<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, 1998 Commission File Number 0-22224
HALLMARK CAPITAL CORP.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1762467
(State of Incorporation) (I.R.S. Employer Identification No.)
7401 West Greenfield Avenue
West Allis, Wisconsin 53214
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (414) 317-7100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes [X] No [ ]
(2) Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, par value $1.00
per share, was 2,933,608 at May 12, 1998, the latest practicable date.
<PAGE> 2
HALLMARK CAPITAL CORP. AND SUBSIDIARY
FORM 10-Q
<TABLE>
<CAPTION>
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition
as of March 31, 1998 (unaudited) and June 30, 1997................................... 1
Consolidated Statements of Income for the Three and Nine Months
Ended March 31, 1998 and 1997 (unaudited)............................................ 2
Consolidated Statements of Shareholders' Equity for the Nine Months
Ended March 31, 1998 and 1997 (unaudited)............................................ 3
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 1998 and 1997 (unaudited)............................................ 4
Notes to Consolidated Financial Statements (unaudited).................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk............................... 28
Part II. Other Information
Item 1. Legal Proceedings....................................................................... 29
Item 2. Changes in Securities................................................................... 29
Item 3. Defaults Upon Senior Securities......................................................... 29
Item 4. Submission of Matters to a Vote of Security Holders..................................... 29
Item 5. Other Information....................................................................... 29
Item 6. Exhibits and Reports on Form 8-K........................................................ 29
Signature Page.......................................................................... 30
</TABLE>
<PAGE> 3
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
-------------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and non-interest bearing deposits..................................... $ 3,582 $ 3,859
Interest-bearing deposits.................................................. 14,894 4,896
-------- --------
Cash and cash equivalents.................................................. 18,476 8,755
Securities available-for-sale (at fair value):
Investment securities.................................................... 7,378 18,137
Mortgage-backed and related securities................................... 22,558 11,381
Securities held-to-maturity:
Investment securities (fair value - $483 at
March 31, 1998 and $780 at June 30, 1997).............................. 483 780
Mortgage-backed and related securities (fair value -
$74,983 at March 31, 1998; $86,149 at June 30, 1997)................... 73,730 85,430
Loans receivable, net...................................................... 283,390 273,556
Investment in Federal Home Loan Bank stock, at cost........................ 6,033 5,279
Foreclosed properties, net................................................. 11 20
Office properties and equipment............................................ 5,626 3,091
Prepaid expenses and other assets.......................................... 3,269 3,391
-------- --------
Total assets..................................................... $420,954 $409,820
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits................................................................. $275,772 $281,512
Notes payable to Federal Home Loan Bank.................................. 108,073 92,073
Advance payments by borrowers for taxes and insurance.................... 1,742 3,485
Accrued interest on deposit accounts and other borrowings................ 1,463 1,578
Accrued expenses and other liabilities................................... 1,562 1,500
-------- --------
Total liabilities................................................ $388,612 $380,148
Shareholders' Equity:
Preferred stock, $1.00 par value; authorized 2,000,000 shares;
none outstanding....................................................... - -
Common stock, $1.00 par value; authorized 6,000,000 shares;
issued 3,162,500 shares; outstanding 2,933,608 shares at
March 31, 1998 and 2,885,900 shares at June 30, 1997................... 1,581 1,581
Additional paid-in capital............................................... 10,792 10,603
Unearned ESOP compensation............................................... (551) (632)
Unearned restricted stock award.......................................... (145) (208)
Net unrealized depreciation on securities available for sale............. (37) (225)
Treasury stock, at cost: 228,892 shares at March 31, 1998
and 276,600 shares at June 30, 1997.................................... (1,385) (1,592)
Retained earnings, substantially restricted.............................. 22,087 20,145
-------- --------
Total shareholders' equity....................................... $ 32,342 $ 29,672
-------- --------
Total liabilities and shareholders' equity....................... $420,954 $409,820
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
1
<PAGE> 4
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------- ------------------
1998 1997 1998 1997
INTEREST INCOME: ------- ------ ------ --------
<S> <C> <C> <C> <C>
Loans receivable.................................................. $ 6,016 $ 5,364 $ 17,909 $ 15,076
Mortgage-backed and related securities ........................... 1,533 1,765 4,737 5,543
Securities and interest-bearing deposits.......................... 394 451 1,463 1,360
------- ------- -------- --------
Total interest income................................... 7,943 7,580 24,109 21,979
INTEREST EXPENSE:
Deposits.......................................................... 3,565 3,576 11,227 10,131
Advance payments by borrowers for taxes and insurance............. 7 8 68 75
Notes payable and other borrowings................................ 1,687 1,526 4,883 4,681
------- ------- -------- --------
Total interest expense.................................. 5,259 5,110 16,178 14,887
------- ------- -------- --------
Net interest income............................................... 2,684 2,470 7,931 7,092
Provision for losses on loans..................................... 200 150 640 504
------- ------- -------- --------
Net interest income after provision for losses on loans........... 2,484 2,320 7,291 6,588
NON-INTEREST INCOME:
Service charges on loans.......................................... 67 55 202 134
Service charges on deposit accounts............................... 100 113 323 369
Loan servicing fees, net.......................................... 18 21 58 65
Insurance commissions............................................. 10 30 18 78
Gain (loss) on sale of securities and
mortgage-backed and related securities, net................... -- - (8) 7
Gain on sale of loans............................................. 114 1 137 14
Other income...................................................... 56 17 71 47
------- ------- -------- --------
Total non-interest income............................... 365 237 801 714
NON-INTEREST EXPENSE:
Compensation and benefits......................................... 994 878 2,880 2,640
Marketing......................................................... 120 79 274 229
Occupancy and equipment........................................... 327 260 822 705
Deposit insurance premiums........................................ 45 41 133 1,045
Other non-interest expense........................................ 325 285 858 863
------- ------- -------- --------
Total non-interest expense.............................. 1,811 1,543 4,967 5,482
------- ------- -------- --------
Income before income taxes........................................ 1,038 1,014 3,125 1,820
Income taxes...................................................... 359 349 1,087 639
------- ------- -------- --------
Net income................................................... $ 679 $ 665 $ 2,038 $ 1,181
======= ======= ======== ========
Earnings per share - (basic) ................................ $ 0.24 $ 0.25 $ 0.74 $ 0.44
======= ======= ======== ========
Earnings per share - (diluted) .............................. $ 0.22 $ 0.23 $ 0.68 $ 0.41
======= ======= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
2
<PAGE> 5
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Unearned Unearned
Common Paid-In ESOP Restricted
Stock Capital Compensation Stock
----- --------- ----------- ----------
<S> <C> <C> <C> <C>
NINE MONTHS ENDED MARCH 31, 1998
Balance at June 30, 1997 ...................... $ 1,581 $ 10,603 ($632) ($208)
Net income .................................... - - - -
Amortization of unearned ESOP and
restricted stock award compensation ......... - 189 81 63
Exercise of stock options (47,708 shares issued
in connection with 55,340 options exercised) - - - -
Unrealized appreciation on securities
available for sale, net of tax benefit ...... - - - -
-------- -------- ----- -----
Balance at March 31, 1998 ..................... $ 1,581 $ 10,792 ($551) ($145)
======== ======== ===== =====
NINE MONTHS ENDED MARCH 31, 1997
Balance at June 30, 1996 ...................... $ 1,581 $ 10,465 ($740) ($334)
Net income .................................... - - - -
Amortization of unearned ESOP and
restricted stock award compensation ......... - 92 81 105
Unrealized appreciation on securities
available for sale, net of tax benefit ...... - - - -
-------- -------- ----- -----
Balance at March 31, 1997 ..................... $ 1,581 $ 10,557 ($659) ($229)
======== ======== ===== =====
<CAPTION>
Unrealized
Gains Treasury Retained
(Losses) Stock Earnings Total
--------- --------- --------- -----
NINE MONTHS ENDED MARCH 31, 1998
<S> <C> <C> <C> <C>
Balance at June 30, 1997 ...................... ($225) ($ 1,592) $ 20,145 $ 29,672
Net income .................................... - - 2,038 2,038
Amortization of unearned ESOP and
restricted stock award compensation ......... - - - 333
Exercise of stock options (47,708 shares issued
in connection with 55,340 options exercised) - 207 (96) 111
Unrealized appreciation on securities
available for sale, net of tax benefit ...... 188 - - 188
----- -------- -------- --------
Balance at March 31, 1998 ..................... ($ 37) ($ 1,385) $ 22,087 $ 32,342
===== ======== ======== ========
NINE MONTHS ENDED MARCH 31, 1997
Balance at June 30, 1996 ...................... ($595) ($ 1,592) $ 18,226 $ 27,011
Net income .................................... - - 1,181 1,181
