<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 September 30, 1997 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 ssection 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 commons stock, par
value $1.00 per share, was 1,442,950 at November 7, 1997, the latest
practicable date. This does not reflect the recent two-for-one stock
split announced on October 30, 1997 -- see Item 5 "Other Information"
page 24.
<PAGE> 2
HALLMARK CAPITAL CORP. AND SUBSIDIARY
FORM 10-Q
<TABLE>
<S> <C>
Part I.Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition
as of September 30, 1997 (unaudited) and June 30, 1996 . . . . . . . . . . . . 1
Consolidated Statements of Income for the Three Months
ended September 30, 1997 and 1996 (unaudited) . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Shareholders' Equity
for the Three Months Ended September 30, 1997 and 1996 (unaudited) . . . . . . 3
Consolidated Statements of Cash Flows for the Three Months
ended September 30, 1997 and 1996 (unaudited) . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk . . . . . . . . . . . . 23
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . 24
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 25
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
<PAGE> 3
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
-------------------- --------------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and non-interest bearing deposits . . . . . . . . . . . . . . . $3,031 $3,859
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . 11,194 4,896
-------- --------
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 14,225 8,755
Securities available-for-sale (at fair value):
Investment securities . . . . . . . . . . . . . . . . . . . . . . . 18,262 18,137
Mortgage-backed and related securities . . . . . . . . . . . . . . 9,291 11,381
Securities held-to-maturity:
Investment securities (fair value - $780 at
September 30, 1997 and June 30, 1997) . . . . . . . . . . . . . . 780 780
Mortgage-backed and related securities (fair value -
$82,766 at September 30, 1997; $86,149 at June 30, 1997) . . . . 82,165 85,430
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . 281,994 273,556
Investment in Federal Home Loan Bank stock, at cost . . . . . . . . . 5,279 5,279
Foreclosed properties, net . . . . . . . . . . . . . . . . . . . . . 247 20
Office properties and equipment . . . . . . . . . . . . . . . . . . . 3,121 3,091
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . 3,103 3,391
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $418,467 $409,820
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $281,205 $281,512
Notes payable to Federal Home Loan Bank . . . . . . . . . . . . . . 98,573 92,073
Advance payments by borrowers for taxes and insurance . . . . . . . 5,007 3,485
Accrued interest on deposit accounts and other borrowings . . . . . 1,560 1,578
Accrued expenses and other liabilities . . . . . . . . . . . . . . 1,567 1,500
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . $387,912 $380,148
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 . . . . . . . . . . . . . . . . . . . . 10,654 10,603
Unearned ESOP compensation . . . . . . . . . . . . . . . . . . . . (605) (632)
Unearned restricted stock award . . . . . . . . . . . . . . . . . . (187) (208)
Net unrealized depreciation on securities available for sale . . . (86) (225)
Treasury stock, at cost: 138,300 shares . . . . . . . . . . . . . (1,592) (1,592)
Retained earnings, substantially restricted . . . . . . . . . . . . 20,790 20,145
-------- --------
Total shareholders' equity . . . . . . . . . . . . . . . . $ 30,555 $ 29,672
-------- --------
Total liabilities and shareholders' equity . . . . . . . . $418,467 $409,820
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
1
<PAGE> 4
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
1997 1996
-------------- ------------
(IN THOUSANDS)
<S> <C> <C>
INTEREST INCOME:
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,859 $ 4,691
Mortgage-backed and related securities . . . . . . . . . . . . . . 1,633 1,923
Securities and interest-bearing liabilities . . . . . . . . . . . . 512 451
------- -------
Total interest income . . . . . . . . . . . . . . . . . . . 8,004 7,065
INTEREST EXPENSE:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,905 3,128
Advance payments by borrowers for taxes and insurance . . . . . . . 29 31
Notes payable and other borrowings . . . . . . . . . . . . . . . . 1,500 1,622
------- -------
Total interest expense . . . . . . . . . . . . . . . . . . 5,434 4,781
------- -------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . 2,570 2,284
Provision for losses on loans . . . . . . . . . . . . . . . . . . . . 200 184
------- -------
Net interest income after provision for losses on loans . . . . . . . 2,370 2,100
Non-interest income:
Service charges on loans . . . . . . . . . . . . . . . . . . . . . 45 34
Service charges on deposit accounts . . . . . . . . . . . . . . . . 114 129
Loan servicing fees, net . . . . . . . . . . . . . . . . . . . . . 21 22
Insurance commissions . . . . . . . . . . . . . . . . . . . . . . . 4 21
Gain (loss) on sale of securities and
mortgage-backed and related securities, net . . . . . . . . . . (17) 7
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . . 21 8
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 17
------- -------
Total non-interest income . . . . . . . . . . . . . . . . . 200 238
NON-INTEREST EXPENSE:
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . 957 874
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 48
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . 243 238
Deposit insurance premiums . . . . . . . . . . . . . . . . . . . . 43 1,015
Other non-interest expense . . . . . . . . . . . . . . . . . . . . 286 251
------- -------
Total non-interest expense . . . . . . . . . . . . . . . . 1,580 2,426
Income before income taxes . . . . . . . . . . . . . . . . . . . . . 990 (88)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345 (31)
------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 645 $ (57)
======= =======
Earnings per share . . . . . . . . . . . . . . . . . . . . $ 0.44 ($0.04)
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
2
<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
Stock Capital Compensation Stock (Losses)
------- --------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1997
- -------------------------------------
Balance at June 30, 1997 . . . . . . . . . . . . . $1,581 $10,603 ($632) ($208) ($225)
Net income . . . . . . . . . . . . . . . . . . . . - - - - -
Amortization of unearned ESOP and
restricted stock award compensation . . . . . . . - 51 27 21 -
Unrealized appreciation on securities
available for sale, net of tax benefit . . . . .
- - - - 139
------ ------- ------ ------ -------
Balance at September 30, 1997 . . . . . . . . . . . $1,581 $10,654 ($605) ($187) ($ 86)
====== ======= ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 1996
- -------------------------------------
Balance at June 30, 1996 . . . . . . . . . . . . . $1,581 $10,465 ($740) ($334) ($595)
Net income . . . . . . . . . . . . . . . . . . . . - - - - -
Amortization of unearned ESOP and
restricted stock award compensation . . . . . . . - 27 27 42 -
Unrealized appreciation on securities
available for sale, net of tax benefit . . . . .
