1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1996 Commission File Number 0-22224
- --------------------------------------------------------------------------------
HALLMARK CAPITAL CORP.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1762467
(State of Incoproration) (I.R.S. Employer Indentification No.)
7401 West Greenfield Avenue
West Allis, Wisconsin 53214
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (414) 778-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
(1) Yes X No
--- ---
(2) Yes X No
--- ---
The number of shares outstanding of the issuer's common stock, par value
$1.00 per share, was 1,442,950 at November 5, 1996, the latest practicable
date.
- --------------------------------------------------------------------------------
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HALLMARK CAPITAL CORP. AND SUBSIDIARY
FORM 10-Q
Part I. Financial Information
---------------------
Item 1. Financial Statements (unaudited):
Consolidated Statements of Financial Condition
as of September 30, 1996 (unaudited) and June 30, 1996 . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income for the Three Months
ended September 30, 1996 and 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Shareholders' Equity
for the Three Months Ended September 30, 1996 and 1995 (unaudited) . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the Three Months
ended September 30, 1996 and 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Part II. Other Information
-----------------
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 3. Default Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . 26
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Signature Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
SEPTEMBER 30, JUNE 30,
1996 1996
-------------- -----------
ASSETS (Unaudited)
Cash and non-interest bearing deposits . . . . . . . . . . . . . . . $3,597 $2,136
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . 1,766 2,689
------ ------
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 5,363 4,825
Securities available-for-sale (at fair value):
Investment securities . . . . . . . . . . . . . . . . . . . . . . . 18,491 19,358
Mortgage-backed and related securities . . . . . . . . . . . . . . 14,946 17,926
Securities held-to-maturity:
Investment securities (fair value - $978 at
September 30, 1996 and June 30, 1996) . . . . . . . . . . . . . . 978 978
Mortgage-backed and related securities (fair value -
$93,656 at September 30, 1996; $97,239 at June 30, 1996) . . . . 93,572 97,332
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . 242,778 224,807
Investment in Federal Home Loan Bank stock, at cost . . . . . . . . . 5,119 5,119
Foreclosed properties, net . . . . . . . . . . . . . . . . . . . . . 24 0
Office properties and equipment . . . . . . . . . . . . . . . . . . . 2,932 2,939
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . 3,468 3,873
---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 387,671 $ 377,157
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 247,967 $ 229,675
Notes payable to Federal Home Loan Bank . . . . . . . . . . . . . . 96,586 102,386
Securities sold under agreements to repurchase . . . . . . . . . . 6,706 11,568
Advance payments by borrowers for taxes and insurance . . . . . . . 5,501 3,554
Accrued interest on deposit accounts and other borrowings . . . . . 1,609 1,523
Accrued expenses and other liabilities . . . . . . . . . . . . . . 2,121 1,440
---------- ----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . $ 360,490 $ 350,146
Shareholders' Equity:
Preferred stock, $1.00 par value; authorized 2,000,000 shares;
none outstanding . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock, $1.00 par value; authorized 6,000,000 shares;
issued 1,581,250 shares; outstanding 1,442,950 shares . . . . . . 1,581 1,581
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 10,492 10,465
Unearned ESOP compensation . . . . . . . . . . . . . . . . . . . . (713) (740)
Unearned restricted stock award . . . . . . . . . . . . . . . . . . (292) (334)
Net unrealized depreciation on securities available for sale . . . (464) (595)
Treasury stock, at cost: 138,300 shares . . . . . . . . . . . . . (1,592) (1,592)
Retained earnings, substantially restricted . . . . . . . . . . . . 18,169 18,226
---------- ---------
Total shareholders' equity . . . . . . . . . . . . . . . . $ 27,181 $ 27,011
---------- ---------
Total liabilities and shareholders' equity . . . . . . . . $ 387,671 $ 377,157
========== =========
See accompanying Notes to Consolidated Financial Statements
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HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for per share data)
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
1996 1995
--------- ----------
INTEREST INCOME:
Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,691 $2,872
Mortgage-backed and related securities . . . . . . . . . . . . . . . . 1,923 1,589
Securities and interest-bearing deposits . . . . . . . . . . . . . . . 451 544
------- -------
Total interest income . . . . . . . . . . . . . . . . . . . . . . 7,065 5,005
INTEREST EXPENSE:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,128 2,117
Advance payments by borrowers for taxes and insurance . . . . . . . . 31 28
Notes payable and other borrowings . . . . . . . . . . . . . . . . . . 1,622 1,204
------- -------
Total interest expense . . . . . . . . . . . . . . . . . . . . . . 4,781 3,349
------- -------
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,284 1,656
Provision for losses on loans . . . . . . . . . . . . . . . . . . . . . . . 184 25
------- -------
Net interest income after provision for losses on loans . . . . . . . . . . 2,100 1,631
NON-INTEREST INCOME:
Service charges on loans . . . . . . . . . . . . . . . . . . . . . . . 34 28
Service charges on deposit accounts . . . . . . . . . . . . . . . . . 129 120
Loan servicing fees, net . . . . . . . . . . . . . . . . . . . . . . . 22 28
Insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . 21 35
Gain on sale of securities and
mortgage-backed and related securities, net . . . . . . . . . . . . 7 4
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . . . 8 9
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 8
------- -------
Total non-interest income . . . . . . . . . . . . . . . . . . . . 238 232
NON-INTEREST EXPENSE:
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . 874 691
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 69
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . 238 200
Deposit insurance premiums . . . . . . . . . . . . . . . . . . . . . . 1,015 77
Other non-interest expense . . . . . . . . . . . . . . . . . . . . . 251 198
------- -------
Total non-interest expense . . . . . . . . . . . . . . . . . . . . 2,426 1,235
------- -------
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . (88) 628
Income tax (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . (31) 226
------- -------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ (57) $ 402
======= =======
Earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . $ (0.04) $ 0.29
======= =======
See accompanying Notes to Consolidated Financial Statements (unaudited)
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HALLMARK CAPITAL CORP. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
(In thousands)
(Unaudited)
Additional Unearned Unearned Unrealized
Common Paid-In ESOP Restricted Gains
Stock Capital Compensation Stock (Losses)
------- --------- ------------ ---------- ----------
THREE MONTHS ENDED SEPTEMBER 30, 1996
- -------------------------------------
Balance at June 30, 1996 . . . . . . . . . . . . . . . . $1,581 $10,465 ($740) ($334) ($595)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . - - - - -
Amortization of unearned ESOP and
restricted stock award compensation . . . . . . . . . . - 27 27 42 -
Unrealized appreciation on securities
available for sale, net of tax benefit . . . . . . . . - - - - 131
------ ------- ------ ------ -------
Balance at September 30, 1996 . . . . . . . . . . . . . . $1,581 $10,492 ($713) ($292) ($464)
====== ======= ====== ====== =======
THREE MONTHS ENDED SEPTEMBER 30, 1995
- -------------------------------------
Balance at June 30, 1995 . . . . . . . . . . . . . . . . $1,581 $10,360 ($861) ($502) ($74)
Net income . . . . . . . . . . . . . . . . . . . . . . . - - - - -
Amortization of unearned ESOP and
restricted stock award compensation . . . . . . . . . . - 23 26 42 -
Unrealized depreciation on securities
available for sale, net of tax benefit . . . . . . . . - - - - 30
------ ------- ------ ------ ------
Balance at September 30, 1995 . . . . . . . . . . . . . . $1,581 $10,383 ($835) ($460) ($44)
====== ======= ====== ====== ======
Treasury Retained
Stock Earnings Total
------- -------- ---------
THREE MONTHS ENDED SEPTEMBER 30, 1996
- -------------------------------------
Balance at June 30, 1996 . . . . . . . . . . . . . . . . ($1,592) $18,226 $27,011
Net loss . . . . . . . . . . . . . . . . . . . . . . . . - (57) (57)
Amortization of unearned ESOP and
restricted stock award compensation . . . . . . . . . . - - 96
Unrealized appreciation on securities
available for sale, net of tax benefit . . . . . . . . - - 131
------- ------- -------
Balance at September 30, 1996 . . . . . . . . . . . . . . ($1,592) $18,169 $27,181
======= ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 1995
- -------------------------------------
Balance at June 30, 1995 . . . . . . . . . . . . . . . . ($1,592) $16,348 $25,260
Net income . . . . . . . . . . . . . . . . . . . . . . . - 402 402
Amortization of unearned ESOP and
restricted stock award compensation . . . . . . . . . . - - 91
Unrealized depreciation on securities
available for sale, net of tax benefit . . . . . . . . - - 30
------- ------- -------
Balance at September 30, 1995 . . . . . . . . . . . . . . ($1,592) $16,750 $25,783
======= ======= =======
See accompanying Notes to Consolidated Financial Statements (unaudited)
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HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1996 1995
-------------- --------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (57) $ 402
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Provision for losses on loans . . . . . . . . . . . . . . . . . . . . . . . . . . 184 25