Amortization of unearned ESOP and
restricted stock award compensation ......... - - - 278
Unrealized appreciation on securities
available for sale, net of tax benefit ...... 136 - - 136
------ -------- -------- --------
Balance at March 31, 1997 ..................... ($459) ($ 1,592) $ 18,742 $ 28,606
====== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
3
<PAGE> 6
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
--------------------------------
1998 1997
-------------- --------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income.................................................................. $ 2,038 $ 1,181
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for losses on loans and real estate............................. 640 504
Provision for depreciation and amortization............................... 234 200
Net (gain) loss on sales of investments and
mortgage-backed and related securities.................................. 8 (7)
Net gain on sale of loans................................................. (137) (14)
Amortization of unearned ESOP and restricted stock awards................. 333 278
Loans originated for sale................................................. (10,086) (988)
Sales of loans originated for sale........................................ 10,086 988
Decrease in prepaid expenses and other assets............................. 122 250
Other adjustments......................................................... (115) 388
-------- --------
Net cash provided by operating activities................................... 3,123 2,780
-------- --------
INVESTING ACTIVITIES
Proceeds from the sale of securities available-for-sale..................... 20,881 1,454
Proceeds from the maturity of securities available-for-sale................. 4,000 500
Purchases of securities available-for-sale.................................. (28,961) (1,950)
Proceeds from sale of investment securities held-to-maturity................ - 435
Proceeds from maturities of investment securities held-to-maturity.......... 297 198
Purchases of mortgage-backed and related securities......................... (352) -
Principal collected on mortgage-backed and related securities............... 15,959 15,287
Net increase in loans receivable............................................ (10,604) (48,153)
Proceeds from sales of foreclosed properties................................ 273 15
Purchase of Federal Home Loan Bank stock.................................... (754) (435)
Purchases of office properties and equipment, net........................... (2,769) (302)
-------- --------
Net cash used in investing activities....................................... ( 2,030) (32,951)
-------- --------
FINANCING ACTIVITIES
Net increase (decrease) in deposits......................................... (5,740) 39,615
Proceeds from long-term notes payable to Federal Home Loan Bank............. 30,000 20,000
Net decrease in short-term notes payable to
Federal Home Loan Bank.................................................... - (13,300)
Net decrease in long-term notes payable to Federal Home Loan Bank........... (14,000) (3,000)
Net decrease in securities sold under agreements to repurchase.............. - (11,568)
Exercise of stock options................................................... 111 -
Net decrease in advance payments by borrowers for
taxes and insurance....................................................... (1,743) (1,649)
-------- --------
Net cash provided by financing activities................................... 8,628 30,098
-------- --------
Increase (decrease) in cash and cash equivalents............................ 9,721 (73)
Cash and cash equivalents at beginning of period............................ 8,755 4,825
-------- --------
Cash and cash equivalents at end of period.................................. $ 18,476 $ 4,752
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
4
<PAGE> 7
HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
-------------- --------
(IN THOUSANDS)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid (including amounts credited to deposit accounts) .............. $16,366 $14,756
Income taxes paid ........................................................... $1,345 $757
Non-cash transactions:
Loans transferred to foreclosed properties .................................. $267 $24
</TABLE>
See accompanying Notes to Consolidated Financial Statements (unaudited)
5
<PAGE> 8
HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles (GAAP) for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results for the interim
periods have been included.
The results of operations and other data for the three and nine months ended
March 31, 1998 are not necessarily indicative of results that may be expected
for the entire fiscal year ending June 30, 1998.
The unaudited consolidated financial statements include the accounts of Hallmark
Capital Corp. (the "Company") and its wholly-owned subsidiary, West Allis
Savings Bank and subsidiaries (the "Bank") as of and for the three and nine
months ended March 31, 1998. All material intercompany accounts and transactions
have been eliminated in consolidation.
The Company declared a two-for one stock split in the form of a 100% stock
dividend on October 30, 1997. Shareholders received one additional share of
common stock for each share of common stock owned as of the record date,
November 10, 1997. As a result of the stock split, the number of shares of
common stock outstanding increased to 2,993,608 from 1,442,950.
(2) STOCK BENEFITS AND INCENTIVE PLANS
At March 31, 1998, the Company has reserved 436,936 shares of common stock for
non-qualified stock option plans for employees and directors. With respect to
options which have not been granted, the option exercise price cannot be less
than the fair market value of the underlying common stock as of the date of
option grant, and the maximum term cannot exceed ten years. The following is a
summary of stock option activity for the nine months ended March 31, 1998:
<TABLE>
<CAPTION>
SHARES UNDER OPTION PRICE
OPTION PER SHARE
------ ---------
<S> <C> <C>
Outstanding and exercisable at June 30, 1997............................. 346,614 $4.00 - $7.625
Exercised............................................................ (55,340) $4.00
-------- --------------
Outstanding and exercisable at March 31, 1998............................ 291,274 $4.00 - $7.625
</TABLE>
(3) EARNINGS PER SHARE
Basic earnings per share of common stock for the three and nine months ended
March 31, 1998 have been computed by dividing net income for the period by the
weighted average number of shares of common stock reduced by ungranted
restricted stock and uncommitted ESOP shares. Diluted earnings per share is
calculated by dividing net income by the sum of the weighted average shares used
in the basic earnings per share calculation plus the effect of dilutive stock
options. The effect of dilutive stock options is calculated using the treasury
stock method. The computation of earnings per share is as follows:
6
<PAGE> 9
(3) EARNINGS PER SHARE (CONT.)
<TABLE>
<CAPTION>
For the Three Months For the Three Months
Ended March 31, 1998 Ended March 31, 1997
----------------------- ------------------------
Basic Diluted Basic Diluted
----- ------- ------ -------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding........... 2,933,608 2,933,608 2,885,900 2,885,900
Ungranted restricted stock........................... (18,462) (18,462) (18,462) (18,462)
Uncommitted ESOP shares.............................. (145,475) (145,475) (168,666) (168,666)
Common stock equivalents due to
dilutive effect of stock options.................. - 249,382 - 173,772
---------- ---------- ---------- ----------
Total weighted average common shares
and equivalents outstanding.................. 2,769,671 3,019,053 2,698,772 2,872,544
========== ========== ========== ==========
Net income for period........................ $679,000 $679,000 $665,000 $665,000
Earnings per share........................... $0.24 $0.22 $0.25 $0.23
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months For the Nine Months
Ended March 31, 1998 Ended March 31, 1997
---------------------- ---------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding...... 2,912,916 2,912,916 2,885,900 2,885,900
Ungranted restricted stock...................... (18,462) (18,462) (18,462) (18,462)
Uncommitted ESOP shares......................... (145,475) (145,475) (168,666) (168,666)
Common stock equivalents due to
dilutive effect of stock options............. - 237,830 - 163,334
----------- ---------- ----------- ----------
Total weighted average common shares
and equivalents outstanding.................. 2,748,979 2,986,809 2,698,772 2,862,106
========== ========== ========== ==========
Net income for period........................ $2,038,000 $2,038,000 $1,181,000 $1,181,000
Earnings per share........................... $0.74 $0.68 $0.44 $0.41
========== ========== ========== ==========
</TABLE>
(4) COMMITMENTS AND CONTINGENCIES
Commitments to originate mortgage loans of $2.5 million at March 31, 1998
represent amounts which the Bank expects to fund during the quarter ending June
30, 1998. At March 31, 1998, there were commitments of $800,000 to sell
fixed-rate mortgage loans in the secondary market. The Bank had unissued credit
under existing home equity line-of-credit loans and credit card lines of $14.5
million and $8.3 million, respectively, as of March 31, 1998. Also, the Bank had
unused credit under existing commercial line-of-credit loans of $5.8 million at
March 31, 1998. The Bank had no commitments to purchase adjustable-rate or
fixed-rate mortgage-backed and related securities as of March 31, 1998.
(5) REGULATORY CAPITAL ANALYSIS
The Company and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's and Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt and corrective
action, the Company and Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and Bank's assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's and Bank's capital amounts and classification also are
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
7
<PAGE> 10
(5) REGULATORY CAPITAL ANALYSIS (CONT.)
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of March 31, 1998, that the
Company and Bank meets all capital adequacy requirements to which it is subject.
As of March 31, 1998, the Company and Bank are well capitalized as defined by
regulatory standards. To be categorized as well capitalized, the Company and
Bank must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the table below. There are no conditions or
events since that notification that management believes have changed the
Company's and Bank's category.
