<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended December 31, 1996 Commission File Number 0-22224
- -------------------------------------------------------------------------------
HALLMARK CAPITAL CORP.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1762467
(State of Incorporation) (I.R.S. Employer Identification No.)
7401 West Greenfield Avenue
West Allis, Wisconsin 53214
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (414) 317-7100
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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes [X] No [ ]
(2) Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, par value $1.00
per share, was 1,422,950 at February 5, 1997, the latest possible date.
<PAGE> 2
HALLMARK CAPITAL CORP. AND SUBSIDIARY
FORM 10-Q
<TABLE>
<S> <C> <C> <C>
Part I. Financial Information
---------------------
Item 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition
as of December 31, 1996 (unaudited) and June 30, 1996 ............ 3
Consolidated Statements of Income for the Three and Six Months
ended December 31, 1996 and 1995 (unaudited) ..................... 4
Consolidated Statements of Shareholders' Equity
for the Six Months Ended December 31, 1996 and 1995 (unaudited) .. 5
Consolidated Statements of Cash Flows for the Six Months
ended December 31, 1996 and 1995 (unaudited) ..................... 6
Notes to Consolidated Financial Statements (unaudited) ............ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 13
Part II. Other Information
-----------------
Item 1. Legal Proceedings ................................................. 30
Item 2. Changes in Securities ............................................. 30
Item 3. Default Upon Senior Securities .................................... 30
Item 4. Submission of Matters to a Vote of Security Holders ............... 30
Item 5. Other Information ................................................. 30
Item 6. Exhibits and Reports on Form 8-K .................................. 31
Signature Page .................................................... 33
</TABLE>
2
<PAGE> 3
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
------------ --------
ASSETS (Unaudited)
<S> <C> <C>
Cash and non-interest bearing deposits ......................... $ 1,877 $ 2,136
Interest-bearing deposits ...................................... 4,136 2,689
------------ --------
Cash and cash equivalents ...................................... 6,013 4,825
Securities available-for-sale (at fair value):
Investment securities ......................................... 18,945 19,358
Mortgage-backed and related securities ........................ 13,916 17,926
Securities held-to-maturity:
Investment securities (fair value - $780 at December 31, 1996;
$978 at June 30, 1996) ....................................... 780 978
Mortgage-backed and related securities (fair value -
$91,170 at December 31, 1996; $97,239 at June 30, 1996) ...... 90,825 97,332
Loans receivable, net .......................................... 254,964 224,807
Investment in Federal Home Loan Bank stock, at cost ............ 5,229 5,119
Foreclosed properties, net ..................................... 18 -
Office properties and equipment ................................ 2,945 2,939
Prepaid expenses and other assets .............................. 3,173 3,873
------------ --------
Total assets .............................................. $396,808 $377,157
============ ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits ...................................................... $260,482 $229,675
Notes payable to Federal Home Loan Bank ....................... 104,586 102,386
Securities sold under agreements to repurchase ................ - 11,568
Advance payments by borrowers for taxes and insurance ......... 618 3,554
Accrued interest on deposit accounts and other borrowings ..... 1,620 1,523
Accrued expenses and other liabilities ........................ 1,428 1,440
------------ --------
Total liabilities ......................................... $368,734 $350,146
Shareholders' Equity:
Preferred stock, $1.00 par value; authorized 2,000,000 shares;
none outstanding ............................................. - -
Common stock, $1.00 par value; authorized 6,000,000 shares;
issued 1,581,250 shares; outstanding 1,442,950 shares ........ 1,581 1,581
Additional paid-in capital .................................... 10,525 10,465
Unearned ESOP compensation .................................... (686) (740)
Unearned restricted stock award ............................... (250) (334)
Net unrealized depreciation on securities available for sale .. (246) (595)
Treasury stock, at cost: 138,300 shares ...................... (1,592) (1,592)
Retained earnings, substantially restricted ................... 18,742 18,226
------------ --------
Total shareholders' equity ................................ $ 28,074 $ 27,011
------------ --------
Total liabilities and shareholders' equity ................ $396,808 $377,157
============ ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE> 4
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable.......................................... $ 5,021 $ 3,211 $ 9,712 $ 6,083
Securities and interest-bearing deposits.................. 1,855 1,905 3,778 3,494
Mortgage-backed and related securities.................... 458 412 909 956
------ ------ ------ -------
Total interest income.................................... 7,334 5,528 14,399 10,533
INTEREST EXPENSE:
Deposits.................................................. 3,427 2,474 6,555 4,591
Advance payments by borrowers for taxes and insurance..... 36 31 67 59
Notes payable and other borrowings........................ 1,533 1,248 3,155 2,452
------ ------ ------ -------
Total interest expense................................... 4,996 3,753 9,777 7,102
------ ------ ------ -------
Net interest income......................................... 2,338 1,775 4,622 3,431
Provision for losses on loans............................... 170 99 354 124
------ ------ ------ -------
Net interest income after provision for losses on loans..... 2,168 1,676 4,268 3,307
NON-INTEREST INCOME:
Service charges on loans.................................. 45 35 79 63
Service charges on deposit accounts....................... 127 134 256 254
Loan servicing fees, net.................................. 22 27 44 55
Insurance commissions..................................... 27 36 48 71
Gain on sale of securities and
mortgage-backed and related securities, net.............. - 39 7 43
Gain on sale of loans..................................... 5 42 13 51
Other income.............................................. 13 38 30 46
------ ------ ------ -------
Total non-interest income................................ 239 351 477 583
NON-INTEREST EXPENSE:
Compensation and benefits................................. 888 756 1,762 1,447
Marketing................................................. 102 88 150 157
Occupancy and equipment................................... 207 184 445 384
Deposit insurance premiums................................ (11) 90 1,004 167
Other non-interest expense................................ 327 268 578 466
------ ------ ------ -------
Total non-interest expense............................... 1,513 1,386 3,939 2,621
------ ------ ------ -------
Income before income taxes.................................. 894 641 806 1,269
Income taxes................................................ 321 220 290 446
------ ------ ------ -------
Net income................................................ $ 573 $ 421 $ 516 $ 823
====== ====== ====== =======
Earnings per share........................................ $ 0.40 $ 0.30 $ 0.36 $ 0.59
====== ====== ====== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
4
<PAGE> 5
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Unearned Unearned Unrealized
Common Paid-In ESOP Restricted Gains Treasury Retained
Stock Capital Compensation Stock (Losses) Stock Earnings Total
------ ---------- ------------ ---------- ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED DECEMBER 31, 1996
- -----------------------------------------
Balance at June 30, 1996 ................. $1,581 $10,465 ($740) ($334) ($595) ($1,592) $18,226 $27,011
Net loss ................................. - - - - - - 516 516
Amortization of unearned ESOP and
restricted stock award compensation ..... - 60 54 84 - - - 198
Unrealized appreciation on securities
available for sale, net of tax benefit .. - - - - 349 - - 349
------ ---------- ------------ ---------- ---------- -------- -------- -------
Balance at December 31, 1996 ............. $1,581 $10,525 ($686) ($250) ($246) ($1,592) $18,742 $28,074
====== ========== ============ ========== ========== ======== ======== =======
SIX MONTHS ENDED DECEMBER 31, 1995
- ----------------------------------
Balance at June 30, 1995 ................ $1,581 $10,360 ($861) ($502) ($74) ($1,592) $16,348 $25,260
Net income .............................. - - - - - - 823 823
Amortization of unearned ESOP and
restricted stock award compensation ..... - 48 50 84 - - - 182
Unrealized appreciation on securities
available for sale, net of tax benefit .. - - - - 89 - - 89
------ ---------- ------------ ---------- ---------- -------- -------- -------
Balance at December 31, 1995 ............ $1,581 $10,408 ($811) ($418) ($15) ($1,592) $17,171 $26,354
====== ========== ============ ========== ========== ======== ======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
5
<PAGE> 6
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income................................................................... $ 516 $ 823
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Provision for losses on loans............................................... 354 124
Provision for depreciation and amortization................................. 129 94
Deferred income taxes....................................................... - (50)
Net gain on sales of investments and
mortgage-backed and related securities..................................... (7) (43)
Net gain on sale of loans................................................... (13) (51)
Amortization of unearned ESOP and restricted stock awards................... 198 182
Loans originated for sale................................................... (922) (8,771)
Sales of loans originated for sale.......................................... 922 2,545
(Increase) decrease in prepaid expenses and other assets.................... 473 (459)
Other adjustments........................................................... 111 896
-------- --------
Net cash provided by (used in) operating activities......................... 1,761 (4,710)
-------- --------
INVESTING ACTIVITIES
Proceeds from sale of securities available-for-sale.......................... 1,454 22,455
Proceeds from the maturity of securities available-for-sale.................. 500 -
Purchases of securities available-for-sale................................... (1,219) (20,767)
Purchases of investment securities held-to-maturity.......................... - (483)
Proceeds from maturities of investment securities held-to-maturity........... 198 95
Purchases of mortgage-backed and related securities.......................... - (42,745)
Proceeds from sale of mortgage-backed and related securities................. 435 -
Principal collected on mortgage-backed and related securities................ 10,323 11,076
Net change in loans receivable............................................... (30,522) (17,655)
Proceeds from sales of foreclosed properties................................. - 150
Purchase of Federal Home Loan Bank stock..................................... (110) (700)
Purchases of office properties and equipment, net............................ (135) (126)
-------- --------
Net cash used in investing activities........................................ (19,076) (48,700)
-------- --------
FINANCING ACTIVITIES
Net increase in deposits..................................................... 30,807 54,708
Proceeds from long-term notes payable to Federal Home Loan Bank.............. 15,000 -
Net increase (decrease) in short-term notes payable to Federal Home Loan Bank (10,800) 300
Repayment of long-term notes payable to Federal Home Loan Bank............... (2,000) -
Net increase (decrease) in securities sold under agreements to repurchase.... (11,568) 277
Net decrease in advance payments by borrowers for taxes and insurance........ (2,936) (2,970)
-------- --------
Net cash provided by financing activities.................................... 18,503 52,315
-------- --------
Increase (decrease) in cash and cash equivalents............................. 1,188 (1,095)
Cash and cash equivalents at beginning of period............................. 4,825 6,820
-------- --------
Cash and cash equivalents at end of period................................... $ 6,013 $ 5,725
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
6
<PAGE> 7
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-----------------
1996 1995
----- ----
(IN THOUSANDS)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid (including amounts credited to deposit accounts).. $9,705 $6,817
Income taxes paid............................................... $367 $387
Mortgage loans securitized as mortgage-backed securities........ - $1,767
Loans transferred to foreclosed properties...................... $24 $126
Securities and mortgage-backed securities reclassified
to securities available-for-sale............................... - -
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
7
<PAGE> 8
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles (GAAP) for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results for the interim
periods have been included.
