<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 March 31, 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 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 commons stock, par value
$1.00 per share, was 1,442,950 at May 7, 1997, the latest practicable
date.
<PAGE> 2
HALLMARK CAPITAL CORP. AND SUBSIDIARY
FORM 10-Q
<TABLE>
<CAPTION>
Part I. Financial Information
---------------------
<S> <C> <C>
Item 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition
as of March 31, 1997 (unaudited) and June 30, 1996 ............. 3
Consolidated Statements of Income for the Three and Nine Months
ended March 31, 1997 and 1996 (unaudited) ...................... 4
Consolidated Statements of Shareholders' Equity
for the Nine Months Ended March 31, 1997 and 1996 (unaudited) .. 5
Consolidated Statements of Cash Flows for the Nine Months
ended March 31, 1997 and 1996 (unaudited) ...................... 6
Notes to Consolidated Financial Statements (unaudited) .......... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk ....... N/A
Part II. Other Information
-----------------
Item 1. Legal Proceedings ............................................... 30
Item 2. Changes in Securities ........................................... 30
Item 3. Defaults 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 ................................ 30
Signature Page .................................................. 31
</TABLE>
2
<PAGE> 3
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
----------- --------
ASSETS (Unaudited)
<S> <C> <C>
Cash and non-interest bearing deposits ......................... $ 1,659 $ 2,136
Interest-bearing deposits ...................................... 3,093 2,689
-------- --------
Cash and cash equivalents ...................................... 4,752 4,825
Securities available-for-sale (at fair value):
Investment securities ......................................... 18,707 19,358
Mortgage-backed and related securities ........................ 12,302 17,926
Securities held-to-maturity:
Investment securities (fair value - $780 at March 31, 1997;
$978 at June 30, 1996) ....................................... 780 978
Mortgage-backed and related securities (fair value -
$88,047 at March 31, 1997; $97,239 at June 30, 1996) ......... 88,082 97,332
Loans receivable, net .......................................... 272,446 224,807
Investment in Federal Home Loan Bank stock, at cost ............ 5,554 5,119
Office properties and equipment ................................ 3,041 2,939
Prepaid expenses and other assets .............................. 3,623 3,873
-------- --------
Total assets .............................................. $409,287 $377,157
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits ...................................................... $269,290 $229,675
Notes payable to Federal Home Loan Bank ....................... 106,086 102,386
Securities sold under agreements to repurchase ................ 11,568
Advance payments by borrowers for taxes and insurance ......... 1,905 3,554
Accrued interest on deposit accounts and other borrowings ..... 1,671 1,523
Accrued expenses and other liabilities ........................ 1,729 1,440
-------- --------
Total liabilities ......................................... $380,681 $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 .................................... 10,557 10,465
Unearned ESOP compensation .................................... (659) (740)
Unearned restricted stock award ............................... (229) (334)
Net unrealized depreciation on securities available for sale .. (459) (595)
Treasury stock, at cost: 138,300 shares ...................... (1,592) (1,592)
Retained earnings, substantially restricted ................... 19,407 18,226
-------- --------
Total shareholders' equity ................................ $28,606 $27,011
-------- --------
Total liabilities and shareholders' equity ................ $409,287 $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 Nine Months Ended
March 31, March 31,
------------ -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable....................................... $5,364 $3,533 $15,076 $ 9,616
Mortgage-backed and related securities................. 1,765 1,986 5,543 5,480
Securities and interest-bearing deposits............... 451 449 1,360 1,405
------ ------ ------- -------
Total interest income............................. 7,580 5,968 21,979 16,501
INTEREST EXPENSE:
Deposits............................................... 3,576 2,740 10,131 7,331
Advance payments by borrowers for taxes and insurance.. 8 8 75 67
Notes payable and other borrowings..................... 1,526 1,232 4,681 3,684
------ ------ ------- -------
Total interest expense............................ 5,110 3,980 14,887 11,082
------ ------ ------- -------
Net interest income....................................... 2,470 1,988 7,092 5,419
Provision for losses on loans............................. 150 129 504 253
------ ------ ------- -------
Net interest income after provision for losses on loans... 2,320 1,859 6,588 5,166
NON-INTEREST INCOME:
Service charges on loans................................ 55 27 134 90
Service charges on deposit accounts..................... 113 116 369 370
Loan servicing fees, net................................ 21 25 65 80
Insurance commissions................................... 30 32 78 103
Gain on sale of securities and
mortgage-backed and related securities, net............ 27 7 70
Gain on sale of loans................................... 1 1 14 52
Other income............................................ 17 119 47 165
------ ------ ------- -------
Total non-interest income......................... 237 347 714 930
NON-INTEREST EXPENSE:
Compensation and benefits............................... 878 724 2,640 2,171
Marketing............................................... 79 80 229 237
Occupancy and equipment................................. 260 239 705 623
Deposit insurance premiums.............................. 41 106 1,045 273
Other non-interest expense.............................. 285 278 863 744
------ ------ ------- -------
Total non-interest expense........................ 1,543 1,427 5,482 4,048
------ ------ ------- -------
Income before income taxes................................ 1,014 779 1,820 2,048
Income taxes.............................................. 349 278 639 724
------ ------ ------- -------
Net income.............................................. $ 665 $ 501 $ 1,181 $ 1,324
====== ====== ======= =======
Earnings per share...................................... $ 0.46 $ 0.35 $ 0.82 $ 0.94
====== ====== ======= =======
</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>
NINE MONTHS ENDED MARCH 31, 1997
- ------------------------------------------
Balance at June 30, 1996 ................. $1,581 $10,465 ($740) ($334) ($595) ($1,592) $18,226 $27,011
Net income ............................... - - - - - 1,181 1,181
Amortization of unearned ESOP and
restricted stock award compensation ..... - 92 81 105 - - - 278
Unrealized appreciation on securities
available for sale, net of tax benefit .. - - - - 136 - - 136
------ ---------- ------------ ---------- ---------- -------- -------- -------
Balance at March 31, 1997 ................ $1,581 $10,557 ($659) ($229) ($459) ($1,592) $19,407 $28,606
====== ========== ============ ========== ========== ======== ======== =======
NINE MONTHS ENDED MARCH 31, 1996
- ------------------------------------------
Balance at June 30, 1995 ................. $1,581 $10,360 ($861) ($502) ($74) ($1,592) $16,348 $25,260
Net income ............................... - - - - - - 1,324 1,324
Amortization of unearned ESOP and
restricted stock award compensation ..... - 73 76 126 - - - 275
Unrealized depreciation on securities
available for sale, net of tax benefit .. - - - - (335) - - (335)
------ ---------- ------------ ---------- ---------- -------- -------- -------
Balance at March 31, 1996 ................ $1,581 $10,433 ($785) ($376) ($409) ($1,592) $17,672 $26,524
====== ========== ============ ========== ========== ======== ======== =======
</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>
NINE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................................... $ 1,181 $ 1,324