The Company's and Bank's actual capital amounts and ratios are presented in the
tables below.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ----------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1998:
Tier I Capital Leverage (to Average Assets):
Consolidated........................ $32,362 7.84% $12,375 3.00% $20,626 5.00%
West Allis Savings Bank............. 29,006 7.05 12,347 3.00 20,579 5.00
Tier I Capital (to Risk-Weighted Assets):
Consolidated........................ 32,362 12.94 10,005 4.00 15,008 6.00
West Allis Savings Bank............. 29,006 11.62 9,981 4.00 14,972 6.00
Total Capital (to Risk-Weighted Assets):
Consolidated........................ 34,579 13.82 20,011 8.00 25,013 10.00
West Allis Savings Bank............. 31,223 12.51 19,962 8.00 24,953 10.00
</TABLE>
As a state-chartered savings bank, the Bank also is subject to a minimum
regulatory capital requirement of the State of Wisconsin. At March 31, 1998, on
a fully-phased-in basis of 6.0%, the Bank had actual capital of $31,203,000 with
a required amount of $25,389,000, for excess capital of $5,814,000.
8
<PAGE> 11
(6) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
------------- ------------
(IN THOUSANDS)
Increase
Amount Percent Amount Percent (Decrease)
----- ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential one-to-four family................... $159,251 54.8% $167,511 58.6% $(8,260)
Home equity...................................... 25,472 9.0% 25,297 8.8% 175
Residential multi-family......................... 33,694 10.1% 27,616 9.7% 6,078
Commercial real estate........................... 29,871 10.1% 21,693 7.6% 8,178
Residential construction......................... 14,635 2.9% 27,003 9.4% (12,368)
Other construction and land...................... 18,674 8.0% 7,385 2.6% 11,289
-------- ------- -------- ------ -------
Total real estate mortgage loans............ 281,597 94.9% 276,505 96.7% 5,092
Consumer-related loans:
Automobile...................................... 800 0.3% 1,195 0.4% (395)
Credit card...................................... 2,890 1.0% 2,730 1.0% 160
Other consumer loans............................. 1,570 0.6% 1,950 0.7% (380)
-------- ------- -------- ------ -------
Total consumer-related loans................ 5,260 1.9% 5,875 2.1% (615)
-------- ------- -------- ------ -------
Commercial loans..................................... 8,429 3.2% 3,471 1.2% 4,958
-------- ------- -------- ------ -------
Gross loans................................. 295,286 100.0% 285,851 100.0% 9,435
Accrued interest receivable.......................... 1,741 1,694
Less:
Undisbursed portion of loan proceeds............. (11,089) (11,998)
Deferred loan fees............................... (327) (197)
Unearned interest................................ (4) (32)
Allowances for loan losses....................... (2,217) (1,762)
-------- --------
$283,390 $273,556
</TABLE>
Loans serviced for investors totaled $27.5 million and $30.0 million at March
31, 1998 and June 30, 1997, respectively.
9
<PAGE> 12
(7) NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
MARCH 31, 1998 JUNE 30, 1997
-------------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY AMOUNT RATE AMOUNT RATE
-------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C>
Advances from
Federal Home Loan Bank 1997 $ - - $25,000 5.62%
1998 19,000 5.61% 23,000 6.16
1999 21,000 6.63 18,012 6.37
2000 22,012 6.24 8,000 6.34
2001 3,000 5.91 15,000 5.95
2002 28,500 5.61 - -
2003 3,061 5.60 3,061 5.60
2004 5,000 6.32 - -
2007 6,500 6.52 - -
-------- -------
$108,073 6.03% $92,073 6.02%
======== ===== ======= ====
</TABLE>
FHLB advances totaled $108.1 million or 100.0% and $92.1 million or 100.0% of
total borrowings at March 31, 1998 and June 30, 1997, respectively. The Company
is required to maintain as collateral unencumbered one-to-four family mortgage
loans in its portfolio such that the outstanding balance of FHLB advances does
not exceed 60% of the book value of this collateral. The Company had delivered
mortgage-backed securities with a carrying value of $32.7 million and $19.7
million at March 31, 1998 and June 30, 1997, respectively. In addition, all FHLB
advances are collateralized by all Federal Home Loan Bank stock and are subject
to prepayment penalties. The Company's unused advance line with the Federal Home
Loan Bank was $12.6 million at March 31, 1998. FHLB variable rate term
borrowings consist of $3.0 million tied to the one-month LIBOR, and $3.0 million
tied to the six-month LIBOR index.
The Company had no liabilities recorded under agreements to repurchase identical
securities or substantially identical securities at March 31, 1998 and June 30,
1997.
10
<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 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. At the end of December 1997, the Company
purchased a former Security Bank site in Glendale, Wisconsin. The Company is
currently evaluating various possibilities to utilize the location as
administrative offices and as a full-service banking operation in the later part
of 1999.
Commencing in fiscal 1994 and continuing through the first half of fiscal 1997,
the Company implemented the first stage of the strategy by leveraging its
capital base to achieve asset growth. The objective of the first stage of the
strategy was to reach a targeted asset size for the Company established by the
Board of Directors within a three-to-five year period following the Conversion.
The Company increased its asset size from $179.6 million at June 30, 1994 to
$409.8 million at June 30, 1997. The Bank's principal investment focus during
the four-year post-Conversion period was to originate and purchase mortgage
loans (principally loans secured by one-to-four family owner-occupied homes) and
purchase mortgage-backed securities. The asset growth was funded through
significant increases in Federal Home Loan Bank ("FHLB") advances and other
borrowings and increases in deposits, primarily brokered and non-brokered
wholesale deposits. Pursuit of the foregoing strategy resulted in increases in
the Company's net income, earnings per share, return on average equity ("ROAE")
and return on average assets ("ROAA") in fiscal 1994, 1995 and 1996. Excluding
the impact of the one-time industry-wide SAIF assessment in fiscal 1997, pursuit
of the strategy also resulted in increases in the Company's net income, earnings
per share, ROAE and ROAA for fiscal 1997.
11
<PAGE> 14
Starting in the latter half of fiscal 1996 and continuing in fiscal 1997, the
Company implemented the second stage of its post-Conversion plan in order to
continue to increase net income, earnings per share, ROAE and ROAA. This
strategy involved shifting the focus from asset growth to asset portfolio
diversification, while maintaining prudent capital and liquidity levels. This
was, and continues to be, achieved by altering the composition of its loan
portfolio and the securities originated, purchased, sold and held in the total
asset portfolio. In particular, the Company focused and will focus on
originating and purchasing higher-yielding multi-family, commercial real estate
and commercial business loans secured by properties or assets located within the
Company's primary lending area, which will either replace or supplement the
lower-yielding one-to-four family mortgage loans and principal run-off from the
mortgage securities portfolio. The Company also evaluates opportunities to
purchase multi-family and commercial real estate loans or participation
interests in such loans secured by properties located outside the Company's
primary lending area. In fiscal 1997, the Company purchased an aggregate of $5.4
million, or 1.9% of gross loans at June 30, 1997, of loans and participation
interests in loans originated by other lenders and secured by properties located
outside of the Company's primary lending area. These loans and participation
interests consisted primarily of commercial real estate and commercial real
estate construction loans. In the second half of fiscal 1997, the Company also
expanded its opportunities to originate higher-yielding loans by establishing a
new commercial lending division which offers commercial/industrial real estate
term loans, equipment leasing, inventory/equipment/receivables financing, lines
of credit, letters of credit and SBA loan programs. Asset portfolio
diversification in fiscal 1997 was funded through principal repayment cash flows
from existing assets, wholesale brokered and non-brokered deposits, retail
deposits and FHLB advances.
In fiscal 1998, the Company continues to implement the second phase of its
strategic plan by slowing the rate of growth of its asset base and focusing on
asset portfolio diversification.* This is accomplished by increasing the
origination and purchase of multi-family real estate, commercial real estate and
commercial/industrial business loans, combined with the growth of the commercial
lending division.* The Company is also increasing sales of one-to-four family
mortgage loans in the secondary market, including selling seasoned and recently
originated one-to-four family mortgage loans in order to provide liquidity for
the funding of higher-yielding loan originations and purchases, increase
non-interest income and maintain adequate levels of capital.* The Company
anticipates that increased sales of one-to-four family loans will decrease the
proportion of the gross loan portfolio represented by such loans, will increase
non-interest income as a result of increased gains on the sales of such loans,
and will further lessen the Company's negative gap position as such loans are
replaced by higher-yielding, adjustable rate assets, including multi-family,
commercial real estate and commercial loans.* Portfolio diversification in
fiscal 1998 also includes continued purchases of loans or participation
interests in loans originated by other lenders both within and outside of its
primary lending area.* Loans purchased, or participation interests purchased,
which relate to properties located outside of the Company's primary lending area
consist primarily of multi-family, commercial real estate, multi-family
construction and commercial real estate construction loans.* In deciding whether
or not to purchase a loan or participation interest in a loan originated outside
of the Company's primary lending area, management of the Company has applied,
and continues to apply, underwriting guidelines which are at least as strict as
those applicable to the origination of similar loans within its primary lending
area.
