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 December 31, 1997 Commission File Number 0-22224
HALLMARK CAPITAL CORP.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1762467
(State of Incorporation) (I.R.S. Employer Identification No.)
7401 West Greenfield Avenue
West Allis, Wisconsin 53214
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (414) 317-7100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes /x/ No / /
(2) Yes /x/ No / /
The number of shares outstanding of the issuer's commons stock, par value $1.00
per share, was 2,933,608 at February 11, 1998, 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 December 31, 1997 (unaudited) and June 30, 1997 ....... 1
Consolidated Statements of Income for the Three and Six Months
ended December 31, 1997 and 1996 (unaudited) ................ 2
Consolidated Statements of Shareholders' Equity for the Six
Months Ended September 30, 1997 and 1996 (unaudited) ......... 3
Consolidated Statements of Cash Flows for the Six Months
ended December 31, 1997 and 1996 (unaudited) ................ 4
Notes to Consolidated Financial Statements (unaudited) ....... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk .... 27
Part II. Other Information
-----------------
Item 1. Legal Proceedings ............................................ 28
Item 2. Changes in Securities ........................................ 28
Item 3. Defaults Upon Senior Securities .............................. 28
Item 4. Submission of Matters to a Vote of Security Holders .......... 28
Item 5. Other Information ............................................ 28
Item 6. Exhibits and Reports on Form 8-K ............................. 29
Signature Page ............................................... 30
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HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
DECEMBER 31, JUNE 30,
1997 1997
------------ --------
ASSETS (Unaudited)
Cash and non-interest bearing deposits ......................... $ 2,995 $ 3,859
Interest-bearing deposits ...................................... 9,217 4,896
----------- ---------
Cash and cash equivalents ...................................... 12,212 8,755
Securities available-for-sale (at fair value):
Investment securities ......................................... 7,353 18,137
Mortgage-backed and related securities ........................ 13,565 11,381
Securities held-to-maturity:
Investment securities (fair value - $780 at
December 31, 1997 and June 30, 1997) ......................... 780 780
Mortgage-backed and related securities (fair value -
$78,746 at December 31, 1997; $86,149 at June 30, 1997) ...... 78,163 85,430
Loans receivable, net .......................................... 286,678 273,556
Investment in Federal Home Loan Bank stock, at cost ............ 6,009 5,279
Foreclosed properties, net ..................................... 11 20
Office properties and equipment ................................ 5,620 3,091
Prepaid expenses and other assets .............................. 3,120 3,391
----------- ---------
Total assets .............................................. $ 413,511 $ 409,820
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits ...................................................... $ 263,113 $ 281,512
Notes payable to Federal Home Loan Bank ....................... 115,573 92,073
Advance payments by borrowers for taxes and insurance ......... 259 3,485
Accrued interest on deposit accounts and other borrowings ..... 1,520 1,578
Accrued expenses and other liabilities ........................ 1,521 1,500
----------- ---------
Total liabilities ......................................... $381,986 $ 380,148
Shareholders' Equity:
Preferred stock, $1.00 par value; authorized 2,000,000 shares;
none outstanding ............................................. - -
Common stock, $1.00 par value; authorized 6,000,000 shares;
issued 3,162,500 shares; outstanding 2,933,608 shares ........ 1,581 1,581
Additional paid-in capital .................................... 10,723 10,603
Unearned ESOP compensation .................................... (578) (632)
Unearned restricted stock award ............................... (166) (208)
Net unrealized depreciation on securities available for sale .. (58) (225)
Treasury stock, at cost: 228,892 shares ...................... (1,385) (1,592)
Retained earnings, substantially restricted ................... 21,408 20,145
----------- ---------
Total shareholders' equity ................................ $ 31,525 $ 29,672
----------- ---------
Total liabilities and shareholders' equity ................ $ 413,511 $ 409,820
=========== =========
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 Six Months Ended
December 31, December 31,
-------------------- ------------------
1997 1996 1997 1996
--------- --------- -------- --------
INTEREST INCOME:
Loans receivable ......................................... $ 6,034 $ 5,021 $ 11,893 $ 9,712
Securities and interest-bearing deposits ................. 1,571 1,855 3,204 3,778
Mortgage-backed and related securities ................... 557 458 1,069 909
--------- --------- -------- --------
Total interest income ............................... 8,162 7,334 16,166 14,399
INTEREST EXPENSE:
Deposits ................................................. 3,757 3,427 7,662 6,555
Advance payments by borrowers for taxes and insurance .... 32 36 61 67
Notes payable and other borrowings ....................... 1,696 1,533 3,196 3,155
--------- --------- -------- --------
Total interest expense .............................. 5,485 4,996 10,919 9,777
--------- --------- -------- --------
Net interest income ...................................... 2,677 2,338 5,247 4,622
Provision for losses on loans ............................ 240 170 440 354
--------- --------- -------- --------
Net interest income after provision for losses on loans .. 2,437 2,168 4,807 4,268
NON-INTEREST INCOME:
Service charges on loans ................................. 90 45 135 79
Service charges on deposit accounts ...................... 109 127 223 256
Loan servicing fees, net ................................. 19 22 40 44
Insurance commissions .................................... 4 27 8 48
Gain on sale of securities and
mortgage-backed and related securities, net ............ 9 - (8) 7
Gain on sale of loans .................................... 2 5 23 13
Other income ............................................. 3 13 15 30
--------- --------- -------- --------
Total non-interest income ........................... 236 239 436 477
NON-INTEREST EXPENSE:
Compensation and benefits ................................ 929 888 1,886 1,762
Marketing ................................................ 103 102 154 150
Occupancy and equipment .................................. 252 207 495 445
Deposit insurance premiums ............................... 45 (11) 88 1,004
Other non-interest expense ............................... 247 327 533 578
--------- --------- -------- --------
Total non-interest expense .......................... 1,576 1,513 3,156 3,939
--------- --------- -------- --------
Income before income taxes ............................... 1,097 894 2,087 806
Income taxes ............................................. 383 321 728 290
--------- --------- -------- --------
Net income ............................................ $ 714 $ 573 $ 1,359 $ 516
========= ========= ======== ========
Earnings per share - (basic) .......................... $ 0.26 $ 0.21 $ 0.50 $ 0.19
========= ========= ======== ========
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
Common Paid-In ESOP Restricted
Stock Capital Compensation Stock
------ ---------- ------------ ----------
SIX MONTHS ENDED DECEMBER 31, 1997
- ------------------------------------------------
Balance at June 30, 1997 ....................... $1,581 $10,603 ($632) ($208)
Net income ..................................... - - - -
Amortization of unearned ESOP and
restricted stock award compensation ........... - 120 54 42
Exercise of stock options (47,708 shares issued
in connection with 55,340 options exercised) .. - - - -
Unrealized appreciation on securities
available for sale, net of tax benefit ........ - - - -
------ ---------- ------------ ----------
Balance at December 30, 1997 ................... $1,581 $10,723 ($578) ($166)
====== ========== ============ ==========
SIX MONTHS ENDED DECEMBER 31, 1996
- ------------------------------------------------
Balance at June 30, 1996 ....................... $1,581 $10,465 ($740) ($334)
Net income ..................................... - - - -
Amortization of unearned ESOP and
restricted stock award compensation ........... - 60 54 84
Unrealized appreciation on securities
available for sale, net of tax benefit ........ - - - -
------ ---------- ------------ ----------
Balance at December 31, 1996 ................... $1,581 $10,525 ($686) ($250)
====== ========== ============ ==========
Unrealized
Gains Treasury Retained
(Losses) Stock Earnings Total
--------- -------- ----------- -------
SIX MONTHS ENDED DECEMBER 31, 1997
- ------------------------------------------------
Balance at June 30, 1997 ....................... ($225) ($1,592) $20,145 $29,672
Net income ..................................... -- 1,359 1,359
Amortization of unearned ESOP and
restricted stock award compensation ........... -- -- 216
Exercise of stock options (47,708 shares issued
in connection with 55,340 options exercised) .. -- 207 (96) 111
Unrealized appreciation on securities
available for sale, net of tax benefit ........ 167 -- -- 167
------- -------- ------- -------
Balance at December 30, 1997 ................... ($58) ($1,385) $21,408 $31,525
======= ======== ======= =======
SIX MONTHS ENDED DECEMBER 31, 1996
- ------------------------------------------------
Balance at June 30, 1996 ....................... ($595) ($1,592) $18,226 $27,011
Net income ..................................... -- -- 516 516
Amortization of unearned ESOP and
restricted stock award compensation ........... -- -- 198
Unrealized appreciation on securities
available for sale, net of tax benefit ........ 349 -- -- 349
------- -------- ------- -------
Balance at December 31, 1996 ................... ($246) ($1,592) $18,742 $28,074
======== ======== ======= =======
See accompanying Notes to Consolidated Financial Statements (unaudited)
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HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
--------------------------------
1997 1996
-------- -------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net Income .......................................................... $ 1,359 $ 516
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for losses on loans and real estate ...................... 440 354
Provision for depreciation and amortization ........................ 148 129
Net (gain) loss on sales of investments and
mortgage-backed and related securities ............................ 8 (7)
Net gain on sale of loans .......................................... (23) (13)
Amortization of unearned ESOP and restricted stock awards .......... 216 198
Loans originated for sale .......................................... (4,434) (922)
Sales of loans originated for sale ................................. 4,434 922
Decrease in prepaid expenses and other assets ...................... 271 473
Other adjustments .................................................. (118) 111
-------- --------
Net cash provided by operating activities ........................... 2,301 1,761
-------- --------
INVESTING ACTIVITIES
Proceeds from the sale of securities available-for-sale ............. 18,100 1,454
Proceeds from the maturity of securities available-for-sale ......... 3,000 500
Purchases of securities available-for-sale .......................... (14,867) (1,219)
Proceeds from sale of investment securities held-to-maturity ........ - 435
Proceeds from maturities of investment securities held-to-maturity .. - 198
Purchases of mortgage-backed and related securities ................. (352) -
Principal collected on mortgage-backed and related securities ....... 10,229 10,323
Net increase in loans receivable .................................... (13,806) (30,522)
Proceeds from sales of foreclosed properties ........................ 273 -
Purchase of Federal Home Loan Bank stock ............................ (730) (110)
Purchases of office properties and equipment, net ................... (2,677) (135)
-------- ---------
Net cash used in investing activities ............................... (830) (19,076)
-------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in deposits ................................. (18,399) 30,807
Proceeds from long-term notes payable to Federal Home Loan Bank ..... 30,000 15,000
Net increase (decrease) in short-term notes payable to
Federal Home Loan Bank ............................................. 500 (10,800)
Net decrease in long-term notes payable to Federal Home Loan Bank ... (7,000) (2,000)
Net decrease in securities sold under agreements to repurchase ...... - (11,568)
Exercise of stock options ........................................... 111 -
Net increase in advance payments by borrowers for
taxes and insurance ................................................ (3,226) (2,936)
-------- --------
Net cash provided by financing activities ........................... 1,986 18,503
-------- --------
Increase in cash and cash equivalents ............................... 3,457 1,188
Cash and cash equivalents at beginning of period .................... 8,755 4,825
-------- --------
Cash and cash equivalents at end of period .......................... $ 12,212 $ 6,013
======== ========
See accompanying Notes to Consolidated Financial Statements (unaudited)
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HALLMARK CAPITAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
-----------------
1997 1996
------ -------
(IN THOUSANDS)
Supplemental disclosures of cash flow information:
Interest paid (including amounts credited to deposit accounts)...... $11,004 $9,705
Income taxes paid................................................... $ 945 $ 367
Non-cash transactions:
Loans transferred to foreclosed properties.......................... $ 267 $ 24
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 and six months ended
December 31, 1997 are not necessarily indicative of results that may be
expected for the entire fiscal year ending June 30, 1998.