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Provision for losses on loans............................................... 504 253
Provision for depreciation and amortization................................. 200 160
Deferred income taxes....................................................... - (221)
Net gain on sales of investments and
mortgage-backed and related securities..................................... (7) (70)
Net gain on sale of loans................................................... (14) (52)
Amortization of unearned ESOP and restricted stock awards................... 278 275
Loans originated for sale................................................... (988) (3,344)
Sales of loans originated for sale.......................................... 988 5,110
(Increase) decrease in prepaid expenses and other assets.................... 250 (626)
Other adjustments........................................................... 388 758
-------- --------
Net cash provided by operating activities.................................... 2,780 3,567
-------- --------
INVESTING ACTIVITIES
Proceeds from the sale of securities available-for-sale...................... 1,454 42,042
Proceeds from the maturity of securities available-for-sale.................. 500 (46,382)
Purchases of securities available-for-sale................................... (1,950) (483)
Purchases of investment securities held-to-maturity.......................... - 95
Proceeds from maturities of investment securities held-to-maturity........... 198 (47,650)
Purchases of mortgage-backed and related securities.......................... 435 -
Proceeds from sale of mortgage-backed and related securities................. 15,287 16,465
Principal collected on mortgage-backed and related securities................ (48,153) (47,321)
Net change in loans receivable............................................... 15 150
Proceeds from sales of foreclosed properties................................. (435) (1,015)
Purchase of Federal Home Loan Bank stock..................................... (302) (207)
Purchases of office properties and equipment, net............................ -------- --------
Net cash used in investing activities........................................ (32,951) (84,306)
-------- --------
FINANCING ACTIVITIES
Net increase in deposits..................................................... 39,615 67,374
Proceeds from long-term notes payable to Federal Home Loan Bank.............. 20,000 18,000
Net increase (decrease) in short-term notes payable to Federal
Home Loan Bank.............................................................. (13,300) 1,800
Repayment of long-term notes payable to Federal Home Loan Bank............... (3,000) (6,000)
Net decrease in securities sold under agreements to repurchase............... (11,568) (1,568)
Net decrease in advance payments by borrowers for taxes and insurance........ (1,649) (1,419)
-------- --------
Net cash provided by financing activities.................................... 30,098 78,187
-------- --------
Increase (decrease) in cash and cash equivalents............................. (73) (2,552)
Cash and cash equivalents at beginning of period............................. 4,825 6,820
-------- --------
Cash and cash equivalents at end of period................................... $ 4,752 $ 4,268
======== ========
</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>
NINE MONTHS ENDED
MARCH 31,
-----------------
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid (including amounts credited to deposit accounts)... $14,756 $10,624
Income taxes paid................................................ $ 757 $ 646
Non-cash transactions:
Mortgage loans securitized as mortgage-backed securities......... - $ 1,767
Loans transferred to foreclosed properties....................... $ 24 $ 126
</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 nine months ended
March 31, 1997 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
nine months ended March 31, 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 and nine months ended March
31, 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 March 31, 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 ..................... (84,333) (84,333)
Common stock equivalents due to
dilutive effect of stock options ........... 86,886 86,407
--------- ---------
Total weighted average common shares
and equivalents outstanding ................ 1,436,272 1,435,793
========= =========
Net income for period ...................... $665,000 $665,000
Earnings per share ......................... $0.46 $0.46
For the Nine Months Ended March 31, 1997
- ----------------------------------------
Weighted average common shares outstanding .. 1,442,950 1,442,950
Ungranted restricted stock .................. (9,231) (9,231)
Uncommitted ESOP shares ..................... (84,333) (84,333)
Common stock equivalents due to
dilutive effect of stock options ........... 81,667 86,407
--------- ---------
Total weighted average common shares
and equivalents outstanding ................ 1,431,053 1,435,793
========== ==========
Net income for period ...................... $1,181,000 $1,181,000
Earnings per share ......................... $0.82 $0.82
</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 March 31, 1997,
totaled $233,963,000.
The Bank's regulatory capital as of March 31, 1997 was as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Tier 1 Total
Capital Capital
------- -------
<S> <C> <C>
Total consolidated shareholders' equity ..... $28,606 $28,606
Less Holding Company shareholders' equity
not available for bank regulatory capital .. (3,702) (3,702)
Loan loss allowances ........................ - 1,655
Net unrealized depreciation on
available-for-sale debt securities ......... 438 438
------- -------
Regulatory capital ......................... $25,342 $26,997
======= =======
</TABLE>
The following table summarizes the Bank's capital amounts and capital ratios,
and the capital ratios required by the FDIC at March 31, 1997 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 .. $25,342 $12,166 $13,176 6.25% 3.00% 3.25%
Tier 1 capital ........... 25,342 9,359 15,983 10.83% 4.00% 6.83%
Total capital ............ 26,997 18,717 8,280 11.54% 8.00% 3.54%
</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 March
31, 1997, on a fully-phased-in basis of 6.0%, the Bank had actual capital of
$26,559,000 with a required amount of $24,628,000.
9
<PAGE> 10
(4) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
------------------ ---------------
(IN THOUSANDS)
Increase
Amount Percent Amount Percent (Decrease)
------ ------- ------ ------- ----------
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential one-to-four family ........ $172,441 60.2% $153,689 61.8% $18,752
Home Equity ........................... 23,399 8.2% 19,349 7.8% 4,050
Residential multi-family .............. 25,359 8.9% 19,788 8.0% 5,571
Commercial real estate ................ 16,144 5.6% 5,488 2.2% 10,656
Residential construction .............. 31,044 10.8% 37,016 14.9% (5,972)
Other construction and land ........... 8,465 3.0% 6,491 2.6% 1,974
-------- ------ -------- ----- -------
Total real estate mortgage loans ... 276,852 96.7% 241,821 97.3% 35,031
Consumer-related loans:
Automobile ............................ 1,334 0.5% 1,774 0.7% (440)
Credit card ........................... 2,810 1.0% 2,585 1.0% 225
Other consumer loans .................. 2,049 0.7% 2,372 1.0% (323)
-------- ------ -------- ----- -------
Total consumer-related loans ....... 6,193 2.2% 6,731 2.7% (538)
-------- ------ -------- ----- -------
Commercial loans ....................... 3,149 1.1% 0 0.0% 3,149
-------- ------ -------- ----- -------
Gross loans ........................ 286,194 100.0% 248,552 100.0% $37,642
Accrued interest receivable ............ 1,649 1,287
Less:
Undisbursed portion of loan proceeds .. (13,570) (23,770)
Deferred loan fees .................... (161) (18)
Unearned interest ..................... (11) (10)
Allowances for loan losses ............ (1,655) (1,234)
-------- --------
$272,446 $224,807
======== ========
</TABLE>
Loans serviced for investors totaled $21.2 million and $23.5 million at March
31, 1997 and June 30, 1996, respectively.