The results of operations and other data for the three and six months ended
December 31, 1996 are not necessarily indicative of results that may be
expected for the entire fiscal year ending June 30, 1997.
The unaudited consolidated financial statements include the accounts of
Hallmark Capital Corp. (the "Company") and its wholly-owned subsidiary, West
Allis Savings Bank and subsidiaries (the "Bank") as of and for the three and
six months ended December 31, 1996. All material intercompany accounts and
transactions have been eliminated in consolidation.
(2) EARNINGS PER SHARE
Earnings per share of common stock for the three and six months ended December
31, 1996 have been computed by dividing net income for the period by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period. Stock options are regarded as common stock
equivalents and are therefore considered in per share calculations. Common
stock equivalents are computed using the treasury stock method. The
computation of earnings per share is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended December 31, 1996 Primary Fully Diluted
--------------------------------------------------- --------- -------------
<S> <C> <C>
Weighted average common shares outstanding .. 1,442,950 1,442,950
Ungranted restricted stock .................. (9,231) (9,231)
Uncommitted ESOP shares ..................... (87,496) (87,496)
Common stock equivalents due to
dilutive effect of stock options ........... 83,451 85,295
--------- -------------
Total weighted average common shares
and equivalents outstanding ................ 1,429,674 1,431,518
========= =============
Net income for period ....................... $573,000 $573,000
Earnings per share .......................... $0.40 $0.40
========= =============
For the Six Months Ended December 31, 1996
---------------------------------------------------
Weighted average common shares outstanding .. 1,442,950 1,442,950
Ungranted restricted stock .................. (9,231) (9,231)
Uncommitted ESOP shares ..................... (87,496) (87,496)
Common stock equivalents due to
dilutive effect of stock options ........... 78,762 85,295
--------- -------------
Total weighted average common shares
and equivalents outstanding ................ 1,424,985 1,431,518
========= =============
Net income for period ....................... $516,000 $516,000
Earnings per share .......................... $0.36 $0.36
========= =============
</TABLE>
8
<PAGE> 9
(3) REGULATORY CAPITAL ANALYSIS
Under the Federal Deposit Insurance Corporation ("FDIC") capital regulations,
the Bank is required to meet the following capital standards: (1) "Tier 1
capital" in an amount not less than 3% of total assets; (2) "Tier 1 leverage
capital" in an amount not less than 4% of risk-weighted assets; and (3) "total
capital" in an amount not less than 8% of risk-weighted assets. Tier 1 capital
is defined to include the Bank's common shareholders' equity. Total capital is
defined to include Tier 1 capital plus the allowance for loan losses. The
risk-based capital requirements presently address credit risk related to both
recorded assets and off-balance sheet commitments and obligations.
Risk-weighted assets, for regulatory measurement purposes, at December 31,
1996, totaled $219,638,000.
The Bank's regulatory capital as of December 31, 1996 was as follows (dollars
in thousands):
<TABLE>
<S> <C> <C>
Tier 1 Total
Capital Capital
------- -------
Total consolidated shareholders' equity ..... $28,074 $28,074
Less Holding Company shareholders' equity
not available for bank regulatory capital .. (3,687) (3,687)
Loan loss allowances ........................ - 1,520
Net unrealized depreciation on
available-for-sale debt securities ......... 234 234
------- -------
Regulatory capital ......................... $24,621 $26,141
======= =======
</TABLE>
The following table summarizes the Bank's capital amounts and capital ratios,
and the capital ratios required by the FDIC at December 31, 1996 on a
fully-phased-in basis (dollars in thousands):
<TABLE>
<CAPTION>
Actual Required Actual Required
Amount Amount Excess Ratio Ratio Excess
------- -------- ------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital leverage .. $24,621 $11,905 $12,716 6.20% 3.00% 3.20%
Tier 1 capital ........... 24,621 8,786 15,835 11.21% 4.00% 7.21%
Total capital ............ 26,141 17,571 8,570 11.90% 8.00% 3.90%
</TABLE>
As a state-chartered stock savings bank, the Bank is also subject to the
minimum regulatory capital requirements of the State of Wisconsin. At December
31, 1996, on a fully-phased-in basis of 6.0%, the Bank had actual capital of
$25,907,000 with a required amount of $23,926,000.
9
<PAGE> 10
(4) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
----------- ------------
(IN THOUSANDS)
Increase
Amount Percent Amount Percent (Decrease)
-------- -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential one-to-four family ........ $168,754 61.8% $153,689 61.8% $15,065
Residential multi-family .............. 23,649 8.7% 19,788 8.0% 3,861
Commercial real estate ................ 9,274 3.4% 5,488 2.2% 3,786
Residential construction .............. 33,995 12.5% 37,016 14.9% (3,021)
Other construction and land ........... 8,165 3.0% 6,491 2.6% 1,674
-------- -------- -------- ------- ----------
Total real estate mortgage loans ... 243,837 89.4% 222,472 89.5% 21,365
Consumer-related loans:
Home equity ........................... 22,286 8.2% 19,349 7.8% 2,937
Automobile ............................ 1,492 0.5% 1,774 0.7% (282)
Credit card ........................... 2,953 1.1% 2,585 1.0% 368
Other consumer loans .................. 2,184 0.8% 2,372 1.0% (188)
-------- -------- -------- ------- ----------
Total consumer-related loans ....... 28,915 10.6% 26,080 10.5% 2,835
-------- -------- -------- ------- ----------
Gross loans ........................ 272,752 100.0% 248,552 100.0% $24,200
Accrued interest receivable ............ 1,541 1,287
Less:
Undisbursed portion of loan proceeds .. (17,703) (23,770)
Deferred loan fees .................... (95) (18)
Unearned interest ..................... (11) (10)
Allowances for loan losses ............ (1,520) (1,234)
-------- --------
$254,964 $224,807
======== ========
</TABLE>
10
<PAGE> 11
(5) MORTGAGE-BACKED AND RELATED SECURITIES
The following is a summary of held-to-maturity mortgage-backed and related
securities by issuer.
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- ---------
At December 31, 1996: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation (FHLMC) ... $ 5,034 $ 77 $ 15 $ 5,096
Federal National Mortgage Association (FNMA) ..... 17,269 258 64 17,463
Government National Mortgage Association (GNMA) .. 973 40 - 1,013
Private issuers .................................. 26,965 23 59 26,929
----------- ----------- ----------- ---------
$50,241 $398 $138 $50,501
----------- ----------- ----------- ---------
Collateralized mortgage obligations:
FHLMC ............................................ $14,226 $296 $ 55 $14,467
FNMA ............................................. 18,803 104 243 18,664
Private issuers .................................. 7,555 44 61 7,538
----------- ----------- ----------- ---------
$40,584 $444 $359 $40,669
----------- ----------- ----------- ---------
Total mortgage-backed and related securities .... $90,825 $842 $497 $91,170
=========== =========== =========== =========
At June 30, 1996:
Mortgage-backed securities:
FHLMC ............................................ $ 6,484 $ 70 $ 45 $ 6,509
FNMA ............................................. 19,127 180 150 19,157
GNMA ............................................. 1,379 54 - 1,433
Private issuers .................................. 28,801 1 278 28,524
----------- ----------- ----------- ---------
$55,791 $305 $473 $55,623
----------- ----------- ----------- ---------
Collateralized mortgage obligations:
FHLMC ............................................ $14,222 $358 $ 40 $14,540
FNMA ............................................. 19,332 111 273 19,170
Private issuers .................................. 7,987 5 86 7,906
----------- ----------- ----------- ---------
$41,541 $474 $399 $41,616
----------- ----------- ----------- ---------
Total mortgage-backed and related securities .... $97,332 $779 $872 $97,239
=========== =========== =========== =========
</TABLE>
The following is a summary of held-to-maturity mortgage-backed and related
securities.
<TABLE>
<S> <C> <C> <C> <C> <C>
At December 31, 1996:
Held-To-Maturity:
Mortgage-backed securities:
Adjustable-rate ................... $44,636 $344 $61 $44,919
Fixed-rate ........................ 5,605 54 77 5,582
Collateralized mortgage obligations:
Adjustable-rate ................... $31,225 $391 $310 $31,306
Fixed-rate ........................ 9,359 53 49 9,363
------ ------- ---- -------
$90,825 $842 $497 $91,170
======= ==== ===== =======
At June 30, 1996:
Held-To-Maturity:
Mortgage-backed securities:
Adjustable-rate ................... $49,256 $234 $315 $49,175
Fixed-rate ........................ 6,534 72 158 6,448
Collateralized mortgage obligations:
Adjustable-rate ................... $31,349 $464 $284 $31,529
Fixed-rate ........................ 10,193 9 115 10,087
------- ---- ------- -------
$97,332 $779 $872 $97,239
======= ==== ==== =======
</TABLE>
11
<PAGE> 12
(6) NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1996
-------------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY AMOUNT RATE AMOUNT RATE
-------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Advances from
Federal Home Loan Bank 1996 $ - - $ 23,200 5.77%
1997 44,500 5.64% 27,100 5.79
1998 21,000 5.44 20,000 5.44
1999 16,000 6.65 18,000 6.06
2000 12,016 6.47 8,016 6.53
2001 3,000 5.91 3,000 5.91
2002 5,000 6.43 - -
2003 3,070 5.60 3,070 5.60
--------- --------
$104,586 5.90% $102,386 5.82%
========= ==== ======== ========
Securities sold under
agreements to repurchase 1996 $ 0 0.00% $ 11,568 5.61%
========= ========
</TABLE>
FHLB advances totaled $104.6 million or 100.0% and $102.4 million or 89.8% of
total borrowings at December 31, 1996 and June 30, 1996, respectively. The
Company is required to maintain as collateral unencumbered one-to-four family
mortgage loans in its portfolio such that the outstanding balance of FHLB
advances does not exceed 60% of the book value of this collateral. The Company
had delivered mortgage-backed securities with a carrying value of $21,207,000
and $23,600,000 at December 31, 1996 and June 30, 1996, respectively. In
addition, all FHLB advances are collateralized by all Federal Home Loan Bank
stock and are subject to prepayment penalties. The Company's unused advance
line with the Federal Home Loan Bank was $14.4 million at December 31, 1996.