Provision for depreciation and amortization . . . . . . . . . . . . . . . . . . . 65 56
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 10
Net gain on sales of investments and
mortgage-backed and related securities . . . . . . . . . . . . . . . . . . . . (7) (4)
Net gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) (9)
Amortization of unearned ESOP and restricted stock awards . . . . . . . . . . . . 96 91
Loans originated for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . (560) (3,014)
Sales of loans originated for sale . . . . . . . . . . . . . . . . . . . . . . . 560 2,268
(Increase) decrease in prepaid expenses and other assets . . . . . . . . . . . . 321 (620)
Decrease in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 681 83
Other adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 337
-------- -------
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . 1,370 (375)
-------- -------
INVESTING ACTIVITIES
Purchases of securities available-for-sale . . . . . . . . . . . . . . . . . . . . 1,454 14,921
Proceeds from the maturity of securities available-for-sale . . . . . . . . . . . . 500 -
Purchases of securities available-for-sale . . . . . . . . . . . . . . . . . . . . (969) (13,767)
Purchases of mortgage-backed and related securities . . . . . . . . . . . . . . . . - (29,507)
Proceeds from sale of mortgage-backed and related securities . . . . . . . . . . . 435 -
Principal collected on mortgage-backed and related securities . . . . . . . . . . . 6,400 5,246
Net change in loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . (18,171) (12,474)
Purchase of Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . - (410)
Purchases of office properties and equipment, net . . . . . . . . . . . . . . . . . (58) (21)
------- -------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . (10,409) (36,012)
------- -------
FINANCING ACTIVITIES
Net increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,292 23,382
Proceeds from long-term notes payable to Federal Home Loan Bank . . . . . . . . . . 10,000 -
Net increase (decrease) in short-term notes
payable to Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . . . . . . (15,800) 10,700
Net decrease in securities sold under agreements to repurchase . . . . . . . . . . (4,862) (1,218)
Net increase in advance payments by borrowers for
taxes and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,947 1,423
------- -------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . 9,577 34,287
------- -------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . 538 (2,100)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . 4,825 6,820
------- -------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . $ 5,363 $ 4,720
======= =======
See accompanying Notes to Consolidated Financial Statements (unaudited)
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HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1995
---------- -----------
(IN THOUSANDS)
Supplemental disclosures of cash flow information:
Interest paid (including amounts credited to deposit accounts) . . . . . $4,665 $3,096
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . $367 $188
Non-cash transactions:
Mortgage loans securitized as mortgage-backed securities . . . . . . . . - $1,767
Loans transferred to foreclosed properties . . . . . . . . . . . . . . . $24 $71
Securities and mortgage-backed securities reclassified
to securities available-for-sale . . . . . . . . . . . . . . . . . . - -
See accompanying Notes to Consolidated Financial Statements (unaudited)
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HALLMARK CAPITAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles (GAAP) for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results for the interim
periods have been included.
The results of operations and other data for the three months ended September
30, 1996 are not necessarily indicative of results that may be expected for the
entire fiscal year ending June 30, 1997.
The unaudited consolidated financial statements include the accounts of
Hallmark Capital Corp. (the "Company") and its wholly-owned subsidiary, West
Allis Savings Bank and subsidiaries (the "Bank") as of and for the three months
ended September 30, 1996. All material intercompany accounts and transactions
have been eliminated in consolidation.
(2) EARNINGS PER SHARE
Earnings per share of common stock for the three months ended September 30,
1996 have been computed by dividing net income for the period by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. Stock options are regarded as common stock
equivalents and are therefore considered in per share calculations. Common
stock equivalents are computed using the treasury stock method. The
computation of earnings per share is as follows:
For the Three Months Ended September 30, 1996 Primary Fully Diluted
- --------------------------------------------- ------- -------------
Weighted average common shares outstanding . . . . . . 1,442,950 1,442,950
Ungranted restricted stock . . . . . . . . . . . . . . (9,231) (9,231)
Uncommitted ESOP shares . . . . . . . . . . . . . . . (89,307) (89,307)
Common stock equivalents due to dilutive effect
of stock options . . . . . . . . . . . . . . . . . . 73,503 80,519
--------- ----------
Total weighted average common shares
and equivalents outstanding . . . . . . . . . . . . 1,417,915 1,424,931
========= ==========
Net loss for period . . . . . . . . . . . . . . . . . ($57,000) ($57,000)
Loss per share . . . . . . . . . . . . . . . . . . . . ($0.04) ($0.04)
========= ==========
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(3) COMMITMENTS AND CONTINGENCIES
Commitments to originate mortgage loans of $5.0 million at September 30, 1996
represent amounts which the Bank expects to fund during the quarter ending
December 31, 1996. There were no commitments to sell fixed-rate mortgage loans
at September 30, 1996. The Bank had unissued credit under existing home equity
line-of-credit loans and credit card lines of $12.0 million and $6.7 million,
respectively, as of September 30, 1996. The Bank had no commitments to
purchase adjustable-rate or fixed-rate mortgage-backed and related securities
as of September 30, 1996.
(4) REGULATORY CAPITAL ANALYSIS
Under the Federal Deposit Insurance Corporation ("FDIC") capital regulations,
the Bank is required to meet the following capital standards: (1) "Tier 1
capital" in an amount not less than 3% of total assets; (2) "Tier 1 leverage
capital" in an amount not less than 4% of risk- weighted assets; and (3) "total
capital" in an amount not less than 8% of risk-weighted assets. Tier 1 capital
is defined to include the Bank's common shareholders' equity. Total capital is
defined to include Tier 1 capital plus the allowance for loan losses. The
risk-based capital requirements presently address credit risk related to both
recorded assets and off-balance sheet commitments and obligations. Risk-
weighted assets, for regulatory measurement purposes, at September 30, 1996,
totaled $210,401,000.
The Bank's regulatory capital as of September 30, 1996 was as follows (dollars
in thousands):
Tier 1 Total
Capital Capital
------- -------
Total consolidated shareholders' equity . . . . . . . . $ 27,181 $ 27,181
Less Holding Company shareholders' equity
not available for bank regulatory capital . . . . . . (4,235) (4,235)
Loan loss allowances . . . . . . . . . . . . . . . . . . - 1,374
Net unrealized depreciation on
available-for-sale debt securities . . . . . . . . . 448 448
-------- --------
Regulatory capital . . . . . . . . . . . . . . . . . $ 23,394 $ 24,768
======== ========
The following table summarizes the Bank's capital amounts and capital ratios,
and the capital ratios required by the FDIC at September 30, 1996 on a
fully-phased-in basis (dollars in thousands):
Actual Required Actual Required
Amount Amount Excess Ratio Ratio Excess
------ ------ ------ ----- ----- ------
Tier 1 capital leverage . . . . $23,394 $11,474 $11,920 6.12% 3.00% 3.12%
Tier 1 capital . . . . . . . . 23,394 8,416 14,978 11.12% 4.00% 7.12%
Total capital . . . . . . . . . 24,768 16,832 7,936 11.77% 8.00% 3.77%
As a state-chartered stock savings bank, the Bank is also subject to the
minimum regulatory capital requirements of the State of Wisconsin. At
September 30, 1996, on a fully-phased-in basis of 6.0%, the Bank had actual
capital of $24,320,000 with a required amount of $23,341,000.
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(5) LOANS RECEIVABLE
Loans receivable are summarized as follows:
SEPTEMBER 30, JUNE 30,
1996 1996
------------------ --------------------
(IN THOUSANDS)
Increase
Amount Percent Amount Percent (Decrease)
------ ------- ------ ------- ----------
Real estate mortgage loans:
Residential one-to-four family . . . . . . . $163,053 61.4% $153,689 61.8% $ 9,364
Residential multi-family . . . . . . . . . . 22,826 8.6% 19,788 8.0% 3,038
Commercial real estate . . . . . . . . . . . 6,007 2.3% 5,488 2.2% 519
Residential construction . . . . . . . . . . 36,326 13.7% 37,016 14.9% (690)
Other construction and land . . . . . . . . . 9,716 3.5% 6,491 2.6% 3,225
-------- ------- -------- ------- --------
Total real estate mortgage loans . . . . 237,928 89.5% 222,472 89.5% 15,456
Consumer-related loans:
Home equity . . . . . . . . . . . . . . . . . 21,360 8.0% 19,349 7.8% 2,011
Automobile . . . . . . . . . . . . . . . . . 1,548 0.6% 1,774 0.7% (226)
Credit card . . . . . . . . . . . . . . . . . 2,640 1.0% 2,585 1.0% 55
Other consumer loans . . . . . . . . . . . . 2,261 0.9% 2,372 1.0% (111)
-------- ------- -------- ------- ---------
Total consumer-related loans . . . . . . 27,809 10.5% 26,080 10.5% 1,729
-------- ------- -------- ------- --------
Gross loans . . . . . . . . . . . . . . 265,737 100.0% 248,552 100.0% $17,185
Accrued interest receivable . . . . . . . . . . . 1,483 1,287
Less:
Undisbursed portion of loan proceeds . . . . (22,976) (23,770)
Deferred loan fees . . . . . . . . . . . . . (82) (18)
Unearned interest . . . . . . . . . . . . . . (10) (10)
Allowances for loan losses . . . . . . . . . (1,374) (1,234)
-------- --------
$242,778 $224,807
======== ========
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(6) MORTGAGE-BACKED AND RELATED SECURITIES
The following is a summary of held-to-maturity mortgage-backed and related
securities by issuer.
