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 June 30, 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)
(630) 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 --2,691,085 shares outstanding
as of August 8, 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 June 30, 1996 and September 30, 1995 1
Consolidated Statements of Income for the Three
and Nine Months Ended June 30, 1996 and 1995 2
Consolidated Statements of Changes in
Stockholders' Equity for the Nine Months Ended
June 30, 1996 and 1995 3
Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 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
June 30, September 30,
(In thousands, except share data) 1996 1995
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(unaudited)
ASSETS
Cash and due from banks $ 5,048 $ 5,427
Interest-bearing deposits 27,248 50,845
Investment securities available for sale, at market value 1,998 1,998
Mortgage-backed securities available for sale, at market value 5,654 7,147
Loans, net of allowance for losses of $2,407 at
June 30, 1996 and $2,589 at September 30, 1995 599,378 614,371
Accrued interest receivable 3,742 3,275
Real estate 2,020 1,872
Premises and equipment, net 6,286 5,756
Stock in Federal Home Loan Bank of Chicago, at cost 6,995 9,215
Other assets 4,113 3,801
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$662,482 $703,707
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $466,109 $445,505
Borrowed funds 121,599 185,339
Collateralized mortgage obligations 3,003 4,353
Advances by borrowers for taxes and insurance 8,405 8,385
Accrued expenses and other liabilities 7,903 8,148
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Total liabilities 607,019 651,730
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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 June 30, 1996 22 22
Additional paid-in capital 20,950 20,861
Retained earnings, substantially restricted 36,324 32,971
Treasury stock, at cost (95,000 shares) (1,284) (1,284)
Common stock purchased by:
Employee Stock Ownership Plan (557) (686)
Bank Recognition and Retention Plans (86) (86)
Net unrealized gains on securities available for sale, net of tax 94 179
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Total stockholders' equity 55,463 51,977
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$662,482 $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 Nine Months Ended
June 30, June 30,
(In thousands, except per share amounts) 1996 1995 1996 1995
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(unaudited)
INTEREST INCOME:
Loans $ 10,669 $ 10,822 $ 32,755 $ 31,348
Mortgage-backed securities 158 432 472 1,426
Investment securities 147 241 512 975
Interest-bearing deposits 328 285 842 384
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Total interest income 11,302 11,780 34,581 34,133
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INTEREST EXPENSE:
Deposits 4,902 4,593 14,816 12,563
Borrowed funds 2,051 2,737 6,917 7,468
Collateralized mortgage obligations 103 149 349 486
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Total interest expense 7,056 7,479 22,082 20,517
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Net interest income 4,246 4,301 12,499 13,616
Provision for loan losses -- 75 50 160
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Net interest income after provision for loan losses 4,246 4,226 12,449 13,456
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NONINTERET INCOME:
Gain (loss) on sales of loans and
mortgage-backed securities (8) 295 300 319
Loss on sales of investment securities -- -- -- (18)
Income from real estate operations 77 174 250 468
Servicing fee income 114 89 329 317
Fees and commissions 2,822 1,406 8,219 3,012
Other 15 (245) 471 (225)
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Total noninterest income 3,020 1,719 9,569 3,873
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NONINTEREST EXPENSE:
Compensation and benefits 3,286 2,366 9,518 6,245
Occupancy expense 742 533 2,187 1,527
Federal deposit insurance premiums 268 245 785 738
Computer services 129 138 402 446
Other 1,434 880 4,055 2,613
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Total noninterest expense 5,859 4,162 16,947 11,569
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Income before income taxes 1,407 1,783 5,071 5,760
Income tax expense 275 718 1,716 2,276
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Net income $ 1,132 $ 1,065 $ 3,355 $ 3,484
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Primary earnings per share $ 0.40 $ 0.38 $ 1.20 $ 1.26
Fully diluted earnings per share $ 0.40 $ 0.38 $ 1.19 $ 1.26
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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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Nine Months Ended June 30, 1995 (Unaudited)