The Company enters into sales of mortgage-backed securities with agreements to
repurchase identical securities (reverse repurchase agreements) and
substantially identical securities (dollar reverse repurchase agreements).
These transactions are treated as financings with the obligations to repurchase
securities reflected as a liability. The dollar amount of securities
underlying the agreements remains in the asset accounts. The securities
underlying the agreements are delivered to the counterparty's account.
Liabilities recorded under agreements to repurchase identical and substantially
identical securities were $0 and $11,568,000 at December 31, 1996 and June 30,
1996, respectively. The reverse repurchase agreements had a weighted average
underlying coupon interest rate of 5.61% at June 30, 1996, and matured within
30 days of the date indicated. The agreements were collateralized by
mortgage-backed certificates with a carrying value and market value of
$11,841,000 and $12,115,000, respectively, at June 30, 1996.
12
<PAGE> 13
HALLMARK CAPITAL CORP. AND SUBSIDIARY
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q or future filings with the
Securities and Exchange Commission, in annual reports or press releases or
other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, various words or phrases are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include words and phrases such as: "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions and various other statements indicated herein with an
asterisk after such statements. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only
as of the date made, and to advise readers that various factors could affect
the Company's financial performance and could cause actual results for future
periods to differ materially from those anticipated or projected. Such factors
include, but are not limited to: (i) general market rates, (ii) general
economic conditions, (iii) legislative/regulatory changes, (iv) monetary and
fiscal policies of the U.S. Treasury and Federal Reserve, (v) changes in the
quality or composition of the Company's loan and investment portfolios, (vi)
demand for loan products, (vii) deposit flows, (viii) competition, (ix) demand
for financial services in the Company's markets, and (x) changes in accounting
principles, policies or guidelines.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
GENERAL
Hallmark Capital Corp. (the "Company") is the holding company for West Allis
Savings Bank (the "Bank"), a Wisconsin state-chartered savings bank. The
Bank's principal business consists of attracting funds in the form of deposits
and other borrowings and investing such funds primarily in residential real
estate loans, mortgage-backed and related securities and various types of
consumer loans. In order to maximize shareholder value, the Company continues
to pursue a strategy of effectively utilizing the capital acquired in the
Bank's conversion from mutual to stock form and the Company's initial public
offering consummated in December 1993 (the "Conversion"). The Company believes
that its effective utilization of capital is best achieved through the growth
of the Company's business. This growth is to be achieved primarily through the
expansion of the Company's asset base and diversification of the Company's
portfolio into higher yielding assets.
Commencing in fiscal 1994 and continuing through 1996, the Company has taken
the first step and implemented this strategy by leveraging its capital base to
achieve asset growth. This leveraging strategy was designed to reach a
targeted asset size for the Company established by the Board of Directors
within a three-to-five year period following the Conversion while maintaining
adequate capital ratios. The Company increased its asset size from $179.6
million at June 30, 1994 to $377.2 million at June 30, 1996. The Bank's
principal investment focus during this three-year post-Conversion period was to
originate and purchase mortgage loans (principally loans secured by
one-to-four family owner-occupied homes) and purchase mortgage-backed and
related securities. The asset growth was funded through significant increases
in Federal Home Loan Bank ("FHLB") advances and other borrowings and increases
in deposits, primarily brokered and non-brokered wholesale deposits. Pursuit
of the foregoing strategy contributed to increases in the Company's net income,
earnings per share, return on average equity ("ROAE") and return on average
assets ("ROAA") in fiscal 1994, 1995 and 1996.
In fiscal 1997, the Company intends to implement the second phase of its
strategic plan by slowing its asset growth and focusing on asset portfolio
diversification. While the Company intends to continue to originate
13
<PAGE> 14
and purchase one-to-four family mortgage loans, the Company's long-term
objective is to increase net income by increasing the proportion of higher
yielding assets in its loan portfolio. In the event the origination and
purchase of one-to-four family mortgage loans exceeds the percentage of
portfolio targets under the Company's assets portfolio diversification plan,
the Company may consider sales of such loans in the secondary market. The
Company began to implement this strategy in the second half of fiscal 1996 by
increasing the multi-family real estate, multi-family construction and
commercial/nonresidential real estate components of its loan portfolio.
Portfolio diversification in fiscal 1997 will include continued investments in
these types of loans, both within its primary lending area, and through
purchases of loans or participation interests in loans originated by other
lenders within and outside of its primary lending area, including loans or
participation interests in loans secured by properties located outside the
state of Wisconsin. In deciding whether or not to purchase a loan or
participation interest in a loan originated outside of the Company's primary
lending area, management of the Company has applied, and continues to apply,
underwriting guidelines which are as strict as those applicable to the
origination of similar loans within its primary lending area.
The Company anticipates that during the last six months of the current fiscal
year, the operations of the Bank's commercial loan division will be active in
the origination of commercial loans and deposits. Kenneth Dexter, as
previously announced, has joined the Bank as President of the Commercial
Lending Division to oversee the startup and growth of this new division of the
Bank. The Company anticipates that the focus of its commercial lending
operation will be small business loans and anticipates the division should
generate approximately $10.0 million to $15.0 million in commercial loans
during its first year of operations.*
The Company intends to fund its asset portfolio diversification in fiscal 1997
through a combination of retail deposits, brokered deposits, borrowings, the
maturity and sale of mortgage-backed and related securities, and management may
consider the sale of 1-4 family mortgage loans.
Management anticipates that as the Company's volume of multi-family and
commercial/nonresidential real estate lending activity continues to increase,
the Company will need to build a higher level of allowance for loan losses
established through a provision for loan losses.* However, the Company
believes that building the higher yielding multi-family and
commercial/nonresidential real estate components of its gross loan portfolio
will benefit the Company longer term, and should contribute to a long-term
improvement in the Company's net income and return on equity.*
RECENT REGULATORY DEVELOPMENTS
Deposits of the Bank currently are insured to applicable limits by the FDIC
under the Savings Associations Insurance Fund ("SAIF"). The FDIC also insures
commercial bank deposits under the Bank Insurance Fund ("BIF"). Premium levels
are set in order to permit the funds to be capitalized at a level equal to
1.25% of total fund deposits. Assessment rate changes made in 1995 created a
deposit insurance premium disparity between the two funds; while most BIF
members were paying only a nominal $2,000 annual premium, SAIF members were
paying average rates of 23.4 basis points of deposits.
On September 30, 1996, Congress passed legislation to address the deposit
insurance premium disparity. The "Deposit Insurance Funds Act of 1996" (the
"DIF Act"), included as part of an Omnibus Appropriations Bill, directed the
FDIC to impose a special assessment on SAIF-assessable deposits at a rate that
would cause the SAIF to achieve its designated reserve ratio of 1.25% of
SAIF-insured deposits as of October 1, 1996. The DIF Act requires that the
special assessment be applied against the SAIF-assessable deposits held by
institutions as of March 31, 1995. Pursuant to a final rule issued by the FDIC
on October 16, 1996, the special assessment rate was determined to be 65.7
basis points. This one-time special assessment fully capitalized the SAIF and
was collected on November 27, 1996.
The amount of the assessment to the Bank was $877,000. The special assessment
was recorded on September 30, 1996 and had the effect of reducing the Bank's
earnings and capital by the after-tax amount of the assessment as of the date
of enactment, which was $533,000 or $0.38 per share. As described
14
<PAGE> 15
below, with the recapitalization of the SAIF, it is currently anticipated that
BIF and SAIF regular premiums will be comparable and FDIC premium expense is
expected to therefore be reduced in future periods.*
The FDIC published a final rule on December 24, 1996, establishing a permanent
base assessment schedule for the SAIF and setting assessment rates at a range
of 4 to 31 basis points. The rule provides for an adjusted assessment schedule
reducing these rates by 4 basis points to reflect current conditions, producing
an effective SAIF assessment range of 0 to 27 basis points beginning October 1,
1996. This assessment range, which applies to all SAIF institutions other than
SAIF member savings associations, is comparable to the current schedule for
BIF-institutions. A special interim rate schedule ranging from 18 to 27 basis
points applies to SAIF-member savings associations for the last quarter of
1996, reflecting the fact that assessments related to certain bond obligations
of the Financial Corporation ("FICO"), which were issued to resolve the savings
and loan crisis in the 1980's, will be included in the SAIF rates for these
institutions during that period. Because the Bank is a "Sasser bank" (a bank
that converted its charter from a savings association to a state savings bank
charter, yet remains a SAIF member in accordance with the so-called "Sasser
Amendment"), it was not assessed this interim rate and received a credit in
January 1997 for its entire FDIC premium for the quarter ended December 31,
1996.
The DIF Act addresses other matters which will affect the Bank. The FICO
obligations will be shared by all insured depository institutions beginning
after December 31, 1996. This obligation had previously been the sole
responsibility of SAIF-insured institutions and had been funded through SAIF
assessments. The DIF Act eliminated the statutory link between FICO's
assessments and amounts authorized to be assessed by the SAIF, effective
January 1, 1997. All insured institutions will pay an annual assessment to
fund interest payments on the FICO bonds. Beginning in 1997, BIF-member
institutions will pay one-fifth the rate to be paid by SAIF members, for the
first three years. The annual FICO assessment is 1.3 and 6.5 basis points of
deposits for BIF and SAIF members, respectively. After January 1, 2000, BIF
and SAIF members will share the FICO payments on a pro-rata basis, which is
assessed at 2.4 basis points, until the bonds mature in 2017.