The Company is funding its asset portfolio diversification in fiscal 1998 by a
combination of retail deposits, brokered deposits, borrowings, principal
repayments on one-to-four family mortgage loans, the sale of one-to-four family
mortgage loans in the secondary market, the maturity and sale of mortgage-backed
and related securities and FHLB advances.*
The increase in the level of the allowance for losses on loans during fiscal
1997 and 1998 was primarily the result of increases in the commercial, home
equity and commercial real estate loan portfolios. Loans secured by multi-family
and commercial real estate and commercial business assets generally involve a
greater degree of credit risk than one-to-four family loans and carry larger
balances. The increased credit risk is the result of several factors, including
concentration of principal in a limited number of loans and borrowers, the
effect of general economic conditions on income-producing properties, and the
increased difficulty of evaluating and monitoring these types of loans.
Management anticipates that as the
12
<PAGE> 15
Company's volume of multi-family and commercial/nonresidential real estate and
commercial business lending activity continues to increase, the Company will
need to build a higher level of allowance for loan losses established through a
provision for loan losses, which will have a negative effect on the Company's
net income in the short-term.* However, the Company believes that building the
higher yielding multi-family and commercial/nonresidential real estate
components of its gross loan portfolio will benefit the Company longer term, and
should contribute to a long-term improvement in the Company's net income and
return on equity.*
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are retail and wholesale brokered and
non-brokered deposits, proceeds from principal and interest payments on loans,
principal and interest payments on mortgage-backed and related securities and
FHLB-Chicago advances. Alternative funding sources are evaluated and utilized
based upon factors such as interest rates, availability, maturity,
administrative costs and retention capability. Although maturity and scheduled
amortization of loans are predicable sources of funds, deposit flows, loan
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 declined during
fiscal 1995 as interest rates increased, and increased during fiscal 1996 as
interest rates declined for the first half of the fiscal year before increasing
in the last half of the fiscal year. Interest rates declined during the first
half of fiscal 1997, and began to increase again at the end of fiscal 1997.
During the nine months of fiscal 1998, interest rates declined and mortgage loan
prepayments accelerated.
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, 1998, the Company originated and purchased loans totaling
$104.7 million and $13.5 million, respectively, as compared to the nine months
ended March 31, 1997 when originated and purchased loans totaled $72.0 million
and $13.5 million, respectively. Purchases of mortgage-backed and related
securities held-to-maturity for the nine months ended March 31, 1998 totaled
$352,000. There were no purchases of investment securities held-to-maturity for
the nine months ended March 31, 1998. For the nine months ended March 31, 1998
and 1997, these activities were funded primarily by principal repayments on
loans of $98.4 million and $46.9 million, respectively; principal repayments on
mortgage-backed and related securities of $16.0 million and $15.3 million,
respectively; proceeds from the sale of mortgage loans of $10.1 million and
$988,000, respectively; net proceeds from notes payable to the FHLB-Chicago of
$16.0 million and $3.7 million, respectively and net increase in deposits of
$39.6 million during the 1997 period. Purchases of securities available-for-sale
totaled $29.0 million and sales were $20.9 million for the nine months ended
March 31, 1998, compared to purchases of $2.0 million and sales of $1.5 million
for the nine months ended March 31, 1997.
The Company is required to maintain minimum levels of liquid assets under the
regulations of the Wisconsin Department of Financial Institutions, Division of
Savings and Loan for state-chartered stock savings banks. Savings banks are
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits, certain bankers acceptances, certain corporate debt
securities, securities of certain mutual funds and specified United States
government, state or federal agency obligations) of not less than 8.0%. The
Company's liquidity ratio was 23.4% at March 31, 1998. 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, 1998 and June 30, 1997, cash
and cash equivalents were $18.5 million and $8.8 million, respectively. The
level of cash and cash equivalents has increased due to the increased level of
one-to-four family loan repayments due to the refinancing of such loans to
outside lenders.
During the nine months ended March 31, 1998, 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, 1998, pricing of
wholesale brokered deposits ranged from 20 to 50 basis points above comparable
term U.S. Treasury
13
<PAGE> 16
securities. At March 31, 1998, the average rate of the wholesale brokered
deposits accepted by the Company was 6.14% compared to an average rate paid for
retail certificates of deposit of 5.86%. During the nine months ended March 31,
1998, 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, 1998, retail and wholesale
certificates of deposit totaled $92.0 million and $126.0 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, 1998, FHLB advances totaled $108.1 million or 25.7% of the Bank's
total assets and there were no other borrowings. At March 31, 1998, the Bank had
unused borrowing authority under the borrowing limitations established by the
Board of Directors of $24.4 million and $37.1 million under the FHLB total asset
limitation. The Bank intends to fund asset portfolio diversification in fiscal
1998 through modest increases in FHLB advances, and to maintain the 3% excess
borrowing capacity with the FHLB as a contingent source of funds to meet
liquidity needs as deemed necessary by the Board of Directors of the Bank.*
Liquidity management for the Company is both an ongoing and long-term function
of the Company's asset/liability management strategy. Excess funds generally are
invested in short-term investments such as federal funds, overnight deposits at
the FHLB-Chicago and commercial paper. Whenever the Company requires funds
beyond its ability to generate them internally, additional sources of funds
usually are available and obtainable from the wholesale brokered and
non-brokered market as well as the unused credit line from the FHLB-Chicago, and
funds also may be available through reverse repurchase agreements wherein the
Company pledges investment, mortgage-backed or related securities. The Company
maintains a $15.0 million contingent backup credit facility with a major
correspondent bank to replace a portion of its interest rate sensitive
liabilities, such as borrowings and wholesale brokered and non-brokered
deposits, should such funding sources become difficult or impracticable to
obtain or retain due to a changing interest rate environment. The Company also
has a federal funds open line of credit in the amount of $10.0 million with a
correspondent bank which does not require the direct pledging of any assets. In
addition, the Company maintains a relatively high level of liquid assets such as
investment securities and mortgage-backed and related securities
available-for-sale in order to ensure sufficient sources of funds are available
to meet the Company's liquidity needs.
The Company has various unfunded commitments at March 31, 1998 which represent
amounts the Company expects to fund during the quarter ended June 30, 1998. For
a summary of such commitments see discussion under footnote (3) "Commitments and
Contingencies" contained in the section entitled, "Notes to Consolidated
Financial Statements". 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.
CHANGE IN FINANCIAL CONDITION
Total assets increased $11.1 million, or 2.7%, from $409.8 million at June 30,
1997 to $421.0 million at March 31, 1998. This increase is primarily reflected
in an increase in loans receivable, securities available-for-sale and
interest-bearing deposits, funded primarily by an increase in FHLB-Chicago
advances and decreases in mortgage-backed and related securities
held-to-maturity. Cash and cash equivalents were $18.5 million and $8.8 million
at March 31, 1998 and June 30, 1997, respectively. The increase in cash and
14
<PAGE> 17
cash equivalents was due to management's decision to increase such assets to
have funding available for unused loan commitments.
Securities available-for-sale increased to $29.9 million at March 31, 1998
compared to $29.5 million at June 30, 1997. Investment securities
available-for-sale decreased to $7.4 million at March 31, 1998 from $18.1
million at June 30, 1997. Management decided to decrease this portion of the
investment portfolio to increase the level of higher-yielding mortgage-backed
and related securities available-for-sale, which increased to $22.6 million at
March 31, 1998 from $11.4 million at June 30, 1997. Mortgage-backed and related
securities held-to-maturity decreased to $73.7 million at March 31, 1998
compared to $85.4 million at June 30, 1997. The decrease in 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 $283.4 million at March 31, 1998 compared to
$273.6 million at June 30, 1997. With the exception of one-to-four family loans,
the increase at March 31, 1998 compared to June 30, 1997 is primarily the result
of management's decision to continue loan portfolio diversification by
increasing the level of multi-family and commercial mortgage and commercial
business loans, as such loans carried higher yields than one-to-four family
mortgage loans and mortgage-backed and related securities during the nine months
ended March 31, 1998. Total mortgage loans originated and purchased amounted to
$90.9 million ($10.4 million of which were purchased mortgage loans) and $62.0
million ($13.5 million of which were purchased mortgage loans) for the nine
months ended March 31, 1998 and 1997, respectively, while sales of fixed-rate
mortgage loans totaled $10.1 million and $988,000 for the nine months ended
March 31, 1998 and 1997, respectively. Total commercial real estate mortgage
loans originated and purchased totaled $26.7 million and $977,000 for the nine
months ended March 31, 1998 and 1997, respectively. Commercial real estate
mortgage loans purchased outside of the Bank's primary lending area totaled $8.7
million for the nine months ended March 31, 1998.
Office properties and equipment increased $2.5 million to $5.6 million at March
31, 1998 from $3.1 million at June 30, 1997. The primary reason for the increase
was the purchase of an office building for $2.5 million which will be used
currently for administrative and in 1999 for full-service banking purposes.
