SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1996 (NO FEE REQUIRED)
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (NO FEE REQUIRED)
For the transition period from ________ to ________
Commission File Number 0-18284
HOMECORP, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 36-3680814
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(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
1107 E. State Street, Rockford, Illinois 61104
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(Address of Principal Executive Offices) Zip Code
Registrant's telephone number, including area code: (815) 987-2200
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
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 twelve months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such requirements for
the past 90 days. YES [X] NO ___
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K (X)
As of March 18, 1997, there were issued and outstanding 1,128,779 shares of the
Registrant's Common Stock.
1
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of such stock on the
Nasdaq National Market System, as of March 18, 1997 was $16,383,000. (The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the Registrant that such person is an
affiliate of the Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the Annual Report to Stockholders for
the fiscal year ended December 31, 1996.
Part III of Form 10-K - Portions of the Proxy Statement for Annual Meeting of
Stockholders to be held in 1997.
PART I
Item 1. Business
General
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HomeCorp, Inc. (the "Company") is a Delaware corporation formed in 1989 as a
thrift holding company to serve as the holding company for HomeBanc, a federal
savings bank ("HomeBanc" or the "Bank"). The Bank was organized in 1889 as the
Swedish Building and Loan Association. HomeBanc converted to a federally
chartered mutual savings and loan association in 1967 and a federal stock
savings bank in 1990. At December 31, 1996, the Company had $335.8 million of
assets, $311.8 million of deposits and $20.9 million of stockholders' equity.
As a community oriented savings bank, HomeBanc offers a range of retail banking
services through its nine full service offices and one limited service office
located in Winnebago, Stephenson, and Lee Counties, Illinois. Included in the
nine full service offices is a supermarket office in Rockford which opened in
April 1995. HomeBanc is principally engaged in the business of attracting
deposits from the general public and using such deposits, together with
borrowings and other funds, to originate residential mortgage, consumer, and
small business loans. HomeBanc sells the majority of its residential mortgage
originations with servicing retained. The Bank's balance sheet reflects these
sales together with the increasing origination of consumer and small business
loans. The consumer loan portfolio increased $19.5 million, or 35% during 1996
while commercial business loans increased $2.2 million, or 56%. HomeBanc also,
to a lesser extent, originates construction and commercial real estate loans
primarily on properties located in its market area as well as construction and
land loans in the western and northern suburban Chicago markets.
Since 1993 the Bank has purchased participating interests in permanent and
construction loans on multi-family and commercial properties located primarily
in southern Wisconsin. The Bank purchased participating interests in seven loans
totaling $7.2 million during 1996. The Bank intends to continue the purchase of
such participations secured by properties located in
2
Midwest States. The loans are adjustable rate or short term fixed rate loans.
In current market conditions, non-residential lending activities may be more
profitable than residential. See "Originations, Purchases, Sales, and Servicing
of Real Estate Loans."
In the past, HomeBanc through its subsidiary Home Federal Service Corporation,
made substantial investments in real estate development projects, principally in
the western and northern suburbs of Chicago. As a result of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), HomeBanc
has made no new commitments for real estate development projects since 1989.
See "Subsidiary Activities" and "Regulation". HomeBanc also offers brokerage
and related services through its affiliation with Invest Financial Corporation,
a full-service investment brokerage program.
HomeBanc intends to continue to emphasize consumer and small business lending in
its principal lending markets, as well as its traditional residential lending.
Subject to regulatory restrictions and the volume and mix of construction
activity in the real estate market, the Bank also intends to continue to
emphasize residential construction lending. In addition, the Bank will continue
to manage as well as reduce its existing real estate development investments.
Market Area
- -----------
HomeBanc serves its customers through six full service offices located in the
Rockford, Illinois metropolitan area, two full service offices located in the
Freeport, Illinois area, and one full service and one limited service office
located in Dixon, Illinois. The Rockford metropolitan area has a population of
approximately 348,000, making it the second most highly populated metropolitan
area in the State of Illinois, and is located approximately 55 miles west of the
Chicago suburbs. This market area is characterized by a diverse economic base
that features a variety of manufacturing and service firms. Major corporations
headquartered or having substantial operations in or around the Rockford area
include the Chrysler Corporation, the Newell Company, Sundstrand Corporation,
Ingersoll Milling Machine Company and Clarcor. Motorola opened a repair
facility in Rockford during 1995 and a manufacturing facility in a community
approximately 25 miles from Rockford. Freeport is located approximately 30 miles
west of Rockford and has a manufacturing based economy. Dixon is located 45
miles southwest of Rockford and has a manufacturing and agricultural economy.
Lending Activities - General
- ----------------------------
The principal lending activity has been the origination of fixed and adjustable
rate conventional real estate loans to enable borrowers to pur chase or
refinance owner-occupied homes. In addition, in order to increase the yield and
interest rate sensitivity of its portfolio, the Bank originates and purchases
consumer, commercial real estate, construction, commercial business loans, and
land.
3
Loan applications are initially approved at various levels of authority,
depending on the type, amount and loan-to-value ratio of the loan. Mortgage
loan commitments of more than $250,000 must be approved by a majority of the
members present at a duly convened meeting of the Bank's Senior Loan Committee.
The Committee is comprised of the President, Executive Vice President, Senior
Vice President-Commercial Lending, Senior Vice President, Residential Lending,
and Vice President-Commercial Credit Administration. At least three Committee
members are required for a quorum.
Commercial business loans of more than $150,000 must be approved by the Bank's
Senior Loan Committee. Such loans in excess of $750,000 must be approved by
the Loan Committee of the Board of Directors, comprised of three outside
Directors and the President.
Specific credit criteria and lending limitations are established for consumer
loan officers. Any deviations from established guidelines require the approval
of the Senior Loan Committee. All loans are ratified by the Board of Directors.
Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Bank's loan portfolio, in dollar amounts and
in percentages (before deductions for unearned discounts, loans in process,
deferred fees and discounts and allowance for loan losses) as of the dates
indicated.
At December 31,
1996 1995 1994 1993 1992
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Real Estate Loans:
Residential $126,108 47.4% $153,986 58.2% $173,698 69.5% $171,089 73.1% $178,081 77.6%
Commercial 40,086 15.1% 38,850 14.7% 38,813 15.5% 27,917 11.9% 18,801 8.2%
Construction 13,482 5.1% 9,354 3.5% 5,548 2.2% 11,379 4.9% 10,210 4.4%
Land 4,415 1.6% 2,335 0.9% 1,611 0.7% 3,361 1.4% 3,386 1.5%
-------- ------ -------- ------ -------- ----- -------- ----- -------- -----
Total R.E. Loans $184,091 69.2% $204,525 77.3% $219,670 87.9% $213,746 91.3% $210,478 91.7%
Other Loans:
Consumer Loans
Automobile 53,249 20.0% 38,687 14.6% 14,602 5.8% 7,341 3.1% 6,806 3.0%
Home Equity and
Improvement 21,168 8.0% 16,268 6.1% 12,297 4.9% 10,238 4.4% 9,668 4.2%
Other 1,374 0.5% 1,293 0.5% 1,213 0.5% 896 0.4% 1,686 0.7%
-------- ------ -------- ------ -------- ----- -------- ----- -------- -----
Total Consumer Lns. $ 75,791 28.5% $ 56,248 21.2% $ 28,112 11.2% $ 18,475 7.9% $ 18,160 7.9%
Commercial
Business Loans $ 6,243 2.3% $ 4,007 1.5% $ 2,211 0.9% $ 1,921 0.8% $ 966 0.4%
-------- ------ -------- ------ -------- ----- -------- ----- -------- -----
Total Other Loans $ 82,034 30.8% $ 60,255 22.7% $ 30,323 12.1% $ 20,396 8.7% $ 19,126 8.3%
-------- ------ -------- ------ -------- ----- -------- ----- -------- -----
Total Loans $266,125 100.0% $264,780 100.0% $249,993 100.0% $234,142 100.0% $229,604 100.0%
------ ------ ----- ----- -----
LESS
Unearned Discount $ 210 $ 270 $ 623 $ 761 $ 1,102
Loans in Process 5,639 2,753 3,343 2,561 1,039
Deferred Fees and
Discount (446) (440) (331) (57) (41)
Allowance for
Loan Losses 1,582 1,175 1,048 956 900
-------- -------- -------- -------- --------
Total Loans Receivable,
Net $259,140 $261,022 $245,310 $229,921 $226,604
======== ======== ======== ======== ========
4
The following table shows the fixed and adjustable rate composition of the
Bank's loan portfolio, in dollar amounts and in percentages (before deductions
for unearned discounts, loans in process, deferred fees and discounts and
allowance for loan losses) as of the dates indicated.
At December 31,
1996 1995 1994 1993 1992
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Fixed Rate Loans
Real Estate:
Residential $ 77,679 29.2% $ 93,155 35.2% $107,055 42.8% $111,653 47.7% $103,083 44.9%
Commercial 16,071 6.0% 12,854 4.8% 17,382 7.0% 9,479 4.0% 5,055 2.2%
Construction 400 0.2% 168 0.1% 459 0.2% 0 0.0% 0 0.0%
Land 1,611 0.6% 216 0.1% 74 0.0% 0 0.0% 0 0.0%
-------- ----- -------- ---- -------- ----- -------- ----- -------- --------
Total R.E. Loans 95,761 36.0% 106,393 40.2% 124,970 50.0% 121,132 51.7% 108,138 47.1%
Consumer 61,117 23.0% 44,649 16.8% 18,633 7.4% 9,566 4.1% 9,141 4.0%
Commercial Bus. 3,037 1.1% 2,062 0.8% 1,005 0.4% 844 0.4% 629 0.3%
-------- ----- -------- ---- -------- ----- -------- ----- -------- --------
Total Fixed
Rate Loans 159,915 60.1% 153,104 57.8% 144,608 57.8% 131,542 56.2% 117,908 51.4%
-------- ----- -------- ---- -------- ----- -------- ----- -------- --------
Adjustable Rate Loans
Real Estate:
Residential 48,429 18.2% 60,831 23.0% 66,643 26.7% 59,437 25.4% 74,998 32.7%
Commercial 24,015 9.0% 25,996 9.8% 21,431 8.6% 18,438 7.9% 13,746 6.0%
Construction 13,082 4.9% 9,186 3.5% 5,089 2.0% 11,379 4.9% 10,210 4.4%
Land 2,804 1.1% 2,119 0.8% 1,537 0.6% 3,361 1.4% 3,386 1.5%
-------- ----- -------- ---- -------- ----- -------- ----- -------- --------
Total R.E. Loans 88,330 33.2% 98,132 37.1% 94,700 37.9% 92,615 39.6% 102,340 44.6%
Consumer 14,674 5.5% 11,599 4.4% 9,479 3.8% 8,909 3.8% 9,019 3.9%
Commercial Bus. 3,206 1.2% 1,945 0.7% 1,206 0.5% 1,076 0.4% 337 0.1%
-------- ----- -------- ---- -------- ----- -------- ----- -------- --------
Total Adjustable
Rate Loans 106,210 39.9% 111,676 42.2% 105,385 42.2% 102,600 43.8% 111,696 48.6%
-------- ----- -------- ---- -------- ----- -------- ----- -------- --------
Total Loans 266,125 100.0% 264,780 100.0% 249,993 100.0% 234,142 100.0% 229,604 100.0%
LESS
Unearned Discount 210 270 623 761 1,102
Loans in Process 5,639 2,753 3,343 2,561 1,039
Deferred Fees
and Discounts (446) (440) (331) (57) (41)
Allowance for
Loan Losses 1,582 1,175 1,048 956 900
-------- -------- -------- ----- --------
Total Loans Receivable,
Net $259,140 $261,022 $245,310 $229,921 $226,604
======== ======== ======== ======== ========
Loan Maturities. The following schedule illustrates the contractual maturity of
the Bank's loan portfolio, at December 31, 1996. Loans which have adjustable or
floating interest rates are shown as maturing in the period during which the
loan is due. This schedule does not reflect the effects of possible prepayments
or enforcement of due-on-sale clauses. Loan maturities are stated at principal
value.