In addition, the DIF Act provides for the merger of BIF and SAIF into a single
Deposit Insurance Fund. This provision will be effective January 1, 1999,
assuming that no insured depository institution is a savings association on
that date. This legislation contemplates that the savings association charter
will be phased out over that period of time. The DIF Act also calls for the
Secretary of the Treasury to undertake a study concerning the development of a
common charter for all insured depository institutions and the abolition of
separate and distinct charters for banks and savings associations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are retail and wholesale brokered
deposits, proceeds from principal and interest payments on loans, principal and
interest payments on mortgage-backed and related securities and FHLB-Chicago
advances. Alternative funding sources are evaluated and utilized based upon
factors such as interest rates, availability, maturity, administrative costs
and retention capability. Although maturity and scheduled amortization of
loans are predicable sources of funds, deposit flows, mortgage prepayments and
prepayments on mortgage-backed and related securities are influenced
significantly by general interest rates, economic conditions and competition.
Mortgage loans and mortgage securities prepayments accelerated in the fiscal
year ended June 30, 1994 as interest rates decreased and declined in fiscal
1995 as interest rates increased, and increased in fiscal 1996 as interest
rates declined for the first half of the fiscal year before increasing in the
last half of the fiscal year. Interest rates declined during the six months
ended December 31, 1996.
The primary investing activity of the Company is the origination and purchase
of loans and the purchase of mortgage-backed and related securities. For the
six months ended December 31, 1996, the Company originated and purchased loans
totaling $42.1 million and $10.5 million, respectively, as compared to the six
months ended December 31, 1995 when originated and purchased loans totaled
$28.7 million and $9.5 million, respectively. There were no purchases of
mortgage-backed and related securities for the six months
15
<PAGE> 16
ended December 31, 1996, and $42.7 million for the six months ended December
31, 1995. There were no purchases of investment securities for the six months
ended December 31, 1996 and 1995. For the six months ended December 31, 1996
and 1995, these activities were funded primarily by principal repayments on
loans of $27.5 million and $18.6 million, respectively; principal repayments on
mortgage-backed and related securities of $10.3 million and $11.1 million,
respectively; proceeds from the sale of mortgage loans of $922,000 and $2.5
million, respectively; net increase in deposits of $30.8 million and $54.7
million, respectively; and proceeds from notes payable to the FHLB-Chicago of
$15.0 million and $300,000, respectively. Purchases of securities
available-for-sale totaled $1.2 million and sales were $1.5 million for the six
months ended December 31, 1996, compared to purchases of $20.8 million and
sales of $22.5 million for the six months ended December 31, 1995.
The Company is required to maintain minimum levels of liquid assets under the
regulations of the Department of Financial Institutions, Division of Savings
and Loan for state-chartered stock savings banks. Savings banks are required
to maintain an average daily balance of liquid assets (including cash, certain
time deposits, certain bankers acceptances, certain corporate debt securities,
securities of certain mutual funds and specified United States government,
state or federal agency obligations) of not less than 8.0%. The Company's
liquidity ratio was 21.28% at December 31, 1996. The Company adjusts its
liquidity levels to meet various funding needs and to meet its asset and
liability management objectives.
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly-liquid, short-term investments. The levels of these
assets are dependent on the Company's operating, financing, lending and
investing activities during any given period. At December 31, 1996 and June
30, 1996, cash and cash equivalents were $6.0 million and $4.8 million,
respectively. The increase in cash and cash equivalents for the six months
ended December 31, 1996 resulted primarily from an increase in net cash
provided by financing activities. The principal component of the increase in
cash was a net increase in wholesale brokered and non-brokered deposits of
$20.5 million.
During the six months ended December 31, 1996, the Company continued to find
wholesale brokered and non-brokered deposits to be an efficient source and a
cost-effective method, relative to local retail market deposits, of meeting the
Bank's funding needs. In fiscal 1996, pricing of wholesale brokered deposits
ranged from 20 to 40 basis points above comparable term U.S. Treasury
securities. At December 31, 1996, the average rate of the wholesale brokered
deposits accepted by the Company was 5.92% compared to an average rate paid for
retail certificates of deposit of 5.77%. During the six months ended December
31, 1996, management believes that the costs, overhead and interest expense of
achieving comparable retail deposit growth would have exceeded the costs
related to the use of wholesale brokered deposits as a funding source.
However, management recognizes that the likelihood for retention of brokered
certificates of deposit is more a function of the rate paid on such accounts as
compared to retail deposits which may be established due to Bank location or
other intangible reasons. The Company's overall cost of funds has increased in
recent years due primarily to a much greater percentage of the deposits being
in certificates, both wholesale brokered and retail, as opposed to passbooks,
money market accounts and checking accounts. Management believes that a
significant portion of its retail deposits will remain with the Company and, in
the case of wholesale brokered deposits, may be replaced with similar type
accounts even should the level of interest rates change.* However, in the
event of a significant increase in market interest rates, the cost of obtaining
replacement brokered deposits would increase as well.
The Bank's Board of Directors has set a maximum limitation of total borrowings
equal to 32% of total assets. This internal limit is 3% below the allowable
borrowing limit (for all borrowings including FHLB advances and reverse
repurchase agreements) of 35% of total assets established by the FHLB-Chicago.
At December 31, 1996, FHLB advances totaled $104.6 million or 26.3% of the
Bank's total assets and there were no other borrowings. At December 31, 1996,
the Bank had unused borrowing authority under the borrowing limitations
established by the Board of Directors of $22.5 million and $34.4 million under
the FHLB total asset limitation. The Bank intends to fund asset portfolio
diversification in fiscal 1997 through modest increases in FHLB advances, and
to maintain the 3% excess borrowing capacity with the FHLB as a contingent
source of funds to meet liquidity needs as deemed necessary by the Board of
Directors of the Bank.
16
<PAGE> 17
Liquidity management for the Company is both an ongoing and long-term function
of the Company's asset/liability management strategy. Excess funds generally
are invested in short-term investments such as federal funds or overnight
deposits at the FHLB-Chicago. Whenever the Company requires funds beyond its
ability to generate them internally, additional sources of funds usually are
available and obtainable from the wholesale brokered and non-brokered market as
well as the unused credit line from the FHLB-Chicago, and funds also may be
available through reverse repurchase agreements wherein the Company pledges
investment, mortgage-backed or related securities. At December 31, 1996,
management has negotiated the terms of an agreement to obtain a contingent
backup credit facility with a major correspondent bank to replace a portion of
its interest rate sensitive liabilities, such as borrowings and wholesale
brokered and non-brokered deposits should such funding sources become difficult
or impracticable to obtain or retain due to a changing interest rate
environment. Management anticipates that the agreement will be finished during
the three months ended March 31, 1997.* The Company also has a federal funds
open line of credit in the amount of $5.0 million with a correspondent bank
which does not require the direct pledging of any assets. In addition, the
Company maintains a relatively high level of liquid assets such as investment
securities and mortgage-backed and related securities available-for-sale in
order to ensure sufficient sources of funds are available to meet the Company's
liquidity needs.
Commitments to originate mortgage loans of $2.8 million at December 31, 1996
represent amounts which the Bank expects to fund during the quarter ending
March 31, 1997. There were no commitments to sell fixed-rate mortgage loans at
December 31, 1996. The Bank had unissued credit under existing home equity
line-of-credit loans and credit card lines of $12.6 million and $6.4 million,
respectively, as of December 31, 1996. The Bank had no commitments to purchase
adjustable-rate or fixed-rate mortgage-backed and related securities as of
December 31, 1996. The Company anticipates it will have sufficient funds
available to meet its current loan commitments, including loan applications
received and in process to the issuance of firm commitments. Certificates of
deposit scheduled to mature in one year or less at December 31, 1996 totaled
$133.9 million.
CHANGE IN FINANCIAL CONDITION
Total assets increased $19.7 million, or 5.2%, from $377.2 million at June 30,
1996 to $396.8 million at December 31, 1996. This increase is primarily
reflected in an increase in loans receivable which was funded primarily by an
increase in wholesale brokered and non-brokered deposits and decreases in
securities available-for-sale and mortgage-backed and related securities.
Cash and cash equivalents increased 24.6% to $6.0 million at December 31, 1996
compared to $4.8 million at June 30, 1996. The increase is largely
attributable to the decrease in securities available-for-sale and
mortgage-backed and related securities.
Securities available-for-sale decreased to $32.9 million at December 31, 1996
compared to $37.3 million at June 30, 1996. Mortgage-backed and related
securities held-to-maturity decreased to $90.8 million at December 31, 1996
compared to $97.3 million at June 30, 1996. The decrease in securities
available-for-sale and mortgage-backed and related securities was the result of
management's decision to use proceeds from the sale of such securities and
principal repayments to fund growth in loans receivable.
Loans receivable increased to $255.0 million at September 30, 1996 compared to
$224.8 million at June 30, 1996. The increase at December 31, 1996 compared to
June 30, 1996 is primarily the result of management's decision to retain its
ARM, intermediate-term (15 year) and long-term (30 year) fixed-rate loans
originated and purchased for the Company's portfolio, as such loans carried
higher yields than comparable mortgage-backed and related securities during the
six months ended December 31, 1996. Total mortgage loans originated and
purchased amounted to $52.6 million and $38.2 million for the six months ended
December 30, 1996 and 1995, respectively, while sales of fixed-rate mortgage
loans totaled $922,000 and $2.5 million for the six months ended December 31,
1996 and 1995, respectively.
17
<PAGE> 18
Deposits increased $30.8 million to $260.5 million at December 31, 1996 from
$229.7 million at June 30, 1996. The increase in deposits was primarily due to
the Company's marketing efforts and the use of brokers to increase the
certificates of deposits with the Company. Brokered certificates of deposit
totaled $89.3 million at December 31, 1996, representing 34.3% of total
deposits as compared to $75.3 million, or 32.8% of total deposits, at June 30,
1996. Non-brokered wholesale deposits totaled $39.2 million at December 31,
1996, representing 15.1% of total deposits as compared to $32.7 million, or
14.2% of total deposits at June 30, 1996. Deposits are the Company's primary
source of externally generated funds. The level of deposits is heavily
influenced by such factors as the general level of short- and long-term
interest rates as well as alternative yields that investors may obtain on
competing investment securities such as money market mutual funds.