Balance at September 30, 1994 $ 22 $20,553 $28,512 $(1,284) $(857) $(230) $ -- $46,716
Net income -- -- 3,484 -- -- -- -- 3,484
Proceeds from exercise of
stock options -- 123 -- -- -- -- -- 123
Tax benefit from stock related
compensation -- 7 -- -- -- -- -- 7
Distribution of BRP stock awards -- -- -- -- -- 20 -- 20
Principal payment on ESOP loan -- -- -- -- 128 -- -- 128
Cumulative effect of change in
accounting for securities
available for sale, net of tax -- -- -- -- -- -- (234) (234)
Change in net unrealized gains
on securities available for
sale, net of tax -- -- -- -- -- -- 392 392
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Balance at June 30, 1995 $ 22 $20,683 $31,996 $(1,284) $(729) $(210) $ 158 $50,636
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Nine Months Ended June 30, 1996
Balance at September 30, 1995 $ 22 $20,861 $32,971 $(1,284) $(686) $ (86) $ 179 $51,977
Net income -- -- 3,355 -- -- -- -- 3,355
Proceeds from exercise of
stock options -- 81 -- -- -- -- -- 81
Tax benefit from stock related
compensation -- 8 -- -- -- -- -- 8
Principal payment on ESOP loan -- -- -- -- 129 -- -- 129
25% stock dividend related to
fractional shares -- -- (2) -- -- -- -- (2)
Change in net unrealized gains
on securities available for
sale, net of tax -- -- -- -- -- -- (85) (85)
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Balance at June 30, 1996 $ 22 $20,950 $36,324 $(1,284) $(557) $ (86) $ 94 $55,463
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See accompanying notes to unaudited consolidated financial statements.
PAGE
HINSDALE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30,
(In thousands) 1996 1995
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(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES: $ 3,355 $ 3,484
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 839 651
Amortization of deferred gain (65) (293)
Provision for loan losses 50 160
Amortization of premiums, discounts, and deferred loan fees 299 (43)
Additions to deferred fees (383) (230)
Amortization of collateralized mortgage obligations discount 124 151
Originations of loans held for sale (344,238) (41,883)
Sale of loans originated for resale 346,274 32,052
Sale of mortgage-backed securities held for sale -- 20,214
Sale of investment securities available for sale -- 14,957
Gain on sales of loans and mortgage-backed securities (300) (319)
Loss on sales of investment securities -- 18
(Increase) decrease in Stock in Federal
Home Loan Bank of Chicago 2,220 (1,175)
Increase in accrued interest receivable (467) (275)
(Increase) decrease in other assets (404) 1,974
Increase (decrease) in accrued expenses and other liabilities (128) 1,017
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Net cash provided by operating activities 7,176 30,460
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of loans 4,803 8,921
Loans originated for investment (59,953) (32,561)
Loans purchased (3,628) (62,223)
Purchase of premises and equipment (1,206) (673)
Purchase of business, net of cash acquired -- (1,890)
Principal collected on loans 71,839 39,851
Principal collected on mortgage-backed securities 1,375 3,569
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Net cash provided by (used in) investing activities 13,230 (45,006)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 20,604 25,577
Proceeds from borrowed funds 9,000 113,537
Repayment of borrowed funds (72,740) (103,328)
Repayment of collateralized mortgage obligations (1,474) (1,583)
Net increase in advance payments by borrowers
for taxes and insurance 20 6,100
Decrease in ESOP loan 129 128
Cash paid in lieu of fractional shares related to 25%
common stock dividend (2) --
Proceeds from options exercised 81 123
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Net cash provided by (used in) financing activities (44,382) 40,554
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Net increase (decrease) in cash and cash equivalents (23,976) 26,008
Cash and cash equivalents at beginning of period 56,272 20,385
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Cash and cash equivalents at end of period $ 32,296 $ 46,393
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest paid $ 22,273 $ 20,241
Income taxes 2,008 1,981
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Loans exchanged for mortgage-backed securities $ 30,780 $ 7,044
Additions to real estate acquired in settlement of loans 159 --
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See accompanying notes to unaudited consolidated financial statements.
HINSDALE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended June 30, 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 nine
months ended June 30, 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.