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 March 31, 1997: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation (FHLMC) ... $ 5,067 $ 64 $ 75 $ 5,056
Federal National Mortgage Association (FNMA) ..... 15,978 210 117 16,071
Government National Mortgage Association (GNMA) .. 958 41 - 999
Private issuers .................................. 26,003 - 298 25,705
------- ---- ---- -------
$48,006 $315 $490 $47,831
------- ---- ---- -------
Collateralized mortgage obligations:
FHLMC ............................................ $14,179 $327 $ 26 $14,480
FNMA ............................................. 18,600 145 199 18,546
Private issuers .................................. 7,297 11 118 7,190
------- ---- ---- -------
$40,076 $483 $343 $40,216
------- ---- ---- -------
Total mortgage-backed and related securities ... $88,082 $798 $833 $88,047
======= ==== ==== =======
At June 30, 1996:
Mortgage-backed securities:
FHLMC ............................................ $ 6,484 $ 72 $ 45 $ 6,511
FNMA ............................................. 19,127 180 150 19,157
GNMA ............................................. 1,379 53 - 1,432
Private issuers .................................. 28,801 1 278 28,524
------- ---- ---- -------
$55,791 $306 $473 $55,624
------- ---- ---- -------
Collateralized mortgage obligations:
FHLMC ............................................ $14,222 $358 $ 40 $14,540
FNMA ............................................. 19,332 111 273 19,170
Private issuers .................................. 7,987 4 86 7,905
------- ---- ---- -------
$41,541 $473 $399 $41,615
------- ---- ---- -------
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>
At March 31, 1997:
Held-To-Maturity:
Mortgage-backed securities:
Adjustable-rate ................................. $42,613 $279 $325 $42,567
Fixed-rate ...................................... 5,393 36 165 5,264
Collateralized mortgage obligations:
Adjustable-rate ................................. $31,122 $469 $223 $31,368
Fixed-rate ...................................... 8,954 14 120 8,848
------- ---- ---- -------
$88,082 $798 $833 $88,047
======= ==== ==== =======
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>
MARCH 31, 1997 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 41,000 5.65% 27,100 5.79
1998 21,000 5.42 20,000 5.44
1999 16,000 6.64 18,000 6.06
2000 17,016 6.27 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
-------- --------
$106,086 5.90% $102,386 5.82%
======== ==== ======== ====
Securities sold under
agreements to repurchase 1996 $ 0 0.00% $ 11,568 5.61%
======== ========
</TABLE>
FHLB advances totaled $106.1 million or 100.0% and $102.4 million or 89.8% of
total borrowings at March 31, 1997 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 $20.5 million
and $23.6 million at March 31, 1997 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 $14.5 million at March 31, 1997.
Short-term FHLB advances due in one year or less totaled $48.0 million and
$49.3 million at March 31, 1997 and June 30, 1996, respectively.
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 $11.6 million at March 31, 1997 and June 30,
1996, respectively. At June 30, 1996, the reverse repurchase agreements had a
weighted average underlying coupon interest rate of 5.61%, 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 $11.8
million and $12.1 million, 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 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 fiscal 1996, the Company took
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.
13
<PAGE> 14
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 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 has included 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 began operations of the Bank's commercial loan division during the
three months ended March 31, 1997. At March 31, 1997, the commercial loan
portfolio totaled $3.1 million. 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, wholesale brokered and non-brokered
deposits, borrowings, the maturity and sale of mortgage-backed and related
securities, and 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 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.
14
<PAGE> 15
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.
The FDIC published a final rule on December 24, 1996, providing for an
effective SAIF assessment range of 0 to 27 basis points beginning October 1,
1996. This assessment range is comparable to the current rate schedule for
BIF-institutions and represents a reduction in FDIC premium expense for the
Bank, which is expected to continue in future periods.
The DIF Act addressed other matters which will affect the Bank. Certain bond
obligations of the Financial Corporation ("FICO"), which were issued to resolve
the savings and loan crisis in the 1980's, 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.
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 nine months ended March 31, 1997, and began to increase again at the
end of March 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
nine months ended March 31, 1997, the Company originated and purchased loans
totaling $72.0 million and $13.5 million, respectively, as compared to the nine
months ended March 31, 1996 when originated and purchased loans totaled $45.1
million and $19.8 million, respectively. There were no purchases of
mortgage-backed and related securities held-to-maturity for the nine months
ended March 31, 1997, and $47.7 million for the nine months ended March 31,
1996. There were no purchases of investment securities held-to-maturity for
the nine months ended March 31, 1997 and $483,000 for the nine months ended
March 31, 1996. For the nine months ended March 31, 1997 and 1996, these
activities were funded primarily by principal repayments on loans of $46.9
million and $21.4 million, respectively; principal repayments on
mortgage-backed and related securities of $15.3 million and $16.5 million,
respectively; proceeds from the sale of mortgage loans of $988,000 and $5.1
million, respectively; net increase in deposits of $39.6 million and $67.4
million, respectively; and net proceeds from notes payable to the FHLB-Chicago
of $3.7 million and $13.8 million, respectively. Purchases of securities
available-for-sale
15
<PAGE> 16
totaled $2.0 million and sales were $1.5 million for the nine months ended
March 31, 1997, compared to purchases of $46.4 million and sales of $42.0
million for the nine months ended March 31, 1996.
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 20.05% at March 31, 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 March 31, 1997 and June 30,
1996, cash and cash equivalents was $4.8 million.
During the nine months ended March 31, 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 nine months ended March 31, 1997, pricing of
wholesale brokered deposits ranged from 20 to 40 basis points above comparable
term U.S. Treasury securities. At March 31, 1997, the average rate of the
wholesale brokered deposits accepted by the Company was 5.96% compared to an
average rate paid for retail certificates of deposit of 5.76%. During the nine
months ended March 31, 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 March 31, 1997, retail and wholesale certificates of deposit totaled $83.2
million and $135.1 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 March 31, 1997, FHLB advances totaled $106.1 million or 26.0% of the Bank's
total assets and there were no other borrowings. At March 31, 1997, the Bank
had unused borrowing authority under the borrowing limitations established by
the Board of Directors of $24.7 million and $37.0 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.