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
At September 30, 1996: (DOLLARS IN THOUSANDS)
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation (FHLMC) . . $ 5,831 $ 89 $ 30 $ 5,890
Federal National Mortgage Association (FNMA) . . . 18,022 204 105 18,121
Government National Mortgage Association (GNMA) . 1,022 36 - 1,058
Private issuers . . . . . . . . . . . . . . . . . 27,743 8 123 27,628
-------- ------ ----- -------
$ 52,618 $ 337 $ 258 $52,697
-------- ------ ----- -------
Collateralized mortgage obligations:
FHLMC . . . . . . . . . . . . . . . . . . . . . . $ 14,230 $ 298 $ 19 $14,509
FNMA . . . . . . . . . . . . . . . . . . . . . . . 18,990 43 282 18,751
Private issuers . . . . . . . . . . . . . . . . . 7,734 35 70 7,699
-------- ------ ----- --------
$ 40,954 $ 376 $ 371 $40,959
-------- ------ ----- -------
Total mortgage-backed and related securities . $ 93,572 $ 713 $ 629 $93,656
======== ====== ===== =======
At June 30, 1996:
Mortgage-backed securities:
FHLMC . . . . . . . . . . . . . . . . . . . . . . $ 6,484 $ 70 $ 45 $ 6,509
FNMA . . . . . . . . . . . . . . . . . . . . . . . 19,127 180 150 19,157
GNMA . . . . . . . . . . . . . . . . . . . . . . . 1,379 54 - 1,433
Private issuers . . . . . . . . . . . . . . . . . 28,801 1 278 28,524
-------- ------ ----- -------
$ 55,791 $ 305 $ 473 $55,623
-------- ------ ----- -------
Collateralized mortgage obligations:
FHLMC . . . . . . . . . . . . . . . . . . . . . . $ 14,222 $ 358 $ 40 $14,540
FNMA . . . . . . . . . . . . . . . . . . . . . . . 19,332 111 273 19,170
Private issuers . . . . . . . . . . . . . . . . . 7,987 5 86 7,906
-------- ------ ----- -------
$ 41,541 $ 474 $ 399 $41,616
-------- ------ ----- -------
Total mortgage-backed and related securities . $ 97,332 $ 779 $ 872 $97,239
======== ====== ===== =======
The following is a summary of held-to-maturity mortgage-backed and related
securities.
At September 30, 1996:
Held-To-Maturity:
Mortgage-backed securities:
Adjustable-rate . . . . . . . . . . . . . . . . $ 46,699 $ 287 $ 137 $46,849
Fixed-rate . . . . . . . . . . . . . . . . . . 5,919 50 121 5,848
Collateralized mortgage obligations:
Adjustable-rate . . . . . . . . . . . . . . . . $ 31,283 $ 330 $ 291 $31,322
Fixed-rate . . . . . . . . . . . . . . . . . . 9,671 46 80 9,637
-------- ------ ----- --------
$ 93,572 $ 713 $ 629 $93,656
======== ====== ===== =======
At June 30, 1996:
Held-To-Maturity:
Mortgage-backed securities:
Adjustable-rate . . . . . . . . . . . . . . . . $ 49,256 $ 234 $ 315 $49,175
Fixed-rate . . . . . . . . . . . . . . . . . . 6,534 72 158 6,448
Collateralized mortgage obligations:
Adjustable-rate . . . . . . . . . . . . . . . . $ 31,349 $ 464 $ 284 $31,529
Fixed-rate . . . . . . . . . . . . . . . . . . 10,193 9 115 10,087
-------- ------ ----- -------
$ 97,332 $ 779 $ 872 $97,239
======== ====== ===== =======
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(7) NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings are summarized as follows (dollars in
thousands):
SEPTEMBER 30, 1996 JUNE 30, 1996
------------------ ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY AMOUNT RATE AMOUNT RATE
-------- ------ ---- ------ ----
Advances from
Federal Home Loan Bank 1996 $ - - $ 23,200 5.77%
1997 34,500 5.71% 27,100 5.79
1998 20,000 5.44 20,000 5.44
1998 18,000 6.06 18,000 6.06
2000 18,016 6.55 8,016 6.53
2001 3,000 5.91 3,000 5.91
2003 3,070 5.60 3,070 5.60
------- --------
$96,586 5.88% $102,386 5.82%
======= ===== ======== ====
Securities sold under
agreements to repurchase 1996 $ 6,706 5.50% $ 11,568 5.61%
======= ========
FHLB advances totaled $96.6 million or 93.5% and $102.4 million or 89.8% of
total borrowings at September 30, 1996 and June 30, 1996, respectively. The
Company is required to maintain as collateral unencumbered one-to-four family
mortgage loans in its portfolio such that the outstanding balance of FHLB
advances does not exceed 60% of the book value of this collateral. The Company
had delivered mortgage-backed securities with a carrying value of $21,849,000
and $23,600,000 at September 30, 1996 and June 30, 1996, respectively. In
addition, all FHLB advances are collateralized by all Federal Home Loan Bank
stock and are subject to prepayment penalties. The Company's unused advance
line with the Federal Home Loan Bank was $19.2 million at September 30, 1996.
The Company enters into sales of mortgage-backed securities with agreements to
repurchase identical securities (reverse repurchase agreements) and
substantially identical securities (dollar reverse repurchase agreements).
These transactions are treated as financings with the obligations to repurchase
securities reflected as a liability. The dollar amount of securities
underlying the agreements remains in the asset accounts. The securities
underlying the agreements are delivered to the counterparty's account.
Liabilities recorded under agreements to repurchase identical and substantially
identical securities were $6,706,000 and $11,568,000 at September 30, 1996 and
June 30, 1996, respectively. The reverse repurchase agreements had a weighted
average underlying coupon interest rate of 6.34% and 5.61% at September 30,
1996 and June 30, 1996, respectively, and matured within 30 days of the date
indicated. The agreements were collateralized by mortgage-backed certificates
with a carrying value and market value of $6,676,000 and $6,956,000; and
$11,841,000 and $12,115,000 at September 30, 1996 and June 30, 1996,
respectively.
12
13
HALLMARK CAPITAL CORP. AND SUBSIDIARY
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The discussion in this Quarterly Report on Form 10-Q includes certain
forward-looking statements based upon management expectations. Factors which
could cause future results to differ from these expectations include the
following: general economic conditions; legislative and regulatory
initiatives; monetary and fiscal policies of the federal government; deposit
flows; cost of funds; general market rates of interest; interest rates on
competing investments; demand for loan products; demand for financial services;
changes in accounting policies or guidelines; and changes in the quality or
composition of the Company's loan and investment portfolios.
GENERAL
Hallmark Capital Corp. (the "Company") is the holding company for West Allis
Savings Bank (the "Bank"), a Wisconsin state-chartered savings bank. The
Bank's principal business consists of attracting funds in the form of deposits
and other borrowings and investing such funds primarily in residential real
estate loans, mortgage-backed and related securities and various types of
consumer loans. In order to maximize shareholder value, the Company continues
to pursue a strategy of effectively utilizing the capital acquired in the
Bank's conversion from mutual to stock form and the Company's initial public
offering consummated in December 1993 (the "Conversion"). The Company believes
that its effective utilization of capital is best achieved through the growth
of the Company's business. This growth is to be achieved through the expansion
of the Company's asset base and diversification of the Company's portfolio into
higher yielding assets.