The unaudited consolidated financial statements include the accounts of
Hallmark Capital Corp. (the "Company") and its wholly-owned subsidiary, West
Allis Savings Bank and subsidiaries (the "Bank") as of and for the three and
six months ended December 31, 1997. All material intercompany accounts and
transactions have been eliminated in consolidation.
(2) STOCK BENEFITS AND INCENTIVE PLANS
At December 31, 1997, the Company has reserved 436,936 shares of common stock
for a non-qualified stock option plan for employees and directors. With
respect to options which have not been granted, the option exercise price
cannot be less than the fair market value of the underlying common stock as of
the date of option grant, and the maximum term cannot exceed ten years. The
following is a summary of stock option activity:
SHARES UNDER OPTION PRICE
OPTION PER SHARE
------------ --------------
Outstanding and exercisable at June 30, 1997 ...... 346,614 $4.00 - $7.625
Exercised ........................................ (55,340) $4.00
---------- --------------
Outstanding and exercisable at December 31, 1997 .. 291,274 $4.00 - $7.625
(3) EARNINGS PER SHARE
Basic earnings per share of common stock for the three and six months ended
December 31, 1997 have been computed by dividing net income for the period by
the weighted average number of shares of common stock reduced by ungranted
restricted stock and uncommitted ESOP shares. Diluted earnings per share is
calculated by dividing net income by the sum of the weighted average shares
used in the basic earnings per share calculation plus the effect of dilutive
stock options. The effect of dilutive stock options is calculated using the
treasury stock method. The computation of earnings per share is as follows:
For the Three Months For the Three Months
Ended December 31, 1997 Ended December 31, 1996
-------------------------- --------------------------
Basic Diluted Basic Diluted
------------ ------------ ------------ ------------
Weighted average common shares outstanding .. 2,919,690 2,919,690 2,885,900 2,885,900
Ungranted restricted stock .................. (18,462) (18,462) (18,462) (18,462)
Uncommitted ESOP shares ..................... (151,800) (151,800) (174,992) (174,992)
Common stock equivalents due to
dilutive effect of stock options .......... - 244,340 - 166,902
---------- ---------- ---------- ----------
Total weighted average common shares
and equivalents outstanding................ 2,749,428 2,993,768 2,692,446 2,859,348
========== ========== ========== ==========
Net income for period ..................... $ 714,000 $ 714,000 $ 573,000 $ 573,000
Earnings per share ........................ $ 0.26 $ 0.24 $ 0.21 $ 0.20
========== ========== ========== ==========
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For the Six Months For the Six Months
Ended December 31, 1997 Ended December 31, 1996
-------------------------- --------------------------
Basic Diluted Basic Diluted
------------ ------------ ------------ ------------
Weighted average common shares outstanding .. 2,902,795 2,902,795 2,885,900 2,885,900
Ungranted restricted stock .................. (18,462) (18,462) (18,462) (18,462)
Uncommitted ESOP shares ..................... (151,800) (151,800) (174,992) (174,992)
Common stock equivalents due to
dilutive effect of stock options ........... - 230,959 - 157,524
---------- ---------- ---------- ----------
Total weighted average common shares
and equivalents outstanding ................ 2,732,533 2,963,492 2,692,446 2,849,970
========== ========== ========== ==========
Net income for period ...................... $1,359,000 $1,359,000 $ 516,000 $ 516,000
Earnings per share ......................... $ 0.50 $ 0.46 $ 0.19 $ 0.18
========== ========== ========== ==========
(4) COMMITMENTS AND CONTINGENCIES
Commitments to originate mortgage loans of $1.7 million at December 31, 1997
represent amounts which the Bank expects to fund during the quarter ending
March 31, 1998. There were no commitments to sell fixed-rate mortgage loans at
December 31, 1997. The Bank had unissued credit under existing home equity
line-of-credit loans and credit card lines of $14.5 million and $8.1 million,
respectively, as of December 31, 1997. Also, the Bank had unused credit under
existing commercial line-of-credit loans of $8.1 million at December 31, 1997.
The Bank had no commitments to purchase adjustable-rate or fixed-rate
mortgage-backed and related securities as of December 31, 1997.
(5) REGULATORY CAPITAL ANALYSIS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt and corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
also are subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1997,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the Bank is well capitalized as defined by regulatory
standards. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table below. There are no conditions or events since that
notification that management believes have changed the Bank's category.
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The Bank's actual capital amounts and ratios are presented in the tables below.
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------ ------------------------ --------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- -------- ----------- ----------- ------------ ------------
(DOLLARS IN THOUSANDS)
As of December 31, 1997:
Tier I Capital Leverage (to Average Assets):
Consolidated .......................... $31,566 7.49% $12,639 3.00% $21,066 5.00%
West Allis Savings Bank ............... 28,212 6.70 12,626 3.00 21,044 5.00
Tier I Capital (to Risk-Weighted Assets):
Consolidated .......................... 31,566 12.84 9,834 4.00 14,751 6.00
West Allis Savings Bank ............... 28,212 11.48 9,831 4.00 14,746 6.00
Total Capital (to Risk-Weighted Assets):
Consolidated .......................... 33,628 13.68 19,668 8.00 24,585 10.00
West Allis Savings Bank ............... 30,274 12.32 19,662 8.00 24,577 10.00
As a state-chartered savings bank, the Bank also is subject to a minimum
regulatory capital requirement of the State of Wisconsin. At December 31,
1997, on a fully-phased-in basis of 6.0%, the Bank had actual capital of
$30,223,000 with a required amount of $25,001,000, for excess capital of
$5,222,000.
(6) LOANS RECEIVABLE
Loans receivable are summarized as follows:
DECEMBER 31, JUNE 30,
1997 1997
----------------- -----------------
(IN THOUSANDS)
Increase
Amount Percent Amount Percent (Decrease)
-------- ------- -------- ------- ----------
Real estate mortgage loans:
Residential one-to-four family .......... $162,697 54.8% $167,511 58.6% $(4,814)
Home equity ............................. 26,826 9.0% 25,297 8.8% 1,529
Residential multi-family ................ 29,993 10.1% 27,616 9.7% 2,377
Commercial real estate .................. 29,935 10.1% 21,693 7.6% 8,242
Residential construction ................ 8,554 2.9% 27,003 9.4% (18,449)
Other construction and land ............. 23,748 8.0% 7,385 2.6% 16,363
-------- ------- -------- ------- ----------
Total real estate mortgage loans ..... 281,753 94.9% 276,505 96.7% 5,248
Consumer-related loans:
Automobile .............................. 946 0.3% 1,195 0.4% (249)
Credit card ............................. 3,090 1.0% 2,730 1.0% 360
Other consumer loans .................... 1,689 0.6% 1,950 0.7% (261)
-------- ------- -------- ------- ----------
Total consumer-related loans ......... 5,725 1.9% 5,875 2.1% (150)
-------- ------- -------- ------- ----------
Commercial loans .......................... 9,506 3.2% 3,471 1.2% 6,035
-------- ------- -------- ------- ----------
Gross loans .......................... 296,984 100.0% 285,851 100.0% 11,133
Accrued interest receivable ............... 1,731 1,694
Less:
Undisbursed portion of loan proceeds .... (9,636) (11,998)
Deferred loan fees ...................... (332) (197)
Unearned interest ....................... (7) (32)
Allowances for loan losses .............. (2,062) (1,762)
-------- --------
$286,678 $273,556
======== ========
Loans serviced for investors totaled $30.7 million and $30.0 million at
December 31, 1997 and June 30, 1997, respectively.