FHLB-Chicago advances and other borrowings decreased to $104.6 million at
December 31, 1996 compared to $114.0 million at June 30, 1996. At December 30,
1996, FHLB advances were $104.6 million or 28.4% of total liabilities compared
to $102.4 million or 29.2% of total liabilities at June 30, 1996. At December
31, 1996, the Company had no funds borrowed under reverse repurchase agreements
compared to $11.6 million at June 30, 1996. The Company has used FHLB-Chicago
advances and securities sold under agreements to repurchase as a funding source
due to attractive rates offered on advances in relation to deposit funds
obtainable in the Company's local market.
ASSET/LIABILITY MANAGEMENT
The Company closely monitors interest rate risk in an attempt to manage the
extent to which net interest income is significantly affected by changes in
market interest rates. In managing the Company's interest rate risk during the
six months ended December 31, 1996, the Company primarily utilized brokered and
non-brokered wholesale certificates of deposit and, to a lesser extent,
FHLB-advances to fund increases in the Company's interest-bearing assets due
primarily to the attractive rates offered on wholesale certificates of deposit
in relation to FHLB advances. At December 31, 1996, the Company's estimated
cumulative one-year gap between assets and liabilities was a negative 3.1% of
total assets as compared to 13.7% at June 30, 1996. For the six months ended
December 31, 1996, the Company managed its interest rate risk to decrease the
level of its one-year negative gap position by extending the maturity of the
Company's liabilities, primarily wholesale brokered and non-brokered
certificates of deposits and FHLB advances, while discontinuing the use of
securities sold under agreements to repurchase. During periods of rising
interest rates, a positive interest rate sensitivity gap would tend to
positively affect net interest income, while a negative interest rate
sensitivity gap would adversely affect net income. Although the opposite
effect on net income would occur in periods of falling interest rates, the
Company could experience substantial prepayments of its fixed rate mortgage
loans and mortgage-backed and related securities, which would result in the
reinvestment of such proceeds at market rates which are lower than current
rates.
18
<PAGE> 19
ASSET/LIABILITY MANAGEMENT SCHEDULE
The following table sets forth at December 31, 1996 the amounts of
interest-earning assets and interest-bearing liabilities maturing or repricing
within the time periods indicated, based on the information and assumptions set
forth in the notes thereto.
<TABLE>
<CAPTION>
AMOUNT MATURING OR REPRICING
---------------------------------------------------------------
MORE THAN MORE THAN
WITHIN FOUR TO ONE YEAR THREE YEARS
THREE TWELVE TO THREE TO FIVE OVER FIVE
MONTHS MONTHS YEARS YEARS YEARS TOTAL
-------- --------- --------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS(1):
Mortgage loans(2):
Fixed rate .................................... $ 2,715 $ 7,967 $ 20,089 $ 18,741 $ 53,064 $102,576
Adjustable rate ............................... 20,998 49,562 48,651 3,224 - 122,435
Consumer loans (2) ................................. 12,156 5,372 8,821 2,169 - 28,518
Mortgage-backed and related securities:
Fixed rate and securities available-for-sale .. 1,776 5,102 10,147 4,908 6,947 28,880
Adjustable rate ............................... 52,519 23,342 - - - 75,861
Investment securities and
securities available-for-sale ..................... 9,615 725 1,900 15,017 1,833 29,090
-------- --------- --------- ----------- -------- --------
Total interest-earning assets ................. $ 99,779 $ 92,070 $ 89,608 $ 44,059 $ 61,844 $387,360
======== ========= ========= =========== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits(3):
NOW accounts .................................. $ 184 $ 553 $ 878 $ 430 $ 413 $ 2,458
Money market deposit accounts ................. 2,430 7,291 5,444 871 166 16,202
Passbook savings accounts ..................... 1,684 5,051 8,015 3,927 3,774 22,451
Certificates of deposit ....................... 60,865 73,026 73,613 3,912 122 211,538
Escrow deposits ............................... - 618 - - - 618
Borrowings(4)
FHLB advances and other borrowings ............ 44,500 8,000 31,000 13,016 8,070 104,586
-------- --------- --------- ----------- -------- --------
Total interest-bearing liabilities ............ $109,663 $ 94,539 $ 118,950 $ 22,156 $ 12,545 $357,853
======== ========= ========= =========== ======== ========
Excess (deficiency) of interest-earning assets over
interest-bearing liabilities ...................... $ (9,884) $ (2,469) $ (29,342) $ 21,903 $ 49,299 $ 29,507
======== ========= ========= =========== ======== ========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities .......... $ (9,884) $ (12,353) $ (41,695) $ (19,792) $ 29,507 $ 29,507
======== ========= ========= =========== ======== ========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities
as a percent of total assets ...................... (2.5)% (3.1)% (10.5)% (5.0)% 7.4% 7.4%
======== ========= ========= =========== ======== ========
</TABLE>
______________________
(1) Adjustable- and floating-rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed-rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization, in
each case adjusted to take into account estimated prepayments utilizing
the Company's historical prepayment statistics modified for forecasted
statistics using annual prepayment rates ranging from 5% to 20%, based on
the loan type.
(2) Balances have been reduced for undisbursed loan proceeds, unearned credit
insurance premiums, deferred loan fees, purchased loan discounts and the
allowance for loan losses, which aggregated $19.3 million at December 31,
1996.
(3) Although the Company's negotiable order of withdrawal ("NOW") accounts,
passbook savings accounts and money market deposit accounts generally are
subject to immediate withdrawal, management considers a certain historical
amount of such accounts to be core deposits having significantly longer
effective maturities and times to repricing based on the Company's
historical retention of such deposits in changing interest rate
environments. NOW accounts, passbook savings accounts and money market
deposit accounts are assumed to be withdrawn at annual rates of 30%, 30%
and 60%, respectively, of the declining balance of such accounts during
the period shown. The withdrawal rates used are higher than the Company's
historical rates but are considered by management to be more indicative of
expected withdrawal rates currently. If all of the Company's NOW
accounts, passbook savings accounts and money market deposit accounts had
been assumed to be subject to repricing within one year, the one-year
cumulative deficiency of interest-earning assets over interest-bearing
liabilities would have been $36.3 million or 9.1% of total assets.
(4) Adjustable- and floating-rate borrowings are included in the period in
which their interest rates are next scheduled to adjust rather than in the
period in which they are due.
19
<PAGE> 20
ASSET QUALITY
The Company and Bank regularly review assets to determine proper valuation.
The review consists of an update of the historical loss experience, valuation
of the underlying collateral and the outlook for the economy in general as well
as the regulatory environment.
The following table sets forth information regarding the Bank's non-accrual
loans and foreclosed properties at the dates indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
DEC 31 SEP 30 JUN 30 MAR 31 DEC 31
1996 1996 1996 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Non-accrual mortgage loans......... $ 33 $ 29 $ 64 $183 $ 0
Non-accrual consumer loans......... 43 117 21 24 10
------ ------ ------ ------ ------
Total non-accrual loans............ $ 76 $146 $ 85 $207 $ 10
====== ====== ====== ====== ======
Loans 90 days or more
delinquent and still accruing...... 9 22 22 87 25
------ ------ ------ ------ ------
Total non-performing loans......... $ 85 $168 $107 $294 $ 35
====== ====== ====== ====== ======
Total foreclosed real estate net of
related allowance for losses....... 18 24 0 0 0
------ ------ ------ ------ ------
Total non-performing assets........ $103 $192 $107 $294 $ 35
====== ====== ====== ====== ======
Non-performing loans to
gross loans receivable............. .02% .06% .04% .14% .02%
====== ====== ====== ====== ======
Non-performing assets to
total assets....................... .03% .05% .03% .09% .01%
====== ====== ====== ====== ======
</TABLE>
20
<PAGE> 21
ALLOWANCE FOR LOAN LOSSES
The following table sets forth an analysis of the Bank's allowance for loan
losses:
<TABLE>
<CAPTION>
SIX MONTHS YEAR SIX MONTHS
ENDED ENDED ENDED
DEC 31, 1996 JUNE 30, 1996 DEC. 31, 1995
------------ ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period ............ $1,234 $ 953 $ 953
Additions charged to operations:
One- to four-family ....................... 59 172 57
Multi-family and commercial real estate ... 185 80 -
Consumer .................................. 104 115 67
--------- --------- ---------
348 367 124
Recoveries:
One- to four-family ...................... 1 8 8
Consumer ................................. - 9 5
--------- --------- ---------
1 17 13
Charge-offs:
One- to four-family ...................... - (15) -
Multi-family and commercial real estate .. - - (12)
Consumer ................................. (63) (88) (52)
--------- --------- ---------
(63) (103) (64)
--------- --------- ---------
Net charge-offs ........................... (62) (86) (51)
--------- --------- ---------
Balance at end of period .................. $1,520 $1,234 $1,026
========= ========= =========
Allowance for loan losses to
non-performing loans at end
of the period ............................ 1,788.24% 1,153.27% 2,960.62%
========= ========= =========
Allowance for loan losses to
total loans at end of the period ......... 0.56% 0.50% 0.57%
========= ========= =========
</TABLE>
The level of allowance for loan losses at December 31, 1996, reflects the
continued low level of charged off and non-performing loans. Management
believes that the allowance for loan losses is adequate as of December 31,
1996.
21
<PAGE> 22
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 31, 1996
AND 1995
GENERAL
Net income for the three months ended December 31, 1996 increased $152,000 or
36.1% to $573,000 from net income of $421,000 for the comparable 1995 period.
Net income for the three months ended December 31, 1996 would have been
$490,000, excluding a FDIC after-tax refund credit of $83,000 due to
overcapitalization of the SAIF. See "Recent Regulatory Developments." Return
on average equity increased to 8.28% for the three months ended December 31,
1996 from 6.46% for the comparable 1995 period. Return on average assets
increased to .58% for the three months ended December 31, 1996 from .55% for
the comparable 1995 period.