Commencing in fiscal 1994 and continuing through 1996, the Company has taken
the first step and implemented this strategy by leveraging its capital base to
achieve asset growth. This leveraging strategy was designed to reach a
targeted asset size for the Company established by the Board of Directors
within a three-to-five year period following the Conversion while maintaining
adequate capital ratios. The Company increased its asset size from $179.6
million at June 30, 1994 to $377.2 million at June 30, 1996. The Bank's
principal investment focus during this three-year post-Conversion period was to
originate and purchase mortgage loans (principally loans secured by one-to-four
family owner- occupied homes) and purchase mortgage-backed and related
securities. The asset growth was funded through significant increases in
Federal Home Loan Bank ("FHLB") advances and other borrowings and increases in
deposits, primarily brokered and non-brokered wholesale deposits. Pursuit of
the foregoing strategy resulted in increases in the Company's net income,
earnings per share, return on average equity ("ROAE") and return on average
assets ("ROAA") in fiscal 1994, 1995 and 1996.
In fiscal 1997, the Company intends to implement the second phase of its
strategic plan by slowing its asset growth and focusing on asset portfolio
diversification. While the Company intends to continue to originate and
purchase one-to-four family mortgage loans, the Company's long-term objective
is to increase net income by increasing the proportion of higher yielding
assets in its loan portfolio. In the event the origination and purchase of
one-to-four family mortgage loans exceeds the percentage of portfolio targets
under the Company's assets portfolio diversification plan, the Company may
consider sales of such loans in the secondary market. The Company began to
implement this strategy in the second half of fiscal 1996 by increasing the
multi-family real estate, multi-family construction, and
commercial/nonresidential real estate components of its loan portfolio.
Portfolio diversification in fiscal 1997 will include continued investments in
these types of loans, both within its primary lending area, and through
purchases of loans or participation interests in loans originated by other
lenders within and outside of its primary lending area, including loans or
participation interests in loans secured by properties located outside the
state of Wisconsin. Management also intends to establish a commercial lending
13
14
division in fiscal 1997 to further it's portfolio diversification objectives.
In deciding whether or not to purchase a loan or participation interest in a
loan originated outside of the Company's primary lending area, management of
the Company has applied, and continues to apply, underwriting guidelines which
are as strict as those applicable to the origination of similar loans within
its primary lending area.
The Company intends to fund its asset portfolio diversification in fiscal 1997
by a combination of retail deposits, brokered deposits, borrowings, the sale of
one-to-four family mortgage loans and the maturity and sale of mortgage-backed
and related securities.
Management anticipates that as the Company's volume of multi-family and
commercial/nonresidential real estate lending activity continues to increase,
the Company will need to build a higher level of allowance for loan losses
established through a provision for loan losses, which will have a negative
effect on the Company's net income in the short-term. However, the Company
believes that building the higher yielding multi-family and
commercial/nonresidential real estate components of its gross loan portfolio
will benefit the Company longer term, and should contribute to a long-term
improvement in the Company's net income and return on equity.
RECENT REGULATORY DEVELOPMENTS
Deposits of the Bank currently are insured to applicable limits by the FDIC
under the Savings Association Insurance Fund ("SAIF"). The FDIC also insures
commercial bank deposits under the Bank Insurance Fund ("BIF"). Premium levels
are set in order to permit the fund to be capitalized at a level equal to 1.25%
of total fund deposits. As the funds reach their designated ratios, the FDIC
has authority to lower fund premium assessments to rates sufficient to maintain
the designated reserve ratio. Historically, BIF and SAIF assessment schedules
had been identical. In May 1995, the BIF achieved its designated ratio and the
FDIC lowered BIF premium rates for most BIF-insured institutions. In November
1995, the FDIC reduced assessment rates by four cents per $100 of deposits for
all institutions, producing a premium rate schedule ranging from zero (i.e.
whereby such institutions will be subject only to a $2,000 minimum annual
premium) to 27 cents per $100 of deposits depending on the institution's
risk-based premium category. Based on these assessment rate modifications, the
majority of BIF members now pay only a $2,000 minimum annual premium. The SAIF
has not achieved its designated reserve ratio and is not anticipated to do so
prior to year 2001. Premium rates for SAIF-insured members are being paid at
an average of 23.4 cents per $100 of deposits. As a result of the new
assessment rate provisions, SAIF member institutions have been placed at a
competitive disadvantage based on higher deposit insurance premium obligations.
Congress recently passed legislation to address the deposit insurance premium
disparity. The "Deposit Insurance Funds Act of 1996" (the "DIF Act") was
included as part of an Omnibus Appropriations Bill that was signed into law on
September 30, 1996. Pursuant to the terms of the DIF Act, the FDIC was
directed to impose a special assessment on SAIF-assessable deposits at a rate
what would cause the SAIF to achieve its designated reserve ratio of 1.25% of
SAIF-insured deposits as of October 1, 1996. The DIF Act requires that the
special assessment be applied against the SAIF-assessable deposits held by
institutions as of March 31, 1995. Pursuant to a final rule issued by the FDIC
on October 16, 1996, the special assessment rate was determined to be 65.7
basis points. This one-time special assessment will fully capitalize SAIF, and
will be collected on November 27, 1996.
Based on the special assessment being imposed at 65.7 basis points per $100 of
insurable deposits, the amount of the assessment to the Bank would be
approximately $877,000. The special assessment will have the effect of
reducing the Bank's earnings and capital by the after-tax amount of the
assessment as of the date of enactment, which is estimated to be $533,000 or
$0.38 per share. As described below, with the recapitalization of the SAIF,
BIF and SAIF premiums currently are expected to be comparable and it is
anticipated that FDIC premium expense will therefore be reduced in future
periods.
14
15
The FDIC published a proposed rule on October 16, 1996, under which a permanent
base assessment schedule for the SAIF would be established, setting assessment
rates at a range of 4 to 31 basis points. The proposed rule also called for an
adjusted assessment schedule reducing these rates by 4 basis points to reflect
current conditions, producing an effective SAIF assessment range of 0 to 27
basis points, beginning October 1, 1996. This assessment range is comparable
to the current schedule for BIF-institutions. A special interim rate schedule
ranging from 18 to 27 basis points applies to SAIF-member savings associations
for the last quarter of 1996, reflecting the fact that assessments related to
certain bond obligations are included in the SAIF rates for these institutions
during that period.
The DIF Act addresses other matters which will affect the Bank. Certain bond
obligations of the Financing Corporation ("FICO"), which were issued to
ameliorate the savings and loan crisis in the 1980's, will be shared by all
insured depository institutions beginning after December 31, 1996. This
obligation had previously been the sole responsibility of SAIF-insured
institutions and had been funded through SAIF assessments. The DIF Act
eliminates the statutory link between FICO's assessments and amounts authorized
to be assessed by the SAIF, effective January 1, 1997. All insured
institutions will pay an annual assessment to fund interest payments on the
FICO bonds. Beginning in 1997, BIF-member institutions will pay one-fifth the
rate to be paid by SAIF members, for the first three years. After January 1,
2000, BIF and SAIF members will share the FICO payments on a pro-rata basis,
which will be assessed at 2.4 basis points, until the bonds mature in 2017.
In addition, the DIF Act provides for the merger of BIF and SAIF into a single
Deposit Insurance Fund. This provision will be effective January 1, 1999
assuming that no insured depository institution is a savings association on
that date. This legislation contemplates that the savings association charter
will be phased out over that period of time. The DIF Act also calls for the
Secretary of the Treasury to undertake a study concerning the development of a
common charter for all insured depository institutions and the abolition of
separate and distinct charters for banks and savings associations.
Management anticipates that the Bank, after consideration of the one-time
assessment described above, will continue to exceed all the regulatory minimum
capital levels. Although management is unable to predict the ultimate effect
on Company operations of the FICO bond assessments, the merger of the BIF and
SAIF, and the potential abolition of separate and distinct charters for banks
and savings associations, management does not presently anticipate that these
provisions will have a material impact on the financial condition of the
Company in future periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are retail and wholesale brokered
deposits, proceeds from principal and interest payments on loans, principal and
interest payments on mortgage-backed and related securities and FHLB-Chicago
advances. Alternative funding sources are evaluated and utilized based upon
factors such as interest rates, availability, maturity, administrative costs
and retention capability. Although maturity and scheduled amortization of
loans are predicable sources of funds, deposit flows, mortgage prepayments and
prepayments on mortgage-backed and related securities are influenced
significantly by general interest rates, economic conditions and competition.
Mortgage loans and mortgage securities prepayments accelerated in the fiscal
year ended June 30, 1994 as interest rates decreased and declined in fiscal
1995 as interest rates increased, and increased in fiscal 1996 as interest
rates declined for the first half of the fiscal year before increasing in the
last half of the fiscal year.
