SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-20082
Hinsdale Financial Corporation
(Exact name of registrant as specified in its charter)
Delaware 36-3811768
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Grant Square, Hinsdale, Illinois 60521
(Address of principal executive offices) (Zip Code)
(708) 323-1776
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all the 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. YES [X] No [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of stock, as of the latest practicable date.
Common Stock, $0.01 par value -- 2,690,155 shares outstanding
as of May 1, 1996.
HINSDALE FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
Index
Page
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Part I. Financial Information
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Item 1. Financial Statements (unaudited)
Consolidated Statements of Financial Condition
as of March 31, 1996 and September 30, 1995 1
Consolidated Statements of Income for the Three
and Six Months Ended March 31, 1996 and 1995 2
Consolidated Statements of Changes in
Stockholders' Equity for the Six Months Ended
March 31, 1996 and 1995 3
Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 1996 and 1995 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information
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Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security
Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature Page 21
PAGE
HINSDALE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, September 30,
(In thousands, except share data) 1996 1995
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(unaudited)
ASSETS
Cash and due from banks $ 5,021 $ 5,427
Interest-bearing deposits 36,498 50,845
Investment securities available for sale, at market value 1,998 1,998
Mortgage-backed securities available for sale, at market value 6,199 7,147
Loans, net of allowance for losses of $2,405 at
March 31, 1996 and $2,589 at September 30, 1995 610,048 614,371
Accrued interest receivable 3,493 3,275
Real estate 1,865 1,872
Premises and equipment, net 5,583 5,756
Stock in Federal Home Loan Bank of Chicago, at cost 6,995 9,215
Other assets 4,329 3,801
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$682,029 $703,707
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $471,927 $445,505
Borrowed funds 133,492 185,339
Collateralized mortgage obligations 3,439 4,353
Advances by borrowers for taxes and insurance 10,577 8,385
Accrued expenses and other liabilities 8,253 8,148
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Total liabilities 627,688 651,730
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Stockholders' Equity:
Preferred stock, $.01 par value;
authorized 1,500,000 shares; none outstanding -- --
Common stock, $.01 par value;
authorized 6,000,000 shares; issued 2,785,155 shares
and outstanding 2,690,155 shares at March 31, 1996 22 22
Additional paid-in capital 20,950 20,861
Retained earnings, substantially restricted 35,192 32,971
Treasury stock, at cost (95,000 shares) (1,284) (1,284)
Common stock purchased by:
Employee Stock Ownership Plan (600) (686)
Bank Recognition and Retention Plans (86) (86)
Net unrealized gains on securities available for sale, net of tax 147 179
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Total stockholders' equity 54,341 51,977
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$682,029 $703,707
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<FN>
See accompanying notes to unaudited consolidated financial statements.
PAGE
HINSDALE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
March 31, March 31,
(In thousands, except per share amounts) 1996 1995 1996 1995
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(unaudited)
INTEREST INCOME:
Loans $ 10,922 $ 10,554 $ 22,086 $ 20,526
Mortgage-backed securities 153 477 314 994
Investment securities 173 285 365 734
Interest-bearing deposits 248 71 514 99
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Total interest income 11,496 11,387 23,279 22,353
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INTEREST EXPENSE:
Deposits 4,933 4,116 9,914 7,970
Borrowed funds 2,262 2,434 4,866 4,731
Collateralized mortgage obligations 117 159 246 337
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Total interest expense 7,312 6,709 15,026 13,038
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Net interest income 4,184 4,678 8,253 9,315
Provision for loan losses -- 50 50 85
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Net interest income after provision for loan losses 4,184 4,628 8,203 9,230
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NONINTERET INCOME:
Gain on sales of loans 210 43 308 24
Loss on sales of investment securities -- (18) -- (18)
Income from real estate operations 97 135 173 294
Servicing fee income 114 131 215 228
Fees and commissions 2,985 733 5,397 1,606
Other 165 9 456 20
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Total noninterest income 3,571 1,033 6,549 2,154
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NONINTEREST EXPENSE:
Compensation and benefits 3,334 1,967 6,232 3,879
Occupancy expense 744 502 1,445 994
Federal deposit insurance premiums 258 245 517 493
Computer services 133 148 273 308
Other 1,323 878 2,621 1,733
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Total noninterest expense 5,792 3,740 11,088 7,407
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Income before income taxes 1,963 1,921 3,664 3,977
Income tax expense 762 759 1,441 1,558
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Net income $ 1,201 $ 1,162 $ 2,223 $ 2,419
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Primary earnings per share $ 0.43 $ 0.42 $ 0.80 $ 0.87
Fully diluted earnings per share $ 0.43 $ 0.42 $ 0.80 $ 0.87
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See accompanying notes to unaudited consolidated financial statements.
PAGE
HINSDALE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unrealized
Common Common Gains (Losses)
Additional Stock Stock on Securities
Common Paid-in Retained Treasury Acquired Acquired Available
(In thousands) Stock Capital Earnings Stock By ESOP By BRPs for Sale Total
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Six Months Ended March 31, 1995 (Unaudited)
Balance at September 30, 1994 $ 22 $20,553 $28,512 $(1,284) $(857) $(230) $ -- $46,716
Net income -- -- 2,419 -- -- -- -- 2,419
Proceeds from exercise of
stock options -- 110 -- -- -- -- -- 110
Principal payment on ESOP loan -- -- -- -- 86 -- -- 86
Cumulative effect of change in
accounting for securities
available for sale, net of tax -- -- -- -- -- -- (234) (234)
Change in net unrealized losses
on securities available for
sale, net of tax -- -- -- -- -- -- 99 99
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Balance at March 31, 1995 $ 22 $20,663 $30,931 $(1,284) $(771) $(230) $ (135) $49,196
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Six Months Ended March 31, 1996
Balance at September 30, 1995 $ 22 $20,861 $32,971 $(1,284) $(686) $ (86) $ 179 $51,977
Net income -- -- 2,223 -- -- -- -- 2,223
Proceeds from exercise of
stock options -- 81 -- -- -- -- -- 81
Tax benefit from stock related
compensation -- 8 -- -- -- -- -- 8
Principal payment on ESOP loan -- -- -- -- 86 -- -- 86
25% stock dividend related to
fractional shares -- -- (2) -- -- -- -- (2)
Change in net unrealized losses
on securities available for
sale, net of tax -- -- -- -- -- -- (32) (32)
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Balance at March 31, 1996 $ 22 $20,950 $35,192 $(1,284) $(600) $ (86) $ 147 $54,341
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See accompanying notes to unaudited consolidated financial statements.
