,
methods, and assumptions are set forth.
Cash and Cash Equivalents
The carrying amounts of $14,140,492 and $10,411,569 for 1996 and 1995,
respectively of cash and cash equivalents approximate fair value because they
mature in three months or less and do not present unanticipated credit
concerns.
Investment and Mortgage-Backed Securities
Comparisons of the recorded book values and estimated fair values to investment
securities held to maturity, securities available for sale and mortgage-backed
securities are summarized in notes (2), (3), and (4), respectively. All fair
values are based upon market quotes. The following table summarizes the
balances:
35
<PAGE>
<TABLE>
<CAPTION>
[LOGO HOMECORP, INC. AND SUBSIDIARY] Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1996 At December 31, 1995
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Investment securities held to maturity $ 5,502,353 $ 5,471,000 $ 6,504,355 $ 6,412,000
Securities available for sale 12,496,885 12,496,885 8,311,118 8,311,118
Mortgage-backed securities held to maturity 18,858,630 18,577,000 24,487,509 24,146,000
====================================================================================================================================
Loans
Fair values are estimated on portfolios of loans with similar financial characteristics. Loans are segregated by type, such
as residential real estate, commercial or consumer and are then further segregated by adjustable and fixed interest rate.
The fair value for the loan portfolio was calculated by discounting estimated future cash flows of loans using estimated
discount rates that consider the credit and interest rate risk inherent in the loans. The assumptions involved in estimating
the future cash flows and appropriate discount rate are judgmentally determined using market information and specific borrower
information, as appropriate.
The following table presents information for loans:
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1995
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value* Amount Fair Value*
<S> <C> <C> <C> <C>
Residential real estate:
Fixed $79,189,188 $79,221,000 $99,675,842 $102,015,000
Adjustable 48,429,170 47,774,000 61,271,355 60,917,000
Other real estate:
Fixed 16,070,904 16,456,000 10,738,298 11,036,000
Adjustable 24,014,859 28,870,000 27,891,711 28,471,000
Construction and land:
Fixed 2,010,952 2,013,000 -- --
Adjustable 10,562,950 10,577,000 6,841,363 6,838,000
Consumer:
Fixed 62,398,873 62,319,000 44,913,412 45,022,000
Adjustable 14,674,712 14,657,000 11,599,302 11,525,000
Commercial:
Fixed 3,036,300 3,018,000 2,062,421 2,067,000
Adjustable 3,206,271 3,186,000 1,944,735 1,949,000
- ------------------------------------------------------------------------------------------------------------------------------------
* Management has made estimates of fair value discount rates that it believes are reasonable. However, because there is no
market for many of these financial instruments, management has no basis to determine whether the fair values presented above
would be indicative of the values negotiated in actual sales.
</TABLE>
36
<PAGE>
Notes to Consolidated Financial Statements HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Deposit Liabilities
Under SFAS No. 107, the fair value of deposits with no stated maturity, such as
non-interest bearing checking, NOW accounts, savings and money market accounts,
is equal to the amount payable on demand as of December 31, 1996 and 1995.
The discount rate is determined by the rates offered as of December 31, 1996 and
1995 for comparable remaining maturities.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
At December 31, 1996 At December 31, 1995
------------------------------ ------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Non-interest bearing demand $ 8,870,796 $ 8,870,796 $ 6,822,512 $ 6,822,512
Savings and NOW 48,140,245 48,140,245 48,515,072 48,515,072
Money market 30,805,437 30,805,437 28,566,474 28,566,474
Certificates of deposit 223,937,968 225,645,000 230,389,825 234,155,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The fair values estimated above do not include the benefit that results from the
low cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market.
- -------------------------------------------------------------------------------
Commitments to Extend Credit, Standby Letters of
Credit, and Financial Guarantees Written
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of financial guarantees written and letters of credit is based on
fees currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle obligations with the counterparties.
The Bank and the company issue letters of credit, primarily on behalf of
the Bank's subsidiary in connection with its ongoing real estate development
operations.
Limitations
The fair value estimates are made at a discrete point in time based on relevant
market information and information about the financial instrument. Because no
market exists for a significant portion of the Bank's financial instruments,
fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
In addition, the fair value estimates are based on existing on-and-off-
balance sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are not
considered financial instruments. Significant assets and liabilities that are
not considered financial assets and liabilities include the mortgage origination
operation, brokerage, deferred taxes and property plant and equipment. In
addition, the tax ramifications related to the realization of unrealized gains
and losses can have a significant effect on fair value estimated and have not
been considered in any estimated.