HINSDALE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended June 30, 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,
$321,722 was capitalized as mortgage servicing rights during the
nine months ended June 30, 1996. The following reflects
capitalized servicing rights activity for the nine months ended
June 30, 1996 and 1995:
1996 1995
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Balance at beginning of year $ 191,446 $ --
Additions 321,722 110,479
Amortization (74,839) (10,652)
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Balance at end of period $ 438,329 $ 99,827
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The fair value of the servicing rights accounted for under SFAS No.
122 at June 30, 1996 is $369,929. The fair value of the servicing
rights acquired prior to October 1, 1995 at June 30, 1996 is
$139,553. As a result of the evaluation of the fair value of the
mortgage servicing rights at June 30, 1996, there was no valuation
allowance for mortgage servicing rights established.
(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 June 30, 1996 nor during the nine months ended June 30,
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 Nine Months Ended June 30, 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 one of the largest mortgage brokers 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 June 30, 1996, the Company had outstanding commitments to
originate and purchase loans of $47.1 million, of which $19.8
million were fixed-rate and $27.3 million were adjustable-rate
commitments. Unused equity lines of credit available to customers
were $48.8 million at June 30, 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
has improved from quarter to quarter through fiscal 1996.
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, one of the largest
mortgage brokers 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.
On August 2, 1996, the Company announced an agreement to merge
Liberty Bancorp, Inc. into the Company under the name Alliance
Bancorp. For further details, See "Part II, Item 5., Other
Information".
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 7.96% for the quarter ended June 30, 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 June 30, 1996,
cash and cash equivalents totaled $32.3 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
provided by operating activities, consisting primarily of interest
and dividends received less interest paid on deposits, and the
origination and sale of loans, were $7.2 million for the nine
months ended June 30, 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
$13.2 million for the nine months ended June 30, 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 $44.4
million for the nine months ended June 30, 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
June 30, 1996 the Company had forward commitments to sell $2.0
million FNMA mortgage-backed securities with delivery dates in July
and August 1996.
The Bank's Tangible capital ratio at June 30, 1996 was 7.64%. This
exceeded the Tangible capital requirement of 1.5% of adjusted
assets by $40.6 million. The Bank's Leverage capital ratio at June
30, 1996 was 7.87%. This exceeded the Leverage capital requirement
of 3.0% of adjusted assets by $32.3 million. The Bank's Risk-based
capital ratio was 13.71% at June 30, 1996. The Bank currently
exceeds the Risk-based capital requirement of 8.0% of Risk-weighted
assets by $22.3 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 June
30, 1996, the special assessment could cause a charge to earnings
of approximately $3.7 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 $662.5 million at June 30,
1996 a decrease of $41.2 million, or 5.9%, from September 30, 1995,
primarily as a result of the repayment of FHLB advances and
external warehouse lines of credit. The loan portfolio decreased
$15.0 million from $614.4 million at September 30, 1995, to $599.4
million at June 30, 1996. For the current nine-month period, loans
originated and purchased were $407.8 million, which were offset by
principal reductions of $71.8 million and the sale of $351.1
million loans.
Deposits increased $20.6 million, or 4.6%, to $466.1 million at
June 30, 1996 from $445.5 million at September 30, 1995. The
average cost of deposits was 4.31% for the nine months ended June
30, 1996. This represents a slight decrease from the average cost
of deposits of 4.35% reported for the nine months ended June 30,
1996. The Bank decreased borrowings from the FHLB by $41.8 million
and warehouse lines of credit by $21.9 million from September 30,
1995.
Stockholders' equity totaled $55.5 million at June 30, 1996. The
number of common shares outstanding were 2,690,155 and book value
per common share outstanding was $20.62 per share.
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
-------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(Dollars in thousands) 1996 1996 1995 1995 1995
- -------------------------------------------------------------------------------------------------
Non-accrual mortgage loans
90 days or more past due $ 731 $ 866 $1,089 $1,237 $1,010
Non-accrual consumer loans
90 days or more past due -- -- 56 63 47
- -------------------------------------------------------------------------------------------------
Total non-performing loans 731 866 1,145 1,300 1,057
Total foreclosed real estate 160 -- -- --(1) 4,321
- -------------------------------------------------------------------------------------------------
Total non-performing assets $ 891 $ 866 $1,145 $1,300 $5,378
Total non-performing loans
to total loans 0.12% 0.13% 0.18% 0.21% 0.17%
Total non-performing assets
to total assets 0.l3% 0.13% 0.17% 0.18% 0.76%
<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 June 30, 1996, the Company had total classified assets of
$1.0 million, all of which were classified "substandard".