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(7) NOTES PAYABLE AND OTHER BORROWINGS
Notes payable and other borrowings are summarized as follows (dollars in
thousands):
DECEMBER 31, 1997 JUNE 30, 1997
-------------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY AMOUNT RATE AMOUNT RATE
-------- --------- --------- ------- --------
Advances from
Federal Home Loan Bank 1997 $ - - $15,000 5.77%
1998 26,500 5.63% 33,000 5.57
1999 21,000 6.79 20,000 6.65
2000 22,012 6.27 13,012 6.45
2001 3,000 5.91 3,000 5.91
2002 28,500 5.61 5,000 6.43
2003 3,061 5.60 3,061 5.60
2004 5,000 6.32 - -
2007 6,500 6.52 - -
--------- -------
$ 115,573 6.04% $92,073 6.02%
========= ========= ======= ========
FHLB advances totaled $115.6 million or 100.0% and $92.1 million or 100.0% of
total borrowings at December 31, 1997 and June 30, 1997, respectively. The
Company is required to maintain as collateral unencumbered one-to-four family
mortgage loans in its portfolio such that the outstanding balance of FHLB
advances does not exceed 60% of the book value of this collateral. The Company
had delivered mortgage-backed securities with a carrying value of $33.9 million
and $19.7 million at December 31, 1997 and June 30, 1997, respectively. In
addition, all FHLB advances are collateralized by all Federal Home Loan Bank
stock and are subject to prepayment penalties. The Company's unused advance
line with the Federal Home Loan Bank was $8.3 million at December 31, 1997.
FHLB variable rate term borrowings consist of $5.0 million tied to the
one-month LIBOR, and $3.0 million tied to the six-month LIBOR index.
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HALLMARK CAPITAL CORP. AND SUBSIDIARY
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q or future filings with the
Securities and Exchange Commission, in annual reports or press releases or
other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, various words or phrases are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include words and phrases such as: "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions and various other statements indicated herein with an
asterisk after such statements. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only
as of the date made, and to advise readers that various factors could affect
the Company's financial performance and could cause actual results for future
periods to differ materially from those anticipated or projected. Such factors
include, but are not limited to: (i) general market rates, (ii) general
economic conditions, (iii) legislative/regulatory changes, (iv) monetary and
fiscal policies of the U.S. Treasury and Federal Reserve, (v) changes in the
quality or composition of the Company's loan and investment portfolios, (vi)
demand for loan products, (vii) deposit flows, (viii) competition, (ix) demand
for financial services in the Company's markets, and (x) changes in accounting
principles, policies or guidelines.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
GENERAL
Hallmark Capital Corp. (the "Company") is the holding company for West Allis
Savings Bank (the "Bank"), a Wisconsin state-chartered savings bank. The
Bank's principal business consists of attracting funds in the form of deposits
and other borrowings and investing such funds in residential real estate loans,
mortgage-backed and related securities and various types of consumer and
commercial loans. In order to maximize shareholder value, the Company
continues to pursue a strategy of effectively utilizing the capital acquired in
the Bank's conversion from mutual to stock form and the Company's initial
public offering consummated in December 1993 (the "Conversion"). The Company
believes that its effective utilization of capital is best achieved through the
growth of the Company's business. This growth is to be achieved primarily
through the expansion of the Company's asset base and diversification of the
Company's portfolio into higher yielding assets. At the end of December 1997,
the Company purchased a former Security Bank site in Glendale, Wisconsin. The
Company is evaluating various possibilities to utilize the location including a
full-service banking operation and administrative offices.
Commencing in fiscal 1994 and continuing through the first half of fiscal 1997,
the Company implemented the first stage of the strategy by leveraging its
capital base to achieve asset growth. The objective of the first stage of the
strategy was to reach a targeted asset size for the Company established by the
Board of Directors within a three-to-five year period following the Conversion.
The Company increased its asset size from $179.6 million at June 30, 1994 to
$409.8 million at June 30, 1997. The Bank's principal investment focus during
the four-year post-Conversion period was to originate and purchase mortgage
loans (principally loans secured by one-to-four family owner-occupied homes)
and purchase mortgage-backed securities. The asset growth was funded through
significant increases in Federal Home Loan Bank ("FHLB") advances and other
borrowings and increases in deposits, primarily brokered and non-brokered
wholesale deposits. Pursuit of the foregoing strategy resulted in increases in
the Company's net income, earnings per share, return on average equity ("ROAE")
and return on average assets ("ROAA") in fiscal 1994, 1995 and 1996. Excluding
the impact of the one-time industry-
10
13
wide SAIF assessment in fiscal 1997, pursuit of the strategy also resulted in
increases in the Company's net income, earnings per share, ROAE and ROAA for
fiscal 1997.
Starting in the latter half of fiscal 1996 and continuing in fiscal 1997, the
Company implemented the second stage of its post-Conversion plan in order to
continue to increase net income, earnings per share, ROAE and ROAA. This
strategy involved shifting the focus from asset growth to asset portfolio
diversification, while maintaining prudent capital and liquidity levels. This
was, and continues to be, achieved by altering the composition of its loan
portfolio and the securities originated, purchased, sold and held in the total
asset portfolio. In particular, the Company focused and will focus on
originating and purchasing higher-yielding multi-family, commercial real estate
and commercial business loans secured by properties or assets located within
the Company's primary lending area, which will either replace or supplement the
lower-yielding one-to-four family mortgage loans and principal run-off from the
mortgage securities portfolio. The Company also evaluates opportunities to
purchase multi-family and commercial real estate loans or participation
interests in such loans secured by properties located outside the Company's
primary lending area. In fiscal 1997, the Company purchased an aggregate of
$5.4 million, or 1.9% of gross loans at June 30, 1997, of loans and
participation interests in loans originated by other lenders and secured by
properties located outside of the Company's primary lending area. These loans
and participation interests consisted primarily of commercial real estate and
commercial real estate construction loans. In the second half of fiscal 1997,
the Company also expanded its opportunities to originate higher-yielding loans
by establishing a new commercial lending division which offers
commercial/industrial real estate term loans, equipment leasing,
inventory/equipment/receivables financing, lines of credit, letters of credit
and SBA loan programs. Asset portfolio diversification in fiscal 1997 was
funded through principal repayment cash flows from existing assets, wholesale
brokered and non-brokered deposits, retail deposits and FHLB advances.
In fiscal 1998, the Company intends to continue the implementation of the
second phase of its strategic plan by slowing the rate of growth of its asset
base and continuing to focus on asset portfolio diversification.* This will
continue to be accomplished by increasing the origination and purchase of
multi-family real estate, commercial real estate and commercial/industrial
business loans, combined with the growth of the commercial lending division.*
The Company also intends to begin to increase sales of one-to-four family
mortgage loans in the secondary market, including selling seasoned and recently
originated one-to-four family mortgage loans in order to provide liquidity for
the funding of higher-yielding loan originations and purchases, increase
non-interest income and maintain adequate levels of capital.* The Company
anticipates that increased sales of one-to-four family loans will decrease the
proportion of the gross loan portfolio represented by such loans, will increase
non-interest income as a result of increased gains on the sales of such loans,
and will further lessen the Company's negative gap position as such loans are
replaced by higher-yielding, adjustable rate assets, including multi-family,
commercial real estate and commercial loans.* Portfolio diversification in
fiscal 1998 also will include continued purchases of loans or participation
interests in loans originated by other lenders both within and outside of its
primary lending area.* Loans purchased, or participation interests purchased,
which relate to properties located outside of the Company's primary lending
area will consist primarily of multi-family, commercial real estate,
multi-family construction and commercial real estate construction loans.* In
deciding whether or not to purchase a loan or participation interest in a loan
originated outside of the Company's primary lending area, management of the
Company has applied, and continues to apply, underwriting guidelines which are
at least as strict as those applicable to the origination of similar loans
within its primary lending area.
The Company intends to fund its asset portfolio diversification in fiscal 1998
by a combination of retail deposits, brokered deposits, borrowings, the sale of
one-to-four family mortgage loans in the secondary market, the maturity and
sale of mortgage-backed and related securities and FHLB advances.*
The increase in the level of the allowance for losses on loans during fiscal
1997 was primarily the result of increases in the commercial, home equity and
commercial real estate loan portfolios. Loans secured by multi-family and
commercial real estate and commercial business assets generally involve a
greater degree of credit risk than one-to-four family loans and carry larger
balances. The increased credit risk is the result of several factors,
including concentration of principal in a limited number of loans and
11
14
borrowers, the effect of general economic conditions on income-producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Management anticipates that as the Company's volume of
multi-family and commercial/nonresidential real estate and commercial business
lending activity continues to increase, the Company will need to build a higher
level of allowance for loan losses established through a provision for loan
losses, which will have a negative effect on the Company's net income in the
short-term.* However, the Company believes that building the higher yielding
multi-family and commercial/nonresidential real estate components of its gross
loan portfolio will benefit the Company longer term, and should contribute to a
long-term improvement in the Company's net income and return on equity.*
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are retail and wholesale brokered and
non-brokered deposits, proceeds from principal and interest payments on loans,
principal and interest payments on mortgage-backed and related securities and
FHLB-Chicago advances. Alternative funding sources are evaluated and utilized
based upon factors such as interest rates, availability, maturity,
administrative costs and retention capability. Although maturity and scheduled
amortization of loans are predicable sources of funds, deposit flows, loan
prepayments and prepayments on mortgage-backed and related securities are
influenced significantly by general interest rates, economic conditions and
competition. Mortgage loans and mortgage securities prepayments declined
during fiscal 1995 as interest rates increased, and increased during fiscal
1996 as interest rates declined for the first half of the fiscal year before
increasing in the last half of the fiscal year. Interest rates declined during
the first half of fiscal 1997, and began to increase again at the end of fiscal
1997. During the first half of fiscal 1998 interest rates declined and mortgage
loan prepayments accelerated.