- - - - 131
------ ------- ------ ------ ------
Balance at September 30, 1996 . . . . . . . . . . . $1,581 $10,492 ($713) ($292) ($464)
====== ======= ====== ====== ======
<CAPTION>
Treasury Retained
Stock Earnings Total
------- -------- -------
<S> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1997
- -------------------------------------
Balance at June 30, 1997 . . . . . . . . . . . . . ($1,592) $20,145 $29,672
Net income . . . . . . . . . . . . . . . . . . . . - 645 645
Amortization of unearned ESOP and
restricted stock award compensation . . . . . . . - - 99
Unrealized appreciation on securities
available for sale, net of tax benefit . . . . .
- - 139
-------- ------- -------
Balance at September 30, 1997 . . . . . . . . . . . ($1,592) $20,790 $30,555
======== ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 1996
- -------------------------------------
Balance at June 30, 1996 . . . . . . . . . . . . . ($1,592) $18,226 $27,011
Net income . . . . . . . . . . . . . . . . . . . . - (57) (57)
Amortization of unearned ESOP and
restricted stock award compensation . . . . . . . - - 96
Unrealized appreciation on securities
available for sale, net of tax benefit . . . . .
- - 131
-------- ------- -------
Balance at September 30, 1996 . . . . . . . . . . . ($1,592) $18,169 $27,181
======== ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
3
<PAGE> 6
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
1997 1996
-------------- ------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 645 ($57)
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Provision for losses on loans and real estate . . . . . . . . . . . 200 184
Provision for depreciation and amortization . . . . . . . . . . . . 73 65
Net (gain) loss on sales of investments and
mortgage-backed and related securities . . . . . . . . . . . . . 17 (7)
Net gain on sale of loans . . . . . . . . . . . . . . . . . . . . . (21) (8)
Amortization of unearned ESOP and restricted stock awards . . . . . 99 96
Loans originated for sale . . . . . . . . . . . . . . . . . . . . . (3,048) (560)
Sales of loans originated for sale . . . . . . . . . . . . . . . . 3,048 560
Decrease in prepaid expenses and other assets . . . . . . . . . . . 288 321
Other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . (33) 776
--------- ---------
Net cash provided by operating activities . . . . . . . . . . . . . . 1,268 1,370
--------- ---------
INVESTING ACTIVITIES
Proceeds from the sale of securities available-for-sale . . . . . . . 7,032 1,454
Proceeds from the maturity of securities available-for-sale . . . . . - 500
Purchases of securities available-for-sale . . . . . . . . . . . . . (5,799) (969)
Proceeds from sale of investment securities held-to-maturity . . . . - 435
Purchases of mortgage-backed and related securities . . . . . . . . . (352) -
Principal collected on mortgage-backed and related securities . . . . 4,553 6,400
Net increase in loans receivable . . . . . . . . . . . . . . . . . . (8,844) (18,171)
Purchases of office properties and equipment, net . . . . . . . . . . (103) (58)
--------- ---------
Net cash used in investing activities . . . . . . . . . . . . . . . . (3,513) (10,409)
--------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in deposits . . . . . . . . . . . . . . . . . (307) 18,292
Proceeds from long-term notes payable to Federal Home Loan Bank . . . 6,500 10,000
Net decrease in short-term notes payable to Federal Home Loan Bank . - (15,800)
Net decrease in securities sold under agreements to repurchase . . . - (4,862)
Net increase in advance payments by borrowers for
taxes and insurance . . . . . . . . . . . . . . . . . . . . . . . . 1,522 1,947
--------- ---------
Net cash provided by financing activities . . . . . . . . . . . . . . 7,715 9,577
--------- ---------
Increase in cash and cash equivalents . . . . . . . . . . . . . . . . 5,470 538
Cash and cash equivalents at beginning of period . . . . . . . . . . 8,755 4,825
--------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . . . . $ 14,225 $ 5,363
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
4
<PAGE> 7
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1997 1996
-------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid (including amounts credited to deposit accounts) . . . . . $5,426 $4,665
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . $412 $367
Non-cash transactions:
Loans transferred to foreclosed properties . . . . . . . . . . . . . . . $255 $24
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
5
<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 months ended September
30, 1997 are not necessarily indicative of results that may be expected for the
entire fiscal year ending June 30, 1998.
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 months
ended September 30, 1997. All material intercompany accounts and transactions
have been eliminated in consolidation.
(2) EARNINGS PER SHARE
Earnings per share of common stock for the three months ended September 30,
1997 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 September 30, 1997 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 . . . . . . . . . . . . (76,021) (76,021)
Common stock equivalents due to
dilutive effect of stock options . . . . . . 107,062 113,571
---------- ----------
Total weighted average common shares
and equivalents outstanding . . . . . . . . . 1,464,760 1,471,269
========== ==========
Net income for period . . . . . . . . . . . . $ 645,000 $ 645,000
Earnings per share . . . . . . . . . . . . . $0.44 $0.44
========== ==========
</TABLE>
Pro-forma earnings per share for the three months ended September 30, 1997
showing the effects of the adoption of FASB 128 is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended September 30, 1997 Basic 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 . . . . . . . . . . . . (76,021) (76,021)
Common stock equivalents due to
dilutive effect of stock options . . . . . . - 107,062
---------- ----------
Total weighted average common shares
and equivalents outstanding . . . . . . . . . 1,357,698 1,464,760
========== ==========
Net income for period . . . . . . . . . . . . $ 645,000 $ 645,000
Earnings per share . . . . . . . . . . . . . $0.48 $0.44
========== ==========
</TABLE>
6
<PAGE> 9
(3) COMMITMENTS AND CONTINGENCIES
Commitments to originate mortgage loans of $1.4 million at September 30, 1997
represent amounts which the Bank expects to fund during the quarter ending
December 31, 1997. There were no commitments to sell fixed-rate mortgage loans
at September 30, 1997. The Bank had unissued credit under existing home equity
line-of-credit loans and credit card lines of $14.8 million and $8.4 million,
respectively, as of September 30, 1997. Also, the Bank had unused credit under
existing commercial line-of-credit loans of $9.6 million at September 30, 1997.
The Bank had no commitments to purchase adjustable-rate or fixed-rate
mortgage-backed and related securities as of September 30, 1997.