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. During the three months
ended March 31, 1997, management 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
16
<PAGE> 17
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. This backup credit facility was put in place on May 2, 1997 and
is now available to the Company. 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 $6.4 million at March 31, 1997
represent amounts which the Bank expects to fund during the quarter ending June
30, 1997. There were no commitments to sell fixed-rate mortgage loans at March
31, 1997. The Bank had unissued credit under existing home equity
line-of-credit loans and credit card lines of $15.8 million and $6.4 million,
respectively, as of March 31, 1997. The Bank had no commitments to purchase
adjustable-rate or fixed-rate mortgage-backed and related securities as of
March 31, 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 March 31, 1997 totaled
$129.1 million.
CHANGE IN FINANCIAL CONDITION
Total assets increased $32.1 million, or 8.5%, from $377.2 million at June 30,
1996 to $409.3 million at March 31, 1997. This increase is primarily reflected
in an increase in loans receivable, 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 were $4.8 million at March 31, 1997 and June 30,
1996.
Securities available-for-sale decreased to $31.0 million at March 31, 1997
compared to $37.3 million at June 30, 1996. Mortgage-backed and related
securities held-to-maturity decreased to $88.1 million at March 31, 1997
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 $272.4 million at March 31, 1997 compared to
$224.8 million at June 30, 1996. The increase at March 31, 1997 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
nine months ended March 31, 1997. Total mortgage loans originated and
purchased amounted to $62.0 million ($13.5 million of which were purchased
mortgage loans) and $62.4 million ($19.8 million of which were purchased
mortgage loans) for the nine months ended March 31, 1997 and 1996,
respectively, while sales of fixed-rate mortgage loans totaled $988,000 and
$5.1 million for the nine months ended March 31, 1997 and 1996, respectively.
Total commercial real estate mortgage loans originated and purchased totaled
$11.9 million and $6.6 million for the nine months ended March 31, 1997 and
1996, respectively.
Deposits increased $39.6 million to $269.3 million at March 31, 1997 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 $90.5 million at March 31, 1997, representing 33.6% of total deposits
as compared to $75.3 million, or 32.8% of total deposits, at June 30, 1996.
Non-brokered wholesale deposits totaled $44.6 million at March 31, 1997,
representing 16.6% 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.
17
<PAGE> 18
FHLB-Chicago advances and other borrowings decreased to $106.1 million at March
31, 1997 compared to $114.0 million at June 30, 1996. At March 31, 1997, FHLB
advances were $106.1 million or 27.9% of total liabilities compared to $102.4
million or 29.2% of total liabilities at June 30, 1996. At March 31, 1997, 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
nine months ended March 31, 1997, 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 March 31, 1997, the Company's estimated
cumulative one-year gap between assets and liabilities was a negative 2.6% of
total assets as compared to 13.7% at June 30, 1996. For the nine months ended
March 31, 1997, the Company managed its interest rate risk to decrease the
level of its one-year negative gap position primarily by extending the maturity
of the Company's liabilities, primarily through 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 March 31, 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
----------- ---------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS(1):
Mortgage loans(2):
Fixed rate .................................... $ 3,446 $ 9,246 $ 21,181 $ 17,787 $61,648 $113,308
Adjustable rate ............................... 33,017 53,224 56,043 6,721 - 149,005
Consumer loans (2) ................................. 342 3,843 1,384 398 67 6,034
Commercial loans (2) ............................... 2,068 61 154 146 193 2,622
Mortgage-backed and related securities:
Fixed rate and securities available-for-sale .. 1,491 4,342 8,742 4,536 7,536 26,647
Adjustable rate ............................... 51,466 22,270 - - - 73,736
Investment securities and
securities available-for-sale ...................... 8,898 1,716 2,035 13,673 1,814 28,136
--------- -------- --------- --------- -------- --------
Total interest-earning assets ................. $ 100,728 $ 94,702 $ 89,539 $ 43,261 $71,258 $399,488
========= ======== ========= ========= ======== ========
INTEREST-BEARING LIABILITIES:
Deposits(3):
NOW accounts .................................. $ 180 $ 540 $ 856 $ 419 $ 403 $ 2,398
Money market deposit accounts ................. 2,891 8,672 6,475 1,036 197 19,271
Passbook savings accounts ..................... 1,668 5,003 7,938 3,890 3,737 22,236
Certificates of deposit ....................... 63,758 65,380 85,291 3,746 123 218,298
Escrow deposits ............................... - 1,905 - - - 1,905
Borrowings(4)
FHLB advances and other borrowings ............ 44,000 12,000 34,000 13,016 3,070 106,086
--------- -------- --------- --------- -------- --------
Total interest-bearing liabilities ............ $ 112,497 $ 93,500 $ 134,560 $ 22,107 $ 7,530 $370,194
========= ======== ========= ========= ======== ========
Excess (deficiency) of interest-earning assets over
interest-bearing liabilities ...................... ($11,769) $ 1,202 ($45,021) $ 21,154 $63,728 $ 29,294
========= ======== ========= ========= ======== ========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities .......... ($11,769) ($10,567) ($55,588) ($34,434) $29,294 $ 29,294
========= ======== ========= ========= ======== ========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities
as a percent of total assets ...................... (2.9)% (2.6)% (13.6)% (8.4)% 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 $13.6 million at March 31,
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 $35.5 million or 8.7% 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 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
--------------------------------------
MAR 31 DEC 31 SEP 30 JUN 30 MAR 31
1997 1996 1996 1996 1996
----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans......... $ 45 $ 33 $ 29 $ 64 $ 183
Non-accrual consumer loans......... 10 43 117 21 24
---- ----- ----- ----- -----
Total non-accrual loans............ $ 55 $ 76 $ 146 $ 85 $ 207
==== ===== ===== ===== =====
Loans 90 days or more
delinquent and still accruing..... 13 9 22 22 87
---- ----- ----- ----- -----
Total non-performing loans......... $ 68 $ 85 $ 168 $ 107 $ 294
==== ===== ===== ===== =====
Total foreclosed real estate net of
related allowance for losses...... 0 18 24 0 0
---- ----- ----- ----- -----
Total non-performing assets........ $ 68 $ 103 $ 192 $ 107 $ 294
==== ===== ===== ===== =====
Non-performing loans to
gross loans receivable............ .02% .02% .06% .04% .14%
==== ===== ===== ===== =====
Non-performing assets to
total assets...................... .02% .03% .05% .03% .09%
==== ===== ===== ===== =====
</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>
NINE MONTHS YEAR NINE MONTHS
ENDED ENDED ENDED
MARCH 31, 1997 JUNE 30, 1996 MARCH 31, 1996
-------------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period ............ $ 1,234 $ 953 $ 953
Additions charged to operations:
One- to four-family ...................... 144 172 124
Multi-family and commercial real estate .. 333 80 50
Consumer (1) ............................. - 115 79
Commercial ............................... 27 - -
-------- -------- -------
504 367 253
Recoveries:
One- to four-family ...................... 1 8 8
Consumer ................................. 1 9 6
-------- -------- -------
2 17 14
Charge-offs:
One- to four-family ...................... (9) (15) (12)
Consumer ................................. (76) (88) (60)
-------- -------- -------
(85) (103) (72)
-------- -------- -------
Net charge-offs ........................... (83) (86) (58)
-------- -------- -------
Balance at end of period .................. $ 1,655 $ 1,234 $ 1,148
======== ======== =======
Allowance for loan losses to
non-performing loans at end
of the period ............................. 2,433.17% 1,153.27% 802.80%
======== ======== =======
Allowance for loan losses to
total loans at end of the period .......... 0.58% 0.50% 0.56%
======== ======== =======
</TABLE>
(1) During the three months ended March 31, 1997, one-to-four family equity
loan balances and additions charged to operations on such loans were
transferred to the one-to-four family category from the consumer category.