Substandard assets consisted of $0.8 million of real estate held
for development and sale and a $0.2 million foreclosed single
family residential loan (real estate owned).
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 June 30, 1996, savings certificates with original
maturities of three months or more totaled $266.1 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 17% at June 30, 1996.
The following table sets forth the amounts of interest-earning
assets and interest-bearing liabilities outstanding at June 30,
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 June 30, 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 June 30, 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) $ 158,753 $330,135 $ 43,304 $ 22,268 $554,460
Consumer loans (1) 43,694 842 591 1,467 46,594
Mortgage-backed securities (2) 1,160 1,595 1,032 1,720 5,507
Interest-bearing deposits 27,248 -- -- -- 27,248
Investment securities (2) 8,997 -- -- -- 8,997
- -------------------------------------------------------------------------------------------------
Total interest-earning assets 239,852 332,572 44,927 25,455 642,806
INTEREST-BEARING LIABILITIES:
Regular savings accounts 14,205 21,576 14,065 33,713 83,559
NOW interest-bearing accounts 8,086 7,402 1,980 4,387 21,855
Money market accounts 42,771 5,956 2,836 2,577 54,140
Certificate accounts 185,085 33,963 47,017 -- 266,065
Borrowed funds 99,214 17,342 5,043 -- 121,599
Collateralized mortgage
obligations 2,127 876 -- -- 3,003
- -------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 351,488 87,115 70,941 40,677 550,221
- -------------------------------------------------------------------------------------------------
Interest sensitivity gap $(111,636) $245,457 $(26,014) $(15,222) $ 92,585
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Cumulative interest
sensitivity gap $(111,636) $133,821 $107,807 $ 92,585
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Cumulative interest
sensitivity gap as a
percentage of total assets (16.85)% 20.20% 16.28% 13,98%
Cumulative net interest-earning
assets as a percentage of
interest-sensitive liabilities 68.24% 130.51% 121.16% 116.83%
- -------------------------------------------------------------------------------------------------
<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 nine months ended June 30, 1996
to the nine months ended June 30, 1995. However, as a result of
interest rates stabilizing in the last half of 1995, net interest
income has improved when comparing each quarter's results for
fiscal 1996.
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 June 30,
-----------------------------------------------------
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) $554,496 $ 9,827 7.09% $564,788 $10,032 7.10%
Equity lines of credit (1) 36,636 739 8.09 18,991 448 9.46
Consumer loans (1) 5,390 103 7.64 11,944 342 11.45
Mortgage-backed securities 7,820 158 8.08 22,938 432 7.53
Interest-bearing deposits 35,295 328 3.68 29,368 285 3.84
Investment securities 8,997 147 6.55 16,492 241 5.85
- -----------------------------------------------------------------------------------
Total interest-earning assets 648,634 11,302 6.97 664,521 11,780 7.09
Noninterest-earning assets 21,278 22,642
- -----------------------------------------------------------------------------------
Total assets $669,912 $687,163
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing liabilities
Deposits:
Savings accounts $349,375 $ 4,375 5.03% $323,212 $ 3,996 4.96%
NOW noninterest-bearing
accounts 36,691 -- -- 31,876 -- --
NOW interest-beearing
accounts 23,175 90 1.56 23,225 96 1.66
Money market accounts 54,613 437 3.21 59,458 501 3.38
- -----------------------------------------------------------------------------------
Total deposits 463,854 4,902 4.24 437,771 4,593 4.21
Funds borrowed:
Borrowed funds 127,571 2,051 6.36 173,976 2,737 6.22
Collateralized mortgage
obligations 2,990 103 13.78 4,615 149 12.91
- -----------------------------------------------------------------------------------
Total funds borrowed 130,561 2,154 6.53 178,591 2,886 6.40
- -----------------------------------------------------------------------------------
Total interest-bearing
liabilities 594,415 7,056 4.74 616,362 7,479 4.84
Other liabilities 20,765 20,796
- -----------------------------------------------------------------------------------
Total liabilities 615,180 637,158
Stockholders' equity 54,732 50,005
- -----------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $669,912 $687,163
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Net interest income/
interest rate spread $ 4,246 2.23% $ 4,301 2.25%
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Net interest-earning assets/
net interest margin $ 54,219 2.62% $ 48,159 2.59%
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
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.