PAGE
HINSDALE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 31,
(In thousands, except share data) 1996 1995
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(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES: $ 2,223 $ 2,419
Net income
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 555 412
Amortization of deferred gain (65) (195)
Provision for loan losses 50 85
Amortization of premiums, discounts, and deferred loan fees 188 (60)
Additions to deferred fees (230) (152)
Amortization of collateralized mortgage obligations discount 86 103
Originations of loans held for sale (217,970) (4,400)
Sale of loans originated for resale 211,421 4,382
Sale of mortgage-backed securities held for sale -- 2,907
Sale of investment securities available for sale -- 14,957
Gain on sales of loans and mortgage-backed securities (308) (24)
Loss on sales of investment securities -- 18
(Increase) decrease in Stock in Federal
Home Loan Bank of Chicago 2,220 (733)
Increase in accrued interest receivable (218) (91)
(Increase) decrease in other assets (688) 750
Increase (decrease) in accrued expenses and other liabilities 194 (68)
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Net cash provided by (used in) operating activities (2,542) 20,310
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of loans 4,803 5,124
Loans originated for investment (39,795) (22,139)
Loans purchased (2,146) (49,947)
Purchase of premises and equipment (295) (554)
Principal collected on loans 48,382 22,753
Principal collected on mortgage-backed securities 908 2,666
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Net cash provided by (used in) operating activities 11,857 (42,097)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 26,422 11,047
Proceeds from borrowed funds 9,000 60,000
Repayment of borrowed funds (60,847) (47,286)
Repayment of collateralized mortgage obligations (1,000) (1,118)
Net increase in advance payments by borrowers
for taxes and insurance 2,192 7,669
Decrease in ESOP loan 86 86
Cash paid in lieu of fractional shares related to 25%
common stock dividend (2) --
Proceeds from options exercised 81 110
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Net cash provided by (used in) financing activities (24,068) 30,508
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Net increase (decrease) in cash and cash equivalents (14,753) 8,721
Cash and cash equivalents at beginning of period 56,272 20,385
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Cash and cash equivalents at end of period $ 41,519 $ 29,106
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest paid $ 15,150 $ 12,770
Income taxes 1,628 1,981
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Loans exchanged for mortgage-backed securities $ 17,107 $ 4,169
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See accompanying notes to unaudited consolidated financial statements.
HINSDALE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended March 31, 1996 and 1995
(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 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 only
normal recurring accruals) necessary for a fair presentation have
been included.
The results of operations and other data for the three and six
months ended March 31, 1996 are not necessarily indicative of
results that may be expected for the entire fiscal year ending
September 30, 1996.
The unaudited consolidated financial statements include the
accounts of Hinsdale Financial Corporation ("the Company"), its
wholly-owned subsidiary, Hinsdale Federal Bank for Savings ("the
Bank"), and the Bank's wholly-owned subsidiaries: Preferred
Mortgage Associates, Ltd. ("Preferred"), Grant Square Service
Corporation, Hinsdale Insurance Services, Inc., and NASCOR II
Corporation. All material intercompany balances and transactions
have been eliminated.
(2) Investments and Mortgage-Backed Securities
On October 1, 1994, the Company adopted the provisions of the
Financial Accounting Standards Board ("FASB") Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
The Company elected to classify all investments and mortgage-backed
securities held as of October 1, 1994 as available for sale.
Statement No. 115 establishes the accounting and reporting for
investments in equity and debt securities that have readily
determinable fair values. Under Statement 115, investments which
the entity has the positive intent and ability to hold to maturity
are classified as "held-to-maturity" and measured at amortized
cost. Investments purchased for the purpose of being sold are
classified as "trading securities" and measured at fair value with
any changes in fair value included in earnings. All other
investments that are not classified as "held-to-maturity", or
"trading" are classified as "available for sale". Investments
available for sale are measured at fair value with any changes in
fair value reflected as a separate component of stockholders'
equity, net of tax. The Company determines the classification of
new purchases of marketable securities at time of purchase.
(3) Loan Servicing
On October 1, 1995, the Company adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights, an amendment of FASB Statement No.
65". This statement requires mortgage loan servicing rights to be
recognized as separate assets from the related loans, regardless of
how those servicing rights are acquired. A mortgage banking
enterprise that acquires mortgage servicing rights through either
the purchase or origination of mortgage loans and sells or
securitizes those loans with servicing retained, is required to
allocate the total cost of the mortgage loans to the mortgage
servicing rights and to the loans (without the mortgage servicing
rights) based on their estimated relative fair values. The
allocation of the total cost of the loan between the mortgage
servicing rights and the loan results in increased gains on the
sales of the loans, reflecting the value of the servicing rights.
PAGE
HINSDALE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended March 31, 1996 and 1995
The statement further requires that mortgage servicing rights
periodically be evaluated for impairment based on the fair value of
those rights. The fair value of the mortgage servicing rights is
determined by discounting the present value of estimated expected
future cash flows using a discount rate commensurate with the risks
involved. This method of valuation incorporates assumptions that
market participants would use in their estimates of future
servicing income and expense, including assumptions about
prepayments, default, and interest rates. For purposes of
measuring impairment, the loans underlying the mortgage servicing
rights are stratified on the basis of interest rate and type. The
amount of impairment is the amount by which the mortgage servicing
rights, net of accumulated amortization, exceed their fair value.
Impairment, if any, is recognized through a valuation allowance and
a charge to current operations.
Mortgage servicing rights, net of valuation allowances, are
amortized in proportion to, and over the period of, the estimated
net servicing revenue of the underlying mortgages, which are
collateralized by single family properties.
As a result of the adoption of SFAS No. 122 on October 1, 1995,
$194,997 was capitalized as mortgage servicing rights during the
six months ended March 31, 1996. The following reflects
capitalized servicing rights activity for the six months ended
March 31, 1996 and 1995:
1996 1995
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Balance at beginning of year $ 191,446 $ --
Additions 194,997 50,229
Amortization (43,740) (855)
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Balance at end of period $ 342,703 $ 49,374
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The fair value of the servicing rights accounted for under SFAS No.
122 at March 31, 1996 is $219,407. The fair value of the servicing
rights acquired prior to October 1, 1995 at March 31, 1996 is
$161,797. A charge to current earnings of $3,863 was the result of
the evaluation of the fair value of the mortgage servicing rights
at March 31, 1996. The valuation allowance for mortgage servicing
rights is $3,863 at March 31, 1996.
(4) Adoption of SFAS 114 and 118
The Company adopted the provisions of SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures" effective October 1, 1995. These statements apply to
all loans that are identified for evaluation except for large
groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment. These loans include, but are not limited
to, credit card, residential mortgage and consumer installment
loans. Substantially all of the Company's lending is excluded from
the provisions of SFAS No. 114 and SFAS No. 118. Of the remaining
loans which are to be evaluated for impairment, management has
determined through an internal loan review process that there were
no loans at March 31, 1996 nor during the six months ended March
31, 1996, which met the definition of an impaired loan. A loan is
considered impaired when it is probable that a creditor will be
unable to collect contractual principal and interest due according
to the contractual terms of the loan agreement.