Deposits decreased $5.7 million to $275.8 million at March 31, 1998 from $281.5
million at June 30, 1997. The decrease in deposits was primarily due to the
Company's use of FHLB advances during the nine months ended March 31, 1998,
which carried attractive rates relative to certificates of deposit. Brokered
certificates of deposit totaled $81.2 million at March 31, 1998, representing
29.4% of total deposits as compared to $92.2 million, or 32.8% of total
deposits, at June 30, 1997. Non-brokered wholesale deposits totaled $44.8
million at March 31, 1998, representing 16.2% of total deposits as compared to
$48.8 million, or 17.3% of total deposits at June 30, 1997. Deposits are the
Company's primary source of externally generated funds. The level of deposits is
heavily influenced by such factors as the general level of short- and long-term
interest rates as well as alternative yields that investors may obtain on
competing investment securities such as money market mutual funds.
FHLB-Chicago advances increased to $108.1 million at March 31, 1998 compared to
$92.1 million at June 30, 1997. At March 31, 1998 and June 30, 1997, the Company
had no funds borrowed under reverse repurchase agreements. The Company has used
FHLB-Chicago advances and securities sold under agreements to repurchase as a
funding source due to attractive rates offered on advances in relation to
deposit funds obtainable in the Company's local market or on a national
wholesale basis.
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, 1998, the Company utilized FHLB-advances to fund
increases in the Company's interest-bearing assets due primarily to the
attractive rates offered on long-term FHLB advances. At March 31, 1998 and June
30, 1997, total interest-bearing liabilities repricing within one year exceeded
total interest-bearing assets repricing in the same period by $22.5 million and
$17.7 million,
15
<PAGE> 18
respectively, representing a negative cumulative one-year interest rate
sensitivity gap equal to 5.3% and 4.3% of total assets, respectively. For the
nine months ended March 31, 1998, the Company managed its interest rate risk to
maintain the level of its one-year negative gap position by matching the
maturity of the Company's liabilities, primarily through the use of FHLB
advances. During periods of rising interest rates, a positive interest rate
sensitivity gap would tend to positively affect net interest income, while a
negative interest rate sensitivity gap would adversely affect net income.
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.*
16
<PAGE> 19
ASSET/LIABILITY MANAGEMENT SCHEDULE
The following table sets forth at March 31, 1998 the amounts of interest-earning
assets and interest-bearing liabilities maturing or repricing within the time
periods indicated, based on the information and assumptions set forth in the
notes thereto.
<TABLE>
<CAPTION>
AMOUNT MATURING OR REPRICING
MORE THAN MORE THAN
-------------------------------------------------------------
WITHIN FOUR TO ONE YEAR THREE YEARS
THREE TWELVE TO THREE TO FIVE OVER FIVE
MONTHS MONTHS YEARS YEARS YEARS TOTAL
------ ------ -------- --------- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS(1):
Mortgage loans(2):
Fixed rate.................................... $ 7,426 $ 18,150 $ 41,340 $31,535 $33,175 $131,626
Adjustable rate............................... 26,103 50,620 54,933 5,065 286 137,007
Consumer loans (2)................................. 389 3,498 868 310 17 5,082
Commercial loans (2)............................... 1,282 3,605 2,452 600 - 7,939
Mortgage-backed and related securities:
Fixed rate and securities available-for-sale.. 1,229 3,412 5,523 2,992 2,742 15,898
Adjustable rate............................... 53,458 26,932 - - - 80,390
Investment securities and
securities available-for-sale ................... 21,172 727 5,131 1,733 28,763
-------- -------- -------- ------- ------- --------
Total interest-earning assets................. $111,059 $106,944 $110,247 $40,502 $37,953 $406,705
======== ======== ======== ======= ======= ========
INTEREST-BEARING LIABILITIES:
Deposits(3):
NOW accounts.................................. $ 182 $ 547 $ 867 $ 425 $ 408 $ 2,429
Money market deposit accounts................. 4,116 12,349 9,221 1,475 282 27,443
Passbook savings accounts..................... 1,567 4,702 7,460 3,655 3,512 20,896
Certificates of deposit....................... 63,377 99,396 52,752 2,475 218,000
Escrow deposits............................... - 1,742 - - - 1,742
Borrowings(4)
FHLB advances and other borrowings............ 31,000 21,500 33,012 8,000 14,561 108,073
-------- -------- -------- ------- ------- --------
Total interest-bearing liabilities............ $100,242 $140,236 $103,312 $16,030 $18,763 $378,583
======== ======== ======== ======= ======= ========
Excess (deficiency) of interest-earning assets over
interest-bearing liabilities..................... $ 10,817 ($33,292) $ 6,935 $24,472 $19,190 $ 28,122
======== ======== ======== ======= ======= ========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities......... $ 10,817 ($22,475) ($15,540) $ 8,932 $28,122 $ 28,122
======== ======== ======== ======= ======= ========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities
as a percent of total assets..................... 2.6% (5.3)% (3.7)% 2.1% 6.7% 6.7%
=== === === === === ===
</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,
1998.
(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 $49.8 million or 11.8% 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.
17
<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
1998 1997 1997 1997 1997
--------- --------- --------- -------- ------
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans............................ $1,028 $ 337 $ 223 $ 572 $ 45
Non-accrual consumer loans............................ 24 29 33 20 10
------ ------ ------ ------ ------
Total non-accrual loans............................... $1,052 $ 366 $ 256 $ 592 $ 55
====== ====== ====== ====== ======
Loans 90 days or more
delinquent and still accruing....................... 61 60 30 31 13
------ ------ ------ ------ ------
Total non-performing loans............................ $1,113 $ 426 $ 286 $ 623 $ 68
====== ====== ====== ====== ======
Total foreclosed real estate net of
related allowance for losses ....................... 11 11 247 20 0
------ ------ ------ ------ ------
Total non-performing assets........................... $1,124 $ 437 $ 533 $ 643 $ 68
====== ====== ====== ====== ======
Non-performing loans to
gross loans receivable.............................. 0.38% 0.14% 0.10% 0.22% 0.02%
====== ====== ====== ====== ======
Non-performing assets to
total assets ....................................... 0.27% 0.11% 0.13% 0.16% 0.02%
====== ====== ====== ====== ======
</TABLE>
The increase at March 31, 1998 in non-accrual mortgage loans relates to the
recent default of a commercial real-estate loan located in the Bank's primary
market, with a balance of $683,000. Management believes that the special loan
loss reserve established on this loan is adequate to absorb a potential loss
related to its resolution.
18
<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
MAR. 31, 1998 JUNE 30, 1997 MAR. 31, 1997
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period..................... $ 1,762 $ 1,234 $ 1,234
Additions charged to operations:
One- to four-family.............................. - 295 255
Multi-family and commercial real estate.......... 412 181 136
Consumer......................................... 133 114 86
Commercial....................................... 95 60 27
--------- --------- ----------
640 650 504
Recoveries:
One- to four-family............................. - 1 1
Consumer........................................ 26 5 1
--------- --------- ----------
26 6 2
Charge-offs:
One- to four-family............................. (69) (11) (9)
Consumer........................................ (142) (117) (76)
--------- --------- ----------
(211) (128) (85)
--------- --------- ----------
Net charge-offs.................................... (185) (122) (83)
--------- --------- ----------
Balance at end of period........................... $ 2,217 $ 1,762 1,655
========= ========= ==========
Allowance for loan losses to
non-performing loans at end
of the period.................................... 188.97% 282.37% 2,433.17%
========= ========= ==========
Allowance for loan losses to
total loans at end of the period................. 0.75% 0.62% 0.58%
========= ========= ==========
</TABLE>
The level of allowance for loan losses at March 31, 1998, reflects the continued
low level of charged off and non-performing loans. Increased loan loss
provisions for multi-family real estate, commercial real estate and business
loans related to the increased balances of such loans during the nine months
ended March 31, 1998.
Management believes that the allowance for loan losses is adequate as of March
31, 1998.
19
<PAGE> 22
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND
1997
GENERAL
Net income for the three months ended March 31, 1998 increased to $679,000 from
$665,000 for the comparable 1997 period. The increase in net income was
primarily due to an increase in net interest income and non-interest income.
Return on average equity decreased to 8.51% for the three months ended March 31,
1998 from 9.38% for the comparable 1997 period. Return on average assets was
0.66% for the three months ended March 31, 1998 and 1997.