NET INTEREST INCOME
The following table presents certain information related to average
interest-earning assets and liabilities, net interest rate spread and net
interest margin:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED DECEMBER 31
---------------------------------------------------------------
1 9 9 6 1 9 9 5
------------------------------- ------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
-------- -------- ----------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans ........................... $220,186 $4,351 7.90% $138,672 $2,639 7.61%
Consumer loans ........................... 27,950 670 9.59 22,853 572 10.01
-------- -------- ----------- --------
Total loans ............................. 248,136 5,021 8.09 161,525 3,211 7.95
Securities held-to-maturity:
Mortgage-backed securities .............. 51,412 917 7.13 58,788 997 6.78
Mortgage related securities ............. 40,764 676 6.63 37,867 692 7.31
-------- -------- ----------- --------
Total mortgage-backed
and related securities ................. 92,176 1,593 6.81 96,655 1,689 6.99
Investment and other securities .......... 4,716 76 6.45 3,959 67 6.77
Securities available-for-sale ............ 33,222 554 6.67 30,049 491 6.54
Federal Home Loan Bank stock ............. 5,147 90 6.99 3,923 70 7.14
-------- -------- ----------- --------
Total interest-earning assets ........... 383,397 7,334 7.65 296,111 5,528 7.47
Non-interest earning assets ............... 9,460 8,398
-------- -----------
Total assets ............................ $392,857 $304,509
======== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW accounts ............................. $2,314 10 1.73% $1,922 8 1.66%
Money market deposit accounts ............ 14,363 191 5.32 5,875 72 4.90
Passbook accounts ........................ 23,608 173 2.93 24,213 192 3.17
Certificates of deposit .................. 207,732 3,053 5.88 150,947 2,202 5.84
-------- -------- ----------- --------
Total deposits .......................... 248,017 3,427 5.53 182,957 2,474 5.41
Advance payments by borrowers
for taxes and insurance 4,762 36 3.02 4,017 31 3.09
Borrowings ................................ 102,197 1,533 6.00 81,087 1,248 6.16
-------- -------- ----------- --------
Total interest-bearing liabilities ...... 354,976 4,996 5.63 268,061 3,753 5.60
Non-interest bearing deposits
and liabilities .......................... 10,213 10,389
Shareholders' equity ...................... 27,668 26,059
-------- -----------
Total liabilities and
shareholders' equity ................... $392,857 $304,509
======== ===========
Net interest income/interest rate spread .. $2,338 2.02% $1,775 1.87%
======== =========== ======== =======
Net earning assets/net interest margin .... $28,421 2.44% $28,050 2.40%
======== =========== =========== =======
</TABLE>
22
<PAGE> 23
Net interest income before provision for losses on loans increased $563,000 or
31.7% to $2.3 million for the three months ended December 31, 1996 from $1.8
million for the comparable 1995 period. Interest income increased $1.8 million
for the three months ended December 31, 1996, partially offset by an increase
in interest expense of $1.2 million. The level of net interest income
primarily reflects a 29.5% increase in average interest-earning assets to
$383.4 million for the three months ended December 31, 1996 from $296.1 million
for the comparable 1995 period, and a 1.3% increase in the excess of the
Company's average interest-earning assets over average interest-bearing
liabilities to $28.4 million for the three months ended December 31, 1996 from
$28.1 million for the comparable 1995 period, and an increase in interest rate
spread to 2.02% for the three months ended December 31, 1996 from 1.87% for the
comparable 1995 period.
INTEREST INCOME
Interest income increased 32.7% to $7.3 million for the three months ended
December 31, 1996 from $5.5 million for the comparable 1995 period. The
increase in interest income was the result of an increase in average
interest-earning assets of 29.5% to $383.4 million for the three months ended
December 31, 1996 from $296.1 million for the comparable 1995 period and an
increase of 18 basis points in the yield on interest-earning assets to 7.65%
for the three months ended December 31, 1996 from 7.47% for the comparable 1995
period. Interest income on loans increased 56.4% to $5.0 million for the three
months ended December 31, 1996 from $3.2 million for the comparable 1995
period. The increase was the result of a rise in the Company's average gross
loans of 53.6% to $248.1 million for the three months ended December 31, 1996
from $161.5 million for the comparable 1995 period, and an increase in average
yield to 8.09% for the three months ended December 31, 1996 from 7.95% for the
comparable 1995 period. Gross loans increased primarily as a result of the
Company retaining substantially all of its adjustable and fixed rate loan
originations and purchasing more loans in the secondary market. The increase
in yield is attributable to the retention of longer-term fixed-rate and
adjustable-rate loans and partially attributable to the higher yields paid on
the multi-family and commercial components of the loan portfolio. Interest
income on mortgage-backed securities decreased 8.0% to $917,000 for the three
months ended December 31, 1996 from $997,000 for the comparable 1995 period.
The decrease was primarily due to a decrease in average balances to $51.4
million for the three months ended December 31, 1996 from $58.8 million for the
comparable 1995 period, offset by an increase in average yield to 7.13% for the
1996 period from 6.78% for the 1995 period. The increase in average yield on
mortgage-backed securities was primarily due to the adjustment in the
adjustable rate securities portion of this portfolio which were not fully
indexed when purchased and partially attributable to the higher yields paid on
the private-issue portion of the mortgage securities portfolio. Interest
income on mortgage-related securities decreased 2.3% to $676,000 for the three
months ended December 31, 1996 from $692,000 for the comparable 1995 period.
The decrease was primarily due to a decrease in average yield to 6.63% for the
three months ended December 31, 1996 from 7.31% for the comparable 1996 period,
offset by an increase in average balances to $40.8 million for the three months
ended December 31, 1996 from $37.9 million for the comparable 1995 period. The
decrease in average yield on mortgage-related securities was primarily due to
the downward adjustment in rate on the adjustable rate securities of this
portfolio and the purchase of fixed rate mortgage-related securities at lower
interest rates due to lowering interest rates during the three months ended
December 31, 1996. The decline in average balances of mortgage-backed and
related securities is due to the increase in loans receivable portfolio.
Interest income on investment securities and securities available-for-sale
increased 12.9% to $630,000 for the three months ended December 31, 1996 from
$558,000 for the comparable 1995 period. The increase was primarily due to a
increase in average balances to $37.9 million for the three months ended
December 31, 1996 from $34.0 million for the comparable 1995 period and an
increase in average yield to 6.64% for the three months ended December 31, 1996
from 6.56% for the comparable 1995 period. The higher average yield was
primarily attributable to the additional balances of securities
available-for-sale invested at higher interest rates and the higher interest
rate environment that existed during the 1996 period.
INTEREST EXPENSE
Interest expense increased 33.1% to $5.0 million for the three months ended
December 31, 1996 from $3.8 million for the comparable 1995 period. The
increase was the result of a 32.4% increase in the average
23
<PAGE> 24
amount of interest-bearing liabilities to $355.0 million for the three months
ended December 31, 1996 compared to $268.1 million for the comparable 1995
period and a increase in the average rate paid on interest-bearing liabilities
to 5.63% for the 1996 period from 5.60% for the 1995 period. The increased
balances of certificates of deposit (including brokered deposits), money market
deposit accounts and NOW accounts at higher average interest rates, partially
offset by lower average rates paid on borrowings and passbook accounts, was the
primary reason for the increase in the average rate paid on the
interest-bearing liabilities for the three months ended December 31, 1996 as
compared to the comparable 1995 period. Interest expense on deposits increased
38.5% to $3.4 million for the three months ended December 31, 1996 from $2.5
million for the comparable 1995 period. The increase was the result of an
increase in average balances of 35.6% to $248.0 million for the three months
ended December 31, 1996 from $183.0 million for the comparable 1995 period, and
an increase in the average rate paid to 5.53% for the 1996 period from 5.41%
for the 1995 period. The increase in deposits was primarily due to an increase
of 37.6% in certificates of deposit to $207.7 million for the three months
ended December 31, 1996 from $150.9 million for the comparable 1995 period and
an increase in the average rate paid to 5.88% for the 1996 period from 5.84%
for the 1995 period. Money market deposit accounts increased 144.5% to $14.4
million for the three months ended December 31, 1996 from $5.9 million for the
comparable 1995 period, and the average rate paid increased to 5.32% for the
1996 period from 4.90% for the 1995 period. Money market deposit accounts
increased primarily due to aggressive marketing and a competitive rate offered
during the three months ended December 31, 1996. NOW accounts increased 20.4%
to $2.3 million for the three months ended December 31, 1996 from $1.9 million
for the comparable 1995 period and an increase in average rate paid to 1.73%
for the 1996 period from 1.66% for the 1995 period. These increases were
partially offset by a decline of 2.5% in Passbook accounts to $23.6 million for
the three months ended December 31, 1996 from $24.2 million for the comparable
1995 period. The Company's increase in certificates of deposit was the result
of aggressive marketing and pricing and the use of brokered certificates of
deposit. Of the $207.7 million in the average balance of certificates of
deposit for the three months ended December 31, 1996, $86.0 million or 41.4%
represented brokered certificates of deposit compared to $48.9 million or 32.4%
for the three months ended December 31, 1995. The average rate paid on
brokered certificates of deposit increased to 5.91% for the three months ended
December 31, 1996 from 5.87% for the comparable 1995 period. Interest on
borrowings (FHLB advances and reverse repurchase agreements) increased 22.8% to
$1.5 million for the months ended December 31, 1996 from $1.2 million for the
comparable 1995 period. The increase was primarily due to growth in average
balance of FHLB advances and reverse repurchase agreements of 26.0% to $102.2
million for the three months ended December 31, 1996 from $81.1 million for the
comparable 1995 period, offset by a decrease in the average rate paid to 6.00%
for the 1996 period from 6.16% for the 1995 period.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased 71.7% to $170,000 for the three
months ended December 31, 1996 from $99,000 for the comparable 1995 period.