- --------------------------------------------------------------------------------
37
<PAGE>
HomeCorp, Inc. and Subsidiary Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(17) Interim Period Consolidated Operating Highlights (unaudited)
Consolidated operating highlights (unaudited) for the respective interim
quarterly reporting periods for the years ended December 31, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
Quarter ended
----------------------------------------------------------
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
1996:
Total interest income $5,973,291 $6,065,503 $ 6,134,173 $6,208,339
Total interest expense 3,707,025 3,646,845 3,751,816 3,779,541
Net interest income 2,266,266 2,418,658 2,382,357 2,428,798
Provision for loan losses 115,000 105,000 175,000 170,000
Net interest income after provision for loan losses 2,151,266 2,313,658 2,207,357 2,258,798
Gain on sale of: 396,974 418,812 436,298 447,136
Loans receivable, investments securities and
mortgage-backed securities 337,498 211,270 180,697 203,849
Income (Loss) from real estate developments (219) (13,644) 388,409 486,629
REO Operations 114,951 115,934 120,062 120,162
Other noninterest operating income 33,264 51,085 21,565 59,598
Noninterest operating expense 2,443,793 2,425,062 2,568,311 2,673,362
SAIF special assessment - - 2,042,942 -
Provision for loss on foreclosed real estate - - - 100,000
Provision for credit enhancement costs - - - 246,000
Income before income taxes 589,941 672,053 (1,256,865) 556,810
Income taxes 234,405 261,000 (500,498) 208,201
Net income (loss) $ 355,536 $ 411,053 $ (756,376) $ 348,609
Earnings per share (loss) $0.30 $0.35 $(0.64) $0.29
- -----------------------------------------------------------------------------------------------------------------
1995:
Total interest income $5,867,331 $6,100,713 $ 6,350,927 $6,116,853
Total interest expense 3,460,246 3,803,614 3,954,695 3,846,043
Net interest income 2,407,085 2,297,099 2,396,232 2,270,810
Provision for loan losses 90,000 90,000 90,000 90,000
Net interest income after provision for loan losses 2,317,085 2,207,099 2,306,232 2,180,810
Loan fees and service charges 336,468 341,691 371,245 406,121
Gain on sale of:
Loans receivable, investment securities and
mortgage backed securities 23,173 59,468 101,184 113,221
Income (Loss) from real estate developments (52,605) 147,578 (68,374) (80,272)
REO Operations - - - 115,573
Other noninterest operating income 33,002 38,411 39,840 18,117
Noninterest operating expense 2,174,191 2,289,044 2,304,124 2,236,921
Income before income taxes 482,932 505,203 446,003 516,649
Income taxes 180,550 193,535 168,050 201,170
Net income $ 302,382 $ 311,668 $ 277,953 $ 315,479
Earnings per share $0.26 $0.26 $0.23 $0.27
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
As computations for each quarter are independent, the sum of earnings per share
data for the quarters in each year may not equal earnings per share for the
year.
- --------------------------------------------------------------------------------
38
Income (Loss) from real estate developments
<PAGE>
Notes to Consolidated Financial Statements HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
(18) Parent Company Financial Information
The parent company only financial information as of and for the years ended
December 31, 1996, 1995, and 1994 is presented below and should be read in
conjunction with the other notes to the consolidated financial statements.