(4) REGULATORY CAPITAL ANALYSIS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt and corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of September 30, 1997,
that the Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 1997, the Bank is well capitalized as defined by regulatory
standards. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table below. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are presented in the tables below.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- ------------------- ----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- -------- --------- ----------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997:
Tier I Capital Leverage (to Average Assets):
Consolidated . . . . . . . . . . . . . . . . . . $30,626 7.36% $12,478 3.00% $20,796 5.00%
West Allis Savings Bank . . . . . . . . . . . . 27,397 6.59 12,465 3.00 20,774 5.00
Tier I Capital (to Risk-Weighted Assets):
Consolidated . . . . . . . . . . . . . . . . . . 30,626 13.21 9,272 4.00 13,909 6.00
West Allis Savings Bank . . . . . . . . . . . . 27,397 11.82 9,270 4.00 13,904 6.00
Total Capital (to Risk-Weighted Assets):
Consolidated . . . . . . . . . . . . . . . . . . 31,645 13.65 18,545 8.00 23,181 10.00
West Allis Savings Bank . . . . . . . . . . . . 29,294 12.64 18,539 8.00 23,174 10.00
</TABLE>
As a state-charted savings bank, the Bank is also subject to a minimum
regulatory capital requirement of the State of Wisconsin. At September 30,
1997, on a fully-phased-in basis of 6.0%, the Bank had actual capital of
$29,223,000 with a required amount of $25,250,000, for excess capital of
$3,973,000.
7
<PAGE> 10
(5) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
-------------------- --------------------
(IN THOUSANDS)
Increase
Amount Percent Amount Percent (Decrease)
------ ------- ------ ------- ----------
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential one-to-four family . . . . . . . $164,796 55.9% $167,511 58.6% $ (2,735)
Home Equity . . . . . . . . . . . . . . . . . 26,576 8.7% 25,297 8.8% 1,279
Residential multi-family . . . . . . . . . . 32,076 10.8% 27,616 9.7% 4,460
Commercial real estate . . . . . . . . . . . 24,212 8.2% 21,693 7.6% 2,519
Residential construction . . . . . . . . . . 24,498 8.8% 27,003 9.4% (962)
Other construction and land . . . . . . . . . 12,817 4.3% 7,385 2.6% 5,431
-------- ------- -------- ------ --------
Total real estate mortgage loans . . . . 284,975 96.7% 276,505 96.7% 9,992
Consumer-related loans:
Automobile . . . . . . . . . . . . . . . . . 1,083 0.4% 1,195 0.4% (112)
Credit card . . . . . . . . . . . . . . . . . 2,709 0.9% 2,730 1.0% (21)
Other consumer loans . . . . . . . . . . . . 1,833 0.6% 1,950 0.7% (117)
-------- ------- -------- ------ --------
Total consumer-related loans . . . . . . 5,626 1.9% 5,875 2.1% (250)
-------- ------- -------- ------ --------
Commercial loans . . . . . . . . . . . . . . . . 4,319 1.4% 3,471 1.2% 868
-------- -------- -------- ------ --------
Gross loans . . . . . . . . . . . . . . 294,920 100.0% 285,851 100.0% $ 10,610
Accrued interest receivable . . . . . . . . . . . 1,771 1,694
Less:
Undisbursed portion of loan proceeds . . . . (12,488) (11,998)
Deferred loan fees . . . . . . . . . . . . . (304) (197)
Unearned interest . . . . . . . . . . . . . . (8) (32)
Allowances for loan losses . . . . . . . . .
(1,897) (1,762)
-------- --------
$281,994 $273,556
======== ========
</TABLE>
Loans serviced for investors totaled $31.0 million and $30.0 million at
September 30, 1997 and June 30, 1997, respectively.
8
<PAGE> 11
(6) NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1997
------------------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY AMOUNT RATE AMOUNT RATE
-------- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Advances from
Federal Home Loan Bank 1997 $15,000 5.74% $15,000 5.77%
1998 33,000 5.57% 33,000 5.57
1999 20,000 6.65 20,000 6.65
2000 13,012 6.45 13,012 6.45
2001 3,000 5.91 3,000 5.91
2002 5,000 6.43 5,000 6.43
2003 3,061 5.60 3,061 5.60
2007 6,500 6.52 - -
------- -------
$98,573 6.05% $92,073 6.02%
======= ===== ======= =====
Securities sold under
agreements to repurchase 1996 $ - 0.00% $ - 0.00%
======= =======
</TABLE>
FHLB advances totaled $98.6 million or 100.0% and $92.1 million or 100.0% of
total borrowings at September 30, 1997 and June 30, 1997, 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 $18.6 million
and $19.7 million at September 30, 1997 and June 30, 1997, 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 $15.6 million at September 30, 1997.
Variable rate term borrowings consist of $7.0 million tied to the one-month
LIBOR, and $3.0 million tied to the six-month LIBOR index.
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. There
were no liabilities recorded under agreements to repurchase identical and
substantially identical securities at September 30, 1997 and June 30, 1997.
9
<PAGE> 12
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 and commercial 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 the first half of fiscal 1997,
the Company implemented the first stage of the strategy by leveraging its
capital base to achieve asset growth. The objective of the first stage of the
strategy was 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.
The Company increased its asset size from $179.6 million at June 30, 1994 to
$409.8 million at June 30, 1997. The Bank's principal investment focus during
the four-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 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 resulted in 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. Excluding
the impact of the one-time industry-wide SAIF assessment in fiscal 1997,
pursuit of the strategy also resulted in increases in the Company's net income,
earnings per share, ROAE and ROAA for fiscal 1997.
10
<PAGE> 13
Starting in the latter half of fiscal 1996 and continuing in fiscal 1997, the
Company implemented the second stage of its post-Conversion plan in order to
continue to increase net income, earnings per share, ROAE and ROAA. This
strategy involved shifting the focus from asset growth to asset portfolio
diversification, while maintaining prudent capital and liquidity levels. This
was, and continues to be, achieved by altering the composition of its loan
portfolio and the securities originated, purchased, sold and held in the total
asset portfolio. In particular, the Company focused and will focus on
originating and purchasing higher-yielding multi-family, commercial real estate
and commercial business loans secured by properties or assets located within
the Company's primary lending area, which will either replace or supplement the
lower-yielding one-to-four family mortgage loans and principal run-off from the
mortgage securities portfolio. The Company also evaluates opportunities to
purchase multi-family and commercial real estate loans or participation
interests in such loans secured by properties located outside the Company's
primary lending area. In fiscal 1997, the Company purchased an aggregate of
$5.4 million, or 1.9% of gross loans at June 30, 1997, of loans and
participation interests in loans originated by other lenders and secured by
properties located outside of the Company's primary lending area. These loans
and participation interests consisted primarily of commercial real estate and
commercial real estate construction loans. In the second half of fiscal 1997,
the Company also expanded its opportunities to originate higher-yielding loans
by establishing a new commercial lending division which offers
commercial/industrial real estate term loans, equipment leasing,
inventory/equipment/receivables financing, lines of credit, letters of credit
and SBA loan programs. Asset portfolio diversification in fiscal 1997 was
funded through principal repayment cash flows from existing assets, wholesale
brokered and non-brokered deposits, retail deposits and FHLB advances.