The level of allowance for losses on loans generally is determined by the
Bank's historical loan loss experience, the condition and composition of the
Bank's loan portfolio, and existing and anticipated general economic
conditions. Management anticipates that as the Company's volume of
multi-family and commercial/non-residential real estate lending activity
continues to increase, the Company will need to build a higher level of
allowance for loan losses established through a provision for loan losses.*
Based on management's evaluation of the loan portfolio and the increase in
gross loans during the three months ended December 31, 1996, the allowance for
losses on loans increased 48.1% to $1.5 million at December 31, 1996 compared
to $1.0 million at December 31, 1995. This increase was primarily the result
of the increase in multi-family, multi-family construction, home equity and
commercial real estate loan components of the gross loan portfolio which carry
a greater degree of credit risk as compared to one-to-four family mortgage
lending. The ratio of allowance for loan losses to gross loans decreased to
0.56% at December 31, 1996 from 0.57% at December 31, 1995, reflecting the
continued low level of loans charged off and non-performing loans. The amount
of non-performing loans at December 31, 1996 was $85,000 or 0.02% of gross
loans compared to $107,000 or 0.04% of gross loans at June 30, 1996 and $35,000
or 0.02% of gross loans at December 31, 1995.
24
<PAGE> 25
NON-INTEREST INCOME
Non-interest income decreased 31.9% to $239,000 for the three months ended
December 31, 1996 from $351,000 for the comparable 1995 period. The largest
components of the decrease were a decrease in gains on the sale of securities
and mortgage-backed and related securities to $0 for the three months ended
December 31, 1996 compared to $39,000 for the comparable 1995 period, and a
decrease in gains on the sale of loans to $5,000 for the three months ended
December 31, 1996 compared to $42,000 for the comparable 1995 period. The
decrease in gains on the sale of securities and mortgage-backed and related
securities reflects management's decision to sell higher-yielding
available-for-sale securities in the 1995 period. The decrease in gains on the
sale of loans reflects the gain on the sale of a significant portion of the
Bank's student loan portfolio in the 1995 period. Service charges on loans
increased $10,000 to $45,000 for the three months ended December 31, 1996 from
$35,000 for the comparable 1995 period, primarily reflecting the increased loan
portfolio and loan volume. Service charges on deposit accounts decreased
$7,000 to $127,000 for the three months ended December 31, 1996 from $134,000.
Other non-interest income decreased $25,000 to $13,000 for the three months
ended December 31, 1996 from $38,000 for the comparable 1995 period. Insurance
commissions decreased $9,000 to $27,000 for the three months ended December 31,
1996 from $36,000 for the comparable 1995 period, due to the sale of property
and casualty policies of the Company's insurance subsidiary during fiscal 1996.
Also, loan servicing fees deceased $5,000 to $22,000 for the three months
ended December 31, 1996 from $27,000 for the comparable 1995 period, primarily
due to decreases in the Company's sold loan serviced portfolio and decreased
sales of loans to the secondary market.
NON-INTEREST EXPENSE
Non-interest expense increased 9.2% to $1.5 million for the three months ended
December 31, 1996 from $1.4 million for the comparable 1995 period. The
increase was primarily due to an increase in compensation and benefits of
$132,000 to $888,000 for the three months ended December 31, 1996 from $756,000
for the comparable 1995 period, which primarily relates to higher salary, loan
commission and incentive compensation. Marketing expense increased $14,000 to
$102,000 for the three months ended December 31, 1996 from $88,000 for the
comparable 1995 period. Occupancy and equipment expense increased $23,000 to
$207,000 for the three months ended December 30, 1996 from $184,000 for the
comparable 1995 period, due to additional bank equipment purchases. Other
non-interest expense increased $59,000 to $327,000 for the three months ended
December 31, 1996 from $268,000 for the comparable 1995 period, due to
increases in loan, printing, office supplies, organization dues, legal and
other miscellaneous expenses. The increases in non-interest expense were
offset by a decrease in FDIC insurance premium expense of $101,000 to
($11,000) for the three months ended December 31, 1996 from $90,000 for the
comparable 1995 period. The decrease in FDIC premium expense was due to a
one-time refund credit received in the 1996 period of $137,000. See "Recent
Regulatory Developments."
25
<PAGE> 26
RESULTS OF OPERATIONS - COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 1996
AND 1995
GENERAL
Net income for the six months ended December 31, 1996 decreased $307,000 or
37.3% to $516,000 from $823,000 for the comparable 1995 period. The decrease
for the six months ended December 31, 1996 is due to a one-time after-tax
charge of $533,000 to recapitalize SAIF, the FDIC insurance fund which insures
deposits of savings associations, offset by an after-tax FDIC refund credit of
$83,000. Net income for the six months ended December 31, 1996 would have been
$966,000, excluding the one-time FDIC special assessment and refund credit.
See "Recent Regulatory Developments." Return on average equity decreased to
3.76% for the six months ended December 31, 1996 from 6.38% for the comparable
1995 period. Return on average assets decreased to .27% for the six months
ended December 31, 1996 from .57% for the comparable 1995 period.
NET INTEREST INCOME
The following table presents certain information related to average
interest-earning assets and liabilities, net interest rate spread and net
interest margin:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED DECEMBER 31
---------------------------------------------------------------
1 9 9 6 1 9 9 5
------------------------------- ------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
-------- -------- ----------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans ........................... $212,847 $8,406 7.90% $132,187 $4,983 7.54%
Consumer loans ........................... 27,171 1,306 9.61 22,339 1,100 9.85
-------- -------- ----------- --------
Total loans ............................. 240,018 9,712 8.09 154,526 6,083 7.87
Securities held-to-maturity:
Mortgage-backed securities .............. 52,755 1,849 7.01 52,230 1,736 6.65
Mortgage related securities ............. 40,988 1,364 6.66 35,008 1,278 7.30
-------- -------- ----------- --------
Total mortgage-backed
and related securities ................. 93,743 3,213 6.85 87,238 3,014 6.91
Investment and other securities .......... 4,636 142 6.13 4,191 135 6.44
Securities available-for-sale ............ 34,394 1,155 6.72 31,437 1,172 7.46
Federal Home Loan Bank stock ............. 5,135 177 6.89 3,691 129 6.99
-------- -------- ----------- --------
Total interest-earning assets ........... 377,926 14,399 7.62 281,083 10,533 7.49
Non-interest earning assets ............... 9,385 7,934
-------- -----------
Total assets ............................ $387,311 $289,017
======== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW accounts ............................. $2,313 20 1.73% $2,842 22 1.55%
Money market deposit accounts ............ 11,994 312 5.20 5,606 135 4.82
Passbook accounts ........................ 23,808 365 3.07 24,593 378 3.07
Certificates of deposit .................. 200,638 5,858 5.84 137,356 4,056 5.91
-------- -------- ----------- --------
Total deposits .......................... 238,753 6,555 5.49 170,397 4,591 5.39
Advance payments by borrowers
for taxes and insurance 4,539 67 2.95 3,898 59 3.03
Borrowings ................................ 106,260 3,155 5.94 79,694 2,452 6.15
-------- -------- ----------- --------
Total interest-bearing liabilities ...... 349,552 9,777 5.59 253,989 7,102 5.59
Non-interest bearing deposits
and liabilities .......................... 10,296 9,249
Shareholders' equity ...................... 27,463 25,779
-------- -----------
Total liabilities and
shareholders' equity ................... $387,311 $289,017
======== ===========
Net interest income/interest rate spread .. $4,622 2.03% $3,431 1.90%
======== =========== ======== =======
Net earning assets/net interest margin .... $28,374 2.45% $27,094 2.44%
======== =========== =========== =======
</TABLE>
26
<PAGE> 27
Net interest income before provision for losses on loans increased $1.2 million
or 34.7% to $4.6 million for the six months ended December 31, 1996 from $3.4
million for the comparable 1995 period. Interest income increased $3.9 million
for the six months ended December 31, 1996, partially offset by an increase in
interest expense of $2.7 million. The level of net interest income primarily
reflects a 34.5% increase in average interest-earning assets to $377.9 million
for the six months ended December 31, 1996 from $281.1 million for the
comparable 1995 period, and a 4.7% increase in the excess of the Company's
average interest-earning assets over average interest-bearing liabilities to
$28.4 million for the six months ended December 31, 1996 from $27.1 million for
the comparable 1995 period, and an increase in interest rate spread to 2.03%
for the six months ended December 31, 1996 from 1.90% for the comparable 1995
period.
INTEREST INCOME
Interest income increased 36.7% to $14.4 million for the six months ended
December 31, 1996 from $10.5 million for the comparable 1995 period. The
increase in interest income was the result of an increase in average
interest-earning assets of 34.5% to $377.9 million for the six months ended
December 31, 1996 from $281.1 million for the comparable 1995 period and an
increase of 13 basis points in the yield on interest-earning assets to 7.62%
for the six months ended December 31, 1996 from 7.49% for the comparable 1995
period. Interest income on loans increased 59.7% to $9.7 million for the six
months ended December 31, 1996 from $6.1 million for the comparable 1995
period. The increase was the result of a rise in the Company's average gross
loans of 55.3% to $240.0 million for the six months ended December 31, 1996
from $154.5 million for the comparable 1995 period, and an increase in average
yield to 8.09% for the six months ended December 31, 1996 from 7.87% for the
comparable 1995 period. Gross loans increased primarily as a result of the
Company retaining substantially all of its adjustable and fixed rate loan
originations and purchasing more loans in the secondary market. The increase
in yield is attributable to the retention of longer-term fixed-rate and
adjustable-rate loans, and partially attributable to the higher yields paid on
the multi-family and commercial components of the loan portfolio. Interest
income on mortgage-backed securities increased 6.5% to $1.8 million for the six
months ended December 31, 1996 from $1.7 million for the comparable 1995
period. The increase was primarily due to an increase in average yield to
7.01% for the six months ended December 31, 1996 from 6.65% for the comparable
1995 period, and an increase in average balances to $52.8 million for the 1996
period from $52.2 million for the 1995 period. The increase in average yield
on mortgage-backed securities was primarily due to the adjustment in the
adjustable rate securities portion of this portfolio which were not fully
indexed when purchased and partially attributable to the higher yields paid on
the private-issue portion of the mortgage securities portfolio. Interest
income on mortgage-related securities increased 6.7% to $1.4 million for the
six months ended December 31, 1996 from $1.3 million for the comparable 1995
period. The increase was primarily due to an increase in average balances to
$41.0 million for the six months ended December 31, 1996 from $35.0 million for
the comparable 1996 period, offset by a decrease in average yield to 6.66% for
the three months ended December 31, 1996 from 7.30% for the comparable 1995
period. The decrease in average yield on mortgage-related securities was
primarily due to the downward adjustment in rate on the adjustable rate
securities of this portfolio and the purchase of fixed rate mortgage-related
securities at lower interest rates. Interest income on investment securities
and securities available-for-sale decreased .77% to $1.297 million for the six
months ended December 31, 1996 from $1.307 million for the comparable 1995
period. The decrease was primarily due to a decrease in average yield to 6.65%
for the six months ended December 31, 1996 from 7.34% for the comparable 1995
period, partially offset by an increase in average balances to $39.0 million
for the six months ended December 31, 1996 from $35.6 million for the
comparable 1995 period. The lower average yield was primarily attributable to
the additional balances of securities available-for-sale invested at lower
interest rates.