Real Estate
Residential Loans Commercial Construction Land Consumer (1)
------------------ ------------------- --------------------- ----------------- -------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
Amounts Due:
Within 1 year $ 334 8.14% $ 1,097 9.42% $10,969 8.93% $1,903 9.31% $ 2,556 8.83%
After 1 year:
1 to 2 years 1,934 6.90% 1,562 8.74% 0 0.00% 0 0.00% 5,346 8.95%
2 to 3 years 3,965 7.76% 3,400 8.89% 106 9.25% 1,272 9.23% 11,619 8.94%
3 to 5 years 6,391 8.16% 4,858 9.06% 0 0.00% 580 9.00% 53,964 8.56%
5 to 10 years 18,961 8.28% 12,087 8.89% 2,000 8.44% 75 7.90% 1,865 10.23%
10 to 15 years 49,644 7.85% 876 9.65% 0 0.00% 59 8.93% 441 11.45%
15 to 25 years 17,461 8.24% 10,251 8.13% 0 0.00% 461 8.99% 0 0.00%
5
Over 25 years 27,418 7.95% 5,955 8.27% 407 7.81% 65 9.07% 0 0.00%
-------- ----- -------- ---- ------- -------- ------ ------- ------- -------
Total $126,108 $ 40,086 $13,482 $4,415 $75,791
======== ======== ======= ====== =======
Commercial
Business Total
--------------------- ----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
Amounts Due:
Within 1 year $ 3,208 9.02% $ 20,067 8.98%
After 1 year:
1 to 2 years 669 8.73% 9,511 8.48%
2 to 3 years 469 8.48% 20,831 8.71%
3 to 5 years 1,709 8.94% 67,502 8.57%
5 to 10 years 43 10.75% 35,031 8.60%
10 to 15 years 0 0.00% 51,020 7.92%
15 to 25 years 0 0.00% 28,173 8.21%
Over 25 years 145 6.40% 33,990 8.00%
-------- --------
Total $ 6,243 $266,125
======== ========
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
Of the $246.1 million of loans due after December 31, 1997, $156.4 million or
63.6%, have fixed rates of interest and $89.7 million or 36.4%, have adjustable
rates of interest.
The Bank does not maintain a predetermined rollover policy for construction,
land, and other non-amortizing or balloon loans. Individual loans are renewed
at maturity as determined by management on a case-by-case basis after
consideration of the borrower's historical performance and current market
considerations.
Management believes the possible future volume of loan renewals or rollovers
would not significantly impact the maturity information presented above.
One- to Four-Family Residential Real Estate Lending
- ---------------------------------------------------
Historically, HomeBanc originated for retention in its own portfolio fixed rate
loans secured by one- to four-family residential real estate. In order to meet
consumer demand, HomeBanc has continued to originate fixed rate residential
loans. For several years, HomeBanc has sold fixed rate mortgage loans with
maturities of 28 years or more into the secondary loan market. In April, 1993
the Bank amended its sales program in response to the historically low interest
rates to include fixed rate mortgage loans with original maturities of 20 years.
During 1994 the Bank began selling all fixed rate mortgage loans. During 1995,
management began selling certain ARM originations. As of December 31, 1996, the
Bank originated ARMS with initial adjustment periods ranging from six months to
five years for retention. The majority of ARM originations are the Bank's fixed
payment six month ARMs, marketed by the Bank as "Trombone" loans.
HomeBanc originates its Trombone loans based upon fully indexed rates and 30 or
15 year amortization periods. The resulting term to maturity of such loans is
generally between 13 to 30 years. The interest rates on Trombone loans
generally adjust every six months to a margin over six-month U.S.
6
Treasury Securities and carry 2% annual and 5% to 6% lifetime interest rate
caps; however, the borrower's fixed payment does not change. The Trombone loan
provides borrowers with the predictability of fixed payments while providing
HomeBanc with an interest rate sensitive asset with no negative amortization.
The Trombone loan avoids a common risk to ARM borrowers and lenders. That risk
is the potential for a significant increase in monthly loan payments over time.
As of December 31, 1996, HomeBanc had $36.6 million of fixed payment ARMs in its
portfolio.
At December 31, 1996, loans secured by residential real estate totaled $126.1
million and represented 47.4% of the Bank's total loan portfolio. Of the total
residential loans, $48.4 million had adjustable interest rates. This compares
to $154.0 million of one- to four-family residential mortgage loans at December
31, 1995, with $60.8 million of such loans having adjustable interest rates. In
view of the Bank's expanding consumer and commercial lending, management
anticipates that the residential mortgage loans will continue to decline as a
percentage of the Company's loan portfolio. As of December 31, 1996, most of
HomeBanc's one- to four-family residential real estate loans were secured by
properties located in its primary market area.
ARM rate adjustments are based upon changes in prevailing rates for comparable
term U.S. Treasury securities plus a margin, and are generally limited to 2%
maximum annual adjustments (1% semi-annual adjustments for six month adjustable
rate loans) as well as a maximum aggregate adjustment over the life of the loan
(generally 5% to 6%). Accordingly, the interest rates on these loans are not
necessarily as rate sensitive as the Bank's cost of funds. Generally, the
Bank's ARMs are not convertible into fixed rate loans, do not permit negative
amortization of principal and carry no prepayment penalty. HomeBanc originates
ARMs with terms to maturity of up to 30 years and qualifies its semi-annual and
annual ARM borrowers based on the maximum interest rate to which the loan could
adjust in the second year. The Bank originates ARMS with interest rates fixed
for periods of three to five years. These borrowers are qualified based upon the
starting rates of the loans.
ARMs entail risks resulting from potential increased payment obligations by the
borrower as a result of repricing. Further, non-trombone ARMs offered by
HomeBanc, as well as by many other institutions, sometimes provide for initial
rates of interest below the rates which would prevail were the index used for
pricing applied initially. These loans are subject to increased risk of
delinquency or default as the higher, fully-indexed rate of interest
subsequently comes into effect in replacement of the initial lower rate.
In underwriting one- to four-family residential real estate loans, HomeBanc
evaluates both the borrower's ability to make monthly payments and the value of
the property securing the loan. It is HomeBanc's policy that all loans in
excess of 80% of the appraised value of the property be insured by a private
mortgage insurance company approved by HomeBanc for the amount of the loan in
excess of 80% of the appraised value. In addition, HomeBanc requires borrowers
to obtain title and fire and casualty insurance in an amount not less than the
amount of the loan. HomeBanc also carries mortgage single interest insurance
which protects the Bank against certain types of uninsured property damage.
Real estate loans originated by the Bank generally contain a "due on sale"
clause allowing the Bank to declare the unpaid principal
7
balance due and payable upon the sale of the security property. The Bank
enforces these due on sale clauses to the extent permitted by law.
Construction and Land Lending
- -----------------------------
The Bank makes construction loans primarily to builders and developers for the
construction of one- to four-family residences and commercial real estate and
the development of one- to four-family lots in the Bank's primary lending areas.
The Bank also makes similar construction loans in the western and northern
suburbs of Chicago. Historically, the Bank primarily originated loans to
builders purchasing developed lots from the Bank's real estate development
subsidiary. The Bank has continued its lending relationships with selected
builders even though the Bank's subsidiary is phasing-out its development
business. At December 31, 1996, loans secured by homes or projects under
construction and land (including loans in process) aggregated $17.9 million, or
6.7% of the Bank's total loan portfolio as compared to $11.7 million, or 4.4% of
the loan portfolio one year earlier. The Bank added a loan officer during 1995
to focus strictly upon construction loan originations. As of December 31, 1996,
the Bank had no loans outstanding to its real estate development subsidiary or
any entity in which the subsidiary participated. The December 31, 1996 loan
balance was comprised primarily of residential construction loans made to non-
affiliated borrowers in the Bank's primary lending market.
Most of the Bank's construction and land loans have been originated with
adjustable rates of interest tied to the prime rate of interest and have terms
of three years or less. Construction and land loans are generally made in
amounts of up to a maximum loan-to-value ratio of 80% (75% in the case of
commercial real estate) based upon an independent appraisal. Many of HomeBanc's
construction and land loans provide an interest reserve for the payment of
interest and fees from the loan proceeds. HomeBanc also obtains personal
guarantees for substantially all of its construction and land loans.
HomeBanc purchased $2.0 million in participating interests in two construction
loans totaling $9.3 million during 1996. The two loans are funding the
construction of two multi-family buildings, one located in eastern Iowa, and one
in southern Wisconsin. Approximately $148,000 was advanced on the two loans at
December 31, 1996. HomeBanc has committed to purchase $2.0 million in
participating interests in the end loans for the multi-family properties. See
"Originations, Purchases, Sales, and Servicing of Real Estate Loans".
HomeBanc's construction loan agreements generally provide that pro rata
principal repayments must be made as individual units are sold to third parties
so that the remaining loan balance is in proportion to the value of the
remaining security. Loan proceeds are disbursed in increments through an
independent title company as construction progresses. The amount of each
disbursement is based on the construction cost estimate of an independent
architect, engineer or qualified fee inspector who inspects the project in
connection with each disbursement request. The Bank periodically reviews the
progress of the underlying construction project.
8
The application process for construction and land loans includes a submission to
the Bank of plans, specifications and costs of the project to be
constructed/developed. These items are used as a basis to determine the
appraised value of the subject property. Loans are based on the lesser of
current appraised value and/or the cost of construction (land plus building).
The Bank's construction and land loans may involve larger principal balances
than do its one-to four-family residential loans. The maximum amount which
HomeBanc or any institution may lend to any one borrower was reduced, effective
August 9, 1989, from an amount equal to its regulatory capital (which was $25.6
million at September 30, 1989 prior to the implementation of the new capital
requirements) to the greater of 15% of unimpaired capital and surplus or
$500,000. This lower limit significantly reduced HomeBanc's ability to make
large construction, commercial real estate or land loans without selling
participations. The Bank's loans-to-one-borrower limit at December 31, 1996,
was $3.4 million. See - "Commercial Real Estate Lending."