In fiscal 1998, the Company intends to continue the implementation of the
second phase of its strategic plan by slowing the rate of growth of its asset
base and continuing to focus on asset portfolio diversification.* This will
continue to be accomplished by increasing the origination and purchase of
multi-family real estate, commercial real estate and commercial/industrial
business loans, combined with the growth of the commercial lending division.*
The Company also intends to begin to increase sales of one-to-four family
mortgage loans in the secondary market, including selling seasoned and recently
originated one-to-four family mortgage loans in order to provide liquidity for
the funding of higher-yielding loan originations and purchases, increase
non-interest income and maintain adequate levels of capital.* The Company
anticipates that increased sales of one-to-four family loans will decrease the
proportion of the gross loan portfolio represented by such loans, will increase
non-interest income as a result of increased gains on the sales of such loans,
and will further lessen the Company's negative gap position as such loans are
replaced by higher-yielding, adjustable rate assets, including multi-family,
commercial real estate and commercial loans.* Portfolio diversification in
fiscal 1998 also will include continued purchases of loans or participation
interests in loans originated by other lenders both within and outside of its
primary lending area.* Loans purchased, or participation interests purchased,
which relate to properties located outside of the Company's primary lending
area will consist primarily of multi-family, commercial real estate,
multi-family construction and commercial real estate construction loans.* 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
at least as strict as those applicable to the origination of similar loans
within its primary lending area.
The Company intends to fund its asset portfolio diversification in fiscal 1998
by a combination of retail deposits, brokered deposits, borrowings, the sale of
one-to-four family mortgage loans in the secondary market, the maturity and
sale of mortgage-backed and related securities and FHLB advances.*
The increase in the level of the allowance for losses on loans during fiscal
1997 was primarily the result of increases in the commercial, home equity and
commercial real estate loan portfolios. Loans secured by multi-family and
commercial real estate and commercial business assets generally involve a
greater degree of credit risk than one-to-four family loans and carry larger
balances. The increased credit risk is the result of several factors,
including concentration of principal in a limited number of loans and
borrowers, the effect of general economic conditions on income-producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Management anticipates that as the Company's volume of
multi-family and commercial/nonresidential real estate and commercial business
11
<PAGE> 14
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, which will have a negative effect on the Company's net income in the
short-term.* 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.*
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are retail and wholesale brokered and
non-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
during the fiscal year ended June 30, 1994 as interest rates decreased,
declined during fiscal 1995 as interest rates increased, and increased during
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 first half of fiscal 1997, and began to increase again at the end of
fiscal 1997.
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
three months ended September 30, 1997, the Company originated and purchased
loans totaling $26.8 million and $2.6 million, respectively, as compared to the
three months ended September 30, 1996 when originated and purchased loans
totaled $24.0 million and $6.4 million, respectively. Purchases of
mortgage-backed and related securities held-to-maturity for the three months
ended September 30, 1997 totaled $352,000. There were no purchases of
investment securities held-to-maturity for the three months ended September 30,
1997. For the three months ended September 30, 1997 and 1996, these activities
were funded primarily by principal repayments on loans of $27.8 million and
$14.3 million, respectively; principal repayments on mortgage-backed and
related securities of $4.6 million and $6.4 million, respectively; proceeds
from the sale of mortgage loans of $3.0 million and $560,000, respectively; net
increase in deposits of $18.3 million during the 1996 period; and net proceeds
from notes payable to the FHLB-Chicago of $6.5 million during the 1997 period.
Purchases of securities available-for-sale totaled $5.8 million and sales were
$7.0 million for the three months ended September 30, 1997, compared to
purchases of $1.0 million and sales of $1.5 million for the three months ended
September 30, 1996.
The Company is required to maintain minimum levels of liquid assets under the
regulations of the Wisconsin 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 22.13% at September 30, 1997. 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 September 30, 1997 and June
30, 1997, cash and cash equivalents were $14.2 million and $8.9 million,
respectively.
During the three months ended September 30, 1997, 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. During the three months ended September 30, 1997,
pricing of wholesale brokered deposits ranged from 20 to 40 basis points above
comparable term U.S. Treasury securities. At September 30, 1997, the average
rate of the wholesale brokered deposits
12
<PAGE> 15
accepted by the Company was 6.13% compared to an average rate paid for retail
certificates of deposit of 5.85%. During the three months ended September 30,
1997, management believed 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 rates 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. At September 30, 1997, retail and
wholesale certificates of deposit totaled $89.9 million and $135.7 million,
respectively. 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 wholesale deposits and
FHLB advances 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 September 30, 1997, FHLB advances totaled $98.6 million or 23.5% of the
Bank's total assets and there were no other borrowings. At September 30, 1997,
the Bank had unused borrowing authority under the borrowing limitations
established by the Board of Directors of $35.5 million and $48.1 million under
the FHLB total asset limitation. The Bank intends to fund asset portfolio
diversification in fiscal 1998 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.
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. The Company maintains a
$15.0 million 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. The Company also has a federal funds open line of
credit in the amount of $10.0 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 $1.4 million at September 30, 1997
represent amounts which the Bank expects to fund during the quarter ending
December 31, 1997. There were no commitments to sell fixed-rate mortgage loans
at September 30, 1997. The Bank had unissued credit under existing home equity
line-of-credit loans and credit card lines of $14.8 million and $8.4 million,
respectively, as of September 30, 1997. Also, the Bank had unused credit under
existing commercial line-of-credit loans of $9.6 million at September 30, 1997.
The Bank had no commitments to purchase adjustable-rate or fixed-rate
mortgage-backed and related securities as of September 30, 1997. 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 September 30, 1997 totaled $147.6 million.
CHANGE IN FINANCIAL CONDITION
Total assets increased $8.7 million, or 2.1%, from $409.8 million at June 30,
1997 to $418.5 million at September 30, 1997. This increase is primarily
reflected in an increase in loans receivable and interest-
13
<PAGE> 16
bearing deposits, funded primarily by an increase in FHLB-Chicago advances and
decreases in securities available-for-sale and mortgage-backed and related
securities.
Cash and cash equivalents were $14.2 million and $8.8 million at September 30,
1997 and June 30, 1997, respectively. The increase in cash and cash
equivalents was due to management's decision to increase such assets to have
funding available for unused loan commitments.