HINSDALE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended March 31, 1996 and 1995
(5) Acquisition of Preferred Mortgage Associates, Ltd.
On May 31, 1995, the Company acquired (the "Acquisition") Preferred
Mortgage Associates, Ltd. ("Preferred"). The operations of
Preferred are included in the Company's "Consolidated Statements of
Income" from the acquisition date and reflect the application of
the purchase method of accounting. Under this method of accounting,
the aggregate cost to the Company of the Acquisition was allocated
to the assets acquired and liabilities assumed, based on their
estimated fair values as of May 31, 1995. Goodwill was recorded by
the Company in connection with the Acquisition. Preferred was
acquired for an aggregate cash purchase price of $2.5 million.
Preferred is the largest mortgage broker in the Chicago
metropolitan area and has four mortgage origination offices
including its headquarters in Downers Grove, Illinois. Effective
October 1, 1995, the Company transferred the ownership of Preferred
to the Bank.
(6) Earnings per Share
Earnings per share of common stock have been determined by dividing
net income for the period by the weighted average number of common
and common equivalent shares outstanding. Stock options are
regarded as common share equivalents and are therefore considered
in both primary and fully diluted earnings per share calculations.
Common stock equivalents are computed using the treasury stock
method.
(7) Commitments and Contingencies
At March 31, 1996, the Company had outstanding commitments to
originate and purchase loans of $50.1 million, of which $26.6
million were fixed-rate and $23.5 million were adjustable-rate
commitments. Unused equity lines of credit available to customers
were $36.7 million at March 31, 1996.
(8) Reclassifications
Certain reclassifications of prior year amounts have been made to
conform with current year presentation.
PAGE
HINSDALE FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
Hinsdale Financial Corporation ("the Company") is a registered
savings and loan holding company incorporated under the laws of the
state of Delaware and is engaged in the business of providing
financial service products to the public through its wholly-owned
subsidiary, Hinsdale Federal Bank for Savings ("the Bank").
The Bank, a Federal savings bank chartered under the authority of
the Office of Thrift Supervision ("OTS"), originally was organized
in 1934, and changed its charter from a federal savings and loan
association to a federal savings bank in 1991. The Bank is a
member of the Federal Home Loan Bank ("FHLB") System and its
deposit accounts are insured to the maximum allowable amount by the
Federal Deposit Insurance Corporation ("FDIC"). The Bank is
regulated by the OTS and the FDIC and is further regulated by the
Board of Governors of the Federal Reserve System as to reserves
required to be maintained against deposits and certain other
matters.
The Bank is a community-oriented company providing financial
services through ten retail banking facilities in DuPage and
western Cook counties in Illinois. The Bank offers a variety of
deposit products in an attempt to attract funds from the general
public in highly competitive market areas surrounding its offices.
In addition to deposit products, the Bank also offers its customers
financial advice and security brokerage services through INVEST
Financial Corporation ("INVEST"). The Bank invests its retail
deposits in mortgage and consumer loans, investment securities and
mortgage-backed securities, secured primarily by one-to four-family
residential loans.
The earnings of the Bank are primarily dependent on its net
interest income, which is the difference between the interest
income earned on its loan, mortgage-backed securities, and
investment portfolios, and its cost of funds, consisting of the
interest paid on its deposits and borrowings. The Bank has
determined to place additional emphasis on expanding its portfolio
of home equity lines of credit, the interest rates on which adjust
with the prime rate. An increase in home equity lines of credit is
intended to enhance the Bank's interest rate spread and its
interest rate risk management. Partly as a result of this emphasis
on home equity lines of credit, the Company's interest rate spread
improved slightly from the first quarter ended December 31, 1995.
The Bank's earnings are also affected by noninterest income,
including income related to loan origination fees contributed by
Preferred Mortgage Associates, Ltd. ("Preferred") and the noncredit
consumer related financial services offered by the Bank, such as
net commissions received by the Bank from securities brokerage
services, commissions from the sale of insurance products, loan
servicing income, fee income on transaction accounts, and
interchange fees from its shared ATMs. The Bank's noninterest
income has also been affected by gains from the sale of various
assets, including loans, mortgage-backed securities, investment
securities, loan servicing, and real estate. Noninterest expense
consists principally of employee compensation, occupancy expense,
federal deposit insurance premiums, and other general and
administrative expenses of the Bank and Preferred.
The Bank's results of operations are also significantly affected by
general economic and competitive conditions, particularly changes
in market interest rates, government policies and actions of
regulatory authorities.
On May 31, 1995, the Company acquired Preferred, the largest
mortgage broker in the Chicago metropolitan area. Preferred has
four mortgage origination offices including its headquarters in
Downers Grove, Illinois. Established in 1987, Preferred brokered
loans for twenty-five separate lenders in 1995. Preferred will
continue to provide mortgage originations for lenders locally and
nationwide. The Bank anticipates that it will continue to retain
approximately 20% of Preferred's current annual loan origination
volume. Financial results for Preferred are included on a
consolidated basis from the date of acquisition. Effective October
1, 1995, the Company transferred the ownership of Preferred to the
Bank. The acquisition of Preferred has resulted in significant
increases in both noninterest income and noninterest expense as
compared to previously reported quarters.
PAGE
Liquidity/Capital Resources
The Company's primary sources of funds are deposits, borrowings,
proceeds from principal and interest payments on loans and
mortgage-backed securities and the sale of securitized loans.
While maturities and scheduled amortization of loans and mortgage-
backed securities are a predictable source of funds, deposit flows
and mortgage prepayments are greatly influenced by interest rate
cycles and economic conditions.
The Bank is required by regulation to maintain specific minimum
levels of liquid investments. Regulations currently in effect
require the Bank to maintain liquid assets at least equal to 5.0%
of the sum of its average daily balance of net withdrawable
accounts and short-term borrowed funds. This regulatory
requirement may be changed from time to time by the OTS to reflect
current economic conditions and deposit flows. The Bank's average
liquidity ratio was 7.37% for the quarter ended March 31, 1996.
The Company's most liquid assets are cash and cash equivalents,
which include investments in highly liquid, short-term investments
and interest-bearing deposits. The levels of these assets are
dependent on the Company's operating, financing, lending and
investing activities during any given period. At March 31, 1996,
cash and cash equivalents totaled $41.5 million.
Liquidity management for the Company is both a daily and long-term
function of the Company's management strategy. Excess funds are
generally invested in short-term investments and interest-bearing
deposits. In the event that the Company should require funds
beyond its ability to generate them internally, additional sources
of funds are available through the use of FHLB advances.