- --------------------------------------------------------------------------------
Statements of Financial Condition
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Assets:
Cash and cash equivalents $ 28,504 $ 88,534 $ 118,085
Investments 11,544 11,159 10,804
Equity in net assets of the Bank 20,830,674 20,337,651 18,905,641
Total assets $20,870,722 $20,437,344 $19,034,530
Liabilities:
Other liabilities $ 12,466 $ 13,844 $ 5,175
Stockholders' equity:
Common stock $ 11,287 $ 11,264 $ 11,220
Additional paid-in capital 6,492,542 6,465,178 6,435,874
Retained earnings 14,332,532 13,973,701 12,766,219
Unrealized gain (loss) on securities available for sale 21,895 (26,643) (184,498)
Total liabilities and stockholders' equity $20,870,722 $20,437,344 $19,034,530
Statements of Operations
Equity in earnings of the Bank:
Income before cumulative effect of change in
accounting principle $ 444,484 $ 1,274,155 $ 684,600
Cumulative effect of change in accounting principle - - (4,340,424)
Interest income 385 355 513
Other income (expense), net (140,893) (109,673) (122,466)
Income before income taxes 303,976 1,164,837 (3,777,777)
Income tax expense (benefit) (54,855) (42,645) 65,400
Net income (loss) $ 358,831 $ 1,207,482 $(3,712,377)
Statements of Cash Flows
Operating activities:
Net income (loss) $ 358,831 $ 1,207,482 $(3,712,377)
Deduct (add) equity in earnings of the Bank
not providing (using) funds (444,484) (1,274,155) 3,655,825
Net increase (decrease) in other liabilities (1,379) 8,129 13,280
Net decrease in other assets - - 45,448
Net cash provided (used) by operations (87,032) (58,544) 2,176
Purchase of investment security (385) (355) (216)
Net cash used by investing activities (385) (355) (216)
Exercise of stock options 27,387 29,348 -
Net cash provided by financing activities 27,387 29,348 -
Net increase (decrease) in cash (60,030) (29,551) 1,960
Cash and cash equivalents, beginning of year 88,534 118,085 116,125
- ----------------------------------------------------------------------------------------------------------
39
</TABLE>
<PAGE>
HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Directors and Executive Officers
- --------------------------------
[PHOTO OF KARL H. ERICKSON]
[PHOTO OF C. STEVEN SJOGREN]
[PHOTO OF JOHN R. PERKINS]
[PHOTO OF WESLEY E. LINDBERG]
[PHOTO OF ROBERT C. HAUSER]
[PHOTO OF ADAM A. JAHNS]
[PHOTO OF LARRY U. LARSON]
[PHOTO OF RICHARD W. MALMGREN]
[PHOTO OF DAVID R. RYDELL]
- --------------------------------------------------------------------------------
KARL H. ERICKSON
Chairman of the Board,
HomeCorp, Inc.
Past President/Hardware
Division, Amerock
Corporation, a
manufacturer of custom
window hardware.
C. STEVEN SJOGREN
President and Chief Executive
Officer, HomeCorp, Inc.
JOHN R. PERKINS
Executive Vice President and
Chief Financial Officer,
HomeCorp, Inc.
WESLEY E. LINDBERG
Secretary, HomeCorp, Inc.
Partner in the law firm of
Reno, Zahm, Folgate,
Lindberg & Powell.
ROBERT C. HAUSER
President, Hauser Inc.,
a lumber and building
materials supplier.
ADAM A. JAHNS
Past Chairman and CEO,
Cragin Financial Corp.
LARRY U. LARSON
Consultant, Larson and Darby,
Inc., an architectural,
engineering and planning firm.
RICHARD W. MALMGREN
Retired Executive, Clarcor, Inc.,
a products packaging company.
DAVID R. RYDELL
President of Bergstrom Inc.,
a manufacturer of vehicle
HVAC systems.
(additional officer)
DIRK J. MEMINGER
Treasurer and Chief Accounting
Officer, HomeCorp, Inc.
Officers--HomeBanc, fsb
- --------------------------------------------------------------------------------
C. STEVEN SJOGREN
President and Chief
Executive Officer
JOHN R. PERKINS
Executive Vice President
and Chief Operating Officer
WESLEY E. LINDBERG
Secretary
DIRK J. MEMINGER
Treasurer
MARSHA A. ABRAMSON
Senior Vice President/
Deposit Services
ROBERT R. BENNEHOFF
Senior Vice President/
Residential Lending
PETER T. ROCHE
Senior Vice President/
Commercial Lending
40
<PAGE>
HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
INVESTOR INFORMATION AND FORM 10-K
- ----------------------------------
Stockholder, stockbroker and security analyst inquiries should be directed to
HomeCorp's president. A copy of the company's annual report on Form 10-K is
available without charge by contacting:
C. STEVEN SJOGREN, President
HomeCorp, Inc.
1107 East State Street, P.O. Box 4779
Rockford, Illinois 61110-4779
815-987-2200
STOCK TRANSFER AGENT & REGISTRAR
- --------------------------------
The transfer agent, Firstar Trust Company, maintains all stockholder records and
can assist with stock transfer and registration, address changes, changes or
corrections in Social Security or tax identification numbers, and 1099 tax
reporting questions. If you have questions, please contact the stock transfer
agent at the address below.