The primary investing activity of the Company is the origination and purchase
of loans and the purchase of mortgage-backed and related securities. For the
six months ended December 31, 1997, the Company originated and purchased loans
totaling $60.2 million and $2.6 million, respectively, as compared to the six
months ended December 31, 1996 when originated and purchased loans totaled
$42.1 million and $10.5 million, respectively. Purchases of mortgage-backed
and related securities held-to-maturity for the six months ended December 31,
1997 totaled $352,000. There were no purchases of investment securities
held-to-maturity for the six months ended December 31, 1997. For the six
months ended December 31, 1997 and 1996, these activities were funded primarily
by principal repayments on loans of $59.4 million and $27.5 million,
respectively; principal repayments on mortgage-backed and related securities of
$10.2 million and $10.3 million, respectively; proceeds from the sale of
mortgage loans of $4.4 million and $922,000, respectively; net proceeds from
notes payable to the FHLB-Chicago of $23.5 million and $2.2 million,
respectively and net increase in deposits of $30.8 million during the 1996
period. Purchases of securities available-for-sale totaled $14.9 million and
sales were $18.1 million for the six months ended December 31, 1997, compared
to purchases of $1.2 million and sales of $1.5 million for the six months ended
December 31, 1996.
The Company is required to maintain minimum levels of liquid assets under the
regulations of the Wisconsin Department of Financial Institutions, Division of
Savings and Loan for state-chartered stock savings banks. Savings banks are
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits, certain bankers acceptances, certain corporate debt
securities, securities of certain mutual funds and specified United States
government, state or federal agency obligations) of not less than 8.0%. The
Company's liquidity ratio was 22.23% at December 31, 1997. The Company adjusts
its liquidity levels to meet various funding needs and to meet its asset and
liability management objectives.
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly-liquid, short-term investments. The levels of these
assets are dependent on the Company's operating, financing, lending and
investing activities during any given period. At December 31, 1997 and June
30, 1997, cash and cash equivalents were $12.2 million and $8.8 million,
respectively.
12
15
During the six months ended December 31, 1997, the Company continued to find
wholesale brokered and non-brokered deposits to be an efficient source and a
cost-effective method, relative to local retail market deposits, of meeting the
Bank's funding needs. During the six months ended December 31, 1997, pricing
of wholesale brokered deposits ranged from 20 to 40 basis points above
comparable term U.S. Treasury securities. At December 31, 1997, the average
rate of the wholesale brokered deposits accepted by the Company was 6.13%
compared to an average rate paid for retail certificates of deposit of 5.85%.
During the six months ended December 31, 1997, management believed that the
costs, overhead and interest expense of achieving comparable retail deposit
growth would have exceeded the costs related to the use of wholesale brokered
deposits as a funding source. However, management recognizes that the
likelihood for retention of brokered certificates of deposit is more a function
of the rates paid on such accounts as compared to retail deposits which may be
established due to Bank location or other intangible reasons. The Company's
overall cost of funds has increased in recent years due primarily to a much
greater percentage of the deposits being in certificates, both wholesale
brokered and retail, as opposed to passbooks, money market accounts and
checking accounts. At December 31, 1997, retail and wholesale certificates of
deposit totaled $92.3 million and $113.6 million, respectively. Management
believes that a significant portion of its retail deposits will remain with the
Company and, in the case of wholesale brokered deposits, may be replaced with
similar type accounts even should the level of interest rates change.*
However, in the event of a significant increase in market interest rates, the
cost of obtaining replacement wholesale deposits and FHLB advances would
increase as well.
The Bank's Board of Directors has set a maximum limitation of total borrowings
equal to 32% of total assets. This internal limit is 3% below the allowable
borrowing limit (for all borrowings including FHLB advances and reverse
repurchase agreements) of 35% of total assets established by the FHLB-Chicago.
At December 31, 1997, FHLB advances totaled $115.6 million or 27.8% of the
Bank's total assets and there were no other borrowings. At December 31, 1997,
the Bank had unused borrowing authority under the borrowing limitations
established by the Board of Directors of $17.1 million and $29.5 million under
the FHLB total asset limitation. The Bank intends to fund asset portfolio
diversification in fiscal 1998 through modest increases in FHLB advances, and
to maintain the 3% excess borrowing capacity with the FHLB as a contingent
source of funds to meet liquidity needs as deemed necessary by the Board of
Directors of the Bank.
Liquidity management for the Company is both an ongoing and long-term function
of the Company's asset/liability management strategy. Excess funds generally
are invested in short-term investments such as federal funds or overnight
deposits at the FHLB-Chicago. Whenever the Company requires funds beyond its
ability to generate them internally, additional sources of funds usually are
available and obtainable from the wholesale brokered and non-brokered market as
well as the unused credit line from the FHLB-Chicago, and funds also may be
available through reverse repurchase agreements wherein the Company pledges
investment, mortgage-backed or related securities. The Company maintains a
$15.0 million contingent backup credit facility with a major correspondent bank
to replace a portion of its interest rate sensitive liabilities, such as
borrowings and wholesale brokered and non-brokered deposits should such funding
sources become difficult or impracticable to obtain or retain due to a changing
interest rate environment. The Company also has a federal funds open line of
credit in the amount of $10.0 million with a correspondent bank which does not
require the direct pledging of any assets. In addition, the Company maintains
a relatively high level of liquid assets such as investment securities and
mortgage-backed and related securities available-for-sale in order to ensure
sufficient sources of funds are available to meet the Company's liquidity
needs.
The Company has various unfunded commitments at December 31, 1997 which
represent amounts the Company expects to fund during the quarter ended March
31, 1998. For a summary of such commitments see discussion under footnote (3)
"Commitments and Contingencies" contained in the section entitled, "Notes to
Consolidated Financial Statements". The Company anticipates it will have
sufficient funds available to meet its current loan commitments, including loan
applications received and in process to the issuance of firm commitments.
13
16
CHANGE IN FINANCIAL CONDITION
Total assets increased $3.7 million, or 0.9%, from $409.8 million at June 30,
1997 to $413.5 million at December 31, 1997. This increase is primarily
reflected in an increase in loans receivable and interest-bearing deposits,
funded primarily by an increase in FHLB-Chicago advances and decreases in
securities available-for-sale and mortgage-backed and related securities. Cash
and cash equivalents were $12.2 million and $8.8 million at December 31, 1997
and June 30, 1997, respectively. The increase in cash and cash equivalents was
due to management's decision to increase such assets to have funding available
for unused loan commitments.
Securities available-for-sale decreased to $20.9 million at December 31, 1997
compared to $29.5 million at June 30, 1997. Mortgage-backed and related
securities held-to-maturity decreased to $78.2 million at December 31, 1997
compared to $85.4 million at June 30, 1997. 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 $286.7 million at December 31, 1997 compared to
$273.6 million at June 30, 1997. Not including one-to-four family loans the
increase at December 31, 1997 compared to June 30, 1997 is primarily the result
of management's decision to retain its ARM, intermediate-term (15 year) and
long-term (30 year) fixed-rate loans originated and purchased for the Company's
portfolio, as such loans carried higher yields than comparable mortgage-backed
and related securities during the six months ended December 31, 1997. Total
mortgage loans originated and purchased amounted to $62.8 million ($2.6 million
of which were purchased mortgage loans) and $52.6 million ($10.5 million of
which were purchased mortgage loans) for the six months ended December 31, 1997
and 1996, respectively, while sales of fixed-rate mortgage loans totaled $4.4
million and $922,000 for the six months ended December 31, 1997 and 1996,
respectively. Total commercial real estate mortgage loans originated and
purchased totaled $7.4 million and $550,000 for the six months ended December
31, 1997 and 1996, respectively.
Office properties and equipment increased $2.5 million to $5.6 million at
December 31, 1997 from $3.1 million at June 30, 1997. The primary reason for
the increase was the purchase of a office building for $2.5 million which will
be used for administrative and full-service banking purposes.
Deposits decreased $18.4 million to $263.1 million at December 31, 1997 from
$281.5 million at June 30, 1997. The decrease in deposits was primarily due to
the Company's use of FHLB advances during the six months ended December 30,
1997, which carried attractive rates relative to certificates of deposit.
Brokered certificates of deposit totaled $90.8 million at December 31, 1997,
representing 32.2% of total deposits as compared to $92.2 million, or 32.8% of
total deposits, at June 30, 1997. Non-brokered wholesale deposits totaled
$44.9 million at December 31, 1997, representing 16.0% of total deposits as
compared to $48.8 million, or 17.3% of total deposits at June 30, 1997.
Deposits are the Company's primary source of externally generated funds. The
level of deposits is heavily influenced by such factors as the general level of
short- and long-term interest rates as well as alternative yields that
investors may obtain on competing investment securities such as money market
mutual funds.