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 8 1 9 9 7
--------------------------------- ---------------------------------
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.......................... $270,602 $5,648 8.35% $255,396 $5,137 8.05%
Consumer loans.......................... 5,244 174 13.27 6,049 191 12.63
Commercial loans........................ 7,751 194 10.01 1,638 36 8.79
-------- ------ -------- ------
Total loans.......................... 283,597 6,016 8.49 263,083 5,364 8.16
Securities held-to-maturity:
Mortgage-backed securities............ 39,035 689 7.06 48,958 876 7.16
Mortgage related securities........... 37,011 633 6.84 40,304 665 6.60
-------- ------ -------- ------
Total mortgage-backed
and related securities............. 76,046 1,322 6.95 89,262 1,541 6.91
Investment and other securities......... 11,251 168 5.97 5,410 70 5.18
Securities available-for-sale........... 21,031 338 6.43 32,172 517 6.43
Federal Home Loan Bank stock............ 6,027 99 6.57 5,317 88 6.62
-------- ------ -------- ------
Total interest-earning assets......... 397,952 7,943 7.98 395,244 7,580 7.67
Non-interest earning assets............... 14,896 9,188
-------- --------
Total assets.......................... $412,848 $404,432
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW accounts............................ $ 2,653 11 1.66% $ 2,342 10 1.71%
Money market deposit accounts........... 26,351 339 5.15 18,171 236 5.20
Passbook accounts....................... 20,629 149 2.89 22,139 163 2.95
Certificates of deposit................. 207,340 3,066 5.91 218,376 3,167 5.80
-------- ------ -------- ------
Total deposits........................ 256,973 3,565 5.55 261,028 3,576 5.48
Advance payments by borrowers
for taxes and insurance................ 1,028 7 2.72 1,255 8 2.55
Borrowings................................ 112,448 1,687 6.00 103,961 1,526 5.87
-------- ------ -------- ------
Total interest-bearing liabilities.... 370,449 5,259 5.68 366,244 5,110 5.58
Non-interest bearing deposits
and liabilities......................... 10,478 9,839
Shareholders' equity...................... 31,921 28,349
-------- --------
Total liabilities and
shareholders' equity................ $412,848 $404,432
======== ========
Net interest income/interest rate spread.. $2,684 2.30% $2,470 2.09%
====== ===== ====== =====
Net earning assets/net interest margin.... $ 27,503 2.70% $ 29,000 2.50%
======== ===== ======== =====
</TABLE>
20
<PAGE> 23
Net interest income before provision for losses on loans increased $214,000 or
8.7% to $2.7 million for the three months ended March 31, 1998 from $2.5 million
for the comparable 1997 period. Interest income increased $363,000 for the three
months ended March 31, 1998, partially offset by an increase in interest expense
of $149,000. The level of net interest income primarily reflects an increase in
interest rate spread to 2.30% for the three months ended March 31, 1998 from
2.09% for the comparable 1997 period. The increase in interest rate spread was
primarily due to the increased proportion of interest earning assets invested in
loans which carry higher yields than investment securities and mortgage-backed
and related securities.
INTEREST INCOME
Interest income increased 4.8% to $7.9 million for the three months ended March
31, 1998 from $7.6 million for the comparable 1997 period. The increase in
interest income was the result of an increase of 31 basis points in the yield on
interest-earning assets to 7.98% for the three months ended March 31, 1998 from
7.67% for the comparable 1997 period. Interest income on loans increased 12.2%
to $6.0 million for the three months ended March 31, 1998, from $5.4 million for
the comparable 1997 period. The increase was the result of a rise in the
Company's average gross loans of 7.8% to $283.6 million for the three months
ended March 31, 1998 from $263.1 million for the comparable 1997 period, and an
increase in average yield to 8.49% for the three months ended March 31, 1998
from 8.16% for the comparable 1997 period. Gross loans increased primarily as a
result of the Company retaining a significant portion of its adjustable and
fixed rate loan originations and purchasing more commercial real estate loans
located outside of the Company's primary lending area. The increase in yield is
attributable to the upward adjustment in rate on existing adjustable-rate loans
and to the higher yields paid on the multi-family and commercial components of
the loan portfolio. At March 31, 1998, the multifamily and commercial components
of the Company's loan portfolio totaled $96.8 million, or 32.8% of the total
loan portfolio, compared to $60.9 million, or 21.3% of the total loan portfolio
at March 31, 1997. Interest income on mortgage-backed securities decreased 21.3%
to $689,000 for the three months ended March 31, 1998 from $876,000 for the
comparable 1997 period. The decrease was primarily due to a decrease in average
balances to $39.0 million for the three months ended March 31, 1998 from $49.0
million for the comparable 1997 period and a decrease in average yield to 7.06%
for the 1998 period from 7.16% for the 1997 period. The decrease in average
yield on mortgage-backed securities was primarily due to the adjustment in the
adjustable rate securities portion of this portfolio which is decreased due to
the lower interest rate environment in the 1998 period. Interest income on
mortgage-related securities decreased 4.8% to $633,000 for the three months
ended March 31, 1998 from $665,000 for the comparable 1997 period. The decrease
was primarily due to a decrease in average balances to $37.0 million for the
three months ended March 31, 1998 from $40.3 million for the comparable 1997
period, partially offset by an increase in average yield to 6.84% for the three
months ended March 31, 1998 from 6.60% for the comparable 1997 period. The
increase in average yield on mortgage-related securities was primarily due to
the upward adjustment in rate on the adjustable rate securities of this
portfolio and the decreased amount of fixed rate mortgage-related securities at
lower interest rates during the three months ended March 31, 1998. 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
13.8% to $506,000 for the three months ended March 31, 1998 from $587,000 for
the comparable 1997 period. The decrease was primarily due to a decrease in
average balance to $32.6 million for the three months ended March 31, 1998 from
$37.6 million for the comparable 1997 period, offset by an increase in average
yield to 6.27% for the 1998 period from 6.25% for the 1997 period. The higher
average yield was primarily attributable to the increased balances of investment
and other securities invested in higher-yielding mortgage-backed and related
securities during the 1998 period as compared to the 1997 period.
INTEREST EXPENSE
Interest expense increased 2.9% to $5.3 million for the three months ended March
31, 1998 from $5.1 million for the comparable 1997 period. The increase was the
result of an 1.1% increase in the average amount of interest-bearing liabilities
to $370.4 million for the three months ended March 31, 1998 compared to $366.2
million for the comparable 1997 period and an increase in the average rate paid
on interest-bearing liabilities to 5.68% for the 1998 period from 5.58% for the
1997 period. The increased balances of borrowings at higher average interest
rates and increased average rate paid on certificate of deposit accounts was the
21
<PAGE> 24
primary reason for the increase in the average rate paid on the interest-bearing
liabilities for the three months ended March 31, 1998 as compared to the
comparable 1997 period. Interest expense on deposits decreased to $3.565 million
for the three months ended March 31, 1998 from $3.576 million for the comparable
1997 period. The decrease was the result of a decrease in average balances of
deposits to $257.0 million for the three months ended March 31,1998 from $261.0
million for the 1997 period, offset by an increase in the average rate paid to
5.55% for the 1998 period from 5.48% for the 1997 period. The decrease in
deposits was primarily due to a decrease of 5.1% in certificate of deposit
accounts to $207.3 million for the three months ended March 31, 1998 from $218.4
million for the comparable 1997 period. Passbook accounts decreased to $20.6
million for the three months ended March 31, 1998 from $22.1 million for the
1997 period. Offsetting the decreases was an increase of 45.0% in money market
deposit accounts to $26.4 million for the three months ended March 31, 1998 from
$18.2 million for the 1997 period. Money market deposit accounts increased
primarily due to aggressive marketing and a competitive rate offered during the
three months ended March 31, 1998. NOW accounts increased 11.7% to $2.7 million
for the three months ended March 31, 1998 from $2.3 million for the comparable
1997 period, partially offset by a decrease in average rate paid to 1.66% for
the 1998 period from 1.71% for the 1997 period. The Company's decrease in
certificates of deposit was the result of utilizing more borrowings to fund its
asset base as compared to wholesale certificates of deposit. Of the $207.3
million in the average balance of certificates of deposit for the three months
ended March 31, 1998, $73.0 million or 35.2% represented brokered certificates
of deposit compared to $93.0 million or 42.6% for the 1997 period. The average
rate paid on brokered certificates of deposit increased to 6.17% for the three
months ended March 31, 1998 from 5.87% for the comparable 1997 period. Interest
on borrowings (FHLB advances and reverse repurchase agreements) increased 10.6%
to $1.7 million for the months ended March 31, 1998 from $1.5 million for the
comparable 1997 period. The increase was primarily due to the increase in
average balances of FHLB advances and reverse repurchase agreements of 8.2% to
$112.4 million for the three months ended March 31, 1998 from $104.0 million for
the comparable 1997 period and an increase in the average rate paid to 6.00% for
the 1998 period from 5.87% for the 1997 period.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased 33.3% to $200,000 for the three
months ended March 31, 1998 from $150,000 for the comparable 1997 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, 1998, the allowance for losses on loans increased
34.0% to $2.2 million at March 31, 1998 compared to $1.7 million at March 31,
1997. 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 0.75% at March 31, 1998
from 0.58% at March 31, 1997, reflecting the continued low level of loans
charged off and non-performing loans. The amount of non-performing loans at
March 31, 1998 was $1.2 million or .40% of gross loans compared to $623,000 or
0.22% of gross loans at June 30, 1997 and $68,000 or 0.02% of gross loans at
March 31, 1997.