The table below sets forth by type of security property, the number and amount
of HomeBanc's construction and land loans at December 31, 1996.
Outstanding Amount Non-
Number Loan Principal Performing or
of Loans Commitment Balance of Concern
-------- ---------- --------- ----------
(Dollars in Thousands)
Land acquisition and
development............. 36 $ 4,415 $ 4,415 $ -
Multi-family............. 2 2,000 148 -
Single family............ 54 11,482 7,815 -
---- ------- ------- ----
Total net construction
and land loans........ 92 $17,897 $12,378 $ -
==== ======= ======= ====
The following table presents the locations and types of properties securing
HomeBanc's construction and land loans at December 31, 1996. The amounts shown
do not reflect allowances for losses.
Outstanding Amount Non-
Number Loan Principal Performing or
of Loans Commitment Balance of Concern
-------- ---------- --------- ----------
(Dollars in Thousands)
Winnebago, Stephenson, Carroll,
Boone, Ogle Counties, IL
Land developments........ 34 $ 4,075 $ 4,075 $ -
Single family............ 49 9,954 6,513 -
Multi-family............. - - - -
---- ------- ------- -----
Total.................. 83 14,029 10,588 -
DuPage, Kane, McHenry,
Lake Counties, IL
Land developments........ 2 340 340 -
Single family............ 5 1,528 1,302 -
Multi-family............. - - - -
---- ------- ------- -----
Total.................. 7 1,868 1,642 -
9
Southern Wisconsin:
Land developments........ - - - -
Single family............ - - - -
Multi-family............. 1 1,000 74 -
---- ------- ------- -----
Total.................. 1 1,000 74 -
Eastern Iowa:
Land developments........ - - - -
Single family............ - - - -
Multi-family............. 1 1,000 74 -
---- ------- ------- -----
Total.................. 1 1,000 74 -
Total net construction
and land
loans................ 92 $17,897 $12,378 $ -
==== ======= ======= =====
Construction and land lending generally affords the Bank an opportunity to
receive interest at rates higher than those obtainable from residential lending
and to receive higher origination and other loan fees. In addition,
construction and land loans are generally made with adjustable rates of interest
and for relatively short terms. Nevertheless, construction and land lending is
generally considered to involve a higher level of credit risk than one- to four-
family residential lending due to the concentration of principal in a limited
number of loans and borrowers and the effects of general economic conditions on
development projects, real estate developers and managers. In addition, the
nature of these loans is such that they are more difficult to evaluate and
monitor. The Bank's risk of loss on a construction or land loan is dependent
largely upon the accuracy of the initial estimate of the property's value upon
completion of the project and the estimated cost (including interest) of the
project. If the estimate of construction or development cost proves to be
inaccurate, HomeBanc may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with a project with a value which is insufficient to
assure full repayment. Because HomeBanc usually provides financing for the
entire estimated cost of the project, including anticipated interest, and, in
some cases, an amount intended to cover initial carrying costs until sufficient
units can be sold, defaults in repayment generally do not occur during the
construction or development period and it is therefore difficult to identify
problem loans at an early stage. When loan payments become due, borrowers may
experience cash flow from the property which is not adequate to service total
debt. In such cases, the Bank may be required to modify the terms of the loan.
See "Non-Performing Assets, Loan Delinquencies and Defaults."
HomeBanc intends to continue to emphasize construction and land loans depending
on market conditions, funding limitations and regulatory restrictions.
Commercial Real Estate Lending
- ------------------------------
The Bank also purchases and originates permanent loans secured by commercial
real estate in order to increase the yield on, and the proportion of interest
rate sensitive loans in, its portfolio. At December 31, 1996, $40.1 million, or
15.1% of the Bank's loan portfolio, consisted of permanent loans secured by
commercial real estate.
The Bank has originated and purchased both adjustable and fixed rate commercial
real estate loans, although $4.5 million of the total $11.7 million in
commercial real estate loans originated and purchased in 1996 had adjustable
rates. Most of its fixed rate commercial real estate loans have terms of 15
years or less. Adjustable rate commercial real estate loans have terms of up to
30 years. Rates on the Bank's adjustable rate commercial real estate loans are
generally tied to a specific treasury rate or to the prime rate of interest.
Some adjust in a manner consistent with the Bank's fixed payment ARMs.
Commercial real estate loans are generally written in amounts of up to 75% of
the appraised value of the underlying property. Appraisals on properties
securing commercial real estate loans originated by the Bank are performed by an
independent appraiser designated by the Bank at the time the loan is made. All
appraisals on commercial real estate loans are reviewed by the Bank's
management. In addition, the Bank's underwriting procedures require
verification of the borrower's credit history, income and financial statements,
banking relationships, references and income projections for the property and
the criteria already discussed for construction and development loans.
Borrowers are generally personally liable for all or a portion of most of the
Bank's commercial real estate loans.
At December 31, 1996, the Bank had five commercial real estate loans to one
borrower with indebtedness in excess of $3.4 million, the Bank's legal lending
limit. All the loans were grandfathered under the applicable regulations. The
borrower had total loans outstanding of $4.0 million, all of which were current
as of December 31, 1996. There were ten other commercial real estate borrowers
with loans in excess of $1.0 million as of December 31, 1996, all of which were
participating interests in multi-family and commercial real estate loans
acquired by the Bank during the past four years. At December 31, 1996 all of
these loans were performing in accordance with their respective terms.
The table below sets forth by type of security property the number and amount of
HomeBanc's commercial real estate loans including $24.9 million of purchased
participations at December 31, 1996. All of the loans in the table below
originated by the Bank are secured by property located in the Bank's primary
lending areas.
Outstanding Amount Non-
Number Principal Performing or
of Loans Balance of Concern
-------- ----------- -------------
(Dollars in Thousands)
Small business facilities......... 64 $ 9,259 972
Apartments and condominiums....... 64 24,874 2,495
11
Office buildings.................. 6 2,402 -
Industrial real estate............ 6 779 -
University and church properties.. 1 15 -
Hotels............................ 1 1,820 -
Shopping Centers.................. 1 937 -
--- ------- --------
Total commercial real estate
loans......................... 143 $40,086 3,467
=== ======= ========
The hotel loan totaling $1.8 million was repaid shortly after year end.
Commercial real estate loans generally present a higher level of risk than loans
secured by one- to four-family residences. This greater risk is due to several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by multi-family and
commercial real estate is typically dependent upon the successful operation of
the related real estate project. If the cash flow from the project is reduced
(for example, if leases are not obtained or renewed), the borrower's ability to
repay the loan may be impaired. Commercial real estate loans also involve many
of the same risks discussed above regarding construction and land loans.
The Bank intends to continue its origination of commercial real estate loans.
Such loans or participating interests in such loans may be purchased in the
future based upon the volume of Bank originations.
Consumer Lending
- ----------------
Management considers consumer lending to be a significant component of its
strategic plan. Specifically, consumer loans generally have shorter terms to
maturity and/or adjustable rates, thus reducing HomeBanc's exposure to changes
in interest rates, and carry higher rates of interest than do residential
mortgage loans. In addition, management believes that the offering of consumer
loan products helps to expand and create stronger ties to its existing customer
base. For these reasons, HomeBanc has increased its emphasis on consumer
lending in recent periods. Originations of consumer loans totaled $54.2
million, $50.0 million, and $20.5 million during the years ended December 31,
1996, 1995, and 1994, respectively. The increases are primarily the result of
higher automobile loan originations. The vast majority of the increase was the
result of loans originated indirectly through local automobile dealers with whom
the Bank maintains ongoing relationships. While individual loans are referred
through automobile dealers, every loan is underwritten and approved by a
HomeBanc loan officer.
Although origination volumes have increased substantially, management remains
committed to maintaining the Bank's asset quality standards. The consumer loan
portfolio delinquency rate declined to 0.1% at December 31, 1996 from 0.4% at
December 31, 1995. Net consumer charge-offs were $69,000 during 1996 and
$24,000 during 1995.
12
HomeBanc offers a variety of secured consumer loans, including automobile loans,
home equity loans and lines of credit. In addition, HomeBanc also offers home
improvement loans and unsecured consumer loans. Consumer loans totaled $75.8
million at December 31, 1996, or 28.5% of the Bank's total loan portfolio.
During 1993, the Bank implemented a home improvement loan program which allows
customers to borrow up to one-hundred percent of the value of their
improvements. The Bank is insuring its loan balances against principal loss
with an independent insurance company. Insurance premiums are paid by the Bank
based upon the aggregate outstanding principal balance insured. If an insured
loan becomes delinquent, the insurance company will purchase it at face value
from the Bank. A total of $1.1 million of such loans were outstanding as of
December 31, 1996. Two loans have required repurchase by the independent
insurance company since the inception of this program.
The Bank initiated targeted home improvement and home equity loan promotions
during 1995. In 1996 and 1995 the Bank promoted the loans to existing Bank
mortgage customers without a second mortgage. The programs have been successful
in building outstanding balances of the second mortgages, with home equity and
improvement loans totaling $21.1 million, $16.3 million, and $12.2 million at
December 31, 1996, 1995, and 1994, respectively. Management intends to continue
promotional programs targeting the loan products.
The Bank's automobile loans are fixed rate, while the equity line interest rates
adjust on a monthly basis, and are based on the six month Treasury securities or
the prime rate plus a margin.
The underwriting standards employed by the Bank for consumer loans include a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is of primary consideration,
the underwriting process also includes a comparison of the value of the
security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be affected by adverse personal circumstances. Furthermore, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. Although the level of delinquencies in the Bank's consumer loan
portfolio has generally been low there can be no assurance that delinquencies
will not increase in the future.
In the future, HomeBanc will continue to emphasize consumer lending, especially
automobile loans and equity lines of credit.
13
Commercial Business Lending
- ---------------------------
A formal commercial, or small business, lending program was initiated by the
Bank in 1991. This program was expanded during 1995 as a part of the Bank's
community banking focus. At December 31, 1996, the Bank's commercial business
loan portfolio totaled $6.2 million. HomeBanc's commercial business lending
activities encompass loans with a variety of purposes and security, including
loans to finance accounts receivable, inventory and equipment. The Bank focused
its loan origination efforts upon local manufacturing and related businesses
during 1996. The Bank had one borrower with an outstanding loan balance in
excess of $400,000 at December 31, 1996. Total indebtedness of this borrower
was $404,000. All of HomeBanc's commercial business loans outstanding as of
December 31, 1996, have been to borrowers in its primary lending areas.
In addition to the outstanding loan balance, the development of commercial
business relationships has provided other benefits to the Bank. Checking and
other deposit products have been generated from borrowers. Also, the Bank has
been able to offer commercial loan products to its commercial deposit customers
who previously had not considered the Bank for their business borrowing needs.