The Company's cash flows are comprised of three classifications:
cash flows from operating activities, cash flows from investing
activities, and cash flows from financing activities. Cash flows
used in operating activities, consisting primarily of interest and
dividends received less interest paid on deposits, and the
origination and sale of loans, were $2.5 million for the six months
ended March 31, 1996. Net cash provided by investing activities,
consisting primarily of disbursements for loans originated for
investment and purchases of loans, offset by principal collections
on loans and mortgage-backed securities was $11.9 million for the
six months ended March 31, 1996. Net cash used in financing
activities, consisting primarily of net activity in deposit and
escrow accounts, net repayment of borrowed funds and the repayment
of collateralized mortgage obligations, totaled $24.1 million for
the six months ended March 31, 1996.
In connection with the Company's loan origination activities, the
Company's interest rate risk management policy specifies the use of
certain hedging activities in an attempt to reduce exposure to
changes in loan market prices from the time of commitment until
securitization. The Company will engage in hedging transactions as
a method of reducing its exposure to interest rate risk present in
the secondary market. The Company's hedging transactions are
generally forward commitments to sell fixed-rate mortgage-backed
securities at a specified future date. The loans securitized
through FNMA are generally used to satisfy these forward
commitments. The sale of fixed-rate mortgage-backed securities for
future delivery presents a risk to the Company that, if the Company
is not able to deliver the mortgage-backed securities on the
specified delivery date, it may be required to repurchase the
forward commitment to sell at the then current market price. At
March 31, 1996 the Company had forward commitments to sell $6.0
million FNMA mortgage-backed securities with delivery dates in
April, May and June 1996.
The Bank's Tangible capital ratio at March 31, 1996 was 7.24%.
This exceeded the Tangible capital requirement of 1.5% of adjusted
assets by $39.0 million. The Bank's Leverage capital ratio at
March 31, 1996 was 7.47%. This exceeded the Leverage capital
requirement of 3.0% of adjusted assets by $30.5 million. The
Bank's Risk-based capital ratio was 13.57% at March 31, 1996. The
Bank currently exceeds the Risk-based capital requirement of 8.0%
of Risk-weighted assets by $21.4 million.
Pending Deposit Insurance Legislation
The FDIC Board has reduced the insurance premium assessed on
deposits insured by the Bank Insurance Fund ("BIF"). The FDIC
reduced the BIF premiums from a range of 23 to 31 basis points,
which is the range of premiums currently paid on deposits insured
by the Savings Association Insurance Fund ("SAIF"), to a range of
0 to 31 basis points. The FDIC estimated that in excess of 90% of
the banks whose deposits are insured through the BIF would be
assessed at the lowest premium rate. Due to the reserve levels of
the SAIF, the FDIC has not proposed a reduction in the SAIF
insurance premiums and it is not expected that, absent legislative
developments, the insurance premiums assessed on SAIF deposits
could be reduced until the end of the decade. The deposits held by
the Bank are insured through the SAIF and, although the Bank
currently pays the lowest premium assessed on SAIF deposits, the
reduction in BIF premiums, without a similar reduction in SAIF
premiums, places the Bank at a competitive disadvantage since BIF
insured institutions can either: (1) pass through to depositors in
the form of higher rates the reduction in deposit premiums, which
would cause the Bank to increase rates on its deposits without an
offsetting reduction in premium expense; (2) increase BIF insured
institutions profitability, which may not be available to the Bank;
or (3) a combination of both. Management continues to monitor the
situation and is working with the various trade associations the
Bank is affiliated with to achieve equality in the insurance
premium assessment.
Legislation has been proposed in Congress to recapitalize the SAIF
fund and possibly consolidate the BIF and SAIF funds. One feature
of this proposal calls for a special one-time assessment on all
SAIF-insured institutions of up to 80 basis points to bring the
SAIF fund up to its required level of capitalization. It is
assumed that after this assessment takes place, that the on-going
level of insurance premium assessments for the SAIF-insured
institutions would be reduced to the same range as that of the BIF-
insured institutions. Based upon the Bank's deposit base at March
31, 1996, the special assessment could cause a charge to earnings
of approximately $3.8 million, while a reduction in the insurance
premium assessment rate from 23 basis points to 4 basis points
would reduce annual premium expenses by approximately $0.9 million.
It is not known at this time when and if this legislation will be
approved and implemented.
Changes in Financial Condition
The Company reported total assets of $682.0 million at March 31,
1996 a decrease of $21.7 million, or 3.1%, from September 30, 1995,
primarily as a result of the repayment of FHLB advances and
external warehouse lines of credit. The loan portfolio decreased
$4.3 million from $614.4 million at September 30, 1995, to $610.1
million at March 31, 1996. This decrease was primarily the result
of the sale of the Bank's credit card portfolio of $4.6 million
during March 1996. For the current six-month period, loans
originated and purchased were $259.9 million, which were offset by
principal reductions of $48.4 million and the sale of $216.2
million loans.
Deposits increased $26.4 million, or 5.9%, to $471.9 million at
March 31, 1996 from $445.5 million at September 30, 1995. The
average cost of deposits was 4.35% for the six months ended March
31, 1996. This represents a slight decrease from the average cost
of deposits of 4.40% reported for the three months ended December
31, 1995. The Bank decreased borrowings from the FHLB by $32.8
million and warehouse lines of credit by $19.0 million from
September 30, 1995.
Stockholders' equity totaled $54.3 million at March 31, 1996. The
number of common shares outstanding were 2,690,155 and book value
per common share outstanding was $20.20 per share.
PAGE
Asset Quality
Non-performing Assets
The following table sets forth information as to non-accrual loans
and real estate owned at the dates indicated. The Company
discontinues the accrual of interest on loans ninety days or more
past due, at which time all accrued but uncollected interest is
reversed.
Quarter Ended
-------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands) 1996 1995 1995 1995 1995
- -------------------------------------------------------------------------------------------------
Non-accrual mortgage loans
90 days or more past due $ 866 $1,089 $1,237 $1,010 $1,440
Non-accrual consumer loans
90 days or more past due -- 56 63 47 36
- -------------------------------------------------------------------------------------------------
Total non-performing loans 866 1,145 1,300 1,057 1,476
Total foreclosed real estate -- -- --(1) 4,321 4,362
- -------------------------------------------------------------------------------------------------
Total non-performing assets $ 866 $1,145 $1,300 $5,378 $5,838
Total non-performing loans
to total loans 0.13% 0.18% 0.21% 0.17% 0.25%
Total non-performing assets
to total assets 0.l3% 0.17% 0.18% 0.76% 0.86%
<FN>
(1) The reduction in foreclosed real estate relates to the sale of a shopping center in Orland
Park, Illinois, which was acquired by the Bank in settlement of a non-performing loan on
January 5, 1992.