NON-INTEREST INCOME
Non-interest income increased 54.0% to $365,000 for the three months ended March
31, 1998 from $237,000 for the comparable 1997 period. The largest components of
the increase were an increase in gain on the sales of loans to $114,000 for the
three months ended March 31, 1998 compared to $1,000 for the comparable 1997
period, reflecting the increased volume of loans sold in the secondary market,
an increase in service charges on loans to $67,000 for the three months ended
March 31, 1998 from $55,000 for the comparable 1997 period and an increase in
other income to $56,000 for the three months ended March 31, 1998 from $17,000
for the comparable 1997 period. Offsetting the increases in non-interest income
was a decrease in service charges on deposit accounts to $100,000 for the three
months ended March 31, 1998
22
<PAGE> 25
compared to $113,000 for the comparable 1997 period and a decrease in insurance
commissions to $10,000 for the three months ended March 31, 1998 from $30,000
for the comparable 1997 period.
NON-INTEREST EXPENSE
Non-interest expense increased 17.4% to $1.8 million for the three months ended
March 31, 1998 from $1.5 million for the comparable 1997 period. The increase
was primarily due to an increase in compensation and benefits of $116,000 to
$994,000 for the three months ended March 31, 1998 from $878,000 for the
comparable 1997 period, which relates to higher salary and benefit levels for
existing employees. Occupancy and equipment expense increased $67,000 to
$327,000 for the three months ended March 31, 1998 from $260,000 for the
comparable 1997 period, which primarily relates to a purchase of an office
building and increased purchases of bank equipment. Marketing expense increased
$41,000 to $120,000 for the three months ended March 31, 1998 from $79,000 for
the comparable 1997 period due to increased promotion efforts for existing bank
products. Also, other non-interest expense increased $40,000 to $325,000 for the
three months ended March 31, 1998 from $285,000 for the 1997 period. The
increase is primarily due to increases in printing, office supplies,
organization dues, legal and other miscellaneous expenses.
The Company is heavily dependent upon complex computer systems for all phases of
its operations, including customer transaction processing, internal/external
reporting and records retention. Non-interest expense includes the cost of
projects underway to ensure accurate date recognition and data processing with
respect to the year 2000. The Company has commenced a program intended to
complete the year 2000 conversion projects by 1999. These costs which are
expensed as incurred, have been immaterial to date and are not expected to have
a material impact on the Company's earnings in the future.*
23
<PAGE> 26
RESULTS OF OPERATIONS - COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 1998
AND 1997
GENERAL
Net income for the nine months ended March 31, 1998 increased to $2.0 million
from $1.2 million for the comparable 1997 period. The increase in net income was
primarily due to a one-time after-tax charge of $533,000 to recapitalize SAIF,
the FDIC insurance fund which insures deposits of savings associations, in the
1997 period, offset by an after-tax FDIC credit refund of $83,000. Net income
for the 1997 period would have been $1.6 million excluding the FDIC special
assessment and credit refund. Return on average equity increased to 8.75% for
the nine months ended March 31, 1998 from 5.67% for the comparable 1997 period
(or 7.83% excluding the effect of the FDIC assessment). Return on average assets
increased to 0.65% for the nine months ended March 31, 1998 from 0.40% for the
comparable 1997 period (or 0.54% excluding the effect of the FDIC assessment).
NET INTEREST INCOME
The following table presents certain information related to average
interest-earning assets and liabilities, net interest rate spread and net
interest margin:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED MARCH 31,
1 9 9 8 1 9 9 7
--------------------------------------------------------------------
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.......................... $269,489 $16,905 8.36% $241,151 $14,450 7.99%
Consumer loans.......................... 5,389 543 13.43 6,098 583 12.75
Commercial loans........................ 6,037 461 10.18 655 43 8.75
-------- ------- -------- -------
Total loans.......................... 280,915 17,909 8.50 247,904 15,076 8.11
Securities held-to-maturity:
Mortgage-backed securities............ 42,098 2,250 7.13 51,488 2,725 7.06
Mortgage related securities........... 37,908 1,947 6.85 40,754 2,028 6.63
-------- ------- -------- -------
Total mortgage-backed
and related securities............. 80,006 4,197 6.99 92,242 4,753 6.87
Investment and other securities......... 11,545 550 6.35 4,843 212 5.84
Securities available-for-sale........... 24,369 1,166 6.38 33,659 1,673 6.63
Federal Home Loan Bank stock............ 5,639 287 6.79 5,198 265 6.80
-------- ------- -------- -------
Total interest-earning assets......... 402,474 24,109 7.99 383,846 21,979 7.63
Non-interest earning assets............... 12,855 9,364
-------- --------
Total assets.......................... $415,329 $393,210
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW accounts............................ $ 2,618 33 1.68% $ 2,310 30 1.73%
Money market deposit accounts........... 24,010 936 5.20 14,044 548 5.20
Passbook accounts....................... 21,180 471 2.97 23,276 527 3.02
Certificates of deposit................. 216,628 9,787 6.02 206,643 9,026 5.82
--------- ------- -------- -------
Total deposits........................ 264,436 11,227 5.66 246,273 10,131 5.48
Advance payments by borrowers
for taxes and insurance................ 3,275 68 2.77 3,617 75 2.76
Borrowings................................ 105,773 4,883 6.16 105,508 4,681 5.92
--------- ------- -------- -------
Total interest-bearing liabilities.... 373,484 16,178 5.78 355,398 14,887 5.59
Non-interest bearing deposits
and liabilities......................... 10,807 10,055
Shareholders' equity...................... 31,038 27,757
--------- --------
Total liabilities and
shareholders' equity................ $415,329 $393,210
======== ========
Net interest income/interest rate spread.. $ 7,931 2.21% $ 7,092 2.04%
======= ==== ======= ====
Net earning assets/net interest margin.... $ 28,990 2.63% $ 28,448 2.46%
========= ==== ======== ====
</TABLE>
24
<PAGE> 27
Net interest income before provision for losses on loans increased $839,000 or
11.8% to $7.9 million for the nine months ended March 31, 1998 from $7.1 million
for the comparable 1997 period. Interest income increased $2.1 million for the
nine months ended March 31, 1998, partially offset by an increase in interest
expense of $1.3 million. The level of net interest income primarily reflects a
4.9% increase in average interest-earning assets to $402.5 million for the nine
months ended March 31, 1998 from $383.8 million for the comparable 1997 period,
a 1.9% increase in the excess of the Company's average interest-earning assets
over average interest-bearing liabilities to $29.0 million for the nine months
ended March 31, 1998 from $28.4 million for the comparable 1997 period, and an
increase in interest rate spread to 2.21% for the nine months ended March 31,
1998 from 2.04% for the comparable 1997 period. The increase in interest rate
spread was primarily due to the increased proportion of interest earning assets
invested in loans which carry higher yields than investment securities and
mortgage-backed and related securities.