The level of allowance for loan losses at March 31, 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 March 31, 1997.
21
<PAGE> 22
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1997 AND
1996
GENERAL
Net income for the three months ended March 31, 1997 increased $164,000 or
32.7% to $665,000 compared to $501,000 for the comparable 1996 period. Return
on average equity increased to 9.38% for the three months ended March 31, 1997
from 7.54% for the comparable 1996 period. Return on average assets increased
to .66% for the three months ended March 31, 1997 from .61% for the comparable
1996 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 MARCH 31,
---------------------------------------------------------------
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 ........................... $232,510 $4,629 7.96% $152,808 $2,962 7.75%
Consumer loans ........................... 28,935 699 9.66 23,804 571 9.60
Commercial loans ......................... 1,,638 36 8.79 - - -
-------- ------ -------- ------
Total loans ........................... 263,083 5,364 8.16 176,612 3,533 8.00
Securities held-to-maturity:
Mortgage-backed securities .............. 48,958 876 7.16 60,297 1,074 7.12
Mortgage related securities ............. 40,304 665 6.60 39,211 681 6.95
-------- ------ -------- ------
Total mortgage-backed
and related securities ................ 89,262 1,541 6.91 99,508 1,755 7.05
Investment and other securities .......... 5,410 70 5.18 4,885 70 5.73
Securities available-for-sale ............ 32,172 517 6.43 34,270 544 6.35
Federal Home Loan Bank stock ............. 5,317 88 6.62 4,074 66 6.48
-------- ------ -------- ------
Total interest-earning assets ........... 395,244 7,580 7.67 319,349 5,968 7.48
Non-interest earning assets ............... 9,188 7,430
-------- --------
Total assets ............................ $404,432 $326,779
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW accounts ............................. $2,342 10 1.71% $2,200 10 1.82%
Money market deposit accounts ............ 18,171 236 5.20 6,358 75 4.72
Passbook accounts ........................ 22,139 163 2.95 23,988 175 2.92
Certificates of deposit .................. 218,376 3,167 5.80 173,157 2,480 5.73
-------- ------ -------- ------
Total deposits .......................... 261,028 3,576 5.48 205,703 2,740 5.33
Advance payments by borrowers
for taxes and insurance 1,255 8 2.55 1,092 8 2.93
Borrowings ................................ 103,961 1,526 5.87 84,136 1,232 5.86
-------- ------ -------- ------
Total interest-bearing liabilities ...... 366,244 5,110 5.58 290,931 3,980 5.47
Non-interest bearing deposits
and liabilities .......................... 9,839 9,285
Shareholders' equity ...................... 28,349 26,563
-------- --------
Total liabilities and
shareholders' equity ................... $404,432 $326,779
======== ========
Net interest income/interest rate spread .. $2,470 2.09% $1,988 2.01%
====== ==== ====== ====
Net earning assets/net interest margin .... $29,000 2.50% $28,418 2.49%
======= ==== ======= ====
</TABLE>
22
<PAGE> 23
Net interest income before provision for losses on loans increased $482,000 or
24.2% to $2.5 million for the three months ended March 31, 1997 from $2.0
million for the comparable 1996 period. Interest income increased $1.6 million
for the three months ended March 31, 1997, partially offset by an increase in
interest expense of $1.1 million. The level of net interest income primarily
reflects a 23.8% increase in average interest-earning assets to $395.2 million
for the three months ended March 31, 1997 from $319.3 million for the
comparable 1996 period, a 2.0% 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 March 31, 1997 from $28.4 million for the
comparable 1996 period, and an increase in interest rate spread to 2.09% for
the three months ended March 31, 1997 from 2.01% 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.
INTEREST INCOME
Interest income increased 27.0% to $7.6 million for the three months ended
March 31, 1997 from $6.0 million for the comparable 1996 period. The increase
in interest income was the result of an increase in average interest-earning
assets of 23.8% to $395.2 million for the three months ended March 31, 1997
from $319.3 million for the comparable 1996 period and an increase of 19 basis
points in the yield on interest-earning assets to 7.67% for the three months
ended March 31, 1997 from 7.48% for the comparable 1996 period. Interest
income on loans increased 51.8% to $5.4 million for the three months ended
March 31, 1997 from $3.5 million for the comparable 1996 period. The increase
was the result of a rise in the Company's average gross loans of 49.0% to
$263.1 million for the three months ended March 31, 1997 from $176.6 million
for the comparable 1996 period, and an increase in average yield to 8.16% for
the three months ended March 31, 1997 from 8.00% 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 retention of longer-term fixed-rate and adjustable-rate
loans and to the higher yields paid on the multi-family and commercial
components of the loan portfolio. At March 31, 1997 the multifamily and
commercial components of the Company's loan portfolio totaled $44.7 million, or
15.6% of the total loan portfolio, compared to $18.6 million, or 9.2% of the
total loan portfolio at March 31, 1996. Interest income on mortgage-backed
securities decreased 18.4% to $876,000 for the three months ended March 31,
1997 from $1.1 million for the comparable 1996 period. The decrease was
primarily due to a decrease in average balances to $49.0 million for the three
months ended March 31, 1997 from $60.3 million for the comparable 1996 period,
partially offset by an increase in average yield to 7.16% for the 1997 period
from 7.12% 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 securities portfolio. Interest income on
mortgage-related securities decreased 2.3% to $665,000 for the three months
ended March 31, 1997 from $681,000 for the comparable 1996 period. The
decrease was primarily due to a decrease in average yield to 6.60% for the
three months ended March 31, 1997 from 6.95% for the comparable 1996 period,
partially offset by an increase in average balances to $40.3 million for the
three months ended March 31, 1997 from $39.2 million for the comparable 1996
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 March 31, 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 4.4% to $587,000 for the
three months ended March 31, 1997 from $614,000 for the comparable 1996 period.