Classification of Assets
The Company regularly reviews the assets in its portfolio to
determine whether any assets require classification in accordance
with applicable regulations.
As of March 31, 1996, the Company had total classified assets of
$1.1 million, all of which were classified "substandard".
Substandard assets consisted of $0.8 million of real estate held
for development and sale and a $0.3 million mortgage loan that
had a well defined weakness.
PAGE
Asset/Liability Management
The Company has managed its exposure to interest rate risk by
emphasizing the origination and purchase of adjustable-rate
mortgage ("ARM") loans. Management believes that investing in
ARM loans, short-term profits are possibly sacrificed compared to
the yields obtainable through investment in fixed-rate loans,
however, the Company's exposure to the risk of interest rate
fluctuations is reduced, thereby enhancing long-term
profitability. The fixed-rate mortgage loans the Bank originates
are securitized and sold into the secondary market, with
servicing retained, as part of its operation and interest rate
risk management strategy. More recently, the Company has placed
additional emphasis on consumer loans, specifically the
origination of home equity lines of credit, the interest rates on
which adjust with the prime rate. An increase in consumer loans
should enhance the Bank's interest rate spread and its interest
rate risk management.
The Bank seeks to lengthen the maturities of its deposits by
emphasizing savings certificates with maturities of three months
or more. At March 31, 1996, savings certificates with original
maturities of three months or more totaled $269.3 million, or
57.1%, of total deposits. The Bank seeks to reduce its risk of
early withdrawals from its longer term savings certificates by
requiring early withdrawal penalties on all certificates. The
Bank does not actively solicit high-rate jumbo certificates of
deposit or brokered funds.
Matching of assets and liabilities may be analyzed by examining
the extent to which such assets and liabilities are interest rate
sensitive by monitoring an institution's interest rate
sensitivity gap. An asset or liability is considered interest
rate sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-
earning assets anticipated, based upon certain assumptions, to
mature or reprice within a specific time period and the amount of
interest-bearing liabilities anticipated, based upon certain
assumptions, to mature or reprice within that time period. A gap
is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate
sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income
while a positive gap would tend to result in an increase in net
interest income. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest
income while a positive gap would tend to adversely affect net
interest income. The Company's one-year interest sensitivity gap
as a percent of total assets was a negative 13% at March 31,
1996.
The following table sets forth the amounts of interest-earning
assets and interest-bearing liabilities outstanding at March 31,
1996, which are anticipated by the Company to reprice or mature
in each of the future time periods shown. Except as stated
below, the amounts of assets and liabilities shown which reprice
or mature during a particular period were based upon the
contractual terms of the asset or liability or certain
assumptions concerning the amortization and prepayment of such
assets and liabilities. Regular savings accounts, NOW accounts
and money market accounts, which collectively totaled $160
million at March 31, 1996, were assumed to be withdrawn at annual
percentage rates of 17%, 37% and 79%, respectively. The
collateralized mortgage obligations were assumed to prepay at the
same rate used for the mortgage-backed securities collateralizing
these obligations. Management believes that these assumptions
approximate actual experience and considers them reasonable,
although the actual amortization and repayment of assets and
liabilities may vary substantially.
PAGE
Interest Rate Sensitivity Gap Analysis
At March 31, 1996
-------------------------------------------------------------
More Than More Than
1 Year 1 Year 3 Years More Than
(Dollars in thousands) Or Less To 3 Years To 5 Years 5 Years Total
- -------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Mortgage loans (1) $156,769 $313,922 $ 81,398 $ 21,201 $573,290
Consumer loans (1) 35,218 934 712 1,433 38,297
Mortgage-backed securities (2) 1,259 1,729 1,118 1,865 5,971
Interest-bearing deposits 36,498 -- -- -- 36,498
Investment securities (2) 8,997 -- -- -- 8,997
- -------------------------------------------------------------------------------------------------
Total interest-earning assets 238,741 316,585 83,228 24,499 663,053
INTEREST-BEARING LIABILITIES:
Regular savings accounts 14,112 21,435 13,973 33,491 83,011
NOW interest-bearing accounts 8,149 7,460 1,996 4,420 22,025
Money market accounts 43,591 6,071 2,890 2,627 55,179
Certificate accounts 187,775 33,173 48,354 -- 269,302
Borrowed funds 69,164 59,243 5,085 -- 133,492
Collateralized mortgage
obligations 2,177 1,262 -- -- 3,439
- -------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 324,968 128,644 72,298 40,538 566,448
- -------------------------------------------------------------------------------------------------
Interest sensitivity gap $(86,227) $187,941 $ 10,930 $(16,039) $ 96,605
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Cumulative interest
sensitivity gap $(86,227) $101,714 $112,644 $ 96,605
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Cumulative interest
sensitivity gap as a
percentage of total assets (12.65)% 14.92% 16.52% 14.17%
Cumulative net interest-earning
assets as a percentage of
interest-sensitive liabilities 73.47% 122.42% 121.42% 117.05%
- -------------------------------------------------------------------------------------------------
<FN>
(1) For purposes of the gap analysis, mortgage and consumer loans are not reduced by the
allowance for loan losses and are reduced for non-performing loans.
(2) Mortgage-backed and investment securities are not increased by unrealized gains resulting
from the adoption of FASB No. 115. (See accompanying notes to unaudited consolidated
financial statements.)
Certain shortcomings are inherent in the method of analysis
presented in the foregoing table. For example, although certain
assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such
as ARM loans, have features which restrict changes in interest
rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of
many borrowers to service their debt may decrease in the event of
an interest rate increase.
The effect of a negative one year gap position and the overall
increase in interest rates in 1995, reduced the Company's net
interest income when comparing the first half of 1996 to the first
half of 1995. However, as a result of interest rates stabilizing in
the last half of 1995, net interest income for the first half of
fiscal 1996 improved when comparing the last six months of fiscal
1995.
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing
liabilities. Net interest income depends upon the volume of
interest-earning assets and interest-bearing liabilities and the
interest rate earned or paid on them.
Average Balance Sheets
The following table sets forth certain information relating to the
Company's Consolidated Statements of Financial Condition and
reflects the average yield on assets and the average cost of
liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of
assets or liabilities, respectively, for the periods shown.
Average balances are derived from average daily balances. The
yields and costs include fees which are considered adjustments to
yields.