INTEREST INCOME
Interest income increased 9.7% to $24.1 million for the nine months ended March
31, 1998 from $22.0 million for the comparable 1997 period. The increase in
interest income was the result of an increase in average interest-earning assets
of 4.9% to $402.5 million for the nine months ended March 31, 1998 from $383.8
million for the comparable 1997 period and an increase of 36 basis points in the
yield on interest-earning assets to 7.99% for the nine months ended March 31,
1998 from 7.63% for the comparable 1997 period. Interest income on loans
increased 18.8% to $17.9 million for the nine months ended March 31, 1998 from
$15.1 million for the comparable 1997 period. The increase was the result of a
rise in the Company's average gross loans of 13.3% to $280.9 million for the
nine months ended March 31, 1998 from $247.9 million for the comparable 1997
period, and an increase in average yield to 8.50% for the nine months ended
March 31, 1998 from 8.11% for the comparable 1997 period. Gross loans increased
primarily as a result of the Company retaining a significant portion of its
adjustable and fixed rate loan originations and purchasing more commercial real
estate loans outside of the Company's primarly lending area. The increase in
yield is attributable to the upward adjustment in rate on existing
adjustable-rate loans and to the higher yields paid on the multi-family and
commercial components of the loan portfolio. At March 31, 1998, the multi-family
and commercial components of the company's loan portfolio totaled $96.8 million,
or 32.8% of the total loan portfolio, compared to $60.9 million, or 21.3% of the
total loan portfolio at March 31, 1997. Interest income on mortgage-backed
securities decreased 17.4% to $2.3 million for the nine months ended March 31,
1998 from $2.7 million for the comparable 1997 period. The decrease was
primarily due to a decrease in average balances to $42.1 million for the nine
months ended March 31, 1998 from $51.5 million for the comparable 1997 period
offset by an increase in average yield to 7.13% for the 1998 period from 7.06%
for the 1997 period. Interest income on mortgage-related securities decreased
4.0% to $1.9 million for the nine months ended March 31, 1998 from $2.0 million
for the comparable 1997 period. The decrease was primarily due to a decrease in
average balances to $37.9 million for the nine months ended March 31, 1998 from
$40.8 million for the comparable 1997 period, partially offset by an increase in
average yield to 6.85% for the nine months ended March 31, 1998 from 6.63% for
the comparable 1997 period. The increase in average yield on mortgage-backed and
mortgage related securities was primarily due to the upward adjustment in rate
on the adjustable rate securities of this portfolio and the decreased amount of
fixed rate mortgage-related securities at lower interest rates during the nine
months ended March 31, 1998. 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 9.0% to $1.7 million for the nine months ended
March 31, 1998 from $1.9 million for the comparable 1997 period. The decrease
was primarily due to a decrease in average balance to $35.9 million for the nine
months ended March 31, 1998 from $38.5 million for the 1997 period and a
decrease in average yield to 6.37% for the 1998 period from 6.53% for the 1997
period. The lower average yield was primarily attributable to the decreased
balances of investment and other securities invested at lower short-term
interest rates than existed during the 1998 period as compared to the 1997
period.
25
<PAGE> 28
INTEREST EXPENSE
Interest expense increased 8.7% to $16.2 million for the nine months ended March
31, 1998 from $14.9 million for the comparable 1997 period. The increase was the
result of a 5.1% increase in the average amount of interest-bearing liabilities
to $373.5 million for the nine months ended March 31, 1998 compared to $355.4
million for the comparable 1997 period and an increase in the average rate paid
on interest-bearing liabilities to 5.78% for the 1998 period from 5.59% for the
1997 period. The increased balances of certificates of deposit (including
brokered deposits) 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 nine months ended March 31, 1998 as compared to the
comparable 1997 period. Interest expense on deposits increased 10.8% to $11.2
million for the nine months ended March 31, 1998 from $10.1 million for the
comparable 1997 period. The increase was the result of an increase in average
balances of 7.4% to $264.4 million for the nine months ended March 31, 1998 from
$246.3 million for the comparable 1997 period, and an increase in the average
rate paid to 5.66% for the 1998 period from 5.48% for the 1997 period. The
increase in deposits was primarily due to an increase of 4.8% in certificates of
deposit (including brokered deposits) to $216.6 million for the nine months
ended March 31, 1998 from $206.6 million for the 1997 period and an increase in
average rate to 6.02% for the 1998 period from 5.82% for the 1997 period. Money
market deposit accounts increased 71.0% to $24.0 million for the nine months
ended March 31, 1998 from $14.0 million for the comparable 1997 period. Money
market deposit accounts increased primarily due to aggressive marketing and a
competitive rate offered during the nine months ended March 31, 1998. NOW
accounts increased 13.3% to $2.6 million for the nine months ended March 31,
1998 from $2.3 million for the comparable 1997 period, partially offset by a
decrease in average rate paid to 1.68% for the 1998 period from 1.73% for the
1997 period. These increases were partially offset by an average balance decline
of 9.0% in Passbook accounts to $21.2 million for the nine months ended March
31, 1998 from $23.3 million for the comparable 1997 period. The Company's
increase in certificates of deposit was the result of aggressive marketing and
pricing offset by a decrease in brokered certificates of deposit. Of the $216.6
million in the average balance of certificates of deposit for the nine months
ended March 31, 1998, $81.7 million or 37.7% represented brokered certificates
of deposit compared to $85.7 million or 41.5% for the 1997 period. The average
rate paid on brokered certificates of deposit increased to 6.15% for the nine
months ended March 31, 1998 from 5.87% for the comparable 1997 period. The
increase was primarily due to management's decision to lengthen the maturities
of such deposits during the 1998 period. Interest on borrowings (FHLB advances
and reverse repurchase agreements) increased 4.3% to $4.9 million for the nine
months ended March 31, 1998 from $4.7 million for the comparable 1997 period.
The increase was primarily due to the increase in average rate paid to 6.16% for
the nine months ended March 31, 1998 from 5.92% for the 1997 period and by an
increase in average balances to $105.8 million for the nine months ended March
31, 1998 from $105.5 million for the comparable 1997 period.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased 27.0% to $640,000 for the nine
months ended March 31, 1998 from $504,000 for the comparable 1997 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, 1998 and 1997."
NON-INTEREST INCOME
Non-interest income increased 12.2% to $801,000 for the nine months ended March
31, 1998 from $714,000 for the comparable 1997 period. The largest components of
increase was an increase in gain on the of loans to $137,000 for the nine months
ended March 31, 1998 compared to $14,000 for the comparable 1997 period, an
increase in service charges on loans to $202,000 for the nine months ended March
31, 1998 from $134,000 for the comparable 1997 period and an increase in other
non-interest income to $71,000 for the nine months ended March 31, 1998 from
$47,000 for the comparable 1997 period. Offsetting the increases in non-interest
income was a decrease in service charges on deposit accounts to $323,000 for the
nine months ended March 31, 1998 compared to $369,000 for the comparable 1997
period and a decrease in insurance commissions to $18,000 for the nine months
ended March 31, 1998 from $78,000 for the comparable 1997
26
<PAGE> 29
period. Also, gains on the sale of securities and mortgage-backed and related
securities decreased to ($8,000) for the nine months ended March 31, 1998 from
$7,000 for the 1997 period.
NON-INTEREST EXPENSE
Non-interest expense decreased 9.4% to $5.0 million for the nine months ended
March 31, 1998 from $5.5 million for the comparable 1997 period. The decrease
was primarily due to a decrease in FDIC deposit insurance premiums of $912,000
to $133,000 for the nine months ended March 31, 1998 from $1.0 for the
comparable 1997 period, which relates to a FDIC industry-wide special assessment
of $877,000 offset by a refund credit of $137,000. Also, other non-interest
expense decreased $5,000 to $858,000 for the nine months ended March 31, 1998
from $863,000 for the 1997 period. The decrease is primarily due to decreases in
printing, office supplies, organization dues, legal and other miscellaneous
expenses. Offsetting the decreases in non-interest expense was an increase in
compensation and benefits of $240,000 to $2.9 million for the nine months ended
March 31, 1998 from $2.6 million for the 1997 period. The increase in
compensation and benefits expense primarily relates to higher salary and benefit
levels and an increase in the number of full-time equivalent employees.
Marketing expense increased $45,000 to $274,000 for the nine months ended March
31, 1998 from $229,000 for the comparable 1997 period. Also, occupancy and
equipment expense increased $117,000 to $822,000 for the nine months ended March
31, 1998 from $705,000 for the 1997 period. The increase in occupancy and
equipment primarily relates to the purchase of an office building and increased
purchases of bank equipment.
27
<PAGE> 30
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts and other financial instruments with similar
characteristics. The Company currently does not enter into futures, forwards,
swaps or options. However, the Company is party to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments consist primarily of
commitments to extend credit. These instruments involve to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates and may
require collateral from the borrower if deemed necessary by the Company.
The information required herein pursuant to Item 305 of Regulation S-K is
incorporated by reference in sections entitled "Liquidity and Capital Resources"
from pages 12 to 13 and "Asset/Liability Management" from pages 15 to 16 hereof.
28
<PAGE> 31
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
None.
ITEM 5. OTHER INFORMATION
The Company declared a two-for one stock split in the form of a 100%
stock dividend on October 30, 1997. Shareholders received one
additional share of common stock for each share of common stock owned
as of the record date, November 10, 1997. As a result of the stock
split, the number of shares of common stock outstanding increased to
2,993,608 from 1,442,950.
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.
* * * * * * * * * * * * * * * * * *
29
<PAGE> 32
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 12, 1998 /s/ James D. Smessaert
-------------------------
James D. Smessaert
Chairman of the Board
Chief Executive Officer
Date: May 12, 1998 /s/ Arthur E. Thompson
-------------------------
Arthur E. Thompson
Chief Financial Officer
30
<PAGE> 33
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.
31
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<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1998
<CASH> 3,582
<INT-BEARING-DEPOSITS> 14,894
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<DEPOSITS> 275,777
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<LIABILITIES-OTHER> 3,025
<LONG-TERM> 83,073
32,342
0
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<INCOME-PRETAX> 3,125
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<LOANS-NON> 1,052
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