FHLB-Chicago advances increased to $115.6 million at December 31, 1997 compared
to $92.1 million at June 30, 1997. At December 31 and June 30, 1997, the
Company had no funds borrowed under reverse repurchase agreements. The Company
has used FHLB-Chicago advances and securities sold under agreements to
repurchase as a funding source due to attractive rates offered on advances in
relation to deposit funds obtainable in the Company's local market.
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
six months ended December 31, 1997, the Company utilized FHLB-advances to fund
14
17
increases in the Company's interest-bearing assets due primarily to the
attractive rates offered on long-term FHLB advances. At December 31, 1997, the
Company's estimated cumulative one-year gap between assets and liabilities was
a negative 4.6% of total assets as compared to a negative 4.3% at June 30,
1997. For the six months ended December 30, 1997, the Company managed its
interest rate risk to maintain the level of its one-year negative gap position
by matching the maturity of the Company's liabilities, primarily through the
use of FHLB advances. During periods of rising interest rates, a positive
interest rate sensitivity gap would tend to positively affect net interest
income, while a negative interest rate sensitivity gap would adversely affect
net income. Although the opposite effect on net income would occur in periods
of falling interest rates, the Company could experience substantial prepayments
of its fixed rate mortgage loans and mortgage-backed and related securities,
which would result in the reinvestment of such proceeds at market rates which
are lower than current rates.*
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18
ASSET/LIABILITY MANAGEMENT SCHEDULE
The following table sets forth at December 31, 1997 the amounts of
interest-earning assets and interest-bearing liabilities maturing or repricing
within the time periods indicated, based on the information and assumptions set
forth in the notes thereto.
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 .................................... $ 6,909 $ 18,508 $ 41,886 $ 30,482 $ 31,373 $129,158
Adjustable rate ............................... 27,561 45,342 61,484 6,492 400 141,279
Consumer loans (2) ................................. 382 3,827 980 320 24 5,533
Commercial loans (2) ............................... 1,730 3,392 3,195 667 - 8,984
Mortgage-backed and related securities:
Fixed rate and securities available-for-sale .. 1,116 3,157 8,010 3,374 3,851 17,508
Adjustable rate ............................... 51,212 23,008 - - - 74,220
Investment securities and
securities available-for-sale ...................... 15,472 1,725 358 4,972 832 23,359
-------- --------- ----------- ----------- --------- --------
Total interest-earning assets ................. $104,382 $ 98,959 $ 113,913 $ 46,307 $ 36,480 $400,041
======== ========= =========== =========== ========= ========
INTEREST-BEARING LIABILITIES:
Deposits(3):
NOW accounts .................................. $ 201 $ 604 $ 958 $ 469 $ 451 $2,683
Money market deposit accounts ................. 3,817 11,451 8,551 1,368 261 25,448
Passbook savings accounts ..................... 1,541 4,824 7,336 3,595 3,454 20,550
Certificates of deposit ....................... 42,613 102,888 57,925 2,444 205,870
Escrow deposits ............................... - 259 - - - 259
Borrowings(4)
FHLB advances and other borrowings ............ 25,500 29,500 38,012 8,000 14,561 115,573
-------- --------- ----------- ----------- --------- --------
Total interest-bearing liabilities ............ $ 73,672 $ 149,326 $ 112,782 $ 15,876 $ 18,727 $369,883
======== ========= =========== =========== ========= ========
Excess (deficiency) of interest-earning assets over
interest-bearing liabilities ....................... $ 31,210 ($50,367) $ 1,131 $ 30,431 $ 17,753 $ 30,158
======== ========= =========== =========== ========= ========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities ........... $ 31,210 ($19,157) ($18,026) $ 12,405 $ 30,158 $ 30,158
======== ========= =========== =========== ========= ========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities
as a percent of total assets ....................... 7.6% (4.6)% (4.4)% 3.0% 7.3% 7.3%
======== ========= =========== =========== ========= ========
(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 $12 million at December 31,
1997.
(3) Although the Company's negotiable order of withdrawal ("NOW") accounts,
passbook savings accounts and money market deposit accounts generally are
subject to immediate withdrawal, management considers a certain historical
amount of such accounts to be core deposits having significantly longer
effective maturities and times to repricing based on the Company's
historical retention of such deposits in changing interest rate
environments. NOW accounts, passbook savings accounts and money market
deposit accounts are assumed to be withdrawn at annual rates of 30%, 30%
and 60%, respectively, of the declining balance of such accounts during
the period shown. The withdrawal rates used are higher than the Company's
historical rates but are considered by management to be more indicative of
expected withdrawal rates currently. If all of the Company's NOW
accounts, passbook savings accounts and money market deposit accounts had
been assumed to be subject to repricing within one year, the one-year
cumulative deficiency of interest-earning assets over interest-bearing
liabilities would have been $45.6 million or 11.0% 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.
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ASSET QUALITY
The Company and the Bank regularly review assets to determine proper valuation.
The review consists of an update of the historical loss experience, valuation
of the underlying collateral and the outlook for the economy in general as well
as the regulatory environment.
The following table sets forth information regarding the Bank's non-accrual
loans and foreclosed properties at the dates indicated:
THREE MONTHS ENDED
DEC 31 SEP 30 JUN 30 MAR 31 DEC 31
1997 1997 1997 1997 1996
---------- ---------- ---------- ------- ------
Non-accrual mortgage loans......... $ 337 $ 223 $ 572 $ 45 $ 33
Non-accrual consumer loans......... 29 33 20 10 43
---------- ---------- ---------- ------ ------
Total non-accrual loans............ $ 366 $ 256 $ 592 $ 55 $ 76
Loans 90 days or more ========== ========== ========== ====== ======
delinquent and still accruing.... 60 30 31 13 9
---------- ---------- ---------- ------ ------
Total non-performing loans......... $ 426 $ 286 $ 623 $ 68 $ 85
Total foreclosed real estate net of ========== ========== ========== ====== ======
related allowance for losses..... 11 247 20 0 18
---------- ---------- ---------- ------ ------
Total non-performing assets........ $ 437 $ 533 $ 643 $ 68 $ 103
Non-performing loans to ========== ========== ========== ====== ======
gross loans receivable........... 0.14% 0.10% 0.22% 0.02% 0.02%
Non-performing assets to ========== ========== ========== ====== ======
total assets..................... 0.11% 0.13% 0.16% 0.02% 0.03%
========== ========== ========== ====== ======
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ALLOWANCE FOR LOAN LOSSES
The following table sets forth an analysis of the Bank's allowance for loan
losses:
SIX MONTHS YEAR SIX MONTHS
ENDED ENDED ENDED
DEC. 31, 1997 JUNE 30, 1997 DEC. 31, 1996
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Balance at beginning of period ............ $ 1,762 $ 1,234 $ 1,234
Additions charged to operations:
One- to four-family ...................... - 295 59
Multi-family and commercial real estate .. 242 181 185
Consumer ................................. 103 114 104
Commercial ............................... 95 60 -
------- ------- ---------
440 650 179
Recoveries:
One- to four-family ...................... - 1 1
Consumer ................................. 15 5 -
------- ------- ---------
15 6 1
Charge-offs:
One- to four-family ...................... (69) (11) -
Consumer ................................. (86) (117) (63)
------- ------- ---------
(155) (128) (63)
------- ------- ---------
Net charge-offs ........................... (140) (122) (62)
------- ------- ---------
Balance at end of period .................. $ 2,062 $ 1,762 $ 1,520
======= ======= =========
Allowance for loan losses to
non-performing loans at end
of the period ............................. 484.04% 282.37% 1,788.24%
======= ======= =========
Allowance for loan losses to
total loans at end of the period .......... 0.69% 0.62% 0.56%
======= ======= =========
The level of allowance for loan losses at December 31, 1997, reflects the
continued low level of charged off and non-performing loans. Management
believes that the allowance for loan losses is adequate as of December 31,
1997.
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21
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1997
AND 1996
GENERAL
Net income for the three months ended December 31, 1997 increased to $714,000
from $573,000 for the comparable 1996 period. The increase in net income was
primarily due to a increase in net interest income. Net income for the 1996
period would have been $490,000 excluding a FDIC after-tax refund credit of
$83,000 due to the overcapitalization of the SAIF. Return on average equity
increased to 9.19% for the three months ended December 31, 1997 from 8.28% for
the comparable 1996 period (or 7.08% excluding the effect of the FDIC credit
refund). Return on average assets increased to 0.68% for the three months
ended December 31, 1997 from 0.58% for the comparable 1996 period (or 0.50%
excluding the effect of the FDIC refund credit).