Commercial business loan net charge-offs were $13,000 for the year ended
December 31, 1996. There were three delinquent business loans totaling $31,000
as of December 31, 1996.
The underwriting standards employed by the Bank for commercial business loans
concentrate upon loan investigation and credit analysis. Loan investigation
procedures include, but are not limited to, a review of credit bureau inquiries,
state and county lien searches and/or verification of indebtedness. Credit
analysis procedures include the review of financial information, including
financial statements, cash flow analysis, comparison to specific industry
operating statistics and other information as deemed appropriate considering the
size and structure of the desired credit.
Originations, Purchases, Sales and Servicing of Real Estate Loans
- -----------------------------------------------------------------
The Bank originates real estate loans through commissioned internal loan
production personnel located in the Bank's branch offices. Walk-in customers
and referrals from real estate brokers and builders are also important sources
of loan originations.
HomeBanc has purchased and sold whole real estate loans and participation
interests in real estate loans to and from the FHLMC and FNMA as well as private
investors, such as thrift institutions and banks. During 1993 the Bank began
purchasing participating interests in multi-family and commercial real estate
mortgage loans from Midwest thrift institutions familiar to management of the
Bank. The underwriting standards and procedures of the Bank are applied in the
purchase of the participations. The Bank purchased
14
seven loan participations totaling $7.2 million from two Wisconsin based thrifts
during 1996.
Management intends to continue its purchase program, concentrating upon
adjustable rate and short term (three to five years) fixed rate loans.
Management prefers to purchase participations in loans secured by multi-family
properties, although office buildings and other commercial properties would be
accepted if the borrowers and properties have a demonstrated history of
performance. To date, the properties securing the loans have been located
primarily in southern Wisconsin. The potential risks associated with out of
market area lending include the Bank's lack of control over loan servicing and
its inability to closely monitor the properties. Borrowers have established
credit histories with the lead lending institutions. Management intends to
limit participation purchases to properties located in the Midwest. One
participation was non-performing and two were greater than 90 days delinquent
and still accruing at December 31, 1996. See "Non-Performing Assets, Classified
Assets, Loan Delinquencies and Defaults."
The Bank has sold its originations of 30 year fixed rate residential mortgage
loans for many years. Beginning in 1994, the Bank began selling originations of
15 year fixed rate residential mortgage loans. During 1995, the Bank began
selling some of the adjustable rate residential mortgage loans originated.
Approximately 96% of the residential mortgage loan originations were sold into
the secondary market during 1996 as compared to approximately 80% during 1995.
The Bank originated $28.4 million of adjustable rate mortgage loans during 1996,
of which $11.3 million were sold. During the fourth quarter of 1996, management
determined that adjustable mortgage loans would be originated for portfolio.
The determination of whether ARMs are originated for sale or portfolio is based
upon consideration of the Bank's liquidity position, its calculated exposure to
interest rate risk and the consumer demand for ARM products. The Bank
originated $5.2 million of ARMS for portfolio during the fourth quarter of 1996.
Management intends to utilize ARM originations to supplement the mortgage
portfolio during 1997. As most loans are sold with servicing retained, the
Bank's mortgage loans servicing portfolio increased to $162.9 million at
December 31, 1996 from $125.8 million at December 31, 1995. Gross fee revenue
from the servicing of mortgage loans increased to $481,000 for the twelve months
ended December 31, 1996 as compared to $362,000 for the twelve months ended
December 31, 1995. The future growth of the Bank's servicing portfolio will
depend not only upon the level of loan originations and sales, but also upon the
rate of prepayments experienced within the servicing portfolio. Management
intends to continue the sale of the majority of residential mortgage loan
originations.
The Company adopted Statement of Financial Accounting Standard Number 122,
"Accounting for Mortgage Servicing Rights" on January 1 1996. Statement No. 122
requires that an allocation of costs be made between loans and their related
servicing rights for loans originated with a definitive plan to sell with
servicing rights retained. The impact of this process is to recognize a
separate asset for servicing rights which will increase the gain on sale of
loans when the servicing rights are retained. The servicing rights, once
established, are amortized as an offset to servicing income. Amortization of
servicing rights totaled $71,000 during 1996, which reduced the gross revenue
generated from the servicing function. The servicing rights established on
15
the balance sheet subject the reported earnings from loan servicing to greater
volatility based upon the rate of repayment of the underlying loans. Capitalized
servicing rights totaled $534,000 at December 31, 1996. While management
intends to continue the sale of loans with servicing retained during 1997, the
impact of servicing rights upon the reported operating earnings of the Company
will be reviewed regularly to determine whether continued growth of the
servicing portfolio is desirable given the administrative costs and potential
volatility of the servicing asset established.
The Bank sold a $1.0 million participating interest in a commercial real estate
loan during 1995. The loan was sold to provide additional lending authority to
the borrower, with whom the Bank has made various real estate related loans.
Management does not anticipate the sale of additional commercial real estate
loans or participations unless it is deemed necessary to continue the Bank's
lending relationship with a borrower.
The following table shows the loan origination, purchase, sale and repayment
activities of the Bank for the periods indicated.
Year Ended December
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
LOANS ORIGINATED
Adjustable Rate:
Real estate:
Residential............................. $ 28,364 $ 24,302 $28,668 $ 6,108 $ 28,908
Commercial.............................. 276 218 239 237 98
Construction............................ 15,503 12,031 5,947 1,411 2,094
Land.................................... 1,624 1,061 432 2,235 1,758
Non-Real Estate:
Consumer................................ 11,582 9,192 3,551 6,030 7,734
Commercial Business..................... 2,827 2,594 1,372 1,004 345
-------- -------- -------- -------- --------
Total adjustable rate................. 60,176 49,398 40,209 17,025 40,937
Fixed rate:
Real estate:
Residential............................. 33,469 45,272 26,926 108,032 65,254
Commercial.............................. 4,225 1,989 3,817 1,534 1,719
Construction............................ 1,338 2,591 582 --- ---
Land.................................... 1,649 35 17 --- ---
Non-Real Estate:
Consumer................................ 42,649 40,778 16,956 7,215 3,676
Commercial business..................... 2,711 1,124 544 627 605
-------- -------- -------- -------- --------
Total fixed rate....................... 86,041 91,789 48,842 117,408 71,254
Total loans originated................. 146,217 141,187 89,051 134,433 112,191
LOANS PURCHASED
Real estate:
Commercial.............................. 5,202 7,205 7,547 7,470 ---
Construction............................ 2,000 3,408 1,044 2,027 ---
-------- -------- -------- -------- --------
Total loans purchased.................. 7,202 10,613 8,591 9,497 ---
Total additions........................ 153,419 151,800 97,642 143,930 112,191
16
LOANS SOLD
Residential real estate loans 59,444 55,782 20,050 43,916 29,476
Commercial real estate loans............. --- 1,000 --- --- ---
Student loans............................ --- --- --- 1,055 926
-------- -------- -------- -------- --------
Total loans sold....................... 59,444 56,782 20,050 44,971 30,402
Principal repayments........................ 92,630 80,231 61,628 95,618 100,220
-------- -------- -------- -------- --------
Total reductions....................... 152,074 137,013 81,678 140,589 130,622
Net increase (decrease)in other items (2,820) 1,052 (483) 32 178
Net increase (decrease)..................... $ (1,475) $ 15,839 $15,481 $ 3,373 $(18,253)
======== ======== ======== ======== ========
Non-Performing Assets, Classified Assets, Loan Delinquencies and Defaults
- -------------------------------------------------------------------------
When a borrower fails to make a required payment on a loan, the Bank attempts to
cause the delinquency to be cured by contacting the borrower. If the
delinquency continues for a period of 90 days, the Bank usually institutes
appropriate action to foreclose on the property.
The following table sets forth information concerning delinquent mortgage and
other loans at December 31, 1996, in dollar amount and as a percentage of the
Bank's total loan portfolio. The amounts presented represent the total
outstanding principal balances of the related loans, rather than the actual
payment amounts which are overdue.
Residential Commercial
Real Estate Real Estate Construction and Land
-------------------------- ------------------------- -----------------------
Percent Percent Percent
of of of
Total Total Total
Number Amount Loans Number Amount Loans Number Amount Loans
------ ------ ----- ------ ------ ----- ------ ------ -----
(Dollars in Thousands)
Loans delinquent for:
30-59 days 48 $1,169 0.5% 2 $ 135 0.1% 1 $ 39 0.0%
60-89 days 3 48 0.0% 1 68 0.0% 0 0 0.0%
90 days and over 7 237 0.1% 4 3,269 1.2% 0 0 0.0%
-- ------ --- -- ------ --- -- ------ ---
Total delinquent
loans 58 $1,454 0.6% 7 $3,472 1.3% 1 $ 39 0.0%
== ====== === == ====== === == ====== ===
Consumer Commercial Business TOTAL
-------------------------- ------------------------- -----------------------
Percent Percent Percent
of of of
Total Total Total
Number Amount Loans Number Amount Loans Number Amount Loans
------ ------ ----- ------ ------ ----- ------ ------ -----
Loans delinquent for:
30-50 days 25 $ 267 0.1% 2 $ 22 0.0% 78 $1,632 0.6%
60-89 days 4 17 0.0% 1 9 0.0% 9 142 0.1%
90 days and over 22 85 0.0% 0 0 0.0% 33 3,591 1.3%
-- ------ --- -- ------ --- --- ------ ---
Total delinquent
loans 51 $ 369 0.1% 3 $ 31 0.0% 120 $5,365 2.0%
== ====== === == ====== === === ====== ===
17
HomeCorp, Inc. classifies loans and other assets such as debt and equity
securities considered to be of lesser quality as "substandard," "doubtful" or
"loss" assets. For the portion of assets classified as "loss," the Company
either establishes a specific allowance of 100% of the amount classified or
charges such amount off its books. In addition, management may establish a
general allowance for losses based on assets classified as "substandard" and
"doubtful" or based on the general quality of the asset portfolio of the Bank.
The Bank's significant classified assets are described below. As of December
31, 1996, there were $13.4 million of assets classified pursuant to this policy.
The table below sets forth the amounts and categories of the Bank's non-
performing assets. Loans are generally placed on non-accrual status when the
loan becomes 90 days contractually delinquent or when the collection of
principal and/or interest otherwise becomes doubtful. For all years presented,
the Bank had no troubled debt restructurings, which involve forgiving a portion
of interest or principal on any loans or making loans at a rate materially less
than that of market rates.
In addition to the non-performing loans, there were two loans totaling $1.4
million representing participating interests in multi-family mortgage loans that
were 90 days delinquent at December 31, 1996 but which continued on an accrual
basis. The participating interests represent interests in loans to a single
borrower. The properties, located in southern Wisconsin, had been sold on
contract by the borrower and the contract buyer filed for bankruptcy protection
under Chapter 11. Cash flow from the properties is currently diverted to a
bankruptcy trustee for distribution. It is anticipated that funds will be
released to the participating banks as senior secured creditors and that such
funds will return the loans to a current status and maintain scheduled payments.