Securities available-for-sale decreased to $27.6 million at September 30, 1997
compared to $29.5 million at June 30, 1997. Mortgage-backed and related
securities held-to-maturity decreased to $82.2 million at September 30, 1997
compared to $85.4 million at JuneE30, 1997. 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 $282.0 million at September 30, 1997 compared to
$273.6 million at JuneE30, 1997. The increase at September 30, 1997 compared to
June 30, 1997 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
three months ended September 30, 1997. Total mortgage loans originated and
purchased amounted to $24.3 million ($2.6 million of which were purchased
mortgage loans) and $24.7 million ($6.4 million of which were purchased
mortgage loans) for the three months ended September 30, 1997 and 1996,
respectively, while sales of fixed-rate mortgage loans totaled $3.0 million and
$560,000 for the three months ended September 30, 1997 and 1996, respectively.
Total commercial real estate mortgage loans originated and purchased totaled
$2.9 million and $550,000 for the three months ended September 30, 1997 and
1996, respectively.
Deposits decreased $0.3 million to $281.2 million at September 30, 1997 from
$281.5 million at June 30, 1997. The decrease in deposits was primarily due to
the Company's use of FHLB advances during the three months ended September 30,
1997. Brokered certificates of deposit totaled $90.8 million at September 30,
1997, representing 32.2% of total deposits as compared to $92.2 million, or
32.8% of total deposits, at June 30, 1997. Non-brokered wholesale deposits
totaled $44.9 million at SeptemberE30, 1997, representing 16.0% of total
deposits as compared to $48.8 million, or 17.3% of total deposits at June 30,
1997. 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 increased to $98.6 million at September 30, 1997 compared
to $92.1 million at June 30, 1997. At September 30 and June 30, 1997, the
Company had no funds borrowed under reverse repurchase agreements. 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
three months ended September 30, 1997, the Company primarily utilized
FHLB-advances to fund increases in the Company's interest-bearing assets due
primarily to the attractive rates offered on long-term FHLB advances. At
September 30, 1997, the Company's estimated cumulative one-year gap between
assets and liabilities was a negative 4.7% of total assets as compared to a
negative 4.3% at June 30, 1997. For the three months ended September 30, 1997,
the Company managed its interest rate risk to maintain the level of its
one-year negative gap position primarily by matching the maturity of the
Company's liabilities, primarily through the use of FHLB advances. 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.
14
<PAGE> 17
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.*
15
<PAGE> 18
ASSET/LIABILITY MANAGEMENT SCHEDULE
The following table sets forth at September 30, 1997 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 . . . . . . . . . . . . . . . . . . . . . . . . $ 3,730 $ 10,673 $ 25,130 $20,877 $53,540 $113,950
Adjustable rate . . . . . . . . . . . . . . . . . . . . . 38,065 48,572 69,151 772 - 156,560
Consumer loans (2) . . . . . . . . . . . . . . . . . . . . . . 385 3,594 1,020 355 117 5,471
Commercial loans (2) . . . . . . . . . . . . . . . . . . . . . 1,232 375 916 826 895 4,244
Mortgage-backed and related securities:
Fixed rate and securities available-for-sale . . . . . . . 1,370 3,902 8,017 3,960 4,152 21,401
Adjustable rate . . . . . . . . . . . . . . . . . . . . . 49,808 20,248 - - - 70,056
Investment securities and
securities available-for-sale . . . . . . . . . . . . . . . 16,721 727 4,353 12,882 832 35,515
-------- --------- --------- ------- ------- --------
Total interest-earning assets . . . . . . . . . . . . . . $111,311 $ 88,091 $ 108,587 $39,672 $59,536 $407,197
======== ========= ========= ======= ======= ========
INTEREST-BEARING LIABILITIES:
Deposits(3):
NOW accounts . . . . . . . . . . . . . . . . . . . . . . . $ 194 $ 582 $ 924 $ 453 $ 435 $ 2,588
Money market deposit accounts . . . . . . . . . . . . . . 3,567 10,702 7,991 1,279 243 23,782
Passbook savings accounts . . . . . . . . . . . . . . . . 1,617 4,851 7,697 3,771 3,623 21,559
Certificates of deposit . . . . . . . . . . . . . . . . . 38,994 108,627 75,562 2,269 110 225,562
Escrow deposits . . . . . . . . . . . . . . . . . . . . . 5,007 -- - - - 5,007
Borrowings(4)
FHLB advances and other borrowings . . . . . . . . . . . . 15,000 30,000 36,012 8,000 9,561 98,573
-------- --------- --------- ------- ------- --------
Total interest-bearing liabilities . . . . . . . . . . . . $ 64,379 $ 154,762 $ 128,186 $15,772 $13,972 $377,071
======== ========= ========= ======= ======= ========
Excess (deficiency) of interest-earning assets over
interest-bearing liabilities . . . . . . . . . . . . . . . . $ 46,932 ($66,671) ($19,599) $23,900 $45,564 $ 30,126
======== ========= ========= ======= ======= ========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities . . . . . . . . . . $ 46,932 ($19,739) ($39,338) ($15,438) $30,126 $ 30,126
======== ========= ========= ======= ======= ========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities
as a percent of total assets . . . . . . . . . . . . . . . . 11.2% (4.7)% (9.4)% (3.7)% 7.2% 7.2%
==== ==== ==== ==== === ===
</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 $14.7 million at September 30,
1997.
(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 $46.2 million or 11.0% 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.