Three Months Ended March 31,
-----------------------------------------------------
1996 1995
------------------------- -------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
- -----------------------------------------------------------------------------------
ASSETS:
Interest-earning assets:
Mortgage loans, net (1) $570,390 $10,090 7.08% $555,374 $ 9,782 7.05%
Equity lines of credit (1) 29,808 638 8.58 17,370 395 9.22
Consumer loans (1) 9,125 194 8.50 12,376 377 12.18
Mortgage-backed securities 7,498 153 8.16 25,222 477 7.56
Interest-bearing deposits 30,933 248 3.17 12,746 71 2.23
Investment securities 10,979 173 6.31 19,890 285 5.73
- -----------------------------------------------------------------------------------
Total interest-earning assets 658,733 11,496 6.98 642,978 11,387 7.08
Noninterest-earning assets 21,256 22,146
- -----------------------------------------------------------------------------------
Total assets $679,989 $665,124
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing liabilities
Deposits:
Savings accounts $346,340 $ 4,399 5.09% $311,116 $ 3,506 4.57%
NOW noninterest-bearing
accounts 36,753 -- -- 30,178 -- --
NOW interest-beearing
accounts 22,693 89 1.57 23,184 95 1.66
Money market accounts 55,019 445 3.24 62,595 515 3.34
- -----------------------------------------------------------------------------------
Total deposits 460,805 4,933 4.29 427,073 4,116 3.91
Funds borrowed:
Borrowed funds 141,788 2,262 6.31 165,487 2,434 5.88
Collateralized mortgage
obligations 3,424 117 13.67 5,032 159 12.64
- -----------------------------------------------------------------------------------
Total funds borrowed 145,212 2,379 6.48 170,519 2,593 6.08
- -----------------------------------------------------------------------------------
Total interest-bearing
liabilities 606,017 7,312 4.82 597,592 6,709 4.53
Other liabilities 20,510 19,096
- -----------------------------------------------------------------------------------
Total liabilities 626,527 616,688
Stockholders' equity 53,462 48,436
- -----------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $679,989 $665,124
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Net interest income/
interest rate spread $ 4,184 2.16% $ 4,678 2.55%
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Net interest-earning assets/
net interest margin $ 52,716 2.54% $ 45,386 2.91%
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Interest-earning assets to
interest-bearing liabilities 1.09x 1.08x
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
<FN>
(1) Average balances include non-performing loans. Interest includes only actual interest recorded on such loans.
Six Months Ended March 31, At March 31,
----------------------------------------------------- -----------------
1996 1995 1996
--------------------------- ------------------------- ----------------
Average Average Average
Average Yield/ Average Yield/ Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Cost
- -------------------------------------------------------------------------------------------------------
ASSETS:
Interest-earning assets:
Mortgage loans, net (1) $573,101 $20,387 7.12% $544,311 $19,082 7.01% $571,751 7.16%
Equity lines of credit (1) 26,908 1,179 8.74 16,781 746 8.92 32,929 8.22
Consumer loans (1) 10,340 520 10.06 12,288 698 11.36 5,368 8.71
Mortgage-backed securities 7,600 314 8.26 26,253 994 7.57 6,199 8.78
Interest-bearing deposits 30,219 514 3.35 11,877 99 1.65 36,498 5.15
Investment securities 11,099 365 6.56 25,381 734 5.78 8,993 6.34
- -------------------------------------------------------------------------------------------------------
Total interest-earning assets 659,267 23,279 7.06 636,891 22,353 7.02 661,738 7.12
Noninterest-earning assets 21,055 22,293 20,291
- -------------------------------------------------------------------------------------------------------
Total assets $680,322 $659,184 $682,029
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing liabilities
Deposits:
Savings accounts $342,075 $ 8,814 5.14% $307,409 $ 6,741 4.40% $352,313 5.05%
NOW noninterest-bearing
accounts 34,763 -- -- 30,696 -- -- 42,410 --
NOW interest-beearing
accounts 22,792 185 1.62 22,752 191 1.68 22,025 1.61
Money market accounts 55,183 915 3.31 63,943 1,038 3.26 55,179 3.31
- ----------------------------------------------------------------------------------------------------------
Total deposits 454,813 9,914 4.35 424,800 7,970 3.76 471,927 4.23
Funds borrowed:
Borrowed funds 150,057 4,866 6.38 164,382 4,731 5.69 133,492 6.37
Collateralized mortgage
obligations 3,686 246 13.35 5,286 337 12.75 3,439 13.85
- ----------------------------------------------------------------------------------------------------------
Total funds borrowed 153,743 5,112 6.55 169,668 5,068 5.91 136,931 6.56
- ----------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 608,556 15,026 4.90 594,468 13,038 4.38 608,858 4.76
Other liabilities 18,896 16,956 18,830
- -----------------------------------------------------------------------------------------------------------
Total liabilities 627,452 611,424 627,688
Stockholders' equity 52,870 47,760 54,341
- ----------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $680,322 $659,184 $682,029
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Net interest income/
interest rate spread $ 8,253 2.16% $ 9,315 2.64% 2.36%
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Net interest-earning assets/
net interest margin $ 50,711 2.50% $ 42,423 2.93%
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Interest-earning assets to
interest-bearing liabilities 1.08x 1.07x
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
<FN>
(1) Average balances include non-performing loans. Interest includes only actual interest recorded on such loans.
PAGE
Rate/Volume Analysis
The following table presents the extent to which changes in
interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Company's
interest income and interest expense during the periods indicated.
Information is provided in each category with respect to (i)
changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume), and (iii) the
net change. The changes attributable to the combined impact of
volume and rate have been allocated proportionately to the changes
due to volume and the changes due to rate.
Three Months Ended Six Months Ended
March 31, 1996 March 31, 1996
Compared to Compared to
Three Months Ended Six Months Ended
March 31, 1995 March 31, 1995
----------------------------- -----------------------------
Increase (Decrease) in Increase (Decrease) in
Net Interest Income Due To Net Interest Income Due To
(In thousands) Volume Rate Net Volume Rate Net
- -------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Mortgage loans, net $ 266 $ 42 $ 308 $1,007 $ 298 $ 1,305
Equity lines of credit 272 (29) 243 448 (15) 433
Consumer loans (85) (98) (183) (103) (75) (178)
Mortgage-backed securities (359) 35 (324) (764) 84 (680)
Interest-bearing deposits 136 41 177 249 166 415
Investment securities (139) 27 (112) (457) 88 (369)
- -------------------------------------------------------------------------------------------------
Total 91 18 109 380 546 926
- -------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits 366 451 817 603 1,341 1,944
Funds borrowed (385) 171 (214) (484) 528 44
- -------------------------------------------------------------------------------------------------
Total (19) 622 603 119 1,869 1,988
- -------------------------------------------------------------------------------------------------
Net change in net
interest income $ 110 $(604) $(494) $ 261 $(1,323) $(1,062)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Comparison of Operating Results for the Three Months Ended
March 31, 1996 and March 31, 1995
General
Net income totaled $1,201,000 for the three months ended March 31,
1996, as compared to $1,162,000 reported for the quarter ended
March 31, 1995. Net interest income for the three months ended
March 31, 1996 was $4.2 million, a decrease of $494,000 from the
March 31, 1995 quarter of $4.7 million.