Based upon the current and historical lease performance of the buildings, their
current physical condition and the economic condition of the area in which the
buildings are located, accrual status was considered appropriate. There were no
troubled debt restructurings.
At December 31,
-----------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
(Dollars in Thousands)
Non-Accruing Loans:
Residential.................. $ 237 $ 11 $ 339 $ 377 $ 398
Construction................. - - - - -
Land......................... - - - 452 630
Commercial real estate....... 1,824 - 99 211 -
Consumer..................... 85 26 109 18 28
------- ------- ------ ------ ------
Total...................... 2,146 37 547 1,058 1,056
------- ------- ------ ------ ------
Accruing Past Due Loans:
Commercial real estate....... 1,445 - - - -
------- ------- ------ ------ ------
Foreclosed Assets:
Residential.................. - 49 59 142 23
Commercial real estate....... 5,617 5,638 - - -
Land......................... 4,681 4,553 3,994 3,306 3,553
------- ------- ------ ------ ------
Total...................... 10,298 10,240 4,053 3,448 3,576
------- ------- ------ ------ ------
18
------- ------- ------ ------ ------
Total......................... $13,339 $10,277 $4,600 $4,506 $4,632
======= ======= ====== ====== ======
Total non-accruing loans and
foreclosed real estate as a
percentage of total assets... 3.54% 3.04% 1.39% 1.35% 1.39%
======= ======= ====== ====== ======
Unallocated allowance for
losses...................... $ 2,132 $ 1,625 $1,498 $1,406 $1,350
======= ======= ====== ====== ======
For the year ended December 31, 1996, accrued interest receivable which would
have been recorded with respect to non-accruing loans, had such loans been
current in accordance with their original terms, amounted to approximately
$126,000. The amount that was included in interest income on such loans for the
year ended December 31, 1996, was approximately $101,000.
The December 31, 1996 non-performing loan total consisted primarily of two
loans. The loans had balances of $1,050,000 and $774,000. The $1.1 million
loan represented a participating interest in a mortgage loan originated in
December 1993 for a senior housing facility located in central Wisconsin. The
Borrower experienced cash flow problems; however, an entity unrelated to the
borrower that had purchased federal tax credits generated by the facility
returned the loan to current status after year end. Management believes the tax
credit purchaser will maintain the loan in a current status. Originated in
March 1994, the $774,000 loan is secured by a commercial building which has been
renovated and is being leased to retail businesses. The lease-up has progressed
more slowly than anticipated, although new tenants are being obtained. This
borrower has a $197,000 loan with the Bank in addition to the delinquent loan.
The $197,000 loan was current at December 31, 1996 and was considered an
impaired loan based upon the repayment history of the borrower. A reserve of
$45,000 had been established for this borrower at December 31, 1996. Management
does not anticipate any further loss beyond the reserve amount.
The remaining balance of non-performing loans at December 31, 1996 consisted
primarily of single family mortgages secured by properties within the Bank's
primary lending area.
The December 31, 1996 real estate owned balance of $9.6 million consisted of two
properties. A $5.4 million shopping center loan was transferred to real estate
owned during 1995. The center is located in the Bank's primary market area and
was approximately 97% leased at December 31, 1996. The center generated
$471,000 of net operating income during 1996. Management is actively marketing
the center for sale and will continue to operate the center until its sale.
The other significant asset in real estate owned represents a 50% interest in a
land acquisition loan to a Michigan limited partnership. The Bank's interest at
December 31, 1996 had a balance of $4.2 million. The parcel, a former quarry,
consists of 364 acres of undeveloped land located near Northville, Michigan.
The property has been restored from its use as a quarry and is listed for sale.
19
Regulations governing the operation of a mining property require appropriate
restoration before residential development is allowed. A dispute arose with the
prior owners regarding the proper restoration of the land. Consequently, the
Bank and its partner determined to undertake mass earthwork sufficient to remedy
the condition. The Bank made an additional investment of $1.2 million in the
property during 1995 related to the earthwork project. Approximately $675,000
has been escrowed by the prior property owners to assure proper restoration of
the property. HomeBanc and its partner believe they are entitled to the escrow
deposit and have filed a lawsuit to obtain reimbursement of earthwork costs.
Management continues to negotiate the sale of the property. Management
believes the Bank has adequate allowances to absorb any loss that may occur as a
result of the disposition of this property.
Allowances for Losses on Loans and Foreclosed Real Estate
- ---------------------------------------------------------
Allowances are established when management determines that it is probable that
the Bank will not collect all principal and interest on a loan. Based upon this
continuing analysis, a total of $565,000 was recorded as provision for loan
losses during 1996. The allowance for loan losses is maintained at an amount
considered adequate to provide for potential losses.
Although management believes that it uses the best information available to make
such determinations, future adjustments to the allowance for losses on loans may
be necessary, and net earnings could be significantly affected, if circumstances
differ substantially from the assumptions used in making the initial
determinations. At December 31, 1996, HomeBanc had an allowance for losses on
loans of $1.6 million.
Real estate properties acquired through foreclosure are initially recorded at
the lower of the related loan balance, net of any allowance for loss (charge-off
at time of transfer), or fair value at the date of foreclosure. Valuations are
periodically updated by management and an allowance for losses is established by
a charge to operations if the carrying value of a property exceeds its fair
value less estimated selling costs.
A total of $100,000 was recorded as provision for losses on foreclosed real
estate during 1996. The allowance, totaling $550,000 at December 31, 1996, is
maintained at a level believed adequate to provide for potential losses.
The following table sets forth an analysis of the Bank's allowance for losses on
loans. There has been no loan loss activity on construction, financial, or
agricultural loans.
Year Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period....... $1,175 $1,048 $ 956 $ 900 $ 668
Charge-Offs:
Residential......................... 76 102 141 115 69
Commercial.......................... 13 103 - - -
Consumer............................ 74 36 18 84 139
------ ------ ------ ----- -----
Total charge-offs................. 163 241 159 199 208
Recoveries:
Residential......................... - - 2 - 10
Consumer............................ 5 8 9 5 15
------ ------ ------ ----- -----
Total recoveries.................. 5 8 11 5 25
Net charge-offs...................... 158 233 148 194 183
Provision for losses on loans........ 565 360 240 250 415
------ ------ ------ ----- -----
Balance at end of period............. $1,582 $1,175 $1,048 $ 956 $ 900
====== ====== ====== ===== =====
Ratio of net charge-offs during the
period to average loans
outstanding during the period....... .06% .09% .06% .09% .09%
==== === ==== ==== ====
The allowance for losses on loans as of the dates indicated allocated by type of
loan is summarized below with the percent of loans in each category to total
loans:
December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
Real Estate:
Residential.............. $ 128 47.4% $ 193 58.2% $ 225 69.5% $ 301 73.1% $ 528 77.6%
Commercial............... 261 15.1 139 14.6 179 15.5 183 11.9 74 8.2
Construction & Land...... 179 6.7 72 4.5 42 2.9 179 6.3 34 5.9
----- ----- ----- ----- -----
568 404 446 663 636
Consumer................... 853 28.5 659 21.2 452 11.2 235 7.9 235 7.9
Commercial Business....... 161 2.3 112 1.5 150 .9 58 .8 29 .4
----- ----- ----- ----- -----
$1,582 $1,175 $1,048 $ 956 $ 900
====== ====== ====== ===== =====
Mortgage-Backed and Investment Securities
- -----------------------------------------
The Bank has used mortgage-backed securities to supplement loan originations and
as a means of addressing asset liability management objectives. The mortgage-
backed securities included in the held to maturity portfolio totaled $18.9
million at December 31, 1996, a reduction of $5.6 million from the December 31,
1995 balance. The portfolio was approximately 44% adjustable rate and 56% fixed
rate securities as of December 31, 1996. All of the adjustable securities are
indexed to short term treasuries. Included in fixed rate securities are
$701,000 of collateralized mortgage obligations which, based upon their
anticipated cash flow characteristics, have a weighted average life of three to
five years. No mortgage-backed securities were purchased for the held to
maturity portfolio during 1996 or 1995. Management intends to continue to
redeploy cash flows from the mortgage-backed securities portfolio into the loan
portfolio.
21
Approximately $2.6 million of mortgage-backed securities were in the available
for sale portfolio at December 31, 1996. There were no purchases of mortgage-
backed securities for the available for sale portfolio during 1996, although the
Bank securitized $2.1 million of adjustable mortgage loans that were recorded in
available for sale. Approximately $1.5 million in mortgage-backed securities
were sold from the available for sale portfolio during 1996. The sales were
lower balance FHLMC balloon pools with 1997 maturities.
Certain mortgage-backed securities can serve as collateral for borrowings and,
through repayments, as a source of liquidity. Investments in mortgage-backed
securities can also compensate for reduced loan demand. HomeBanc's mortgage-
backed securities available for sale portfolio is recorded at its fair value.
The held to maturity portfolio is included in the financial statements at
amortized cost. For information regarding the carrying and market values of
HomeBanc's mortgage-backed securities, see Notes 3 and 4 of the Notes to
Consolidated Financial Statements in the Annual Report.
Under the Bank's risk-based capital requirement, most mortgage-backed securities
have a risk weight of 20% in contrast to the 50% risk weight carried by
residential loans. See "Regulation". See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Regulatory Capital
Requirements" in the Annual Report.
The Bank's mortgage-backed securities portfolio contained no corporate
securities rated below investment grade or derivative securities. Additionally,
as of December 31, 1996, the mortgage-backed securities portfolio contained no
securities of any issuer, excluding the United States Government or its
agencies, with an aggregate book value in excess of 10% of the Company's
stockholders' equity.
The following table sets forth the contractual maturities of HomeBanc's
mortgage-backed securities that were held to maturity at December 31, 1996.
Principal Payment Due In
----------------------------------------------------------------------------------------
December 31,
6 Months 6 Months 1 - 3 3 - 5 5 - 10 10 - 20 Over 20 1996 Balance
or less to 1 Yr. Years Years Years Years Years Outstanding
-------- ---------- ----- ----- ------ ------- ------- ------------
Federal Home Loan
Mortgage Corporation $ -- $ -- $3,016 $ 7 $ 776 $ 663 $1,705 $6,167
Weighted Average Yield 5.58% 7.75% 6.50% 6.85% 7.20% 6.28%
Federal National
Mortgage Association -- -- -- 1,178 2,793 -- 2,530 6,501
Weighted Average Yield 6.36% 5.97% 7.32% 6.57%
Government National
Mortgage Association -- -- -- 37 -- -- 3,663 3,700
Weighted Average Yield 7.10% 6.93% 6.93%
Small Business
Administration -- -- -- -- -- 1,398 -- 1,398
Weighted Average Yield 6.64% 6.64%
Agency for Inter-
National Development -- -- -- -- 23 -- -- 23
Weighted Average Yield 7.50% 7.50%
Collateralized
Mortgage Obligations -- -- -- -- -- 701 369 1,070
Weighted Average Yield 5.89% 7.32% 6.39%
22
----- ----- ------ ------ -------- ------ ------ -------
TOTAL $ -- $ -- $3,016 $1,222 $ 3,592 $2,762 $8,267 $18,859
===== ===== ====== ====== ======== ====== ====== =======
WEIGHTED AVG. YIELD (1) -- -- 5.58% 6.39% 6.09% 6.50% 7.12% 6.54%
===== ===== ====== ====== ======== ====== ====== =======
(1) Yields have been computed based upon historical amortized cost.