FIRSTAR TRUST COMPANY
Corporate Trust Services
615 East Michigan Street, 4th Floor
Milwaukee, Wisconsin 53202
414-276-3737 . 1-800-637-7549
================================================================================
HOMECORP, INC. SHARES
The company's common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market(SM) under the symbol:
HMCI.
- --------------------------------------------------------------------------------
Common shares outstanding: 1,128,779
Stockholders of record: * 509
Estimated total owners: * 1,060
Market makers: These investment brokerage firms make a market in HomeCorp, Inc.
common stock.
EVEREN Securities, Inc.
Howe Barnes Investments, Inc.
*As of March 1, 1997
================================================================================
This pricing table for the corporation's common stock reflects high and low
sales prices reported by the NASDAQ since January 1, 1995.
<TABLE>
<CAPTION>
1996 1995
------------------------------------
High Low High Low
<S> <C> <C> <C> <C>
First quarter $18.00 $16.50 $15.00 $10.33
Second quarter 18.75 17.00 15.50 10.50
Third quarter 19.875 17.00 13.00 10.50
Fourth quarter 19.875 17.75 14.50 12.00
</TABLE>
- --------------------------------------------------------------------------------
No cash dividends have been paid on HomeCorp, Inc. common stock to date. For
information regarding restrictions on dividends, see Note (15) to the
Consolidated Financial Statements.
HOMEBANC
OFFICE LOCATIONS
ROCKFORD
1107 East State Street
815-987-2200
3210 Eleventh Street
815-987-2240
2641 North Mulford Road
815-987-2230
5875 Riverside Blvd.
815-636-4080
CherryVale Mall
815-322-5834
LOVES PARK
5629 North Second Street
815-633-1363
Freeport
205 West Stephenson Street
815-235-1000
1550 West Galena Avenue
815-235-1001
Dixon
98 Galena Avenue
815-288-3315
122 West Boyd
815-288-3315
HEADQUARTERS
HOMECORP, INC.
1107 East State Street
P.O. Box 4779
Rockford, Illinois
61110-4779
815-987-2200
- ----------------------
ANNUAL MEETING
The annual meeting of stockholders will convene at 4:00 p.m., Tuesday, April 22,
1997. It will be held in the Wallingford Center at the Best Western Clock Tower
Resort, located at 7801 East State Street in Rockford.
[HOMECORP LOGO]
<PAGE>
HomeCorp, Inc. and Subsidiary
- -----------------------------
<TABLE>
<CAPTION>
Consolidated Financial Highlights
========================================================================================
As of, or for the year ended
December 31
Dollars in thousands, except per share amounts 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets $335,824 $338,027 $330,412
Cash and cash equivalents, investment
securities held to maturity and investment
securities available for sale 32,140 25,227 39,843
Loans receivable and mortgage-backed securities 277,998 285,509 273,292
Deposit accounts 311,754 314,294 307,605
Stockholders' equity 20,858 20,424 19,029
- ----------------------------------------------------------------------------------------
Net interest income $ 9,496 $ 9,371 $ 9,025
Net income (loss) 359 1,207 (3,712)
Net income (loss) per share 0.30 1.03 (3.21)
Book value per share 18.48 18.13 16.96
- ----------------------------------------------------------------------------------------
Key ratios:
Net interest income to average earnings assets 3.04% 2.98% 2.98%
Net income to average assets 0.11 0.36 n/m
Net income to average stockholders' equity 1.72 5.49 n/m
Non-interest operating expenses to average assets* 2.98 2.67 2.62
Stockholders' equity to total assets 6.21 6.04 5.76
Non-performing assets to total assets 3.68 3.04 1.39
Reserve for loan losses to total loans 0.61 0.45 0.43
- ----------------------------------------------------------------------------------------
</TABLE>
n/m = not meaningful.
* Prior year amounts exclude goodwill amortization.