The primary investing activity of the Company is the origination and purchase
of loans and the purchase of mortgage-backed and related securities. For the
three months ended September 30, 1996, the Company originated and purchased
loans totaling $24.0 million and $6.4 million, respectively, as compared to the
three months ended September 30, 1995 when originated and purchased loans
totaled $16.8 million and $3.7 million, respectively. There were no purchases
of mortgage-backed and related securities for the three months ended September
30, 1996, and $29.5 million for the three months ended
15
16
September 30, 1995. There were no purchases of investment securities for the
three months ended September 30, 1996 and 1995. For the three months ended
September 30, 1996 and 1995, these activities were funded primarily by
principal repayments on loans of $14.3 million and $6.2 million, respectively;
principal repayments on mortgage-backed and related securities of $6.4 million
and $5.2 million, respectively; proceeds from the sale of mortgage loans of
$560,000 and $2.3 million, respectively; net increase in deposits of $18.3
million and $23.4 million, respectively; and proceeds from notes payable to the
FHLB-Chicago of $10.0 million and $10.7 million, respectively. Purchases of
securities available-for-sale totaled $969,000 and sales were $1.5 million for
the three months ended September 30, 1996, compared to purchases of $13.8
million and sales of $14.9 million for the three months ended September 30,
1995.
The Company is required to maintain minimum levels of liquid assets under the
regulations of the Department of Financial Institutions, Division of Savings
and Loan for state-chartered stock savings banks. Savings banks are required
to maintain an average daily balance of liquid assets (including cash, certain
time deposits, certain bankers acceptances, certain corporate debt securities,
securities of certain mutual funds and specified United States government,
state or federal agency obligations) of not less than 8.0%. The Company's
liquidity ratio was 22.89% at September 30, 1996. The Company adjusts its
liquidity levels to meet various funding needs and to meet its asset and
liability management objectives.
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly-liquid, short-term investments. The levels of these
assets are dependent on the Company's operating, financing, lending and
investing activities during any given period. At September 30, 1996 and June
30, 1996, cash and cash equivalents were $5.4 million and $4.8 million,
respectively. The increase in cash and cash equivalents for the three months
ended September 30, 1996 resulted primarily from an increase in net cash
provided by financing activities. The principal component of the increase in
cash was a net increase in wholesale brokered and non-brokered deposits of
$15.3 million.
During the three months ended September 30, 1996, the Company continued to find
wholesale brokered and non-brokered deposits to be an efficient source and a
cost-effective method, relative to local retail market deposits, of meeting the
Bank's funding needs. In fiscal 1996, pricing of wholesale brokered deposits
ranged from 20 to 40 basis points above comparable term U.S. Treasury
securities. At September 30, 1996, the average rate of the wholesale brokered
deposits accepted by the Company was 5.95% compared to an average rate paid for
retail certificates of deposit of 5.71%. During the three months ended
September 30, 1996, management believes that the costs, overhead and interest
expense of achieving comparable retail deposit growth would have exceeded the
costs related to the use of wholesale brokered deposits as a funding source.
However, management recognizes that the likelihood for retention of brokered
certificates of deposit is more a function of the rate paid on such accounts as
compared to retail deposits which may be established due to Bank location or
other intangible reasons. The Company's overall cost of funds has increased in
recent years due primarily to a much greater percentage of the deposits being
in certificates, both wholesale brokered and retail, as opposed to passbooks,
money market accounts and checking accounts. Management believes that a
significant portion of its retail deposits will remain with the Company and, in
the case of wholesale brokered deposits, may be replaced with similar type
accounts even should the level of interest rates change. However, in the event
of a significant increase in market interest rates, the cost of obtaining
replacement brokered deposits would increase as well.
The Bank's Board of Directors has set a maximum limitation of total borrowings
equal to 32% of total assets. This internal limit is 3% below the allowable
borrowing limit (for all borrowings including FHLB advances and reverse
repurchase agreements) of 35% of total assets established by the FHLB-Chicago.
At September 30, 1996, FHLB advances totaled $96.6 million or 24.9% of the
Bank's total assets and other borrowings totaled $6.7 million or 1.7% of the
Bank's total assets. At September 30, 1996, the Bank had unused borrowing
authority under the borrowing limitations established by the Board of Directors
of $20.8 million and $32.4 million under the FHLB total asset limitation. The
Bank intends to fund asset portfolio diversification in fiscal 1997 through
modest increases in FHLB advances, and to maintain the 3% excess
16
17
borrowing capacity with the FHLB as a contingent source of funds to meet
liquidity needs as deemed necessary by the Board of Directors of the Bank.
Liquidity management for the Company is both an ongoing and long-term function
of the Company's asset/liability management strategy. Excess funds generally
are invested in short-term investments such as federal funds or overnight
deposits at the FHLB-Chicago. Whenever the Company requires funds beyond its
ability to generate them internally, additional sources of funds are available
and obtained from the wholesale brokered and non-brokered market as well as the
unused credit line from the FHLB-Chicago, and funds also may be available
through reverse repurchase agreements wherein the Company pledges investment,
mortgage-backed or related securities. During fiscal 1997, management will
seek to obtain contingent backup credit facilities to replace a portion of its
interest rate sensitive liabilities such as borrowings and wholesale brokered
and non-brokered deposits should such funding sources become difficult or
impracticable to obtain or retain due to a changing interest rate environment.
There can be no assurance, however, that the Company will be able to obtain
such a facility. The Company also has a federal funds open line of credit in
the amount of $5.0 million with a correspondent bank which does not require the
direct pledging of any assets. In addition, the Company maintains a relatively
high level of liquid assets such as investment securities and mortgage-backed
and related securities available-for-sale in order to assure sufficient sources
of funds are available to meet the Company's liquidity needs.
At September 30, 1996, the Company had outstanding loan commitments of $5.0
million. The Company had no commitments to purchase mortgage-backed and
related securities at September 30, 1996. The Company anticipates it will have
sufficient funds available to meet its current loan commitments, including loan
applications received and in process to the issuance of firm commitments.
Certificates of deposit scheduled to mature in one year or less at September
30, 1996 totaled $137.3 million.
CHANGE IN FINANCIAL CONDITION
Total assets increased $10.5 million, or 2.8%, from $377.2 million at June 30,
1996 to $387.7 million at September 30, 1996. This increase is primarily
reflected in an increase in loans receivable which was funded primarily by an
increase in wholesale brokered and non-brokered deposits and decreases in
securities available-for-sale and mortgage-backed and related securities.
Cash and cash equivalents increased 11.1% to $5.4 million at September 30, 1996
compared to $4.8 million at June 30, 1996. The increase is largely
attributable to the decrease in securities available-for-sale and
mortgage-backed and related securities.
Securities available-for-sale decreased to $33.4 million at September 30, 1996
compared to $37.3 million at June 30, 1996. Mortgage-backed and related
securities held-to-maturity decreased to $93.6 million at September 30, 1996
compared to $97.3 million at June 30, 1996. The decrease in securities
available-for-sale and mortgage-backed and related securities was the result of
management's decision to use proceeds from the sale of such securities and
principal repayments to fund growth in loans receivable.
Loans receivable increased to $242.8 million at September 30, 1996 compared to
$224.8 million at June 30, 1996. The increase at September 30, 1996 compared
to June 30, 1996 is primarily the result of managements's decision to retain
its ARM, intermediate-term (15 year) and long-term (30 year) fixed-rate loans
originated and purchased for the Company's portfolio, as such loans carried
higher yields than comparable mortgage-backed and related securities during
the three months ended September 30, 1996. Total mortgage loans originated and
purchased amounted to $24.7 million and $19.5 million for the three months
ended September 30, 1996 and 1995, respectively, while sales of fixed-rate
mortgage loans totaled $560,000 and $3.3 million for the three months ended
September 30, 1996 and 1995, respectively.
Deposits increased $18.3 million to $248.0 million at September 30, 1996 from
$229.7 million at June 30, 1996. The increase in deposits was primarily due to
the Company's marketing efforts and the use of
17
18
brokers to increase the certificates of deposits with the Company. Brokered
certificates of deposit totaled $84.2 million at September 30, 1996,
representing 34.0% of total deposits as compared to $75.3 million, or 32.8% of
total deposits, at June 30, 1996. Non-brokered wholesale deposits totaled
$39.1 million at September 30, 1996, representing 15.8% of total deposits as
compared to $32.7 million, or 14.2% of total deposits at June 30, 1996.
Deposits are the Company's primary source of externally generated funds. The
level of deposits is heavily influenced by such factors as the general level of
short- and long-term interest rates as well as alternative yields that
investors may obtain on competing investment securities such as money market
mutual funds.