The following table sets forth the contractual maturities of HomeBanc's
mortgage-backed securities that were available for sale at December 31, 1996.
Principal Payment Due In
-------------------------------------------------------------------------------------
December 31,
6 Months 6 Months 1 - 3 3 - 5 5 - 10 10 - 20 Over 20 1996 Balance
or less to 1 Yr. Years Years Years Years Years Outstanding
-------- -------- ----- ----- ------ ------- ------- ------------
Federal Home Loan
Mortgage Corporation $ -- $ -- $ -- $ -- $ -- $ -- $2,044 $2,044
Weighted Average Yield 7.26% 7.26%
Federal National
Mortgage Association -- -- 545 -- -- -- -- 545
Weighted Average Yield 5.78% 5.78%
----- ------ ------ ----- ----- ------ ------ ------
TOTAL $ -- $ -- $ 545 $ -- $ -- $ -- $2,044 $2,589
===== ====== ====== ===== ===== ====== ====== ======
WEIGHTED AVG. YIELD (1) -- -- 5.78% -- -- -- 7.26% 6.95%
===== ====== ====== ===== ===== ====== ====== ======
(1) Yields have been computed based upon historical amortized cost.
The $12.5 million available for sale portfolio contained $8.6 million in debt
securities, $1.2 million in mutual fund shares and $15,000 in equity securities
in addition to mortgage-backed securities noted above.
Based on historical experience, HomeBanc believes that its mortgage-backed
securities will be prepaid significantly in advance of the date of maturity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset Liability Management" in the Annual Report.
As a savings bank, HomeBanc must maintain minimum levels of investments that are
liquid assets as specified by OTS. Liquidity may increase or decrease depending
upon the availability of funds and comparative yields on investments in relation
to the return on loans. Historically, the Bank has maintained its liquid assets
above the minimum requirements imposed by the regulations and at a level
believed adequate to meet requirements of normal daily activities, repayment of
maturing debt and potential deposit outflows. The majority of the Bank's
interest bearing assets are amortizing loans that provide regular cash flows.
Cash flow projections are regularly reviewed and updated to assure that adequate
liquidity is maintained. As of December 31, 1996, the Bank's liquidity ratio
(liquid assets as a percentage of net withdrawable savings and current
borrowings) was 8.2%. See "Regulation -Liquidity".
23
The amortized cost and fair values of investment securities classified as held-
to-maturity at the dates indicated are summarized as follows:
At December 31,
---------------------------------------------------
1996 1995 1994
----------------- --------------- ----------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------ ------- ------ ------- -------
(In thousands)
United States Treasury and
Federal agency obligations.. $5,502 $5,471 $6,504 $6,412 $ 9,494 $ 8,844
Other securities............ -- -- -- -- 3,181 3,147
------ ------ ------ ------ ------- -------
TOTAL................ $5,502 $5,471 $6,504 $6,412 $12,675 $11,991
====== ====== ====== ====== ======= =======
The amortized cost and fair values of investment and mortgage-backed securities
available for sale as of December 31, 1996 and 1995 are summarized as follows:
At December 31,
1996 1995 1994
------------------ ---------------- ----------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(In thousands)
Federal Home Loan Mortgage.. $ 2,044 $ 2,105 $2,061 $2,051 $3,143 $3,033
Federal National Mortgage... 545 539 669 662 2,994 2,860
Mutual Fund Shares.......... 1,253 1,228 1,253 1,223 1,187 1,129
Investment Securities....... 8,619 8,625 4,376 4,375 - -
------- ------- ------ ------ ------ ------
TOTAL................. $12,461 $12,497 $8,359 $8,311 $7,324 $7,022
======= ======= ====== ====== ====== ======
The following table presents the contractual maturities and weighted average
yields of investment securities held to maturity at December 31, 1996. The
yields contained in the table below have been computed on a tax equivalent
basis.
Maturity Distribution
---------------------------------------------------------------------------
Within One Over One to Over Five to Over Ten
Year Five Years Ten Years Years Total
--------------- ------------- ------------- ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
----- ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
United States
Treasury and
Federal agency
obligations... -- -- $5,502 5.41% -- -- -- -- $5,502 5.41%
24
The Bank's investment securities portfolio at December 31, 1996 contained no
securities of any issuer, excluding the United States Government or its
agencies, with an aggregate book value in excess of 10% of the Company's
stockholders' equity. The Bank's investment securities portfolio also contained
no corporate securities rated below investment grade or derivative securities.
The Bank intends to maintain a held-to-maturity and available for sale
investment securities portfolio comprised of adjustable rate and short term
fixed rate securities as a means of complying with current regulatory liquidity
requirements.
Sources of Funds
- ----------------
General
- -------
Deposit accounts have traditionally been the principal source of the Bank's
funds for use in lending and for other general business purposes. In addition
to deposits, the Bank obtains funds through loan repayments, loan sales, and
cash flows generated from operations (including interest credited to deposit
accounts), and net deposit inflows. Scheduled loan payments are a relatively
stable source of funds, while loan prepayments and deposit inflows and outflows
are significantly influenced by general interest rates and money market
conditions. The Bank intends to continue to sell the majority of its residential
mortgage originations.
Deposits
- --------
The Bank attracts both short-term and long-term deposits from the general public
by offering a wide variety of accounts and rates. In recent years, the Bank has
relied increasingly on short-term accounts and other deposit alternatives that
are more responsive to market interest rates than the passbook accounts and
regulated fixed interest rate, fixed-term certificates that were the Bank's
primary source of deposits prior to 1978. The Bank offers regular passbook
accounts, checking accounts, NOW accounts, various money market accounts, and
fixed interest rate certificates with varying maturities.
The composition of the Bank's deposits at the end of recent periods is set forth
in Note 9 of the Notes to Consolidated Financial Statements in the Annual
Report.
The Bank utilized Federal Home Loan Bank advances for approximately five months
during 1996 and may use short term advances in the future to compensate for
seasonal fluctuations in deposit and certain loan balances.
25
The following table sets forth the dollar amount of savings deposits, by
interest rate range, in the various types of deposit programs offered by the
Bank at the dates indicated.
At December 31,
-------------------------------------------------------------
1996 1995 1994
------------------ ------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
Certificate Accounts:
--------------------
1.00- 1.99............ $ 100 0.1% 0 0.0% 0 0.0%
2.00- 3.99............ 0 0.0 3,243 1.0 28,190 9.2
4.00- 4.99............ 18,797 6.0 21,560 6.9 49,846 16.2
5.00- 7.99............ 203,236 65.1 202,049 64.3 142,105 46.2
8.00- 9.99............ 1,805 0.6 3,538 1.1 6,846 2.2
-------- ----- -------- ----- -------- -----
Total Certificate
Accounts........... $223,938 71.8% $230,390 73.3% $226,987 73.8%
-------- ----- -------- ----- -------- -----
Other Accounts:
--------------
Passbook Accounts...... 22,167 (1) 7.1 23,443 7.4 24,103 7.9
Money Market Accounts 30,805 (2) 8.1 28,566 9.1 28,073 9.1
NOW & Checking Accts... 34,844 13.0 31,895 10.2 28,442 9.2
-------- ----- -------- ----- -------- -----
Total Other
Accounts........... $ 87,816 28.2% $ 83,904 26.7% $ 80,618 26.2%
-------- ----- -------- ----- -------- -----
Total Deposits..... $311,754 100.0% $314,294 100.0% $307,605 100.0%
======== ===== ======== ===== ======== =====
(1) The Bank's interest rate on passbook accounts was 1.75% as of December 31,
1996.
(2) The Bank's interest rates on money market deposit accounts varied from
1.78% to 3.70% based upon account balance, as of December 31, 1996.
The following table allocates the Bank's deposit types by weighted average rate
and average amount for the years indicated.
Year Ended December 31,
---------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ----------------------------- ------------------------------
Weighted Weighted Weighted
Average Percent Average Average Percent Average Average Percent Average
Balance of Total Rate Balance of Total Rate Balance of Total Rate
-------- --------- --------- -------- --------- -------- -------- --------- ---------
Certificate
accounts $225,519 72.4% 5.9% $231,376 74.3% 5.9% $218,066 72.2% 5.1%
Passbook
accounts 23,710 7.6 1.8 23,880 7.7 1.8 25,777 8.5 1.8
Money Market
accounts 27,858 9.0 3.1 27,247 8.8 2.9 30,668 10.2 2.4
NOW accounts 25,144 8.1 0.9 23,414 7.5 0.8 22,562 7.5 0.8
Non interest
bearing deposits 9,109 2.9 0.0 5,400 1.7 0.0 4,732 1.6 0.0
-------- ----- ---- -------- ----- --- -------- ----- ---
TOTAL $311,340 100.0% $311,317 100.0% $301,805 100.0%
======== ===== ======== ===== ======== =====
26
The following table sets forth the savings flows at the Bank during the periods
indicated. Net decrease refers to the amount of deposits during a period less
the amount of withdrawals during the period. While total deposits declined in
1996 as compared to 1995, core deposits, comprised of checking, NOW, money
market, and passbook savings, experienced an increase. Management continues to
focus upon building the core deposit base of the Bank and undertook extensive
staff sales training during 1996. The training will be ongoing throughout the
Bank and will promote not only original sales of Bank products, but also
additional product sales to established customers. Management followed a
generally conservative pricing strategy throughout 1996 for time deposits. The
focus of the Bank for 1997 will be to obtain continued growth of core deposit
relationships and may place greater emphasis upon such relationships than growth
of the deposit base in the aggregate. Much of the 1995 deposit growth came in
core deposits, with NOW and checking account growth resulting from a checking
account marketing campaign focused upon an expanded offering of checking
accounts, increased cross-selling of the Bank's commercial borrower base and the
operation of the Bank's in-store supermarket office, which opened in April 1995.
Management followed a generally conservative pricing strategy during 1994
although special pricing promotions were offered on selected deposit products
throughout the year. Additionally, management believed the increase in market
interest rates experienced throughout 1994 generated renewed interest in deposit
products as opposed to mutual funds and other alternative investments.
Deposit flows at savings institutions may also be influenced by external factors
such as governmental credit policies and, particularly in recent periods,
depositors' perceptions of the adequacy of federal insurance of accounts.