<TABLE>
<CAPTION>
Inside This Report
------------------
<S> <C>
President Message..................................................... 1
Marketing Overview.................................................... 2
Selected Financial Information........................................ 3
Management's Discussion and Analysis.................................. 4-13
Report of Independent Auditors........................................ 14
Consolidated Financial Statements..................................... 15-19
Notes to Consolidated Financial Statements............................ 20-39
Management and Shareholder Information................................ 40-41
</TABLE>
ABOUT HOMECORP
HomeCorp, Inc. was formed in 1989 to serve as the holding company for HomeBanc,
a federal savings bank.
In June 1990, HomeBanc converted from a mutual savings and loan to a stock
federal savings bank. The bank and its subsidiary account for substantially all
of the operations of HomeCorp. Inc.
HomeBanc was founded in 1889 in Rockford, Illinois. The institution ended 1996
with assets of $335.8 million and total stockholders' equity of $20.9 million.
HomeBanc operates ten offices in northern Illinois, including six in Rockford
and two each in Freeport and Dixon. The bank serves its customers with an
emphasis on personal service and a wide range of contemporary retail banking
products, including mortgage and consumer installment lending. HomeBanc also
markets financing and investment services for qualified small businesses. In
addition, stock, bond and annuity sales are promoted through a relationship with
INVEST Financial Corporation.
HomeCorp, Inc. shares are traded on the Nasdaq National Market System, using the
symbol HMCI.
<PAGE>
EXHIBIT 21
- ----------
SUBSIDIARIES OF THE REGISTRANT
- ------------------------------
<TABLE>
<CAPTION>
Percent State of
of Incorporation
Parent Subsidiary Ownership or Organization
- ----------------- -------------------- ---------- ---------------
<S> <C> <C> <C>
HomeCorp, Inc. HomeBanc, a 100% Federal
federal savings bank
HomeBanc, a federal Home Federal 100% Illinois
savings bank Service Corporation
</TABLE>
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of HomeCorp, Inc. of our report dated January 22, 1997, included in the 1996
Annual Report to Shareholders of HomeCorp, Inc.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-4252) pertaining to the HomeCorp, Inc. 1996 Premium Price
Stock Option and Incentive Plan and the Registration Statement (Form S-8 No.
33-74082) pertaining to the HomeCorp, Inc. 1990 Stock Option and Incentive Plan
of our report dated January 22, 1997, with respect to the consolidated financial
statements of HomeCorp, Inc. incorporated by reference in the Annual Report
(Form10-K) for the year ended December 31, 1996.
/s/ Ernst and Young LLP
-----------------------
ERNST & YOUNG LLP
Chicago, Illinois
March 28, 1997
<PAGE>
[LOGO OF PEAT MARWICK LLP APPEARS HERE]
The Board of Directors
HomeCorp, Inc:
We have audited the consolidated statements of operations, changes in
stockholders' equity and cash flows of HomeCorp, Inc. and subsidiary for the
year ended December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
HomeCorp, Inc. and subsidiary for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill to adopt the provisions of the
Financial Accounting Standards Board's SFAS No. 72, "Accounting for Certain
Acquisitions of Banking and Thrift Institutions," on January 1, 1994.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
February 24, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 13,959
<INT-BEARING-DEPOSITS> 181
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,497
<INVESTMENTS-CARRYING> 24,361
<INVESTMENTS-MARKET> 24,048
<LOANS> 260,722
<ALLOWANCE> 1,582
<TOTAL-ASSETS> 335,824
<DEPOSITS> 311,754
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,212
<LONG-TERM> 0
0
0
<COMMON> 11
<OTHER-SE> 20,847
<TOTAL-LIABILITIES-AND-EQUITY> 335,824
<INTEREST-LOAN> 21,788
<INTEREST-INVEST> 2,203
<INTEREST-OTHER> 390
<INTEREST-TOTAL> 24,381
<INTEREST-DEPOSIT> 14,749
<INTEREST-EXPENSE> 14,885
<INTEREST-INCOME-NET> 9,496
<LOAN-LOSSES> 565
<SECURITIES-GAINS> (10)
<EXPENSE-OTHER> 12,153
<INCOME-PRETAX> 562
<INCOME-PRE-EXTRAORDINARY> 359
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 359
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
<YIELD-ACTUAL> 3.04
<LOANS-NON> 2,146
<LOANS-PAST> 1,445
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 197
<ALLOWANCE-OPEN> 1,175
<CHARGE-OFFS> 163
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 1,582
<ALLOWANCE-DOMESTIC> 1,582
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