16
<PAGE> 19
ASSET QUALITY
The Company and the 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
--------------------------------------------------
SEP 30 JUN 30 MAR 31 DEC 31 SEP 30
1997 1997 1997 1996 1996
------ ------ ------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans . . . . . . . . . . . . $223 $572 $ 45 $ 33 $ 29
Non-accrual consumer loans . . . . . . . . . . . . 33 20 10 43 117
---- ---- ---- ---- ----
Total non-accrual loans . . . . . . . . . . . . . . $256 $592 $ 55 $ 76 $146
==== ==== ==== ==== ====
Loans 90 days or more
delinquent and still accruing . . . . . . . . . . 30 31 13 9 22
---- ---- ---- ---- ----
Total non-performing loans . . . . . . . . . . . . $286 $623 $ 68 $ 85 $168
==== ==== ==== ==== ====
Total foreclosed real estate net of
related allowance for losses . . . . . . . . . . 247 20 0 18 24
---- ---- ---- ---- ----
Total non-performing assets . . . . . . . . . . . . $533 $643 $ 68 $103 $192
==== ==== ==== ==== ====
Non-performing loans to
gross loans receivable . . . . . . . . . . . . . 0.10% 0.22% 0.02% 0.02% 0.06%
===== ===== ===== ===== =====
Non-performing assets to
total assets . . . . . . . . . . . . . . . . . . 0.13% 0.16% 0.02% 0.03% 0.05%
===== ===== ===== ===== =====
</TABLE>
17
<PAGE> 20
ALLOWANCE FOR LOAN LOSSES
The following table sets forth an analysis of the Bank's allowance for loan
losses:
<TABLE>
<CAPTION>
THREE MONTHS YEAR THREE MONTHS
ENDED ENDED ENDED
SEPT. 30, 1997 JUNE 30, 1997 SEPT. 31, 1996
-------------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period . . . . . . . . $ 1,762 $ 1,234 $ 1,234
Additions charged to operations:
One- to four-family . . . . . . . . . . . . - 295 31
Multi-family and commercial real estate . . 132 181 91
Consumer . . . . . . . . . . . . . . . . . . 33 114 57
Commercial . . . . . . . . . . . . . . . . . 35 60 -
-------- -------- ----------
200 650 179
Recoveries:
One- to four-family . . . . . . . . . . . . - 1 1
Consumer . . . . . . . . . . . . . . . . . 6 5 -
-------- -------- ----------
6 6 1
Charge-offs:
One- to four-family . . . . . . . . . . . . (27) (11) -
Consumer . . . . . . . . . . . . . . . . . (44) (117) (40)
-------- -------- ----------
(71) (128) (42)
-------- -------- ----------
Net charge-offs . . . . . . . . . . . . . . . (65) (122) (39)
-------- -------- ----------
Balance at end of period . . . . . . . . . . . $ 1,897 $ 1,762 $ 1,374
======== ======== ==========
Allowance for loan losses to
non-performing loans at end
of the period . . . . . . . . . . . . . . . . 697.54% 282.37% 817.86%
======= ======= =======
Allowance for loan losses to
total loans at end of the period . . . . . . 0.64% 0.62% 0.52%
========= ========= ==========
</TABLE>
The level of allowance for loan losses at September 30, 1997, reflects the
continued low level of charged off and non-performing loans. Management
believes that the allowance for loan losses is adequate as of September 30,
1997.
18
<PAGE> 21
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997
AND 1996
GENERAL
Net income for the three months ended September 30, 1997 increased to $645,000
from a loss of $57,000 for the comparable 1996 period. The increase in net
income was primarily due to a one-time after-tax charge of $533,000 in the 1996
period to recapitalize the FDIC fund which insures deposits of savings
associations. Net income for the 1996 period would have been $476,000 excluding
the one-time FDIC assessment. Return on average equity increased to 8.57% for
the three months ended September 30, 1997 from (0.84%) for the comparable 1996
period (or 7.00% excluding the effect of the one-time FDIC assessment). Return
on average assets increased to 0.62% for the three months ended September 30,
1997 from (0.06%) for the comparable 1996 period (or 0.50% excluding the effect
of the one-time FDIC assessment).
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 SEPTEMBER 30,
-----------------------------------------------------------------------------
1 9 9 7 1 9 9 6
------------------------------ ---------------------------------
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 . . . . . . . . . . . . . . $267,348 $ 5,560 8.32% $ 226,049 $4,491 7.95%
Consumer loans . . . . . . . . . . . . . . 5,591 193 13.81 6,170 200 12.97
Commercial loans . . . . . . . . . . . . .
4,440 106 9.55 - - -
--------- ------- --------- ------
Total loans . . . . . . . . . . . . . . 277,379 5,859 8.45 232,219 4,691 8.08
Securities held-to-maturity:
Mortgage-backed securities . . . . . . . 44,938 810 7.21 54,065 932 6.90
Mortgage related securities . . . . . . . 38,868 665 6.84 41,203 689 6.69
--------- ------- --------- ------
Total mortgage-backed
and related securities . . . . . . . . 83,806 1,475 7.04 95,268 1,621 6.81
Investment and other securities . . . . . . 9,565 153 6.40 4,266 65 6.09
Securities available-for-sale . . . . . . . 27,094 427 6.30 35,327 601 6.80
Federal Home Loan Bank stock . . . . . . . 5,279 90 6.82 5,119 87 6.80
--------- ------- --------- ------
Total interest-earning assets . . . . . . 403,123 8,004 7.94 372,199 7,065 7.59
Non-interest earning assets . . . . . . . . . 11,807 9,315
--------- ---------
Total assets . . . . . . . . . . . . . . $ 414,930 $ 381,514
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW accounts . . . . . . . . . . . . . . . $ 2,588 11 1.70% $ 2,299 10 1.74%
Money market deposit accounts . . . . . . . 21,775 282 5.18 9,670 121 5.01
Passbook accounts . . . . . . . . . . . . . 21,592 162 3.00 24,109 192 3.19
Certificates of deposit . . . . . . . . . . 226,978 3,450 6.08 194,069 2,805 5.78
--------- ------- --------- ------
Total deposits . . . . . . . . . . . . . 272,933 3,905 5.73 230,147 3,128 5.44
Advance payments by borrowers
for taxes and insurance . . . . . . . . . . 4,279 29 2.71 4,556 31 2.72
Borrowings . . . . . . . . . . . . . . . . . 96,948 1,500 6.19 109,579 1,622 5.92
--------- ------- --------- ------
Total interest-bearing liabilities 374,160 5,434 5.81 344,282 4,781 5.55
Non-interest bearing deposits
and liabilities . . . . . . . . . . . . . . 10,659 10,050
Shareholders' equity . . . . . . . . . . . . 30,111 27,182
--------- ---------
Total liabilities and
shareholders' equity . . . . . . . . . $414,930 $ 381,514
========= =========
Net interest income/interest rate spread. . . $ 2,570 2.13% $2,284 2.04%
======= ==== ====== ====
Net earning assets/net interest margin. . . . $28,963 2.55% $ 27,917 2.45%
========= ==== ========= ====
</TABLE>
19
<PAGE> 22
Net interest income before provision for losses on loans increased $286,000 or
12.5% to $2.6 million for the three months ended September 30, 1997 from $2.3
million for the comparable 1996 period. Interest income increased $939,000 for
the three months ended September 30, 1997, partially offset by an increase in
interest expense of $653,000. The level of net interest income primarily
reflects an 8.3% increase in average interest-earning assets to $403.1 million
for the three months ended September 30, 1997 from $372.2 million for the
comparable 1996 period, a 3.7% increase in the excess of the Company's average
interest-earning assets over average interest-bearing liabilities to $29.0
million for the three months ended September 30, 1997 from $27.9 million for
the comparable 1996 period, and an increase in interest rate spread to 2.13%
for the three months ended September 30, 1997 from 2.04% for the comparable
1996 period. The increase in interest rate spread was primarily due to the
increased proportion of interest earning assets invested in loans which carry
higher yields than investment securities and mortgage-backed and related
securities.