Nine Months Ended June 30, At June 30,
----------------------------------------------------- --------------
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) $566,899 $30,214 7.11% $551,136 $29,114 7.04% $552,783 7.20%
Equity lines of credit (1) 30,150 1,918 8.47 17,518 1,194 9.11 41,383 8.11
Consumer loans (1) 8,690 623 9.56 12,173 1,040 11.39 5,212 8.73
Mortgage-backed securities 7,673 472 8.20 25,148 1,426 7.56 5,654 8.76
Interest-bearing deposits 31,911 842 3.47 17,707 384 2.86 27,248 5.32
Investment securities 10,398 512 6.56 22,418 975 5.80 8,993 6.56
- -----------------------------------------------------------------------------------------------
Total interest-earning assets 655,721 34,581 7.03 646,100 34,133 7.04 641,273 7.20
Noninterest-earning assets 21,128 22,409 21,209
- -----------------------------------------------------------------------------------------------
Total assets $676,849 $668,509 $662,482
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing liabilities
Deposits:
Savings accounts $344,508 $13,189 5.10% $312,676 $10,737 4.59% $349,624 4.98%
NOW noninterest-bearing
accounts 35,405 -- -- 31,089 -- -- 40,490 --
NOW interest-beearing
accounts 22,919 275 1.60 22,909 287 1.67 21,855 1.61
Money market accounts 54,993 1,352 3.28 62,448 1,539 3.29 54,140 3.30
- -----------------------------------------------------------------------------------------------
Total deposits 457,825 14,816 4.31 429,122 12,563 3.91 466,109 4.19
Funds borrowed:
Borrowed funds 142,561 6,917 6.38 167,580 7,468 5.88 121,599 6.45
Collateralized mortgage
obligations 3,454 349 13.47 5,062 486 12.80 3,003 13.86
- -----------------------------------------------------------------------------------------------
Total funds borrowed 146,015 7,266 6.54 172,642 7,954 6.08 124,602 6.63
- -----------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 603,840 22,082 4.85 601,764 20,517 4.54 590,711 4.71
Other liabilities 19,519 18,237 16,308
- ---------------------------------------------------------------------------------------------------
Total liabilities 623,359 620,001 607,019
Stockholders' equity 53,490 48,508 55,463
- -----------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $676,849 $668,509 $662,482
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Net interest income/
interest rate spread $12,499 2.18% $13,616 2.50% 2.49%
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Net interest-earning assets/
net interest margin $ 51,881 2.54% $ 44,336 2.81%
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Interest-earning assets to
interest-bearing liabilities 1.09x 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 Nine months Ended
June 30, 1996 June 30, 1996
Compared to Compared to
Three Months Ended Nine months Ended
June 30, 1995 June 30, 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 $(190) $ (15) $(205) $ 816 $ 284 $ 1,100
Equity lines of credit 364 (73) 291 813 (89) 724
Consumer loans (149) (90) (239) (267) (150) (417)
Mortgage-backed securities (304) 30 (274) (1,066) 112 (954)
Interest-bearing deposits 55 (12) 43 362 96 458
Investment securities (120) 26 (94) (578) 115 (463)
- -------------------------------------------------------------------------------------------------
Total (344) (134) (478) 80 368 448
- -------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits 276 33 309 891 1,362 2,253
Funds borrowed (788) 56 (732) (1,261) 573 (688)
- -------------------------------------------------------------------------------------------------
Total (512) 89 (423) (370) 1,935 1,565
- -------------------------------------------------------------------------------------------------
Net change in net
interest income $ 168 $(223) $ (55) $ 450 $(1,567) $(1,117)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Comparison of Operating Results for the Three Months Ended
June 30, 1996 and June 30, 1995
General
Net income totaled $1,132,000 for the three months ended June 30,
1996, as compared to $1,065,000 reported for the quarter ended June
30, 1995. Net interest income for the three months ended June 30,
1996 was $4.2 million, a decrease of $55,000 from the June 30, 1995
quarter of $4.3 million.