FHLB-Chicago advances and other borrowings decreased to $103.3 million at
September 30, 1996 compared to $114.0 million at June 30, 1996. At September
30, 1996, FHLB advances were $96.6 million or 26.8% of total liabilities
compared to $102.4 million or 29.2% of total liabilities at June 30, 1996. At
September 30, 1996, the Company had borrowed $6.7 million under reverse
repurchase agreements compared to $11.6 million at June 30, 1996. The Company
has used FHLB-Chicago advances and securities sold under agreements to
repurchase as a funding source due to attractive rates offered on advances in
relation to deposit funds obtainable in the Company's local market.
ASSET/LIABILITY MANAGEMENT
The Company closely monitors interest rate risk in an attempt to manage the
extent to which net interest income is significantly affected by changes in
market interest rates. In managing the Company's interest rate risk during the
three months ended September 30, 1996, the Company primarily utilized brokered
and non-brokered wholesale certificates of deposit and, to a lesser extent,
FHLB-advances to fund increases in the Company's interest-bearing assets due
primarily to the attractive rates offered on wholesale certificates of deposit
in relation to FHLB advances. At September 30, 1996, the Company's estimated
cumulative one-year gap between assets and liabilities was a negative 6.9% of
total assets as compared to 13.7% at June 30, 1996. The Company decreased the
level of its one-year negative gap position by extending the maturity of the
Company's liabilities, primarily wholesale brokered and non-brokered
certificates of deposits and FHLB advances, while investing in adjustable rate
and short-term fixed rate assets. During periods of rising interest rates, a
positive interest rate sensitivity gap would tend to positively affect net
interest income, while a negative interest rate sensitivity gap would adversely
affect net income. Although the opposite effect on net income would occur in
periods of falling interest rates, the Company could experience substantial
prepayments of its fixed rate mortgage loans and mortgage-backed and related
securities, which would result in the reinvestment of such proceeds at market
rates which are lower than current rates.
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19
ASSET/LIABILITY MANAGEMENT SCHEDULE
The following table sets forth at September 30, 1996 the amounts of
interest-earning assets and interest-bearing liabilities maturing or repricing
within the time periods indicated, based on the information and assumptions set
forth in the notes thereto.
AMOUNT MATURING OR REPRICING
-----------------------------------------------------------------------------
MORE THAN MORE THAN
WITHIN FOUR TO ONE YEAR THREE YEARS
THREE TWELVE TO THREE TO FIVE OVER FIVE
MONTHS MONTHS YEARS YEARS YEARS TOTAL
------ ------ ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS(1):
Mortgage loans(2):
Fixed rate . . . . . . . . . . . . . . . . $ 2,388 $ 7,045 $ 18,019 $ 17,148 $ 54,949 $ 99,549
Adjustable rate . . . . . . . . . . . . . 15,786 48,646 48,630 1,342 - 114,404
Consumer loans (2) . . . . . . . . . . . . . . 9,431 6,334 9,202 2,468 - 27,435
Mortgage-backed and related securities:
Fixed rate and securities available-for-
sale . . . . . . . . . . . . . . . . . . . 1,825 5,248 10,870 5,080 7,512 30,535
Adjustable rate . . . . . . . . . . . . . 53,567 24,416 - - - 77,983
Investment securities and
securities available-for-sale . . . . . . . 7,135 823 2,048 14,679 1,670 26,355
------- -------- --------- --------- ---------- ---------
Total interest-earning assets . . . . . . $90,132 $ 92,512 $ 88,769 $ 40,717 $ 64,131 $ 376,261
======= ======== ========= ========= ========== =========
INTEREST-BEARING LIABILITIES:
Deposits(3):
NOW accounts . . . . . . . . . . . . . . . $ 169 $ 507 $ 805 $ 394 $ 380 $ 2,255
Money market deposit accounts . . . . . . 1,827 5,480 4,092 655 124 12,178
Passbook savings accounts . . . . . . . . 1,816 5,447 8,643 4,235 4,070 24,211
Certificates of deposit . . . . . . . . . 63,203 74,081 61,140 4,195 120 202,739
Escrow deposits . . . . . . . . . . . . . 5,501 - - - - 5,501
Borrowings(4)
FHLB advances and other borrowings . . . . 23,206 28,000 31,000 18,016 3,070 103,292
------- -------- --------- --------- ---------- ---------
Total interest-bearing liabilities . . . . $95,722 $113,515 $ 105,680 $ 27,495 $ 7,764 $ 350,176
======= ======== ========= ========= ========== =========
Excess (deficiency) of interest-earning assets over
interest-bearing liabilities . . . . . . . . ($5,590) ($21,003) ($16,911) $ 13,222 $ 56,367 $ 26,085
======= ======== ========= ========= ========== =========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities . . ($5,590) ($26,593) ($43,504) ($30,282) $ 26,085 $ 26,085
======= ======== ========= ========= ========== =========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities
as a percent of total assets . . . . . . . . (1.4)% (6.9)% (11.2)% (7.8)% 6.7% 6.7%
======= ======== ========= ========= ========== =========
(1) Adjustable- and floating-rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed-rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization, in
each case adjusted to take into account estimated prepayments utilizing
the Company's historical prepayment statistics modified for forecasted
statistics using annual prepayment rates ranging from 5% to 20%, based on
the loan type.
(2) Balances have been reduced for undisbursed loan proceeds, unearned credit
insurance premiums, deferred loan fees, purchased loan discounts and the
allowance for loan losses, which aggregated $24.4 million at September 30,
1996.
(3) Although the Company's negotiable order of withdrawal ("NOW") accounts,
passbook savings accounts and money market deposit accounts generally are
subject to immediate withdrawal, management considers a certain historical
amount of such accounts to be core deposits having significantly longer
effective maturities and times to repricing based on the Company's
historical retention of such deposits in changing interest rate
environments. NOW accounts, passbook savings accounts and money market
deposit accounts are assumed to be withdrawn at annual rates of 30%, 30%
and 60%, respectively, of the declining balance of such accounts during
the period shown. The withdrawal rates used are higher than the Company's
historical rates but are considered by management to be more indicative of
expected withdrawal rates currently. If all of the Company's NOW
accounts, passbook savings accounts and money market deposit accounts had
been assumed to be subject to repricing within one year, the one-year
cumulative deficiency of interest-earning assets over interest-bearing
liabilities would have been $50.0 million or 12.9% of total assets.
(4) Adjustable- and floating-rate borrowings are included in the period in
which their interest rates are next scheduled to adjust rather than in the
period in which they are due.
19
20
ASSET QUALITY
The Company and Bank regularly review assets to determine proper valuation.
The review consists of an update of the historical loss experience, valuation
of the underlying collateral and the outlook for the economy in general as well
as the regulatory environment.
The following table sets forth information regarding the Bank's non-accrual
loans and foreclosed properties at the dates indicated:
THREE MONTHS ENDED
SEP 30 DEC 31 MAR 31 JUN 30 SEP 30
1995 1995 1996 1996 1996
------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
Non-accrual mortgage loans . . . . . . . . . . . . $ 50 $ 0 $183 $ 64 $ 29
Non-accrual consumer loans . . . . . . . . . . . . 11 10 24 21 117
---- ---- ---- ---- ----
Total non-accrual loans . . . . . . . . . . . . . . $ 61 $ 10 $207 $ 85 $146
==== ==== ==== ==== ====
Loans 90 days or more
delinquent and still accruing . . . . . . . . . . 24 25 87 22 22
---- ---- ---- ---- ----
Total non-performing loans . . . . . . . . . . . . $ 85 $ 35 $294 $107 $168
==== ==== ==== ==== ====
Total foreclosed real estate net of
related allowance for losses . . . . . . . . . . 85 0 0 0 24
---- ---- ---- ---- ----
Total non-performing assets . . . . . . . . . . . . $170 $ 35 $294 $107 $213
==== ==== ==== ==== ====
Non-performing loans to
gross loans receivable . . . . . . . . . . . . . .05% .02% .14% .04% .06%
==== ==== ==== ==== ====
Non-performing assets to
total assets . . . . . . . . . . . . . . . . . . .06% .01% .09% .03% .05%
==== ==== ==== ==== ====
20
21
ALLOWANCE FOR LOAN LOSSES
The following table sets forth an analysis of the Bank's allowance for loan
losses:
THREE MONTHS YEAR THREE MONTHS
ENDED ENDED ENDED
SEPT. 30, 1996 JUNE 30, 1996 SEPT. 30, 1995
-------------- ------------- --------------
(DOLLARS IN THOUSANDS)
Balance at beginning of period . . . . . . . . $ 1,234 $ 953 $ 953
Additions charged to operations:
One- to four-family . . . . . . . . . . . . 31 172 -
Multi-family and commercial real estate . . 91 80 -
Consumer . . . . . . . . . . . . . . . . . . 57 115 25
--------- ----------- -----------
179 367 25
Recoveries:
One- to four-family . . . . . . . . . . . . 1 8 -
Consumer . . . . . . . . . . . . . . . . . - 9 3
--------- ----------- -----------
1 17 3
Charge-offs:
One- to four-family . . . . . . . . . . . . - (15) -
Multi-family and commercial real estate . . - - (7)
Consumer . . . . . . . . . . . . . . . . . (40) (88) (21)
--------- ----------- -----------
(40) (103) (28)
--------- ----------- -----------
Net charge-offs . . . . . . . . . . . . . . . (39) (86) (25)
--------- ----------- -----------
Balance at end of period . . . . . . . . . . . $ 1,374 $ 1,234 $ 953
========= =========== ===========
Allowance for loan losses to
non-performing loans at end
of the period . . . . . . . . . . . . . . . 819.65% 1,153.27% 1,191.25%
========= =========== ===========
Allowance for loan losses to
total loans at end of the period . . . . . 0.52% 0.50% 0.57%
========= =========== ===========
The level of allowance for loan losses at September 30, 1996, reflects the
continued low level of charged off and non-performing loans. Management
believes that the allowance for loan losses is adequate as of September 30,
1996.