INTEREST EXPENSE
Interest expense increased 37.7% to $9.8 million for the six months ended
December 31, 1996 from $7.1 million for the comparable 1995 period. The
increase was the result of a 37.6% increase in the average amount of
interest-bearing liabilities to $349.6 million for the six months ended
December 31, 1996 compared to $254.0 million for the comparable 1995 period.
The increased balances of certificates of deposit and borrowings at lower
average interest rates, partially offset by higher average rates paid on money
market
27
<PAGE> 28
deposits and NOW accounts, was the primary reason the average rate paid on the
interest-bearing liabilities was 5.59% for both the six months ended December
31, 1996 and the comparable 1995 period. Interest expense on deposits
increased 42.8% to $6.6 million for the six months ended December 31, 1996 from
$4.6 million for the comparable 1995 period. The increase was the result of an
increase in average balances of 40.1% to $238.8 million for the six months
ended December 31, 1996 from $170.4 million for the comparable 1995 period, and
an increase in the average rate paid to 5.49% for the 1996 period from 5.39%
for the 1995 period. The increase in deposits was primarily due to an increase
of 46.1% in certificates of deposit to $200.6 million for the six months ended
December 31, 1996 from $137.4 million for the comparable 1995 period, offset by
a decrease in the average rate paid to 5.84% for the 1996 period from 5.91% for
the 1995 period. Money market deposit accounts increased 113.9% to $12.0
million for the six months ended December 31, 1996 from $5.6 million for the
comparable 1995 period, and the average rate paid increased to 5.20% for the
1996 period from 4.82% for the 1995 period. Money market deposit accounts
increased primarily due to aggressive marketing and a competitive rate offered
during the six months ended December 31, 1996. Passbook accounts decreased
3.2% to $23.8 million for the six months ended December 31, 1996 from $24.6
million for the comparable 1995 period. These increases were partially offset
by a decline of 18.6% in NOW accounts to $2.3 million for the six months ended
December 31, 1996 from $2.8 million for the comparable 1995 period. The
decline in NOW accounts was primarily the result of transferring $3.0 million
of interest-bearing NOW accounts to non-interest bearing demand deposit type
accounts during fiscal 1996. The Company's increase in certificates of deposit
was the result of aggressive marketing and pricing and the use of brokered
certificates of deposit. Of the $200.6 million in the average balance of
certificates of deposit for the six months ended December 31, 1996, $82.3
million or 41.0% represented brokered certificates of deposit compared to $37.7
million or 27.4% for the six months ended December 31, 1995. The average rate
paid on brokered certificates of deposit decreased to 5.83% for the six months
ended December 31, 1996 from 5.94% for the comparable 1995 period. Interest on
borrowings (FHLB advances and reverse repurchase agreements) increased 28.7% to
$3.2 million for the six months ended December 31, 1996 from $2.5 million for
the comparable 1995 period. The increase was primarily due to growth in
average balance of FHLB advances and reverse repurchase agreements of 33.3% to
$106.3 million for the six months ended December 31, 1996 from $79.7 million
for the comparable 1995 period, offset by a decrease in the average rate paid
to 5.94% for the 1996 period from 6.15% for the 1995 period.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased 185.5% to $354,000 for the six
months ended December 31, 1996 from $124,000 for the comparable 1995 period.
For a discussion of the factors considered by management in determining the
appropriate level of allowance for losses on loans to be established through a
provision for losses on loans, see comments under "Provision for Losses on
Loans" contained in the section entitled, "Results of Operations - Comparison
of the Three Months Ended December 31, 1996 and 1995."
NON-INTEREST INCOME
Non-interest income decreased 18.2% to $477,000 for the six months ended
December 31, 1996 from $583,000 for the comparable 1995 period. The largest
components of the decrease were a decrease in gains on the sale of securities
and mortgage-backed and related securities to $7,000 for the six months ended
December 31, 1996 compared to $43,000 for the comparable 1995 period, and a
decrease in gains on the sale of loans to $13,000 for the six months ended
December 31, 1996 compared to $51,000 for the comparable 1995 period. The
decrease in gains on the sale of securities and mortgage-backed and related
securities reflects management's decision to sell higher-yielding
available-for-sale securities in the 1995 period. The decrease in gains on the
sale of loans reflects the gain on the sale of a significant portion of the
Bank's student loan portfolio in the 1995 period. Service charges on loans
increased $16,000 to $79,000 for the six months ended December 31, 1996 from
$63,000 for the comparable 1995 period, primarily reflecting the increased loan
portfolio and loan volume. Service charges on deposit accounts increased
$2,000 to $256,000 for the six months ended December 31, 1996 from $254,000 for
the comparable 1995 period. Other non-interest income decreased $16,000 to
$30,000 for the six months ended December 31, 1996 from $46,000 for the
comparable 1995 period. Insurance commissions decreased $23,000 to $48,000 for
the six
28
<PAGE> 29
months ended December 31, 1996 from $71,000 for the comparable 1995 period, due
to the sale of property and casualty policies of the Company's insurance
subsidiary during fiscal 1996. Also, loan servicing fees decreased $11,000 to
$44,000 for the six months ended December 31, 1996 from $55,000 for the
comparable 1995 period, primarily due to decreases in the Company's sold loan
serviced portfolio and sales of loans to the secondary market.
NON-INTEREST EXPENSE
Non-interest expense increased 50.3% to $3.9 million for the six months ended
December 31, 1996 from $2.6 million for the comparable 1995 period. The
increase was primarily due to an increase in FDIC deposit insurance premiums of
$837,000 to $1,004,000 for the six months ended December 31, 1996 from $167,000
for the comparable 1995 period. The increase in FDIC deposit insurance
premiums was primarily a result of an industry-wide special assessment charge
of $877,000 for an amount to recapitalize the SAIF during the 1996 period,
offset by a refund credit of $137,000. See "Recent Regulatory Developments."
Compensation and benefits expense increased $315,000 to $1.8 million for the
six months ended December 31, 1996 from $1.4 million for the comparable 1995
period, which primarily relates to higher salary, loan commissions and
incentive compensation. Occupancy and equipment expense increased $61,000 to
$445,000 for the six months ended December 31, 1996 from $384,000 for the
comparable 1995 period, due to additional bank equipment purchases. Other
non-interest expense increased $112,000 to $578,000 for the six months ended
December 31, 1996 from $466,000 for the comparable 1995 period, due to
increases in loan, printing, office supplies, organization dues, legal and
other miscellaneous expenses. The increases in non-interest expense were
offset by a decrease in marketing expense of $7,000 to $150,000 for the six
months ended December 31, 1996 from $157,000 for the comparable 1995 period.
29
<PAGE> 30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company and the Bank are parties to legal
proceedings arising out of its lending activities and other
operations. However, there are no pending legal proceedings of which
the Company or the Bank is a party which, if determined adversely to
the Company or the Bank, would have a material adverse effect on the
consolidated financial position of the Company.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on October
24, 1996. There were 1,442,950 shares of Common Stock of the Company
entitled to vote at the Annual Meeting, and 1,326,774 shares
present at the meeting by holders thereof in person or by proxy, which
constituted a quorum. The following is a summary of the results of
the votes:
<TABLE>
<CAPTION>
Number of Votes
For Withheld
--- --------
<S> <C> <C> <C>
Nominees for Director for Three-Year Term Expiring in 1999
Floyd D. Brink......................................... 1,161,101 165,673
Donald A. Zellmer...................................... 1,160,326 166,448
Ratification of KPMG Peat Marwick LLP For Against Abstain
as independent auditors for --- ------- -------
fiscal year ending June 30, 1997........................... 1,289,640 19,280 17,854
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter for which this
report was filed. There are no exhibits to this report other
than the Financial Data Schedule attached hereto as Exhibit 27.
See Note 2 to the unaudited Consolidated Financial Statements for the
information required for Exhibit 11 - Computation of Earnings Per
Share.
* * * * * * * * * * * * * * * * * * *
30
<PAGE> 31
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hallmark Capital Corp.
(Registrant)
Date: February 5, 1997 James D. Smessaert
-------------------------
James D. Smessaert
Chairman of the Board
Chief Executive Officer
Date: February 5, 1997 Arthur E. Thompson
-------------------------
Arthur E. Thompson
Chief Financial Officer
31
<PAGE> 32
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information only
and not filed.
32
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,877
<INT-BEARING-DEPOSITS> 4,136
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,861
<INVESTMENTS-CARRYING> 32,861
<INVESTMENTS-MARKET> 32,861
<LOANS> 254,964
<ALLOWANCE> 1,520
<TOTAL-ASSETS> 396,808
<DEPOSITS> 260,482
<SHORT-TERM> 44,500
<LIABILITIES-OTHER> 3,666
<LONG-TERM> 60,086
0
0
<COMMON> 28,074
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 396,808
<INTEREST-LOAN> 9,712
<INTEREST-INVEST> 4,687
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14,399
<INTEREST-DEPOSIT> 6,555
<INTEREST-EXPENSE> 9,777
<INTEREST-INCOME-NET> 4,622
<LOAN-LOSSES> 354
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 578
<INCOME-PRETAX> 806
<INCOME-PRE-EXTRAORDINARY> 806
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 516
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
<YIELD-ACTUAL> 8.09
<LOANS-NON> 76
<LOANS-PAST> 9
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,234
<CHARGE-OFFS> 63
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 1,520
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,499
</TABLE>