Interest Income
Interest income for the quarter ended June 30, 1996 totaled $11.3
million, a decrease of $478,000, or 4.1%, from the prior year's
quarter. Interest income on mortgage loans decreased $205,000, or
2.0%, to $9.8 million from the comparable quarter of 1995. This
decrease resulted primarily from a decrease of $10.3 million, or
1.8% in the average mortgage loan portfolio, to $554.5 million when
comparing the 1996 and 1995 periods. The annualized average yield
on the mortgage loan portfolio decreased slightly to 7.09% for the
three months ended June 30, 1996, from 7.10% for the 1995 period.
Interest income on equity lines of credit increased $291,000, or
65.0%, to $739,000 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 $17.6 million, or 92.9%, to $36.6 million
from $19.0 million from the comparable quarter of 1995. Interest
income on consumer loans decreased $239,000 to $103,000 for the
three months ended June 30, 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 June 30, 1996 decreased $274,000 to $158,000
from the comparable quarter of 1995. The annualized average yield
on the mortgage-backed securities portfolio increased to 8.08% for
the three months ended June 30, 1996, from 7.53% 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 $15.1 million, or 65.9%,
to $7.8 million from the prior year's period. The average balance
of the investment securities portfolio for the 1996 period
decreased $7.5 million, or 45.5%, to $9.0 million compared to the
three months ended June 30, 1995 as a result of maturities and
sales in the portfolio.
Interest Expense
Interest expense on deposit accounts increased $309,000, or 6.7%,
to $4.9 million, for the quarter ended June 30, 1996 compared to
the prior year's quarter. The annualized average cost of deposits
for the three months ended June 30, 1996 was 4.24%, an increase
from the annualized average cost of 4.21% for the comparable 1995
period. The average deposit base increased $26.1 million to $463.9
million during the 1996 period. For the quarter ended June 30,
1996, the Company recorded interest expense on borrowed funds of
$2.1 million on an average balance of $127.6 million at an
annualized cost of 6.36% 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 35.2%, to $3.0 million for the three
months ended June 30, 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 $46,000 to $103,000 compared to the
three months ended June 30, 1995. The annualized average cost on
the CMO bonds increased to 13.78% for the 1996 quarter from 12.91%
for the three months ended June 30, 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 June 30, 1996
decreased $55,000 or 1.3%, to $4.2 million from the comparable 1995
period. The annualized average yield on interest-earning assets
decreased from 7.09% to 6.97% when comparing the 1995 and 1996
quarters. The annualized average cost of interest-bearing
liabilities decreased from 4.84% to 4.74%. This resulted in an
annualized average net interest rate spread of 2.23% for the three-
month period ended June 30, 1996 compared to 2.25% for the
comparable prior year's period. The average balance of interest-
earning assets decreased $15.9 million, when comparing 1996 to
1995, primarily due to the decrease in mortgage-backed and
investment securities. Interest-bearing liabilities decreased
$21.9 million during the same period primarily due to the decrease
in borrowed funds.
Provision for Loan Losses
Based on management's evaluation of the loan portfolio, no
provision for loan losses was recorded during the quarter ended
June 30, 1996. A $75,000 provision had been recorded in the 1995
period. The amount of non-performing loans at June 30, 1996, was
$731,000, or 0.12% of total loans, compared to $1,057,000 or 0.17%
of total loans at June 30, 1995.
Noninterest Income
Total noninterest income for the three months ended June 30, 1996
was $3.0 million, an increase of $1.3 million from the 1995 period.
The quarter ended June 30, 1996 included losses on sales of loans
of $8,000. This compares to a gains on sales of loans and
mortgage-backed securities held for sale of $295,000 for the prior
year's quarter. Fees and commissions increased $1.4 million for
the quarter ended June 30, 1996 primarily due to loan origination
fees contributed by Preferred. Other noninterest income for the
quarter ended June 30, 1995 included a $250,000 valuation write-
down of a 20 year old equity investment in a community
rehabilitation organization.