The decrease was primarily due to a decrease in average balances to $37.6
million for the three months ended March 31, 1997 from $39.2 million for the
comparable 1996 period, and a decrease in average yield to 6.25% for the 1997
period from 6.27% for the comparable 1996 period. The lower average yield was
primarily attributable to the increased 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.
23
<PAGE> 24
INTEREST EXPENSE
Interest expense increased 28.4% to $5.1 million for the three months ended
March 31, 1997 from $4.0 million for the comparable 1996 period. The increase
was the result of a 25.9% increase in the average amount of interest-bearing
liabilities to $366.2 million for the three months ended March 31, 1997
compared to $290.9 million for the comparable 1996 period and a increase in
the average rate paid on interest-bearing liabilities to 5.58% for the 1997
period from 5.47% 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 March 31, 1997 as compared to the comparable 1996 period.
Interest expense on deposits increased 30.5% to $3.6 million for the three
months ended March 31, 1997 from $2.7 million for the comparable 1996 period.
The increase was the result of an increase in average balances of 26.9% to
$261.0 million for the three months ended March 31, 1997 from $205.7 million
for the comparable 1996 period, and an increase in the average rate paid to
5.48% for the 1997 period from 5.33% for the 1996 period. The increase in
deposits was primarily due to an increase of 26.1% in certificates of deposit
to $218.4 million for the three months ended March 31, 1997 from $173.2 million
for the comparable 1996 period and an increase in the average rate paid to
5.80% for the 1997 period from 5.73% for the 1996 period. Money market deposit
accounts increased 185.8% to $18.2 million for the three months ended March 31,
1997 from $6.4 million for the comparable 1996 period, and the average rate
paid increased to 5.20% for the 1997 period from 4.72% for the 1996 period.
Money market deposit accounts increased primarily due to aggressive marketing
and a competitive rate offered during the three months ended March 31, 1997.
NOW accounts increased 6.5% to $2.3 million for the three months ended March
31, 1997 from $2.2 million for the comparable 1996 period, partially offset by
a decrease in average rate paid to 1.71% for the 1997 period from 1.82% for the
1996 period. These increases were partially offset by an average balance
decline of 7.7% in Passbook accounts to $22.1 million for the three months
ended March 31, 1997 from $24.0 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
$218.4 million in the average balance of certificates of deposit for the three
months ended March 31, 1997, $93.0 million or 42.6% represented brokered
certificates of deposit compared to $67.5 million or 39.0% for the three months
ended March 31, 1996. The average rate paid on brokered certificates of
deposit increased to 5.95% for the three months ended March 31, 1997 from 5.71%
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)
increased 23.9% to $1.5 million for the months ended March 31, 1997 from $1.2
million for the comparable 1996 period. The increase was primarily due to
growth in average balance of FHLB advances and reverse repurchase agreements of
23.6% to $104.0 million for the three months ended March 31, 1997 from $84.1
million for the comparable 1996 period and a increase in the average rate paid
to 5.87% for the 1997 period from 5.86% for the 1996 period.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased 16.3% to $150,000 for the three
months ended March 31, 1997 from $129,000 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 March 31, 1997, the allowance for losses on loans increased
44.2% to $1.7 million at March 31, 1997 compared to $1.1 million at March 31,
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 0.58% at March 31, 1997
from 0.56% at March 31, 1996, reflecting the continued low level of loans
charged off and non-performing loans. The amount of non-performing loans at
March 31, 1997 was
24
<PAGE> 25
$68,000 or .02% of gross loans compared to $107,000 or 0.04% of gross loans at
June 30, 1996 and $294,000 or 0.14% of gross loans at March 31, 1996.
NON-INTEREST INCOME
Non-interest income decreased 31.7% to $237,000 for the three months ended
March 31, 1997 from $347,000 for the comparable 1996 period. The largest
components of the decrease were a decrease in other income to $17,000 for the
three months ended March 31, 1997 compared to $119,000 for the comparable 1996
period, and a decrease in gains on the sale of securities and mortgage-backed
and related securities to $0 for the three months ended March 31, 1997 compared
to $27,000 for the comparable 1996 period. The decrease in other income
reflects a gain on the sale of the property and casualty policies of the
Company's insurance subsidiary of $100,000 during the three months ended March
31, 1996. 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 1996 period. Service charges on deposit
accounts decreased $3,000 to $113,000 for the three months ended March 31, 1997
from $116,000. Insurance commissions decreased $2,000 to $30,000 for the three
months ended March 31, 1997 from $32,000 for the comparable 1996 period. Also,
loan servicing fees deceased $4,000 to $21,000 for the three months ended March
31, 1997 from $25,000 for the comparable 1996 period, primarily due to
decreases in the Company's sold loan serviced portfolio and decreased sales of
loans to the secondary market. Offsetting the decreases in non-interest income
was a increase in service charges on loans to $55,000 for the three months
ended March 31, 1997 compared to $27,000 for the comparable 1996 period,
primarily reflecting the increased loan portfolio and loan volume.
NON-INTEREST EXPENSE
Non-interest expense increased 8.1% to $1.5 million for the three months ended
March 31, 1997 from $1.4 million for the comparable 1996 period. The increase
was primarily due to an increase in compensation and benefits of $154,000 to
$878,000 for the three months ended March 31, 1997 from $724,000 for the
comparable 1996 period, which primarily relates to higher salary, loan
commission and incentive compensation. Occupancy and equipment expense
increased $21,000 to $260,000 for the three months ended March 31, 1997 from
$239,000 for the comparable 1996 period, due to additional bank equipment
purchases. Other non-interest expense increased $7,000 to $285,000 for the
three months ended March 31, 1997 from $278,000 for the comparable 1996 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 $65,000 to $41,000
for the three months ended March 31, 1997 from $106,000 for the comparable 1996
period. The decrease in FDIC premium expense was due to a lower assessment rate
charged in the 1997 period by the FDIC on insurable deposits. See "Recent
Regulatory Developments."