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 DECEMBER 31,
---------------------------------------------------------------
1 9 9 7 1 9 9 6
------------------------------- ------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
-------- -------- ----------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Mortgage loans ........................... $271,023 $5,698 8.41% $242,028 $4,828 7.98%
Consumer loans ........................... 5,350 175 13.08 6,108 193 12.64
Commercial loans ......................... 6,208 161 10.37 - - -
-------- -------- ----------- --------
Total loans ........................... 282,581 6,034 8.54 248,136 5,021 8.09
Securities held-to-maturity:
Mortgage-backed securities .............. 42,438 751 7.08 51,412 917 7.13
Mortgage related securities ............. 37,806 650 6.88 40,764 676 6.63
-------- -------- ----------- --------
Total mortgage-backed
and related securities ................ 80,244 1,401 6.98 92,176 1,593 6.81
Investment and other securities .......... 13,925 227 6.52 4,716 76 6.45
Securities available-for-sale ............ 24,915 401 6.44 33,222 554 6.67
Federal Home Loan Bank stock ............. 5,614 99 7.05 5,147 90 6.99
-------- -------- ----------- --------
Total interest-earning assets ........... 407,279 8,162 8.02 383,397 7,334 7.65
Non-interest earning assets ............... 11,238 9,460
-------- -----------
Total assets ............................ $418,517 $392,857
======== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW accounts ............................. $2,623 11 1.68% $2,314 10 1.73%
Money market deposit accounts ............ 24,205 315 5.21 14,363 191 5.32
Passbook accounts ........................ 21,207 159 3.00 23,608 173 2.93
Certificates of deposit .................. 215,161 3,272 6.08 207,732 3,053 5.88
-------- -------- ----------- --------
Total deposits .......................... 263,196 3,757 5.71 248,017 3,427 5.53
Advance payments by borrowers
for taxes and insurance................... 4,197 32 3.05 4,762 36 3.02
Borrowings ................................ 108,572 1,696 6.25 102,197 1,533 6.00
-------- -------- ----------- --------
Total interest-bearing liabilities ...... 375,965 5,485 5.84 354,976 4,996 5.63
Non-interest bearing deposits
and liabilities .......................... 11,469 10,213
Shareholders' equity ...................... 31,083 27,668
-------- -----------
Total liabilities and
shareholders' equity ................... $418,517 $392,857
======== ===========
Net interest income/interest rate spread .. $2,677 2.18% $2,338 2.02%
======== =========== ======== =======
Net earning assets/net interest margin .... $31,314 2.63% $28,421 2.44%
======== =========== =========== =======
19
22
Net interest income before provision for losses on loans increased $339,000 or
14.5% to $2.7 million for the three months ended December 31, 1997 from $2.3
million for the comparable 1996 period. Interest income increased $828,000 for
the three months ended December 31, 1997, partially offset by an increase in
interest expense of $489,000. The level of net interest income primarily
reflects an 6.2% increase in average interest-earning assets to $407.3 million
for the three months ended December 31, 1997 from $383.4 million for the
comparable 1996 period, a 10.2% increase in the excess of the Company's average
interest-earning assets over average interest-bearing liabilities to $31.3
million for the three months ended December 31, 1997 from $28.4 million for the
comparable 1996 period, and an increase in interest rate spread to 2.18% for
the three months ended December 31, 1997 from 2.02% for the comparable 1996
period. The increase in interest rate spread was primarily due to the
increased proportion of interest earning assets invested in loans which carry
higher yields than investment securities and mortgage-backed and related
securities.
INTEREST INCOME
Interest income increased 11.3% to $8.2 million for the three months ended
December 31, 1997 from $7.3 million for the comparable 1996 period. The
increase in interest income was the result of an increase in average
interest-earning assets of 6.2% to $407.3 million for the three months ended
December 31, 1997 from $383.4 million for the comparable 1996 period and an
increase of 37 basis points in the yield on interest-earning assets to 8.02%
for the three months ended December 31, 1997 from 7.65% for the comparable 1996
period. Interest income on loans increased 20.2% to $6.0 million for the three
months ended December 31, 1997, from $5.0 million for the comparable 1996
period. The increase was the result of a rise in the Company's average gross
loans of 13.9% to $282.6 million for the three months ended December 31, 1997
from $248.1 million for the comparable 1996 period, and an increase in average
yield to 8.54% for the three months ended December 31, 1997 from 8.09% for the
comparable 1996 period. Gross loans increased primarily as a result of the
Company retaining substantially all of its adjustable and fixed rate loan
originations and purchasing more loans in the secondary market. The increase
in yield is attributable to the upward adjustment in rate on existing
adjustable-rate loans and to the higher yields paid on the multi-family and
commercial components of the loan portfolio. At December 31, 1997 the
multifamily and commercial components of the Company's loan portfolio totaled
$90.7 million, or 30.5% of the total loan portfolio, compared to $50.1 million,
or 18.4% of the total loan portfolio at December 31, 1996. Interest income on
mortgage-backed securities decreased 18.1% to $751,000 for the three months
ended December 31, 1997 from $917,000 for the comparable 1996 period. The
decrease was primarily due to a decrease in average balances to $42.4 million
for the three months ended December 31, 1997 from $51.4 million for the
comparable 1996 period and a decrease in average yield to 7.08% for the 1997
period from 7.13% for the 1996 period. The decrease in average yield on
mortgage-backed securities was primarily due to the adjustment in the
adjustable rate securities portion of this portfolio which is decreased due to
the lower interest rate environment in the 1997 period. Interest income on
mortgage-related securities decreased 3.8% to $650,000 for the three months
ended December 31, 1997 from $676,000 for the comparable 1996 period. The
decrease was primarily due to a decrease in average balances to $37.8 million
for the three months ended December 31, 1997 from $40.8 million for the
comparable 1996 period, partially offset by a increase in average yield to
6.88% for the three months ended December 31, 1997 from 6.63% for the
comparable 1996 period. The increase in average yield on mortgage-related
securities was primarily due to the upward adjustment in rate on the adjustable
rate securities of this portfolio and the decreased amount of fixed rate
mortgage-related securities at lower interest rates during the three months
ended December 31, 1997. The decline in average balances of mortgage-backed
and related securities is due to management's decision to increase the loans
receivable portfolio. Interest income on investment securities and securities
available-for-sale decreased 0.3% to $628,000 for the three months ended
December 31, 1997 from $630,000 for the comparable 1996 period. The decrease
was primarily due to a decrease in average yield to 6.47% for the three months
ended December 31, 1997 from 6.64% for the comparable 1996 period, offset by a
increase in average balance to $38.8 million for the 1997 period from $37.9
million for the 1996 period. The lower average yield was primarily
attributable to the decreased balances of investment and other securities
invested at lower short-term interest rates that existed during the 1997 period
as compared to the 1996 period.
20
23
INTEREST EXPENSE
Interest expense increased 9.8% to $5.5 million for the three months ended
December 31, 1997 from $5.0 million for the comparable 1996 period. The
increase was the result of an 5.9% increase in the average amount of
interest-bearing liabilities to $376.0 million for the three months ended
December 31, 1997 compared to $355.0 million for the comparable 1996 period and
an increase in the average rate paid on interest-bearing liabilities to 5.84%
for the 1997 period from 5.63% for the 1996 period. The increased balances of
certificates of deposit (including brokered deposits), money market deposit
accounts and borrowings at higher average interest rates was the primary reason
for the increase in the average rate paid on the interest-bearing liabilities
for the three months ended December 31, 1997 as compared to the comparable 1996
period. Interest expense on deposits increased 9.6% to $3.8 million for the
three months ended December 31, 1997 from $3.4 million for the comparable 1996
period. The increase was the result of an increase in average balances of 6.1%
to $263.2 million for the three months ended December 31, 1997 from $248.0
million for the comparable 1996 period, and an increase in the average rate
paid to 5.71% for the 1997 period from 5.53% for the 1996 period. The increase
in deposits was primarily due to an increase of 68.5% in money market deposit
accounts to $24.2 million for the three months ended December 31, 1997 from
$14.4 million for the comparable 1996 period offset by a decrease in average
rate paid to 5.21% for the 1997 period from 5.32% for the 1996 period. Money
market deposit accounts increased primarily due to aggressive marketing and a
competitive rate offered during the three months ended December 31, 1997.
Certificate of deposit accounts (including brokered deposits) increased 3.6% to
$215.2 million for the three months ended December 31, 1997 from $207.7 million
for the 1996 period and an increase in average rate to 6.08% for the 1997
period from 5.88% for the 1996 period. NOW accounts increased 13.4% to $2.6
million for the three months ended December 31, 1997 from $2.3 million for the
comparable 1996 period, partially offset by a decrease in average rate paid to
1.68% for the 1997 period from 1.73% for the 1996 period. These increases were
partially offset by an average balance decline of 10.2% in passbook accounts to
$21.2 million for the three months ended December 31, 1997 from $23.6 million
for the comparable 1996 period. The Company's increase in certificates of
deposit was the result of aggressive marketing and pricing and the use of
brokered certificates of deposit. Of the $227.0 million in the average balance
of certificates of deposit for the three months ended September 30, 1997, $91.1
million or 40.1% represented brokered certificates of deposit compared to $78.6
million or 40.5% for the 1996 period. The average rate paid on brokered
certificates of deposit increased to 6.13% for the three months ended September
30, 1997 from 5.75% for the comparable 1996 period. The increase was primarily
due to management's decision to lengthen the maturities of such deposits during
the 1997 period. Interest on borrowings (FHLB advances and reverse repurchase
agreements) decreased 10.6% to $1.7 million for the months ended December 31,
1997 from $1.5 million for the comparable 1996 period. The increase was
primarily due to the increase in average balances of FHLB advances and reverse
repurchase agreements of 6.2% to $108.6 million for the three months ended
December 31, 1997 from $102.2 million for the comparable 1996 period and an
increase in the average rate paid to 6.25% for the 1997 period from 6.00% for
the 1996 period.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased 41.2% to $240,000 for the three
months ended December 31, 1997 from $170,000 for the comparable 1996 period.