21
22
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1996
AND 1995
GENERAL
Net income for the three months ended September 30, 1996 decreased $459,000 or
114.2% to a loss of $57,000 from net income of $402,000 for the comparable 1995
period. The net loss for the three months ended September 30, 1996 is
primarily due to a one-time after-tax charge of $533,000 to recapitalize the
FDIC fund which insures deposits of savings associations. Net income for the
three months ended September 30, 1996 would have been $476,000 excluding the
one-time FDIC special assessment. See "Recent Regulatory Developments."
Return on average equity decreased to (0.84%) for the three months ended
September 30, 1996 from 6.31% for the comparable 1995 quarter. Return on
average assets decreased to (.06%) for the three months ended September 30,
1996 from .59% for the comparable 1995 period.
NET INTEREST INCOME
The following table presents certain information related to average
interest-earning assets and liabilities, net interest rate spread and net
interest margin:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
1996 1995
------------------------------- --------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD
BALANCE PAID RATE BALANCE PAID RATE
------- ---- ---- ------- ---- ----
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Mortgage loans . . . . . . . . . . . $205,762 $4,055 7.88% $126,152 $ 2,344 7.43%
Consumer loans . . . . . . . . . . . 26,457 636 9.62 21,840 528 9.67
-------- ------ -------- -------
Total loans . . . . . . . . . . . . 232,219 4,691 8.08 147,992 2,872 7.76
Securities held-to-maturity:
Mortgage-backed securities . . . . 54,065 932 6.90 46,801 739 6.32
Mortgage related securities . . . . 41,203 689 6.69 32,078 586 7.31
-------- ------ -------- -------
Total mortgage-backed
and related securities . . . . . 95,268 1,621 6.81 78,879 1,325 6.72
Investment and other securities . . . 4,266 65 6.09 4,245 68 6.41
Securities available-for-sale . . . . 35,327 601 6.80 32,828 681 8.30
Federal Home Loan Bank stock . . . . 5,119 87 6.80 3,462 59 6.82
-------- ------ -------- -------
Total interest-earning assets . . . 372,199 7,065 7.59 267,406 5,005 7.49
Non-interest earning assets . . . . . . 9,315 7,513
-------- --------
Total assets . . . . . . . . . . . $381,514 $274,919
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW accounts . . . . . . . . . . . . $ 2,299 10 1.74% $ 3,470 13 1.50%
Money market deposit accounts . . . . 9,670 121 5.01 5,307 64 4.82
Passbook accounts . . . . . . . . . . 24,109 192 3.19 24,895 186 2.99
Certificates of deposit . . . . . . . 194,069 2,805 5.78 123,436 1,854 6.01
-------- ------ -------- -------
Total deposits . . . . . . . . . . 230,147 3,128 5.44 157,108 2,117 5.39
Advance payments by borrowers
for taxes and insurance . . . . . . 4,556 31 2.72 3,991 28 2.81
Borrowings . . . . . . . . . . . . . . 109,579 1,622 5.92 79,943 1,204 6.02
-------- ------ -------- -------
Total interest-bearing liabilities. 344,282 4,781 5.55 241,042 3,349 5.56
Non-interest bearing deposits
and liabilities . . . . . . . . . . . 10,050 8,378
Shareholders' equity . . . . . . . . . 27,182 25,499
-------- --------
Total liabilities and
shareholders' equity . . . . . . $381,514 $274,919
======== ========
Net interest income/interest rate spread $2,284 2.04% $1,656 1.93%
====== ===== ====== =====
Net earning assets/net interest margin. $ 27,917 2.45% $ 26,364 2.48%
======== ===== ======== =====
22
23
Net interest income before provision for losses on loans increased $628,000 or
37.9% to $2.3 million for the three months ended September 30, 1996 from $1.7
million for the comparable 1995 period. Interest income increased $2.1 million
for the three months ended September 30, 1996, partially offset by an increase
in interest expense of $1.4 million. The level of net interest income
primarily reflects a 39.2% increase in average interest-earning assets to
$372.2 million for the three months ended September 30, 1996 from $267.4
million for the comparable 1995 period, and a 5.9% increase in the excess of
the Company's average interest-earning assets over average interest-bearing
liabilities to $27.9 million for the three months ended September 30, 1996 from
$26.4 million for the comparable 1995 period, and an increase in interest rate
spread to 2.04% for the three months ended September 30, 1996 from 1.93% for
the comparable 1995 period.
INTEREST INCOME
Interest income increased 41.2% to $7.1 million for the three months ended
September 30, 1996 from $5.0 million for the comparable 1995 period. The
increase in interest income was the result of an increase in average
interest-earning assets of 39.2% to $372.2 million for the three months ended
September 30, 1996 from $267.4 million for the comparable 1995 period and an
increase of 10 basis points in the yield on interest-earning assets to 7.59%
for the three months ended September 30, 1996 from 7.49% for the comparable
1995 period. Interest income on loans increased 63.3% to $4.7 million for the
three months ended September 30, 1996 from $2.9 million for the comparable 1995
period. The increase was the result of a rise in the Company's average gross
loans of 56.9% to $232.2 million for the three months ended September 30, 1996
from $148.0 million for the comparable 1995 period, and an increase in average
yield to 8.08% for the three months ended September 30, 1996 from 7.76% for the
comparable 1995 period. Gross loans increased primarily as a result of the
Company retaining substantially all of its fixed rate loans and purchasing more
loans in the secondary market. The increase in yield is attributable to the
retention of longer-term fixed-rate and adjustable-rate loans and partially
attributable to the higher yields paid on the multi-family and commercial
components of the loan portfolio. Interest income on mortgage-backed
securities increased 26.1% to $932,000 for the three months ended September 30,
1996 from $739,000 for the comparable 1995 period. The increase was primarily
due to an increase in average balances to $54.1 million for the three months
ended September 30, 1996 from $46.8 million for the comparable 1995 period, and
an increase in average yield to 6.90% for the 1996 period from 6.32% for the
1995 period. The increase in average yield on mortgage-backed securities was
primarily due to the adjustment in the adjustable rate securities portion of
this portfolio which were not fully indexed when purchased and partially
attributable to the higher yields paid on private-issue portion mortgage
securities portfolio. Interest income on mortgage-related securities increased
17.6% to $689,000 for the three months ended September 30, 1996 from $586,000
for the comparable 1995 period. The increase was primarily due to an increase
in average balances to $41.2 million for the three months ended September 30,
1996 from $32.1 million for the comparable 1996 period, offset by a decrease in
average yield to 6.69% for the three months ended September 30, 1996 from 7.31%
for the comparable 1995 period. The decrease in average yield on
mortgage-related securities was primarily due to the downward adjustment in
rate on the adjustable rate securities of this portfolio and purchase of fixed
rate mortgage-related securities at lower interest rates. Interest income on
investment securities and securities available-for-sale decreased 11.1% to
$666,000 for the three months ended September 30, 1996 from $749,000 for the
comparable 1995 period. The decrease was primarily due to a decrease in
average yield to 6.73% for the three months ended September 30, 1996 from 8.08%
for the comparable 1995 period, partially offset by an increase in average
balances to $39.6 million for the three months ended September 30, 1996 from
$37.1 million for the comparable 1995 period. The lower average yield was
primarily attributable to the additional balances of securities available-
for-sale invested at lower interest rates and the lower interest rate
environment that existed during the 1996 period.