Noninterest Expense
Noninterest expense for the quarter ended June 30, 1996 totaled
$5.9 million, an increase of $1.7 million from the prior year's
comparable quarter primarily related to the operations of
Preferred.
Income Tax Provision
The income tax provision of $275,000 for the three months ended
June 30, 1996 reflects an accrual rate of 20%, as compared to an
accrual of 40% for the prior year's three months ended June 30,
1995. This decrease reflects an adjustment made in the third
quarter to decrease the rate of accrual for the nine months ended
June 30, 1996.
Comparison of Operating Results for the Nine Months Ended
June 30, 1996 and June 30, 1995
General
Net income totaled $3,355,000 for the nine months ended June 30,
1996, as compared to $3,484,000 reported for the nine months
ended June 30, 1995. Net interest income for the nine months
ended June 30, 1996 was $12.5 million, a decrease of $1.1
million from the nine months ended June 30, 1995 of $13.6
million.
Interest Income
Interest income for the nine months ended June 30, 1996 totaled
$34.6 million, an increase of $448,000, or 1.3%, from the prior
year's nine months. Interest income on mortgage loans increased
$1.1 million, or 3.8%, to $30.2 million from the comparable nine
months of 1995. This increase resulted primarily from an
increase of $15.8 million, or 2.9% in the average mortgage loan
portfolio, to $566.9 million when comparing the 1996 and 1995
periods. The annualized average yield on the mortgage loan
portfolio increased to 7.11% for the nine months ended June 30,
1996, from 7.04% for the 1995 period. Interest income on equity
lines of credit increased $724,000, or 60.6%, to $1.9 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 $12.6 million, or 72.1%, to $30.1 million
from $17.5 million from the comparable period of 1995. Interest
income on consumer loans decreased $417,000 to $623,000 for the
nine months ended June 30, 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 nine months ended June 30, 1996 decreased $954,000 to
$472,000 from the comparable nine months of 1995. The
annualized average yield on the mortgage-backed securities
portfolio increased to 8.20% for the nine months ended June 30,
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 fixed-rate collateralized mortgage obligations. The
average balance of the mortgage-backed securities portfolio for
the 1996 period decreased $17.5 million, or 69.5%, to $7.7
million from the prior year's period. The average balance of
the investment securities portfolio for the 1996 period
decreased $12.0 million, or 53.6%, to $10.4 million compared to
the nine months ended June 30, 1995 as a result of maturities
and sales in the portfolio.
Interest Expense
Interest expense on deposit accounts increased $2.3 million, or
17.9%, to $14.8 million, for the nine months ended June 30, 1996
compared to the prior year's period. The annualized average
cost of deposits for the nine months ended June 30, 1996 was
4.31%, an increase from the annualized average cost of 3.91% for
the comparable 1995 period. The average deposit base increased
$28.7 million to $457.8 million during the 1996 period. For the
nine months ended June 30, 1996, the Company recorded interest
expense on borrowed funds of $6.9 million on an average balance
of $142.6 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 31.8%, to
$3.5 million for the nine months ended June 30, 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 $137,000 to $349,000 compared to the nine months ended
June 30, 1995. The annualized average cost on the CMO bonds
increased to 13.47% for the 1996 period from 12.80% for the nine
months ended June 30, 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 nine months ended June 30, 1996
decreased $1.1 million, or 8.2%, to $12.5 million from the
comparable 1995 period. The annualized average yield on
interest-earning assets decreased to 7.03% from 7.04% when
comparing the 1995 and 1996 periods. The annualized average
cost of interest-bearing liabilities increased to 4.85% from
4.54%. This resulted in an annualized average net interest rate
spread of 2.18% for the nine-month period ended June 30, 1996
compared to 2.50% for the comparable prior year's period. The
average balance of interest-earning assets increased $9.6
million, when comparing 1996 to 1995, primarily due to the
increase in mortgage loans and equity lines of credit.
Interest-bearing liabilities increased $2.1 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, a
provision of $50,000 for loan losses was recorded during the
nine months ended June 30, 1996. A $160,000 provision had been
recorded in the 1995 period. The amount of non-performing loans
at June 30, 1996, was $731,000, or 0.12% of total loans,
compared to $1,057,000 or 0.17% of total loans at June 30, 1995.