Interest Income
Interest income for the quarter ended March 31, 1996 totaled $11.5
million, an increase of $109,000, or 1.0%, from the prior year's
quarter. Interest income on mortgage loans increased $308,000, or
3.1%, to $10.1 million from the comparable quarter of 1995. This
increase resulted primarily from an increase of $15.0 million, or
2.7% in the average mortgage loan portfolio, to $570.4 million when
comparing the 1996 and 1995 periods. The annualized average yield
on the mortgage loan portfolio increased slightly to 7.08% for the
three months ended March 31, 1996, from 7.05% for the 1995 period.
Interest income on equity lines of credit increased $243,000, or
61.5%, to $638,000 from the prior year's quarter. As a result of
the Bank's promotion of this product, the average balance of equity
lines of credit increased $12.4 million, or 71.6%, to $29.8 million
from $17.4 million from the comparable quarter of 1995. Interest
income on consumer loans decreased $183,000 to $194,000 for the
three months ended March 31, 1996. The decrease is primarily the
result of the sale in March 1996 of the Bank's credit card
portfolio. Interest income on mortgage-backed securities for the
three months ended March 31, 1996 decreased $324,000 to $153,000
from the comparable quarter of 1995. The annualized average yield
on the mortgage-backed securities portfolio increased to 8.16% for
the three months ended March 31, 1996, from 7.56% for the
comparable 1995 period. The increase in yield is primarily a
result of sales in fiscal 1995 of lower coupon
PAGE
fixed-rate collateralized mortgage obligations. The average
balance of the mortgage-backed securities portfolio for the 1996
period decreased $17.7 million, or 70.3%, to $7.5 million from the
prior year's period. The average balance of the investment
securities portfolio for the 1996 period decreased $8.9 million, or
44.8%, to $11.0 million compared to the three months ended March
31, 1995 as a result of maturities and sales in the portfolio.
Interest Expense
Interest expense on deposit accounts increased $817,000, or 19.8%,
to $4.9 million, for the quarter ended March 31, 1996 compared to
the prior year's quarter. The annualized average cost of deposits
for the three months ended March 31, 1996 was 4.29%, an increase
from the annualized average cost of 3.91% for the comparable 1995
period. The average deposit base increased $33.7 million to $460.8
million during the 1996 period. For the quarter ended March 31,
1996, the Company recorded interest expense on borrowed funds of
$2.3 million on an average balance of $141.8 million at an
annualized cost of 6.31% primarily related to Federal Home Loan
Bank of Chicago ("FHLB") advances. The average balance of the
Collateralized Mortgage Obligations ("CMO") bonds outstanding
decreased $1.6 million, or 32.0%, to $3.4 million for the three
months ended March 31, 1996 compared to the 1995 period, due to
payments and prepayments of the mortgage-backed securities held as
collateral for the bonds. The interest expense on the CMO bonds
for the 1996 period decreased $42,000 to $117,000 compared to the
three months ended March 31, 1995. The annualized average cost on
the CMO bonds increased to 13.67% for the 1996 quarter from 12.64%
for the three months ended March 31, 1995, due to adjustments to
the discount on the bonds for changes in the estimated average
maturities of the collateral.
Net Interest Income
Net interest income for the three months ended March 31, 1996
decreased $494,000, or 10.6%, to $4.2 million from the comparable
1995 period. The annualized average yield on interest-earning
assets decreased from 7.08% to 6.98% when comparing the 1995 and
1996 quarters. The annualized average cost of interest-bearing
liabilities increased to 4.82% from 4.53%. This resulted in an
annualized average net interest rate spread of 2.16% for the three-
month period ended March 31, 1996 compared to 2.55% for the
comparable prior year's period. The average balance of interest-
earning assets increased $15.8 million, when comparing 1996 to
1995, primarily due to the increase in mortgage loans and equity
lines of credit. Interest-bearing liabilities increased $8.4
million during the same period primarily due to the increase in
deposits.
Provision for Loan Losses
Based on management's evaluation of the loan portfolio, no
provision for loan losses was recorded during the quarter ended
March 31, 1996. A $50,000 provision had been recorded in the 1995
period. The amount of non-performing loans at March 31, 1996, was
$866,000, or 0.13% of total loans, compared to $1,476,000 or 0.25%
of total loans at March 31, 1995.
Noninterest Income
Total noninterest income for the three months ended March 31, 1996
was $3.6 million, an increase of $2,538,000 from the 1995 period.
The quarter ended March 31, 1996 included gains on sales of loans
of $210,000, of which $183,000 was the result of the sale of the
Bank's credit card portfolio. This compares to a gain on sales of
loans held for sale of $43,000 from the prior year's quarter. Fees
and commissions increased $2,252,000 for the quarter ended March
31, 1996 primarily due to loan origination fees contributed by
Preferred. Other noninterest income for the quarter ended March
31, 1996 included a $104,000 tax refund and $53,000 from the
redemption of an equity investment.
Noninterest Expense
Noninterest expense for the quarter ended March 31, 1996 totaled
$5.8 million, an increase of $2.1 million from the prior year's
comparable quarter primarily related to the operations of
Preferred.
PAGE
Comparison of Operating Results for the Six Months Ended
March 31, 1996 and March 31, 1995
General
Net income totaled $2,223,000 for the six months ended March 31,
1996, as compared to $2,419,000 reported for the six months ended
March 31, 1995. Net interest income for the six months ended March
31, 1996 was $8.3 million, a decrease of $1.0 million from the six
months ended March 31, 1995 of $9.3 million.