Year Ended December 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(Dollars in Thousands)
Opening balance.............. $ 314,294 $ 307,605 $ 307,586
Deposits..................... 610,950 525,105 501,593
Withdrawals.................. (623,853) (528,696) (510,169)
Interest credited............ 10,363 10,280 8,595
--------- --------- ---------
Ending balance............... $ 311,754 $ 314,294 $ 307,605
========= ========= =========
Net increase (decrease)...... $ (2,540) $ 6,689 $ 19
========= ========= =========
Percent increase (decrease).. (0.81)% 2.17% .01%
The Bank has become more susceptible to short-term fluctuations in deposit
flows, as customers have become more interest rate conscious. The Bank manages
the pricing of its deposits in keeping with its asset/liability management and
profitability objectives. Based on its experience, the Bank believes that its
passbook and certificate accounts are relatively stable sources of deposits.
However, the ability of the Bank to attract and
27
maintain deposits, and the rates paid on these deposits, have been and will
continue to be significantly affected by market conditions.
The following table sets forth the time remaining until maturity of the Bank's
certificates of deposit as of December 31, 1996.
Maturity
-------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------- -------- -------- --------- --------
(In thousands)
Certificates of
deposit (less than
$100,000)........... $36,388 $31,631 $23,399 $104,216 $195,634
Certificates of
deposit ($100,000
or more)............ 6,836 4,005 4,500 12,963 28,304
-------- -------- -------- --------- --------
Total certificates
of deposit.......... $43,224 $35,636 $27,899 $117,179 $223,938
======== ======== ======== ========= ========
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1996
1.00- 5.00- 7.00- 8.00- 10.00- Percent
4.99% 6.99% 7.99% 9.99% 10.99% Total of Total
----- ----- ----- ----- ------ ----- --------
(Dollars in Thousands)
Certificate Accounts
Maturing in
Quarter Ending:
March 31, 1997................... $10,327 $ 26,173 $ 6,603 $ 121 $ - $ 43,224 19.30%
June 30, 1997.................... 4,534 26,619 4,482 1 - 35,636 15.91
September 30, 1997............... 640 13,063 194 48 - 13,945 6.23
December 31, 1997................ 160 13,506 159 129 - 13,954 6.23
March 31, 1998................... 963 13,922 1,588 186 - 16,659 7.44
June 30, 1998.................... 448 20,831 56 443 - 21,778 9.73
September 30, 1998............... 125 8,350 - 336 - 8,811 3.94
December 31, 1998................ 912 9,642 11 172 - 10,737 4.79
March 31, 1999................... 720 8,230 - 107 - 9,057 4.04
June 30, 1999.................... - 3,589 - 98 - 3,687 1.65
September 30, 1999............... - 4,288 - 28 - 4,316 1.93
December 31, 1999................ 39 5,278 4,971 18 - 10,306 4.60
Thereafter....................... 29 8,704 22,977 118 - 31,828 14.21
Total....................... $18,897 $162,195 $41,041 $1,805 $ - $223,938 100.00%
28
Borrowings
- ----------
HomeBanc's other sources of funds have included advances from the FHLBank of
Chicago as well as other borrowings. As a member of the FHLBank of Chicago, the
Bank is required to own capital stock in the FHLBank of Chicago and is
authorized to apply for advances from the FHLBank of Chicago. Each FHLBank
credit program has its own interest rate, which may be fixed or variable, and
range of maturities. The FHLBank of Chicago may prescribe the acceptable uses
for these advances, as well as limitations on the size of the advances and
repayment provisions.
The Bank utilized short term advances during 1996 as a means of funding the
seasonal growth of the construction loan portfolio and the purchase of
participating interests in multi-family and commercial mortgage loans. The
advances were repaid through the seasonal reduction of the construction loan
portfolio, the sale of residential mortgage loans, and the repayment of
participating interests purchased in prior years. Management may utilize
advances in the future in similar circumstances or if it is believed the
advances represent a more cost effective means of funding asset growth.
FHLBank advances were utilized during 1995 primarily as a means of funding the
purchase of participating interests in multi-family and commercial mortgage
loans. The advances were repaid through the sale of residential mortgages and
deposit growth.
The following table sets forth the maximum and average month-end balances of
FHLBank advances and other borrowing during the periods indicated.
Year Ended December 31,
----------------------------
1996 1995 1994
-------- -------- --------
(Dollars In Thousands)
Maximum Balance:
FHLBank advances....... $14,100 $13,850 $2,400
Other.................. - - 237
Average Balance:
FHLBank advances....... $ 2,408 $ 1,581 $ 26
Other.................. - - 219
Weighted average
interest rate of
FHLBank advances........ 5.69% 6.14% 4.49%
Weighted average
interest rate of other
borrowing............... -% -% 7.76%
There were no FHLBank advances outstanding at December 31, 1996, 1995, or 1994.
29
Subsidiary Activities
- ---------------------
In order to benefit from the strength of the western and northern suburban
Chicago economy and real estate market, and to increase its non-interest income,
in the early 1980s, HomeBanc began to increase its real estate development
activities in that market. At December 31, 1996, HomeBanc's total investment in
real estate developments as presented in the consolidated balance sheet was $5.1
million. These developments have been operated through Home Federal Service
Corporation, a wholly owned direct subsidiary of HomeBanc, and consist of
unconsolidated joint ventures owned 50% by HomeBanc.
Under the terms of HomeBanc's development agreements, HomeBanc (and its
subsidiary) generally provided funds to acquire and develop the real estate in
exchange for a percentage (generally 35%-50%) of the profits thereon. A
developer or builder acted operating manager of the development. Fees and
profits due to the operating manager are negotiated on a case-by-case basis and
may not be paid to the manager until HomeBanc has been reimbursed for its
investment in the development. Home Federal Service Corporation realized net
income of $431,000 for the year ended December 31, 1996.
HomeBanc has historically participated in loans to the unconsolidated joint
ventures generally in an amount equal to its ownership interest. HomeBanc
recognized interest income on its participation loan balance at the rate
provided for in the joint venture agreements. During 1996, 1995, and 1994,
HomeBanc recognized $-0-, $-0-, and $665,000 in interest income on loans to the
unconsolidated joint ventures. HomeBanc had no loans outstanding to its
unconsolidated joint ventures as of December 31, 1996.
Interest capitalization on the real estate projects is discontinued upon
completion of the development phase, or during the development phase when
HomeBanc determines market conditions indicate collectability of such interest
is uncertain. See Notes 1 and 7 of the Notes to Consolidated Financial
Statements in the Annual Report.
The following table sets forth information concerning all the Bank's investments
in real estate developments at December 31, 1996.
Units Sold
Origination Description of the or Under
Location of Development Date Property Contract
- ----------------------- ----------- ------------------- ------------
C>
Geneva, Illinois 07/89 (3) 533 single family 355
lots,37 acres 16
commercial and
a championship golf
course
Naperville, Illinois 11/85 279 single family 279
lots
85 acres commercial 83
real estate
Naperville, Illinois 05/86 300 single family 300
lots,
680 multi-family 680
units
32 acres commercial 29
real estate
HomeBanc Total Remaining
Location of Development Investment (1) Commitment Commitment (2)
- ----------------------- ------------- ------------ ---------------
(Dollars in Thousands)
30
Geneva, Illinois $4,879 $12,058 $223
Naperville, Illinois 95 -
Naperville, Illinois 121 - -
------ -------- -----
$5,095 $12,058 $223
====== ======= =====
(1) Amounts presented on a consolidated basis. The Bank offsets cash balances
on deposit in excess of loans and deferred revenues from its investment in
real estate figures.
(2) Includes amounts which may be funded by the Bank incrementally as
construction and development progresses, amounts to guarantee satisfactory
performance which may never ben funded on the specific projects and amounts
representing profits which have been recognized by the Bank but have not
been distributed to the Bank in cash. These profit amounts are included, on
a consolidated basis, in the $5.1 million investment in real estate.
(3) Investment was committed to prior to April 12, 1989.
Real estate development activities involve each of the risks described above
with respect to real estate development lending. See "Construction and Land
Lending". In addition, real estate developments typically produce negative cash
flow during the early stages thereof. Most of HomeBanc's real estate
developments have also been in the same market, the western and northern suburbs
of Chicago, and are therefore subject to the risk that this market could become
overbuilt or that real estate values in this market could decline. Finally, as
an equity investor rather than a lender on a real estate project, HomeBanc is
required to share in any losses on a project rather than require the borrower to
absorb the losses thereon.
Federal thrift institutions generally may invest up to 2% of their assets in
subsidiaries, plus an additional 1% if such investment is for community
purposes. The Bank's permissible investment in its subsidiary under this
regulation at December 31, 1996, was $6.7 million. On the same date, its
investment (including loans as well as direct investments) in its subsidiary was
$699,000.
Competition
- -----------
HomeBanc faces strong competition both in originating real estate and other
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from other savings institutions, commercial banks and mortgage
bankers making loans secured by real estate located in the Bank's market areas.
Commercial banks and finance companies provide vigorous competition in consumer
lending. The Bank competes for real estate and other loans principally on the
basis of the interest rates and loan fees it charg es, the types of loans it
originates and the quality of services it provides to borrowers.
The Bank faces substantial competition in attracting deposits from other savings
institutions, commercial banks, money market funds, credit unions and other
investment vehicles. The Bank attracts a significant amount of deposits through
its branch offices primarily from the communities in which those branch offices
are located; therefore, competition for those deposits is principally from other
savings institutions and commercial banks located in the same communities. The
Bank competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours, and convenient branch locations
with interbranch deposit and withdrawal privileges at each. HomeBanc opened its
first supermarket branch during
31
April 1995. Not only does this location provide an entry into supermarket
banking, but it also provides HomeBanc with an office location in an area of
Rockford that is experiencing rapid growth both from a residential and business,
primarily retail, perspective.
Management considers its primary market area to be the Rockford, Freeport and
Dixon metropolitan areas. HomeBanc has also directed a portion of its real
estate development lending and investment activity to the western and northern
Chicago suburbs. Although HomeBanc has developed relationships with a number of
developers, builders and lenders in the market, HomeBanc's overall lending
volume in this market has not constituted a significant percentage of the total
lending activity in this large market.
The authority to offer money market deposits and the expanded lending and other
powers authorized for thrift institutions by federal and state legislation have
resulted in increased competition for both deposits and loans between thrift
institutions and other financial institutions such as commercial banks.
Employees
- ---------
At December 31, 1996, the Company and its subsidiary had a total of 205 em
ployees, including 40 part-time employees. None of the employees of the Company
and its subsidiary are represented by any collective bargaining group.
Management considers its employee relations to be good.
Executive Officers of the Company and the Bank
- ----------------------------------------------
The following information as to the business experience during the past five
years is supplied with respect to the executive officers of the Company and the
Bank who do not serve on the Company's Board of Directors. Executive officers
of the Company are elected annually to serve until their successors are elected
or until they resign or are removed by the Board of Directors. There are no
arrangements or understandings between the persons named and any other person
pursuant to which such officers were elected.