The level of allowance for losses on loans generally is determined by the
Bank's historical loan loss experience, the condition and composition of the
Bank's loan portfolio, and existing and anticipated general economic
conditions. Management anticipates that as the Company's volume of
multi-family and commercial/non-residential real estate lending activity
continues to increase, the Company will need to build a higher level of
allowance for loan losses established through a provision for loan losses.*
Based on management's evaluation of the loan portfolio and the increase in
gross loans during the three months ended December 31, 1997, the allowance for
losses on loans increased 35.7% to $2.1 million at December 31, 1997 compared
to $1.5 million at December 31, 1996. This increase was primarily the result
of the increase in multi-family, multi-family construction, home equity,
commercial real estate and commercial loan components of the gross loan
portfolio which carry a greater degree of credit risk as compared to
one-to-four family mortgage lending. The ratio of allowance for loan losses to
gross loans increased to 0.69% at December 31, 1997 from 0.56% at December 31,
1996, reflecting the continued low level of loans charged off and
non-performing loans. The amount of non-performing loans at December 31, 1997
was
21
24
$349,000 or .12% of gross loans compared to $623,000 or 0.22% of gross loans at
June 30, 1997 and $85,000 or 0.02% of gross loans at December 31, 1996.
NON-INTEREST INCOME
Non-interest income decreased 1.3% to $236,000 for the three months ended
December 31, 1997 from $239,000 for the comparable 1996 period. The largest
components of the decrease were a decrease in insurance commissions to $4,000
for the three months ended December 31, 1997 compared to $27,000 for the
comparable 1996 period and a decrease in service charges on deposit accounts to
$109,000 for the three months ended December 31, 1997 from $127,000 for the
comparable 1996 period. Offsetting the decreases in non-interest income was an
increase in service charges on loans to $90,000 for the three months ended
December 31, 1997 compared to $45,000 for the comparable 1996 period, primarily
reflecting the increased loan portfolio and loan volume, and an increase in
gains on the sale of securities and mortgage-backed and related securities to
$9,000 for the three months ended December 31, 1997 from $0 for the comparable
1996 period, reflecting management's decision to sell available-for-sale
securities to fund loan demand in the 1997 period.
NON-INTEREST EXPENSE
Non-interest expense increased 4.2% to $1.576 million for the three months
ended December 31, 1997 from $1.513 million for the comparable 1996 period.
The increase was primarily due to a increase in FDIC deposit insurance premiums
of $56,000 to $45,000 for the three months ended December 31, 1997 from (
$11,000) for the comparable 1996 period, which relates to a one-time refund
credit received in the 1996 period. Also, compensation and benefits expense
increased $41,000 to $929,000 for the three months ended December 31, 1997
from $888,000 for the comparable 1996 period, and occupancy and equipment
expense increased $45,000 to $252,000 for the three months ended December 31,
1997 from $207,000 for the comparable 1996 period. The increase in compensation
and benefits expense primarily relates to higher salary levels and an increase
in the number of full time equivalent employees. The increase in occupancy and
equipment primarily relates to increased purchases of bank equipment.
Offsetting the increases in non-interest expense was a decrease in other
non-interest expense of $80,000 to $247,000 for the three months ended December
31, 1997 from $327,000 for the 1996 period. The decrease is primarily due to
decreases in printing, office supplies, organization dues, legal and other
miscellaneous expenses.
The Company is heavily dependent upon complex computer systems for all phases
of its operations, including customer transaction processing, internal/external
reporting and records retention. Non-interest expense includes the cost of
projects underway to ensure accurate date recognition and data processing with
respect to the year 2000. The Company has commenced a program intended to
complete the year 2000 conversion projects by 1999. These costs which are
expensed as incurred, have been immaterial to date and are not expected to have
a material impact on the Company's earnings in the future.
22
25
RESULTS OF OPERATIONS - COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 1997
AND 1996
GENERAL
Net income for the six months ended December 31, 1997 increased to $1.4
million from $516,000 for the comparable 1996 period. The increase in net
income was primarily due to a one-time after-tax charge of $533,000 to
recapitalize SAIF, the FDIC insurance fund which insures deposits of savings
associations, in the 1996 period, offset by an after-tax FDIC credit refund of
$83,000. Net income for the 1996 period would have been $966,000 excluding
the FDIC special assessment and credit refund. Return on average equity
increased to 8.88% for the six months ended December 31, 1997 from 3.76% for
the comparable 1996 period (or 7.03% excluding the effect of the FDIC
assessment). Return on average assets increased to 0.65% for the six months
ended December 31, 1997 from 0.27% for the comparable 1996 period (or 0.50%
excluding the effect of the FDIC assessment).
NET INTEREST INCOME
The following table presents certain information related to average
interest-earning assets and liabilities, net interest rate spread and net
interest margin:
FOR THE SIX MONTHS ENDED DECEMBER 31,
---------------------------------------------------------------
1 9 9 7 1 9 9 6
------------------------------- ------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
-------- -------- ----------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Mortgage loans ........................... $268,940 $11,258 8.37% $233,840 $ 9,319 7.97%
Consumer loans ........................... 5,483 368 13.42 6,178 393 12.72
Commercial loans ......................... 5,534 267 9.65 - - -
-------- ------- -------- -------
Total loans ........................... 279,957 11,893 8.50 240,018 9,712 8.09
Securities held-to-maturity:
Mortgage-backed securities .............. 43,661 1,561 7.15 52,755 1,849 7.01
Mortgage related securities ............. 38,344 1,314 6.85 40,988 1,364 6.66
-------- ------- -------- -------
Total mortgage-backed
and related securities ................ 82,005 2,875 7.01 93,743 3,213 6.85
Investment and other securities .......... 11,603 382 6.58 4,636 142 6.13
Securities available-for-sale ............ 25,783 827 6.42 34,394 1,155 6.72
Federal Home Loan Bank stock ............. 5,471 189 6.91 5,135 177 6.89
-------- ------- -------- -------
Total interest-earning assets .......... 404,819 16,166 7.99 377,926 14,399 7.62
Non-interest earning assets ............... 11,668 9,385
-------- --------
Total assets ............................ $416,487 $387,311
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
NOW accounts ............................. $ 2,608 22 1.69% $ 2,313 20 1.73%
Money market deposit accounts ............ 22,877 597 5.22 11,994 312 5.20
Passbook accounts ........................ 21,405 321 3.00 23,808 365 3.07
Certificates of deposit .................. 220,399 6,722 6.10 200,638 5,858 5.84
-------- ------- -------- -------
Total deposits .......................... 267,289 7,662 5.73 238,753 6,555 5.49
Advance payments by borrowers
for taxes and insurance................... 4,129 61 2.95 4,539 67 2.95
Borrowings ................................ 103,358 3,196 6.18 106,260 3,155 5.94
-------- ------- -------- -------
Total interest-bearing liabilities ...... 374,776 10,919 5.83 349,552 9,777 5.59
Non-interest bearing deposits
and liabilities .......................... 11,108 10,296
Shareholders' equity ...................... 30,603 27,463
-------- --------
Total liabilities and
shareholders' equity ................... $416,487 $387,311
======== ========
Net interest income/interest rate spread .. $ 5,247 2.16% $ 4,622 2.03%
======= ===== ======= ====
Net earning assets/net interest margin .... $ 30,043 2.59% $ 28,374 2.45%
======== ===== ======== ====
23
26
Net interest income before provision for losses on loans increased $625,000 or
13.5% to $5.2 million for the six months ended December 31, 1997 from $4.6
million for the comparable 1996 period. Interest income increased $1.8 for the
six months ended December 31, 1997, partially offset by an increase in interest
expense of $1.2 million. The level of net interest income primarily reflects a
7.1% increase in average interest-earning assets to $404.8 million for the six
months ended December 31, 1997 from $377.9 million for the comparable 1996
period, a 5.9% increase in the excess of the Company's average interest-earning
assets over average interest-bearing liabilities to $30.0 million for the six
months ended December 31, 1997 from $28.4 million for the comparable 1996
period, and an increase in interest rate spread to 2.16% for the six months
ended December 31, 1997 from 2.03% for the comparable 1996 period. The
increase in interest rate spread was primarily due to the increased proportion
of interest earning assets invested in loans which carry higher yields than
investment securities and mortgage-backed and related securities.
INTEREST INCOME
Interest income increased 12.3% to $16.2 million for the six months ended
December 31, 1997 from $14.4 million for the comparable 1996 period. The
increase in interest income was the result of an increase in average
interest-earning assets of 7.1% to $404.8 million for the six months ended
December 31, 1997 from $377.9 million for the comparable 1996 period and an
increase of 37 basis points in the yield on interest-earning assets to 7.99%
for the six months ended December 31, 1997 from 7.62% for the comparable 1996
period. Interest income on loans increased 22.5% to $11.9 million for the six
months ended December 31, 1997 from $9.7 million for the comparable 1996
period. The increase was the result of a rise in the Company's average gross
loans of 16.6% to $280.0 million for the six months ended December 31, 1997
from $240.0 million for the comparable 1996 period, and an increase in average
yield to 8.50% for the six months ended December 31, 1997 from 8.09% for the
comparable 1996 period. Gross loans increased primarily as a result of the
Company retaining substantially all of its adjustable and fixed rate loan
originations and purchasing more loans in the secondary market. The increase
in yield is attributable to the upward adjustment in rate on existing
adjustable-rate loans and to the higher yields paid on the multi-family and
commercial components of the loan portfolio. At December 31, 1997, the
multi-family and commercial components of the company's loan portfolio totaled
$90.7 million, or 30.5% of the total loan portfolio, compared to $50.1 million,
or 18.4% of the total loan portfolio at December 31, 1996. Interest income on
mortgage-backed securities decreased 15.6% to $1.6 million for the six months
ended December 31, 1997 from $1.8 million for the comparable 1996 period. The
decrease was primarily due to a decrease in average balances to $43.7 million
for the six months ended December 31, 1997 from $52.8 million for the
comparable 1996 period offset by a increase in average yield to 7.15% for the
1997 period from 7.01% for the 1996 period. Interest income on
mortgage-related securities decreased 3.7% to $1.3 million for the six months
ended December 31, 1997 from $1.4 million for the comparable 1996 period. The
decrease was primarily due to a decrease in average balances to $38.3 million
for the six months ended December 31, 1997 from $41.0 million for the
comparable 1996 period, partially offset by a increase in average yield to
6.85% for the six months ended December 31, 1997 from 6.66% for the comparable
1996 period. The increase in average yield on mortgage-backed and mortgage
related securities was primarily due to the upward adjustment in rate on the
adjustable rate securities of this portfolio and the decreased amount of fixed
rate mortgage-related securities at lower interest rates during the six months
ended December 31, 1997. The decline in average balances of mortgage-backed
and related securities is due to management's decision to increase the loans
receivable portfolio. Interest income on investment securities and securities
available-for-sale decreased 6.8% to $1.2 million for the six months ended
December 31, 1997 from $1.3 million for the comparable 1996 period. The
decrease was primarily due to a decrease in average balance to $37.4 million
for the six months ended December 31, 1997 from $39.0 million for the 1996
period and a decrease in average yield to 6.47% for the 1997 period from 6.65%
for the 1996 period. The lower average yield was primarily attributable to the
decreased balances of investment and other securities invested at lower
short-term interest rates than existed during the 1997 period as compared to
the 1996 period.