Interest Income
Interest income for the six months ended March 31, 1996 totaled
$23.3 million, an increase of $926,000, or 4.1%, from the prior
year's six months. Interest income on mortgage loans increased
$1.3 million, or 6.8%, to $20.4 million from the comparable six
months of 1995. This increase resulted primarily from an increase
of $28.8 million, or 5.3% in the average mortgage loan portfolio,
to $573.1 million when comparing the 1996 and 1995 periods. The
annualized average yield on the mortgage loan portfolio increased
to 7.12% for the six months ended March 31, 1996, from 7.01% for
the 1995 period. Interest income on equity lines of credit
increased $433,000, or 58.0%, to $1.2 million from the prior year's
period. As a result of the Bank's promotion of this product, the
average balance of equity lines of credit increased $10.1 million,
or 60.3%, to $26.9 million from $16.8 million from the comparable
period of 1995. Interest income on consumer loans decreased
$178,000 to $520,000 for the six months ended March 31, 1996. The
decrease is primarily the result of the sale in March 1996 of the
Bank's credit card portfolio. Interest income on mortgage-backed
securities for the six months ended March 31, 1996 decreased
$680,000 to $314,000 from the comparable six months of 1995. The
annualized average yield on the mortgage-backed securities
portfolio increased to 8.26% for the six months ended March 31,
1996, from 7.57% for the comparable 1995 period. The increase in
yield is primarily a result of sales in fiscal 1995 of lower coupon
fixed-rate collateralized mortgage obligations. The average
balance of the mortgage-backed securities portfolio for the 1996
period decreased $18.7 million, or 71.1%, to $7.6 million from the
prior year's period. The average balance of the investment
securities portfolio for the 1996 period decreased $14.3 million,
or 56.3%, to $11.1 million compared to the six months ended March
31, 1995 as a result of maturities and sales in the portfolio.
Interest Expense
Interest expense on deposit accounts increased $1.9 million, or
24.4%, to $9.9 million, for the six months ended March 31, 1996
compared to the prior year's period. The annualized average cost
of deposits for the six months ended March 31, 1996 was 4.35%, an
increase from the annualized average cost of 3.76% for the
comparable 1995 period. The average deposit base increased $30.0
million to $454.8 million during the 1996 period. For the six
months ended March 31, 1996, the Company recorded interest expense
on borrowed funds of $4.9 million on an average balance of $150.1
million at an annualized cost of 6.38% primarily related to Federal
Home Loan Bank of Chicago ("FHLB") advances. The average balance
of the Collateralized Mortgage Obligations ("CMO") bonds
outstanding decreased $1.6 million, or 30.3%, to $3.7 million for
the six months ended March 31, 1996 compared to the 1995 period,
due to payments and prepayments of the mortgage-backed securities
held as collateral for the bonds. The interest expense on the CMO
bonds for the 1996 period decreased $91,000 to $246,000 compared to
the six months ended March 31, 1995. The annualized average cost
on the CMO bonds increased to 13.35% for the 1996 period from
12.75% for the six months ended March 31, 1995, due to adjustments
to the discount on the bonds for changes in the estimated average
maturities of the collateral.
Net Interest Income
Net interest income for the six months ended March 31, 1996
decreased $1.0 million, or 11.4%, to $8.3 million from the
comparable 1995 period. The annualized average yield on interest-
earning assets increased from 7.02% to 7.06% when comparing the
1995 and 1996 periods. The annualized average cost of interest-
bearing liabilities increased to 4.90% from 4.38%. This resulted
in an annualized average net interest rate spread of 2.16% for the
six-month period ended March 31, 1996 compared to 2.64% for the
comparable prior year's period. The average balance of interest-
earning assets increased $22.4 million, when comparing 1996 to
1995, primarily due to the increase in mortgage loans and equity
lines of credit. Interest-bearing liabilities increased $14.1
million during the same period primarily due to the increase in
deposits.
PAGE
Provision for Loan Losses
Based on management's evaluation of the loan portfolio, a provision
of $50,000 for loan losses was recorded during the six months ended
March 31, 1996. A $85,000 provision had been recorded in the 1995
period. The amount of non-performing loans at March 31, 1996, was
$866,000, or 0.13% of total loans, compared to $1,476,000 or 0.25%
of total loans at March 31, 1995.
Noninterest Income
Total noninterest income for the six months ended March 31, 1996
was $6.5 million, an increase of $4,395,000 from the 1995 period.
The six months ended March 31, 1996 included gains on sales of
loans of $308,000, of which $183,000 was the result of the sale of
the Bank's credit card portfolio. This compares to a gain on sales
of loans held for sale of $24,000 from the prior year's period.
Fees and commissions increased $3,791,000 for the six months ended
March 31, 1996 primarily due to loan origination fees contributed
by Preferred. Other noninterest income for the six months ended
March 31, 1996 included a $392,000 tax refund and $53,000 from the
redemption of an equity investment.
Noninterest Expense
Noninterest expense for the six months ended March 31, 1996 totaled
$11.1 million, an increase of $3.7 million from the prior year's
comparable period primarily related to the operations of Preferred.
Part II - Other Information
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Shareholders on
February 14, 1996.
(b) The names of each director elected at the Annual
Meeting are as follows:
William R. Rybak
Donald E. Sveen
The names of each of the directors whose term of office
continued after the Annual Meeting are as follows:
Thomas R. Anderson Howard R. Jones
Kenne P. Bristol Russell F. Stephens, Jr.
Howard A. Davis
PAGE
(c) The following matters were voted upon at the Annual
Meeting and the number of affirmative votes and
negative votes cast (there were no broker non-votes)
with the respect to each matter is as follows:
(i) The election of two directors for terms of three
years each:
For Withheld
William R. Rybak 2,468,918 99,374
Donald E. Sveen 2,468,606 99,686
(ii) Ratification of the appointment of KPMG Peat
Marwick, LLP as the Company's independent auditors
for the fiscal year ending September 30,1996:
For Against Abstain
2,469,078 58,502 40,712
(iii) Shareholder proposal:
For Against
91,975 2,476,317
(d) None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No. 11 Statement re: Computation of Per Share
Earnings
Quarter Ended Six Months Ended
March 31, 1996 March 31, 1996
-------------- ----------------
Net income $1,201,000 $2,223,000
---------- ----------
---------- ----------
Weighted average common shares outstanding 2,683,493 2,682,062
Common stock equivalents due to dilutive
effect of stock options 109,708 112,003
---------- ----------
Total weighted average common shares
and equivalents outstanding 2,793,201 2,794,065
---------- ----------
---------- ----------
Primary earnings per share $ 0.43 $ 0.80
---------- ----------
---------- ----------
Total weighted average common shares
and equivalents outstanding 2,793,201 2,794,065
Additional dilutive shares using end of
period market value versus average market
value for the period when utilizing the
treasury stock method regarding stock
options -- --
---------- ----------
Total weighted average common shares
and equivalents outstanding for fully
diluted computation 2,793,201 2,794,065
---------- ----------
---------- ----------
Fully diluted earnings per share $ 0.43 $ 0.80
---------- ----------
---------- ----------
(b) Reports on Form 8-K.
None.
PAGE
SIGNATURES
Pursuant to the requirements 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.
Hinsdale Financial Corporation
Dated: May 1, 1996 (s) Kenne P. Bristol
----------- ----------------
Kenne P. Bristol
President and
Chief Executive Officer
Dated: May 1, 1996 (s) Richard A. Hojnicki
----------- -------------------
Richard A. Hojnicki
Executive Vice President and
Chief Financial Officer