INTEREST INCOME
Interest income increased 13.3% to $8.0 million for the three months ended
September 30, 1997 from $7.1 million for the comparable 1996 period. The
increase in interest income was the result of an increase in average
interest-earning assets of 8.3% to $403.1 million for the three months ended
September 30, 1997 from $372.2 million for the comparable 1996 period and an
increase of 35 basis points in the yield on interest-earning assets to 7.94%
for the three months ended September 30, 1997 from 7.59% for the comparable
1996 period. Interest income on loans increased 24.9% to $5.9 million for the
three months ended September 30, 1997 from $4.7 million for the comparable 1996
period. The increase was the result of a rise in the Company's average gross
loans of 19.4% to $277.4 million for the three months ended September 30, 1997
from $232.2 million for the comparable 1996 period, and an increase in average
yield to 8.45% for the three months ended September 30, 1997 from 8.08% for the
comparable 1996 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 upward adjustment in rate on existing
adjustable-rate loans and to the higher yields paid on the multi-family and
commercial components of the loan portfolio. At September 30, 1997 the
multifamily and commercial components of the Company's loan portfolio totaled
$70.8 million, or 23.9% of the total loan portfolio, compared to $47.9 million,
or 18.0% of the total loan portfolio at September 30, 1996. Interest income on
mortgage-backed securities decreased 13.1% to $810,000 for the three months
ended September 30, 1997 from $932,000 for the comparable 1996 period. The
decrease was primarily due to a decrease in average balances to $44.9 million
for the three months ended September 30, 1997 from $54.1 million for the
comparable 1996 period, partially offset by an increase in average yield to
7.21% for the 1997 period from 6.90% for the 1996 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 to the higher yields paid on the private-issue
portion of the mortgage-backed securities portfolio. Interest income on
mortgage-related securities decreased 3.5% to $665,000 for the three months
ended September 30, 1997 from $689,000 for the comparable 1996 period. The
decrease was primarily due to a decrease in average balances to $38.9 million
for the three months ended September 30, 1997 from $41.2 million for the
comparable 1996 period, partially offset by a increase in average yield to
6.84% for the three months ended September 30, 1997 from 6.69% for the
comparable 1996 period. The increase in average yield on mortgage-related
securities was primarily due to the upward adjustment in rate on the adjustable
rate securities of this portfolio and the decreased amount of fixed rate
mortgage-related securities at lower interest rates during the three months
ended September 30, 1997. The decline in average balances of mortgage-backed
and related securities is due to management's decision to increase the loans
receivable portfolio. Interest income on investment securities and securities
available-for-sale decreased 12.9% to $580,000 for the three months ended
September 30, 1997 from $666,000 for the comparable 1996 period. The decrease
was primarily due to a decrease in average balances to $36.7 million for the
three months ended September 30, 1997 from $39.6 million for the comparable
1996 period, and a decrease in average yield to 6.33% for the 1997 period from
6.73% for the comparable 1996 period. The lower average yield was primarily
attributable to the decreased balances of investment and other securities
invested at lower short-term interest rates that existed during the 1997 period
as compared to the 1996 period.
20
<PAGE> 23
INTEREST EXPENSE
Interest expense increased 13.7% to $5.4 million for the three months ended
September 30, 1997 from $4.8 million for the comparable 1996 period. The
increase was the result of an 8.7% increase in the average amount of
interest-bearing liabilities to $374.2 million for the three months ended
SeptemberE30, 1997 compared to $344.3 million for the comparable 1996 period
and an increase in the average rate paid on interest-bearing liabilities to
5.81% for the 1997 period from 5.55% for the 1996 period. The increased
balances of certificates of deposit (including brokered deposits), money market
deposit accounts and borrowings at higher average interest rates was the
primary reason for the increase in the average rate paid on the
interest-bearing liabilities for the three months ended September 30, 1997 as
compared to the comparable 1996 period. Interest expense on deposits increased
24.8% to $3.9 million for the three months ended September 30, 1997 from $3.1
million for the comparable 1996 period. The increase was the result of an
increase in average balances of 18.6% to $272.9 million for the three months
ended September 30, 1997 from $230.1 million for the comparable 1996 period,
and an increase in the average rate paid to 5.73% for the 1997 period from
5.44% for the 1996 period. The increase in deposits was primarily due to an
increase of 17.0% in certificates of deposit (including brokered deposits) to
$227.0 million for the three months ended September 30, 1997 from $194.1
million for the comparable 1996 period and the increase in average rate paid
was primarily due to an increase in the average rate paid on certificates of
deposit (including brokered deposits) to 6.08% for the 1997 period from 5.78%
for the 1996 period. Money market deposit accounts increased 125.2% to $21.8
million for the three months ended September 30, 1997 from $9.7 million for the
comparable 1996 period, and the average rate paid increased to 5.18% for the
1997 period from 5.01% for the 1996 period. Money market deposit accounts
increased primarily due to aggressive marketing and a competitive rate offered
during the three months ended September 30, 1997. NOW accounts increased 12.6%
to $2.6 million for the three months ended September 30, 1997 from $2.3 million
for the comparable 1996 period, partially offset by a decrease in average rate
paid to 1.70% for the 1997 period from 1.74% for the 1996 period. These
increases were partially offset by an average balance decline of 10.4% in
Passbook accounts to $21.6 million for the three months ended September 30,
1997 from $24.1 million for the comparable 1996 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 $227.0 million in the
average balance of certificates of deposit for the three months ended September
30, 1997, $91.1 million or 40.1% represented brokered certificates of deposit
compared to $78.6 million or 40.5% for the 1996 period. The average rate paid
on brokered certificates of deposit increased to 6.13% for the three months
ended September 30, 1997 from 5.75% for the comparable 1996 period. The
increase was primarily due to management's decision to lengthen the maturities
of such deposits during the 1997 period. Interest on borrowings (FHLB advances
and reverse repurchase agreements) decreased 7.5% to $1.5 million for the
months ended September 30, 1997 from $1.6 million for the comparable 1996
period. The decrease was primarily due to the decline in average balances of
FHLB advances and reverse repurchase agreements of 11.5% to $96.9 million for
the three months ended September 30, 1997 from $109.6 million for the
comparable 1996 period, partially offset by an increase in the average rate
paid to 6.19% for the 1997 period from 5.92% for the 1996 period.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased 8.7% to $200,000 for the three
months ended SeptemberE30, 1997 from $184,000 for the comparable 1996 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 September 30, 1997, the allowance for
losses on loans increased 38.1% to $1.9 million at September 30, 1997 compared
to $1.4 million at September 30, 1996. This increase was primarily the result
of the increase in multi-family, multi-family construction, home equity,
commercial real estate and commercial 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 increased to 0.64% at
21
<PAGE> 24
September 30, 1997 from 0.52% at September 30, 1996, reflecting the continued
low level of loans charged off and non-performing loans. The amount of
non-performing loans at September 30, 1997 was $286,000 or .10% of gross loans
compared to $623,000 or 0.22% of gross loans at June 30, 1997 and $168,000 or
0.06% of gross loans at September 30, 1996.