Noninterest Income
Total noninterest income for the nine months ended June 30, 1996
was $9.6 million, an increase of $5.7 million from the 1995
period. The nine months ended June 30, 1996 included gains on
sales of loans of $300,000. This compares to gains on sales of
loans and mortgage-backed securities held for sale of $319,000
from the prior year's period. Fees and commissions increased
$5.2 million for the nine months ended June 30, 1996 primarily
due to loan origination fees contributed by Preferred. Other
noninterest income for the nine months ended June 30, 1996
included a $392,000 tax refund and $53,000 from the redemption
of an equity investment. This compares to a $250,000 valuation
write-down of a 20 year old equity investment in a community
rehabilitation organization recorded in the nine months ended
June 30, 1995.
Noninterest Expense
Noninterest expense for the nine months ended June 30, 1996
totaled $16.9 million, an increase of $5.4 million from the
prior year's comparable period primarily related to the
operations of Preferred.
Income Tax Provision
The income tax provision of $1.7 million for the nine months
ended June 30, 1996 reflects an accrual rate of 34%, as compared
to an accrual of 40% for the prior year's nine months ended June
30, 1995. This decrease reflects an adjustment made in the
third quarter to decrease the rate of accrual for the nine
months ended June 30, 1996.
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
Not Applicable.
Item 5. Other Information
On August 2, 1996, Hinsdale Financial Corporation
("Hinsdale"), the registrant, and Liberty Bancorp, Inc. ("Liberty")
announced an agreement to merge Liberty into Hinsdale under the
name "Alliance Bancorp" through an exchange of stock ("the
Merger"). Immediately following consummation of the Merger,
Liberty Federal Bank will be merged with and into Hinsdale Federal
Bank, with Hinsdale Federal Bank as the surviving savings
institution, which effective upon consummation of the transactions
contemplated hereby, will operate under the name "Liberty Federal
Bank". The Merger will be accounted for under the purchase method
of accounting. Under the Merger Agreement, Liberty shareholders
would receive 1.054 shares of common stock in Alliance Bancorp for
every share of stock they currently hold in Liberty. Hinsdale
shareholders would maintain one share of stock in Alliance Bancorp
for each share of stock of Hinsdale they own. Under this exchange
ratio, Liberty shareholders will receive a 49.3% ownership stake
in Alliance Bancorp.
Hinsdale and Liberty each granted the other an option to
purchase 19.9% of the shares of its common stock outstanding,
which option is exercisable only upon the occurrence of certain
events that would jeopardize completion of the Merger.
The Merger must be approved by shareholders of both
companies and is subject to regulatory review, including the
Office of Thrift Supervision and the Securities and Exchange
Commission. The transaction is expected to close in the first
quarter of calendar 1997.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No. 11 Statement re: Computation of Per
Share Earnings
Quarter Ended Nine Months Ended
June 30, 1996 June 30, 1996
Net income $1,132,000 $3,355,000
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- --------------------------------------------------------------------------------
Weighted average common shares
outstanding 2,690,155 2,684,750
Common stock equivalents due to dilutive
effect of stock options 112,870 112,291
- --------------------------------------------------------------------------------
Total weighted average common shares
and equivalents outstanding 2,803,025 2,797,041
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- ---------------------------------------------------------------------------------
Primary earnings per share $0.40 $1.20
Total weighted average common shares
and equivalents outstanding 2,803,025 2,797,041
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 13,710 14,289
- ---------------------------------------------------------------------------------
Total weighted average common shares
and equivalents outstanding
for fully diluted computation 2,816,735 2,811,330
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Fully diluted earnings per share $0.40 $1.19
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- ---------------------------------------------------------------------------------
(b) Reports on Form 8-K.
None.
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: August 8, 1996 (s)Kenne P. Bristol
----------------------
Kenne P. Bristol
President and
Chief Executive Officer
Dated: August 8, 1996 (s)Richard A. Hojnicki
----------------------
Richard A. Hojnicki
Executive Vice President and
Chief Financial Officer