24
27
INTEREST EXPENSE
Interest expense increased 11.7% to $10.9 million for the six months ended
December 31, 1997 from $9.8 million for the comparable 1996 period. The
increase was the result of an 7.2% increase in the average amount of
interest-bearing liabilities to $374.8 million for the six months ended
December 31, 1997 compared to $349.6 million for the comparable 1996 period and
an increase in the average rate paid on interest-bearing liabilities to 5.83%
for the 1997 period from 5.59% for the 1996 period. The increased balances of
certificates of deposit (including brokered deposits), money market deposit
accounts and borrowings at higher average interest rates was the primary reason
for the increase in the average rate paid on the interest-bearing liabilities
for the six months ended December 31, 1997 as compared to the comparable 1996
period. Interest expense on deposits increased 16.9% to $7.7 million for the
six months ended December 31, 1997 from $6.6 million for the comparable 1996
period. The increase was the result of an increase in average balances of
11.6% to $267.3 million for the six months ended December 31, 1997 from $238.8
million for the comparable 1996 period, and an increase in the average rate
paid to 5.73% for the 1997 period from 5.49% for the 1996 period. The increase
in deposits was primarily due to an increase of 9.8% in certificates of deposit
(including brokered deposits) to $220.4 million for the six months ended
December 31, 1997 from $200.6 million for the 1996 period and a increase in
average rate to 6.10% for the 1997 period from 5.84% for the 1996 period. Money
market deposit accounts increased 90.7% to $22.9 million for the six months
ended December 31, 1997 from $12.0 million for the comparable 1996 period and
increase in average rate paid to 5.22% for the 1997 period from 5.20% for the
1996 period. Money market deposit accounts increased primarily due to
aggressive marketing and a competitive rate offered during the three months
ended December 31, 1997. NOW accounts increased 12.8% to $2.6 million for the
six months ended December 31, 1997 from $2.3 million for the comparable 1996
period, partially offset by a decrease in average rate paid to 1.69% for the
1997 period from 1.73% for the 1996 period. These increases were partially
offset by an average balance decline of 10.1% in Passbook accounts to $21.4
million for the three months ended December 31, 1997 from $23.8 million for the
comparable 1996 period. The Company's increase in certificates of deposit was
the result of aggressive marketing and pricing and the use of brokered
certificates of deposit. Of the $220.4 million in the average balance of
certificates of deposit for the six months ended December 31, 1997, $91.1
million or 40.1% represented brokered certificates of deposit compared to $78.6
million or 40.5% for the 1996 period. The average rate paid on brokered
certificates of deposit increased to 6.13% for the six months ended December
31, 1997 from 5.75% for the comparable 1996 period. The increase was primarily
due to management's decision to lengthen the maturities of such deposits during
the 1997 period. Interest on borrowings (FHLB advances and reverse repurchase
agreements) increased 1.3% to $3.196 million for the six months ended December
31, 1997 from $3.155 million for the comparable 1996 period. The increase was
primarily due to the increase in average rate paid to 6.18% for the six months
ended December 31, 1997 from 5.94% for the 1996 period offset by a decrease in
average balance to $103.4 million for the six months ended December 31, 1997
from $106.3 million for the comparable 1996 period.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased 24.3% to $440,000 for the six
months ended December 31, 1997 from $354,000 for the comparable 1996 period.
For a discussion of the factors considered by management in determining the
appropriate level of allowance for losses on loans to be established through a
provision for losses on loans, see comments under "Provision for Losses on
Loans" contained in the section entitled, "Results of Operations - Comparison
of the Three Months Ended December 31, 1997 and 1996."
NON-INTEREST INCOME
Non-interest income decreased 8.6% to $436,000 for the six months ended December
31, 1997 from $477,000 for the comparable 1996 period. The largest components
of the decrease were a decrease in insurance commissions to $8,000 for the six
months ended December 31, 1997 compared to $48,000 for the comparable 1996
period, a decrease in service charges on deposit accounts to $223,000 for the
six months ended December 31, 1997 from $256,000 for the comparable 1996 period
and a decrease in gains on the sale of securities and mortgage-backed and
related securities to ($8,000) for the six months
28
ended December 31, 1997 from $7,000 for the 1996 period. Offsetting the
decreases in non-interest income was an increase in service charges on loans to
$135,000 for the six months ended December 31, 1997 compared to $79,000 for the
comparable 1996 period, primarily reflecting the increased loan portfolio and
loan volume and an increase in gains on the sale of loans to $23,000 for the
six months ended December 31, 1997 from $13,000 for the comparable 1996 period.
NON-INTEREST EXPENSE
Non-interest expense decreased 19.9% to $3.2 million for the six months ended
December 31, 1997 from $3.9 million for the comparable 1996 period. The
decrease was primarily due to a decrease in FDIC deposit insurance premiums of
$916,000 to $88,000 for the six months ended December 31, 1997 from $1.0 for
the comparable 1996 period, which relates to a FDIC industry-wide special
assessment of $877,000 offset by a refund credit of $137,000. Also, other
non-interest expense decreased $45,000 to $533,000 for the six months ended
December 31, 1997 from $578,000 for the 1996 period. The decrease is primarily
due to decreases in printing, office supplies, organization dues, legal and
other miscellaneous expenses. Offsetting the decreases in non-interest expense
was an increase in compensation and benefits of $124,000 to $1.9 million for
the six months ended December 31, 1997 from $1.8 million for the 1996 period.
The increase in compensation and benefits expense primarily relates to higher
salary levels and an increase in the number of full-time equivalent employees.
Also, occupancy and equipment expense increased $45,000 to $495,000 for the
six months ended December 31, 1997 from $445,000 for the 1996 period. The
increase in occupancy and equipment primarily relates to increased purchases of
bank equipment.
26
29
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts and other financial instruments with similar
characteristics. The Company currently does not enter into futures, forwards,
swaps or options. However, the Company is party to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments consist primarily of
commitments to extend credit. These instruments involve to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets. Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates
and may require collateral from the borrower if deemed necessary by the
Company.
The information required herein pursuant to Item 305 of Regulation S-K is
incorporated by reference in sections entitled "Liquidity and Capital Resources"
from pages 12 to 13 and "Asset/Liability Management" from pages 14 to 15 hereof.
27
30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company and the Bank are parties to legal
proceedings arising out of its lending activities and other operations.
However, there are no pending legal proceedings of which the Company or
the Bank is a party which, if determined adversely to the Company or
the Bank, would have a material adverse effect on the consolidated
financial position of the Company.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on October
30, 1997. There were 1,442,950 shares of Common Stock of the Company
entitled to vote at the Annual Meeting, and 1,197,530 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
-------------------------------------------
Against or Broker
For Withheld Abstain Non-Votes
----------- ---------- ------- ---------
Nominees for Director for
Three-Year Term Expiring in 2000
James D. Smessaert ................. 1,184,155 13,375 - -
Approval of amendment to the
Hallmark Capital Corp. 1993
Incentive Stock Option Plan .............. 793,901 84,008 43,692 275,929
Approval of amendment to the
Hallmark Capital Corp. 1993
Stock Option Plan for Outside Directors .. 781,783 94,896 44,922 275,929
Ratification of KPMG Peat Marwick LLP
as independent auditors for
fiscal year ending June 30, 1998 ......... 1,163,888 21,868 11,774 -
The continuing directors of the Company include: Peter A. Gilbert,
Reginald M. Hislop III, Floyd D. Brink, Charles E. Rickheim and
Donald A. Zellmer.
ITEM 5. OTHER INFORMATION
The Company declared a two-for one stock split in the form of a 100%
stock dividend on October 30, 1997. Shareholders received one
additional share of common stock for each share of common stock owned
as of the record date, November 10, 1997. As a result of the stock
split, the number of shares of common stock outstanding increased to
2,993,608 from 1,442,950.
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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.
* * * * * * * * * * * * * * * * * * * * * * * * * * *
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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: February 11, 1998 /s/ James D. Smessaert
-----------------------------
James D. Smessaert
Chairman of the Board
Chief Executive Officer
Date: February 11, 1998 /s/ Arthur E. Thompson
-----------------------------
Arthur E. Thompson
Chief Financial Officer
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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.
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