NON-INTEREST INCOME
Non-interest income decreased 16.0% to $200,000 for the three months ended
September 30, 1997 from $238,000 for the comparable 1996 period. The largest
components of the decrease were a decrease in gains on the sale of securities
and mortgage-backed and related securities to a loss of $17,000 for the three
months ended September 30, 1997 compared to a gain of $7,000 for the comparable
1996 period, a decrease in insurance commissions to $4,000 for the three months
ended September 30, 1997 compared to $21,000 for the comparable 1996 period and
a decrease in service charges on deposit accounts to $114,000 for the three
months ended September 30, 1997 from $129,000 for the comparable 1996 period.
The decrease in gains on the sale of securities and mortgage-backed and related
securities reflects management's decision to sell only the lower-yielding
available-for-sale securities in the 1997 period. Offsetting the decreases in
non-interest income was an increase in service charges on loans to $45,000 for
the three months ended September 30, 1997 compared to $34,000 for the
comparable 1996 period, primarily reflecting the increased loan portfolio and
loan volume and a increase in gains on the sale of loans to $21,000 for the
three months ended September 30, 1997 from $8,000 for the comparable 1996
period reflecting an increase in loans sold in the 1997 period.
NON-INTEREST EXPENSE
Non-interest expense decreased 34.9% to $1.6 million for the three months ended
September 30, 1997 from $2.4 million for the comparable 1996 period. The
decrease was primarily due to a decrease in deposit insurance premiums of
$972,000 to $43,000 for the three months ended September 30, 1997 from
$1,015,000 for the comparable 1996 period, which relates to an FDIC
industry-wide special assessment of $877,000 in the 1996 period. Absent the
increase in FDIC premiums non-interest expense would have increased $31,000 to
$1.6 million. This increase primarily consisted of an increase in compensation
and benefits expense of $83,000 to $957,000 for the three months ended
September 30, 1997 from $874,000 for the comparable 1996 period, an increase in
other non-interest expense of $35,000 to $286,000 for the three months ended
September 30, 1997 from $251,000 for the comparable 1996 period and an increase
in occupancy and equipment expense of $5,000 to $243,000 for the three months
ended September 30, 1997 from $238,000 for the comparable 1996 period. The
increase in compensation and benefits expense primarily relates to higher
salary levels and an increase in the number of full time equivalent employees.
The increase in other non-interest expense was primarily due to increases in
printing, office supplies, organization dues, legal and other miscellaneous
expenses.
The Company is heavily dependent upon complex computer systems for all phases
of its operations, including customer transaction processing, internal/external
reporting and records retention. Non-interest expense includes the cost of
projects underway to ensure accurate date recognition and data processing with
respect to the year 2000. The Company has commenced a program intended to
complete the year 2000 conversion projects by 1999. These costs which are
expensed as incurred, have been immaterial to date and are not expected to have
a material impact on the Company's earnings in the future.
22
<PAGE> 25
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts, and other financial instruments with similar
characteristics. The Company currently does not enter into futures, forwards,
swaps or options. However, the Company is party to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments consist primarily of
commitments to extend credit. These instruments involve to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets. Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates
and may require collateral from the borrower if deemed necessary by the
Company.
The information required herein pursuant to Item 305 of Regulation S-K is
incorporated by reference in sections entitled "Liquidity and Capital
Resources" from pages 12 to 13 and "Asset/Liability Management" from pages 14
to 16 hereof.
23
<PAGE> 26
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
30, 1997. There were 1,442,950 shares of Common Stock of the Company
entitled to vote at the Annual Meeting, and 1,197,530 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
Against or Broker
For Withheld Abstain Non-Votes
--- -------- ------- ---------
<S> <C> <C> <C> <C>
Nominees for Director for
Three-Year Term Expiring in 2000
James D. Smessaert . . . . . . . . . . 1,184,155 13,375 -- --
Approval of amendment to the
Hallmark Capital Corp. 1993
Incentive Stock Option Plan . . . . . . . . 793,901 84,008 43,692 275,929
Approval of amendment to the
Hallmark Capital Corp. 1993
Stock Option Plan for Outside Directors . . 781,783 94,896 44,922 275,929
Ratification of KPMG Peat Marwick LLP
as independent auditors for
fiscal year ending June 30, 1998 . . . . . . 1,163,888 21,868 11,774 --
</TABLE>
The continuing directors of the Company include: Peter A. Gilbert,
Reginald M. Hislop, III, Floyd D. Brink, Charles E. Rickheim and
Donald A. Zellmer.
ITEM 5. OTHER INFORMATION
The Company declared a two-for one stock split in the form of a 100%
stock dividend on October 30, 1997. Shareholders will receive one
additional share of common stock for each share of common stock owned
as of the record date, November 10, 1997. As a result of the stock
split, the number of shares of common stock outstanding will increase
to 2,885,900 from 1,442,950.
24
<PAGE> 27
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.
* * * * * * * * * * * * * * * * * * * *
25
<PAGE> 28
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: November 11, 1997 /s/ James D. Smessaert
--------------------------------
James D. Smessaert
Chairman of the Board
Chief Executive Officer
Date: November 11, 1997 /s/ Arthur E. Thompson
--------------------------------
Arthur E. Thompson
Chief Financial Officer
26
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only
and not filed.
</TABLE>
27
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,031
<INT-BEARING-DEPOSITS> 11,194
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,553
<INVESTMENTS-CARRYING> 27,553
<INVESTMENTS-MARKET> 27,553
<LOANS> 281,994
<ALLOWANCE> 1,897
<TOTAL-ASSETS> 418,467
<DEPOSITS> 281,205
<SHORT-TERM> 30,000
<LIABILITIES-OTHER> 8,134
<LONG-TERM> 68,573
30,555
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 418,467
<INTEREST-LOAN> 5,859
<INTEREST-INVEST> 2,145
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,004
<INTEREST-DEPOSIT> 3,905
<INTEREST-EXPENSE> 5,434
<INTEREST-INCOME-NET> 2,570
<LOAN-LOSSES> 200
<SECURITIES-GAINS> (17)
<EXPENSE-OTHER> 286
<INCOME-PRETAX> 990
<INCOME-PRE-EXTRAORDINARY> 990
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 645
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 8.45
<LOANS-NON> 256
<LOANS-PAST> 30
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,762
<CHARGE-OFFS> 71
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 1,897
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,897
</TABLE>