INTEREST EXPENSE
Interest expense increased 42.8% to $4.8 million for the three months ended
September 30, 1996 from $3.3 million for the comparable 1995 period. The
increase was the result of a 42.8% increase in the
23
24
average amount of interest-bearing liabilities to $344.3 million for the three
months ended September 30, 1996 compared to $241.0 million for the comparable
1995 period, offset by a decrease in the average rate paid on interest-bearing
liabilities to 5.55% for the 1996 period from 5.56% for the 1995 period. The
increased balances of borrowings at lower average interest rates, partially
offset by higher average rates paid on certificates of deposit (including
brokered deposits), NOW accounts, money market deposits and passbook deposits,
was the primary reason for the decrease in the average rate paid on the
interest-bearing liabilities for the three months ended September 30, 1996 as
compared to the comparable 1995 period. Interest expense on deposits increased
47.8% to $3.1 million for the three months ended September 30, 1996 from $2.1
million for the comparable 1995 period. The increase was the result of an
increase in average balances of 46.5% to $230.1 million for the three months
ended September 30, 1996 from $157.1 million for the comparable 1995 period,
and an increase in the average rate paid to 5.44% for the 1996 period from
5.39% for the 1995 period. The increase in deposits was primarily due to an
increase of 57.2% in certificates of deposit to $194.1 million for the three
months ended September 30, 1996 from $123.4 million for the comparable 1995
period, offset by a decrease in the average rate paid to 5.78% for the 1996
period from 6.01% for the 1995 period. Money market deposit accounts increased
82.2% to $9.7 million for the three months ended September 30, 1996 from $5.3
million for the comparable 1995 period, and the average rate paid increased to
5.01% for the 1996 period from 4.82% for the 1995 period. Passbook accounts
decreased 3.2% to $24.1 million for the three months ended September 30, 1996
from $24.9 million for the comparable 1995 period, offset by an increase in
average rate paid to 3.19% for the 1996 period from 2.99% for the 1995 period.
These increases were partially offset by a decline of 33.7% in NOW accounts to
$2.3 million for the three months ended September 30, 1996 from $3.5 million
for the comparable 1995 period. The decline in NOW accounts was primarily the
result of transferring $3.0 million of interest-bearing NOW accounts to
non-interest bearing demand deposit type accounts during fiscal 1996. The
Company's increase in certificates of deposit was the result of aggressive
marketing and pricing and the use of brokered certificates of deposit. Of the
$194.1 million in the average balance of certificates of deposit for the three
months ended September 30, 1996, $78.6 million or 40.5% represented brokered
certificates of deposit compared to $26.4 million or 33.0% for the three months
ended September 30, 1995. The average rate paid on brokered certificates of
deposit decreased to 5.75% for the three months ended September 30, 1996 from
6.01% for the comparable 1995 period. Interest on borrowings (FHLB advances
and reverse repurchase agreements) increased 34.6% to $1.6 million for the
months ended September 30, 1996 from $1.2 million for the comparable 1995
period. The increase was primarily due to growth in average balance of FHLB
advances and reverse repurchase agreements of 37.1% to $109.6 million for the
three months ended September 30, 1996 from $79.9 million for the comparable
1995 period, offset by a decrease in the average rate paid to 5.92% for the
1996 period from 6.02% for the 1995 period.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased 636.0% to $184,000 for the three
months ended September 30, 1996 from $25,000 for the comparable 1995 period.
The level of allowance for losses on loans generally is determined by the
Bank's historical loan loss experience, the condition and composition of the
Bank's loan portfolio, and existing and anticipated general economic
conditions. Management anticipates that as the Company's volume of
multi-family and commercial/non-residential real estate lending activity
continues to increase, the Company will need to build a higher level of
allowance for loan losses established through a provision for loan losses.
Based on management's evaluation of the loan portfolio and the increase in
gross loans during the three months ended September 30, 1996, the allowance for
losses on loans increased 44.2% to $1.4 million at September 30, 1996 compared
to $953,000 at September 30, 1995. This increase was primarily the result of
the increase in multi-family, multi-family construction, home equity and
commercial real estate loan portfolios which carry a greater degree of credit
risk as compared to one-to-four family mortgage lending. The ratio of
allowance for loan losses to gross loans decreased to 0.52% at September 30,
1996 from 0.57% at September 30, 1995, reflecting the continued low level of
loans charged off and non-performing loans. The amount of non-performing
loans at September 30, 1996 was $189,000 or 0.06% of gross loans compared to
$107,000 or 0.04% of gross loans at June 30, 1996 and $85,000 or 0.05% of gross
loans at September 30, 1995.
24
25
NON-INTEREST INCOME
Non-interest income increased 2.6% to $238,000 for the three months ended
September 30, 1996 from $232,000 for the comparable 1995 period. Service
charges on loans increased $6,000 to $34,000 for the three months ended
September 30, 1996 from $28,000 for the comparable 1995 period, primarily
reflecting the increased loan portfolio and loan volume. Service charges on
deposit accounts increased $9,000 to $129,000 for the three months ended
September 30, 1996 from $120,000, primarily due to normal deposit pricing
increases. Gains on the sales of investments and mortgage-backed and related
securities increased $3,000 to $7,000 for the three months ended September 30,
1996 from $4,000 for the comparable 1995 period. Other non-interest income
increased $9,000 to $17,000 for the three months ended September 30, 1996 from
$8,000 for the comparable 1995 period. Increases in non-interest income were
partially offset by decreases in insurance commissions $14,000 to $21,000 for
the three months ended September 30, 1996 from $35,000 for the comparable 1995
period, due to the sale of property and casualty policies of the Company's
insurance subsidiary during fiscal 1996. Also offsetting the increase in
non-interest income was a decrease in loan servicing fees and gains on the sale
of loans primarily due to decreases in the Company's sold loan serviced
portfolio and sales of loans to the secondary market.
NON-INTEREST EXPENSE
Non-interest expense increased 96.4% to $2.4 million for the three months ended
September 30, 1996 from $1.2 million for the comparable 1995 period. The
increase was primarily due to an increase in FDIC deposit insurance premiums of
$938,000 to $1,015,000 for the three months ended September 30, 1996 from
$77,000 for the comparable 1995 period. The increase in FDIC deposit insurance
premiums was primarily a result of an industry-wide special assessment accrual
of $877,000 for an amount to recapitalize the SAIF fund during the 1996 period.
Compensation and benefits expense increased $183,000 to $874,000 for the three
months ended September 30, 1996 from $691,000 for the comparable 1995 period,
which primarily relates to higher salary, loan commissions and incentive
compensation. Occupancy and equipment expense increased $38,000 to $238,000
for the three months ended September 30, 1996 from $200,000 for the comparable
1995 period, due to additional bank equipment purchases. Other non-interest
expense increased $53,000 to $251,000 for the three months ended September 30,
1996 from $198,000 for the comparable 1995 period, due to increases in loan,
printing, office supplies, organization dues, legal and other miscellaneous
expenses. The increases in non-interest expense were offset by a decrease in
marketing expense of $21,000 to $48,000 for the three months ended September
30, 1996 from $69,000 for the comparable 1995 period.
25
26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company and the Bank are parties to legal
proceedings arising out of its lending activities and other
operations. However, there are no pending legal proceedings of which
the Company or the Bank is a party which, if determined adversely to
the Company or the Bank, would have a material adverse effect on the
consolidated financial position of the Company.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on October
24, 1996. There were 1,442,950 shares of Common Stock of the Company
entitled to vote at the Annual Meeting, and 1,326,774 shares present
at the meeting by holders thereof in person or by proxy, which
constituted a quorum. The following is a summary of the results of
the votes:
Number of Votes
For Withheld
--- --------
Nominees for Director for Three-Year Term Expiring in 1999
Floyd D. Brink . . . . . . . . . . . . . . . . . . . . 1,161,101 165,673
Donald A. Zellmer . . . . . . . . . . . . . . . . . . 1,160,326 166,448
Ratification of KPMG Peat Marwick LLP For Against Abstain
as independent auditors for --- ------- -------
fiscal year ending June 30, 1997 . . . . . . . . . . . . . . 1,289,640 19,280 17,854
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter for which this
report was filed. There are no exhibits to this report other than the
Financial Data Schedule attached hereto as Exhibit 27. See Note 2 to
the unaudited Consolidated Financial Statements for the information
required for Exhibit 11 - Computation of Earnings Per Share.
* * * * * * * * * * * * * * * * * * * *
26
27
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hallmark Capital Corp.
(Registrant)
Date: November 5, 1996 /s/ James D. Smessaert
----------------------------------
James D. Smessaert
Chairman of the Board
Chief Executive Officer
Date: November 5, 1996 /s/ Arthur E. Thompson
----------------------------------
Arthur E. Thompson
Chief Financial Officer
27
28
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed.
28