25
<PAGE> 26
RESULTS OF OPERATIONS - COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 1997 AND
1996
GENERAL
Net income for the nine months ended March 31, 1997 decreased $143,000 or 10.8%
to $1.2 million from $1.3 million for the comparable 1996 period. The
decrease in net income for the nine months ended March 31, 1997 is due
primarily to a one-time after-tax charge of $533,000 to recapitalize SAIF, the
FDIC insurance fund which insures deposits of savings associations, partially
offset by an after-tax FDIC refund credit of $83,000. Net income for the nine
months ended March 31, 1997 would have been $1.6 million, excluding the
one-time FDIC special assessment and refund credit. See "Recent Regulatory
Developments." Return on average equity decreased to 5.67% for the nine months
ended March 31, 1997 from 6.78% for the comparable 1996 period. Return on
average assets decreased to .40% for the nine months ended March 31, 1997 from
.58% for the comparable 1996 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 NINE MONTHS ENDED MARCH 31,
---------------------------------------------------------------
1 9 9 7 1 9 9 6
------------------------------- ------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
-------- -------- ----------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Mortgage loans ........................... $219,507 $13,034 7.92% $139,212 $7,945 7.61%
Consumer loans ........................... 27,742 1,999 9.61 22,832 1,671 9.76
Commercial loans ......................... 655 43 8.75 - - -
-------- ------- -------- ------
Total loans ............................. 247,904 15,076 8.11 162,044 9,616 7.91
Securities held-to-maturity:
Mortgage-backed securities .............. 51,488 2,725 7.06 55,296 2,810 6.78
Mortgage related securities ............. 40,754 2,028 6.63 36,385 1,959 7.18
-------- ------- -------- ------
Total mortgage-backed
and related securities ................ 92,242 4,753 6.87 91,681 4,769 6.94
Investment and other securities .......... 4,843 212 5.84 4,363 205 6.26
Securities available-for-sale ............ 33,659 1,673 6.63 32,382 1,716 7.07
Federal Home Loan Bank stock ............. 5,198 265 6.80 3,820 195 6.81
-------- ------- -------- ------
Total interest-earning assets ........... 383,846 21,979 7.63 294,290 16,501 7.48
Non-interest earning assets ............... 9,364 7,779
-------- --------
Total assets ............................ $393,210 $302,069
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW accounts ............................. $2,310 30 1.73% $2,530 32 1.69%
Money market deposit accounts ............ 14,044 548 5.20 5,847 210 4.79
Passbook accounts ........................ 23,276 527 3.02 24,365 553 3.03
Certificates of deposit .................. 206,643 9,026 5.82 149,180 6,536 5.84
-------- ------- -------- ------
Total deposits .......................... 246,273 10,131 5.48 181,922 7,331 5.37
Advance payments by borrowers
for taxes and insurance 3,617 75 2.76 3,033 67 2.95
Borrowings ................................ 105,508 4,681 5.92 81,722 3,684 6.01
-------- ------- -------- ------
Total interest-bearing liabilities ...... 355,398 14,887 5.59 266,677 11,082 5.54
Non-interest bearing deposits
and liabilities .......................... 10,055 9,351
Shareholders' equity ...................... 27,757 26,041
-------- --------
Total liabilities and
shareholders' equity ................... $393,210 $302,069
======== ========
Net interest income/interest rate spread .. $7,092 2.04% $5,419 1.94%
====== ==== ====== ====
Net earning assets/net interest margin .... $28,448 2.46% $27,613 2.46%
======= ==== ======= ====
</TABLE>
26
<PAGE> 27
Net interest income before provision for losses on loans increased $1.7 million
or 30.9% to $7.1 million for the nine months ended March 31, 1997 from $5.4
million for the comparable 1996 period. Interest income increased $5.5 million
for the nine months ended March 31, 1997, partially offset by an increase in
interest expense of $3.8 million. The level of net interest income primarily
reflects a 30.4% increase in average interest-earning assets to $383.8 million
for the nine months ended March 31, 1997 from $294.3 million for the comparable
1996 period, a 3.0% increase in the excess of the Company's average
interest-earning assets over average interest-bearing liabilities to $28.4
million for the nine months ended March 31, 1997 from $27.6 million for the
comparable 1996 period, and an increase in interest rate spread to 2.04% for
the nine months ended March 31, 1997 from 1.94% for the comparable 1996 period.
INTEREST INCOME
Interest income increased 33.2% to $22.0 million for the nine months ended
March 31, 1997 from $16.5 million for the comparable 1996 period. The increase
in interest income was the result of an increase in average interest-earning
assets of 30.4% to $383.8 million for the nine months ended March 31, 1997 from
$294.3 million for the comparable 1996 period and an increase of 15 basis
points in the yield on interest-earning assets to 7.63% for the nine months
ended March 31, 1997 from 7.48% for the comparable 1996 period. Interest
income on loans increased 56.8% to $15.1 million for the nine months ended
March 31, 1997 from $9.6 million for the comparable 1996 period. The increase
was the result of a rise in the Company's average gross loans of 53.0% to
$247.9 million for the nine months ended March 31, 1997 from $162.0 million for
the comparable 1996 period, and an increase in average yield to 8.11% for the
nine months ended March 31, 1997 from 7.91% 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 retention of longer-term fixed-rate and adjustable-rate
loans, and to the higher yields paid on the multi-family and commercial
components of the loan portfolio. Interest income on mortgage-backed
securities decreased 3.0% to $2.7 million for the nine months ended March 31,
1997 from $2.8 million for the comparable 1996 period. The decrease was
primarily due to an decrease in average balances to $51.5 million for the nine
months ended March 31, 1997 from $55.3 million for the 1996 period, partially
offset by an increase in average yield to 7.06% for the 1997 period from 6.78%
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 partially attributable to the higher yields paid on the
private-issue portion of the mortgage securities portfolio. Interest income on
mortgage-related securities increased 3.5% to $2.028 million for the nine
months ended March 31, 1997 from $1.959 million for the comparable 1996 period.
The increase was primarily due to an increase in average balances to $40.8
million for the nine months ended March 31, 1997 from $36.4 million for the
comparable 1996 period, partially offset by a decrease in average yield to
6.63% for the nine months ended March 31, 1997 from 7.18% for the comparable
1996 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 1.9% to $1.885 million for the nine
months ended March 31, 1997 from $1.921 million for the comparable 1996 period.
The decrease was primarily due to a decrease in average yield to 6.53% for the
nine months ended March 31, 1997 from 6.97% for the comparable 1996 period,
partially offset by an increase in average balances to $38.5 million for the
nine months ended March 31, 1997 from $36.7 million for the comparable 1996
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 34.3% to $14.9 million for the nine months ended
March 31, 1997 from $11.1 million for the comparable 1996 period. The increase
was the result of a 33.3% increase in the average amount of interest-bearing
liabilities to $355.4 million for the nine months ended March 31, 1997 compared
to $266.7 million for the comparable 1996 period. The increased balances of
certificates of deposit and borrowings at higher average interest rates,
partially offset by lower average rates paid on money market deposits and NOW
accounts, was the primary reason for the increase in average rate paid on
interest-
27
<PAGE> 28
bearing liabilities to 5.59% for the nine months ended March 31, 1997 from
5.54% for the comparable 1996 period. Interest expense on deposits increased
38.2% to $10.1 million for the nine months ended March 31, 1997 from $7.3
million for the comparable 1996 period. The increase was the result of an
increase in average balances of 35.4% to $246.3 million for the nine months
ended March 31, 1997 from $181.9 million for the comparable 1996 period, and an
increase in the average rate paid to 5.48% for the 1997 period from 5.37% for
the 1996 period. The increase in deposits was primarily due to an increase of
38.5% in certificates of deposit to $206.6 million for the nine months ended
March 31, 1997 from $149.2 million for the comparable 1996 period. The
increase in average rate paid during the 1997 period was due to an increase in
the certificates of deposit and money market deposits which carry higher
average rates paid than the passbook and NOW accounts, for which average
balances declined. 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 $206.6 million in the average balance of certificates of
deposit for the nine months ended March 31, 1997, $85.7 million or 41.5%
represented brokered certificates of deposit compared to $46.9 million or 31.4%
for the nine months ended March 31, 1996. The average rate paid on brokered
certificates of deposit decreased to 5.87% for the nine months ended March 31,
1997 from 5.88% for the comparable 1996 period. Money market deposit accounts
increased 140.2% to $14.0 million for the nine months ended March 31, 1997 from
$5.8 million for the comparable 1996 period, and the average rate paid
increased to 5.20% for the 1997 period from 4.79% for the 1996 period. Money
market deposit accounts increased primarily due to aggressive marketing and a
competitive rate offered during the nine months ended March 31, 1997. These
increases were partially offset by a decrease in passbook accounts of 4.5% to
$23.3 million for the nine months ended March 31, 1997 from $24.4 million for
the comparable 1996 period and by a decline of 8.7% in NOW accounts to $2.3
million for the nine months ended March 31, 1997 from $2.5 million for the
comparable 1996 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. Interest on borrowings
(FHLB advances and reverse repurchase agreements) increased 27.1% to $4.7
million for the nine months ended March 31, 1997 from $3.7 million for the
comparable 1996 period. The increase was primarily due to growth in average
balance of FHLB advances and reverse repurchase agreements of 29.1% to $105.5
million for the nine months ended March 31, 1997 from $81.7 million for the
comparable 1996 period, partially offset by a decrease in the average rate paid
to 5.92% for the 1997 period from 6.01% for the 1996 period.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased 99.2% to $504,000 for the nine
months ended March 31, 1997 from $253,000 for the comparable 1996 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 March 31, 1997 and 1996."
NON-INTEREST INCOME
Non-interest income decreased 23.2% to $714,000 for the nine months ended March
31, 1997 from $930,000 for the comparable 1996 period. The largest components
of the decrease were a decrease in other income to $47,000 for the nine months
ended March 31, 1997 compared to $165,000 for the comparable 1996 period, a
decrease in gains on the sale of securities and mortgage-backed and related
securities to $7,000 for the nine months ended March 31, 1997 compared to
$70,000 for the comparable 1996 period, a decrease in gains on the sale of
loans to $14,000 for the nine months ended March 31, 1997 compared to $52,000
for the comparable 1996 period, a decrease in insurance commissions to $78,000
for the three months ended March 31, 1997 compared to $103,000 for the
comparable 1996 period, and a decrease in loan servicing fee to $65,000 for the
nine months ended March 31, 1997 compared to $80,000 for the comparable 1996
period. The decrease in other income and insurance commissions reflects the
sale of the property and casualty policies of the Company's insurance
subsidiary for a one-time gain of $100,000 during the three months ended March
31, 1996. The decrease in gains on the sale of securities and mortgage-backed
and related securities reflects management's decision to sell more
higher-yielding available-for-sale securities in the 1996 period. The decrease
in gains on the sale of loans reflects the gain on the sale of a
28
<PAGE> 29
significant portion of the Bank's student loan portfolio in the 1996 period.
The decrease in loan servicing fees reflects the decreases in the Company's
sold loan serviced portfolio and sales of loans to the secondary market.
Service charges on loans increased $44,000 to $134,000 for the nine months
ended March 31, 1997 from $90,000 for the comparable 1996 period, primarily
reflecting the increased loan portfolio and loan volume. Service charges on
deposit accounts decreased $1,000 to $369,000 for the nine months ended March
31, 1997 from $370,000 for the comparable 1996 period.
NON-INTEREST EXPENSE
Non-interest expense increased 35.4% to $5.5 million for the nine months ended
March 31, 1997 from $4.0 million for the comparable 1996 period. The increase
was primarily due to an increase in FDIC deposit insurance premiums of $772,000
to $1,045,000 for the nine months ended March 31, 1997 from $273,000 for the
comparable 1996 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, partially offset
by a refund credit of $137,000. See "Recent Regulatory Developments."
Compensation and benefits expense increased $469,000 to $2.6 million for the
nine months ended March 31, 1997 from $2.2 million for the comparable 1996
period, which primarily relates to higher salary, loan commissions and
incentive compensation and an increase in full-time equivalent employees.
Occupancy and equipment expense increased $82,000 to $705,000 for the nine
months ended March 31, 1997 from $623,000 for the comparable 1996 period, due
to additional bank equipment purchases. Other non-interest expense increased
$119,000 to $863,000 for the nine months ended March 31, 1997 from $744,000 for
the comparable 1996 period, due to increases in loan, printing, office
supplies, organization dues, legal and other miscellaneous expenses. The
increases in non-interest expense were partially offset by a decrease in
marketing expense of $8,000 to $229,000 for the nine months ended March 31,
1997 from $237,000 for the comparable 1996 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
Not applicable.
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: May 7, 1997 /s/ James D. Smessaert
-------------------------
James D. Smessaert
Chairman of the Board
Chief Executive Officer
Date: May 7, 1997 /s/ 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.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,659
<INT-BEARING-DEPOSITS> 3,093
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,009
<INVESTMENTS-CARRYING> 31,009
<INVESTMENTS-MARKET> 31,009
<LOANS> 272,446
<ALLOWANCE> 1,655
<TOTAL-ASSETS> 409,287
<DEPOSITS> 269,290
<SHORT-TERM> 48,000
<LIABILITIES-OTHER> 5,305
<LONG-TERM> 58,086
0
0
<COMMON> 28,606
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 409,287
<INTEREST-LOAN> 15,076
<INTEREST-INVEST> 6,903
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 21,979
<INTEREST-DEPOSIT> 10,131
<INTEREST-EXPENSE> 14,887
<INTEREST-INCOME-NET> 7,092
<LOAN-LOSSES> 504
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 863
<INCOME-PRETAX> 1,820
<INCOME-PRE-EXTRAORDINARY> 1,820
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,181
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.82
<YIELD-ACTUAL> 8.11
<LOANS-NON> 55
<LOANS-PAST> 13
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,234
<CHARGE-OFFS> 85
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 1,655
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,633
</TABLE>