Marsha A. Abramson, age 46. Mrs. Abramson is Senior Vice President-Deposit
Services of the Bank. She has held this position since 1984.
Dirk J. Meminger, age 37. Mr. Meminger has been Treasurer of the Bank since 1986
and has served as Treasurer of the Company since 1990. Prior to joining the
Bank, Mr. Meminger was employed as an auditor with a local office of an
international accounting firm. He is also a certified public accountant.
Robert R. Bennehoff, age 57. Mr. Bennehoff is Senior Vice President-Residential
Lending of the Bank. Mr. Bennehoff joined the Bank in 1977 and has held
positions including Vice President/Loan Servicing and Vice President/Customer
Service.
Peter T. Roche, age 50. Mr. Roche is Senior Vice President-Commercial Lending
of the Bank. He joined the Bank in May 1994. Mr. Roche has 16 years of banking
experience including officer positions responsible for mortgage and commercial
business lending.
32
REGULATION
- ----------
General
- -------
The Bank is a federally chartered savings bank, the deposits of which are
federally insured and backed by the full faith and credit of the United States
Government. Accordingly, the Bank is subject to broad federal regulation and
oversight extending to all its operations. The Bank is a member of the FHLB of
Chicago and is subject to certain limited regulation by the Board of Governors
of the Federal Reserve System ("Federal Reserve Board"). As the savings and
loan holding company of HomeBanc, the Company also is subject to federal
regulation and oversight. The purpose of the regulation of the Company and
other holding companies is to protect institutions. The Bank is a member of the
Savings Association Insurance Fund ("SAIF"), which together with the Bank
Insurance Fund (the "BIF") are the two deposit insurance funds administered by
the FDIC, and the deposits of the Bank are insured by the FDIC. As a result,
the FDIC has certain regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed below or
elsewhere in this document.
Federal Regulation of Savings Institutions
- ------------------------------------------
The OTS has extensive authority over the operations of savings institutions. As
part of this authority, the Bank is required to file periodic reports with the
OTS and is subject to periodic examinations by the OTS and the FDIC. The last
regular OTS examination of the Bank was as of March 31, 1996. The last regular
FDIC Examination was as of April 30, 1995. Under agency scheduling guidelines,
it is likely that another OTS examination will be initiated in the near future.
When these examinations are conducted, the examiners may require the Bank to
provide for higher general or specific loan loss reserves. All savings
institutions are subject to a semi-annual assessment, based upon the savings
institution's total assets, to fund the operations of the OTS. The Bank's OTS
assessment for the fiscal year ended December 31, 1996 was $86,000.
The OTS also has extensive enforcement authority over all savings institutions
and their holding companies, including the Bank and the Company. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. Except under certain
circumstances, public disclosure of final enforcement actions by the OTS is
required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws, and it is prohibited from engaging in any
33
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal institutions in loans secured by non-
residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings institutions are also generally authorized
to branch nationwide. The Bank is in compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower is equal
to the greater of $500,000 or 15% of unimpaired capital and surplus (except for
loans fully secured by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus). At December 31,
1996, the Bank's lending limit under this restriction was $3.4 million. On
December 31, 1996, the Bank had five loans, totaling $4.0 million to one
borrower in excess of such amount. All of these loans, however, were originated
by the Bank prior to the implementation of this limitation and are unaffected by
this regulation. Since the implementation of this rule, HomeBanc has not
originated any loans exceeding the specified maximum.
The OTS, as well as the other federal banking agencies, has adopted guidelines
establishing safety and soundness standards on such matters such as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to
comply with an approved plan will subject the institution to further enforcement
action.
Insurance of Accounts and Regulation by the FDIC
- ------------------------------------------------
The Bank is a member of the SAIF, which is administered by the FDIC. Deposits
are insured up to applicable limits by the FDIC and such insurance is backed by
the full faith and credit of the United States Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the SAIF or the BIF. The FDIC
also has the authority to initiate enforcement actions against savings
institutions, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based system,
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums based upon their level of capital and
supervisory evaluation. Under the system, institutions classified as well
capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or
core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least
6% and a risk-based capital ratio of at least 10%) and considered healthy pay
the lowest premium while institutions that are less
34
than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of
less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. Risk classification of
all insured institutions is made by the FDIC for each semi-annual assessment
period.
The FDIC is authorized to increase assessment rates, on a semi-annual basis, if
it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Regulatory Capital Requirements" in the
Annual Report to Stockholders.
Regulatory Capital Requirements
- -------------------------------
Federally insured savings institutions, such as the Bank, are required to
maintain a minimum level of regulatory capital. The OTS has established capital
standards, including a tangible capital requirement, a leverage ratio (or core
capital) requirement and a risk-based capital requirement applicable to such
savings institutions. These capital requirements must be generally as stringent
as the comparable capital requirements for national banks. The OTS is also
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). Tangible capital generally includes
common stockholders' equity and retained income, and certain noncumulative
perpetual preferred stock and related income. In addition, all intangible
assets, other than a limited amount of purchased mortgage servicing rights, must
be deducted from tangible capital for calculating compliance with the
requirement.
The OTS regulations establish special capitalization requirements for savings
institutions that own subsidiaries. In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for
national banks or engaged in certain other activities solely as agent for its
customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the institution's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. The Bank's subsidiary is an excludable subsidiary. At
December 31, 1996, the regulatory investment in this subsidiary was $4.9
million.
At December 31, 1996, the Bank had tangible capital of $15.9 million, or 4.81%
of adjusted total assets, which is approximately $10.9 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.
35
The capital standards also require core capital equal to at least 3% of adjusted
total assets. Core capital generally consists of tangible capital plus certain
intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings institution must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. As of December 31, 1996,
the Bank had no intangibles subject to these tests.
At December 31, 1996, the Bank had core capital equal to $15.9 million, or 4.81%
of adjusted total assets, which is $6.0 million above the minimum leverage ratio
requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings institutions to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
The OTS is also authorized to require a savings institution to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1996, the Bank had
$1.6 million of capital instruments (consisting of general loss reserves) that
qualify as supplementary capital which was less than 1.25% of risk-weighted
assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had no such
exclusions from capital and assets at December 31, 1996.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to
100%, based on the risk inherent in the type of asset. For example, the OTS has
assigned a risk weight of 50% for prudently underwritten permanent one- to four-
family first lien mortgage loans not more than 90 days delinquent and having a
loan to value ratio of not more than 80% at origination unless insured to such
ratio by an insurer approved by the Federal National Mortgage Association
("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC").
OTS regulations also require that every savings association with more than
normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net
portfolio value of a savings institution, greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and off-
balance sheet contracts. The rule will not become
36
effective until the OTS evaluates the process by which savings institutions may
appeal an interest rate risk deduction determination. It is uncertain as to
when this evaluation may be completed. Any savings institutions with less than
$300 million in assets and a total capital ratio in excess of 12% is exempt from
this requirement unless the OTS determines otherwise. Based upon OTS
calculations through December 31, 1996, the Bank's capital calculation has not
been impacted by the interest rate risk component.
On December 31, 1996, the Bank had total capital of $17.5 million (including
$15.9 million in core capital and $1.6 million in qualifying supplementary
capital) and risk weighted assets of $210.4 million (including $3.2 million in
converted off-balance sheet assets); or total capital of 8.29% of risk-weighted
assets. This amount was $.6 million above the 8% requirement in effect on that
date.
The OTS and the FDIC are authorized and, under certain circumstances required,
to take certain actions against institutions that fail to meet their capital
requirements. The OTS is generally required to take action to restrict the
activities of an "undercapitalized institution" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital
ratio or an 8% risk-based capital ratio). Any such institution must submit a
capital restoration plan and until such plan is approved by the OTS may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The
OTS is authorized to impose the additional restrictions that are applicable to
significantly undercapitalized institutions.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized institution must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings institution that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the institution. An institution that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized institutions. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized institution is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or receiver.
The OTS is also generally authorized to reclassify an association into a lower
capital category and impose the restrictions applicable to such category if the
institution is engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
37
The imposition by the OTS or the FDIC of any of these measures on the Bank may
have a substantial adverse effect on the Bank's operations and profitability.
Company shareholders do not have preemptive rights, and therefore, if the
Company is directed by the OTS or the FDIC to issue additional shares of Common
Stock, such issuance may result in the dilution in the percentage of ownership
of the Company.
Limitations on Dividends and Other Capital Distributions
- --------------------------------------------------------
OTS regulations impose various restrictions on savings associations with respect
to their ability to make distributions of capital, which include dividends,
stock redemptions or repurchases, cash-out mergers and other transactions
charged to the capital account. OTS regulations also prohibit a savings
association from declaring or paying any dividends or from repurchasing any of
its stock if, as a result, the regulatory capital of the association would be
reduced below the amount required to be maintained for the liquidation account
established in connection with its mutual to stock conversion.
Generally, savings institutions, such as the Bank, that before and after the
proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
institution's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an institution deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Bank may pay dividends in accordance with this general authority. The Bank,
however, did not pay dividends to the Company during 1996. Savings institutions
proposing to make any capital distribution need only submit written notice to
the OTS 30 days prior to such distribution. Savings institutions that do not, or
would not meet their current minimum capital requirements following a proposed
capital distribution, however, must obtain OTS approval prior to making such
distribution. The OTS may object to the distribution during that 30-day period
notice based on safety and soundness concerns. See "- Regulatory Capital
Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings institution may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings institutions that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings institution may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a
38
result of, such a distribution. As under the current rule, the OTS may object
to a capital distribution if it would constitute an unsafe or unsound practice.
No assurance may be given as to whether or in what form the regulations may be
adopted.
Liquidity
- ---------
All savings institutions, including the Bank, are required to maintain an
average daily balance of liquid assets equal to a certain percentage of the sum
of its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. For a discussion of what the Bank includes in
liquid assets, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources" in the Annual
Report. This liquid asset ratio requirement may vary from time to time (between
4% and 10%) depending upon economic conditions and savings flows of all savings
institutions. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the institution's average daily balance
of net withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon institutions for violations of either liquid asset ratio
requirement. At December 31, 1996, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 8.2% and a short-term liquid
assets ratio of 4.5%.
Accounting
- ----------
An OTS policy statement applicable to all savings institutions clarifies and re-
emphasizes that the investment activities of a savings institution must be in
compliance with approved and documented investment policies and strategies, and
must be accounted for in accordance with GAAP. Under the policy statement,
management must support its classification of and accounting for loans and
securities (i.e., whether held for investment, sale or trading) with appropriate
documentation. The Bank is in compliance with these amended rules.
OTS accounting regulations, which may be made more stringent than GAAP by the
OTS, require that transactions be reported in a manner that best reflects their
underlying economic substance and inherent risk and that financial reports must
incorporate any other accounting regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test
- ----------------------------
All savings institutions, including the Bank, are required to meet a qualified
thrift lender ("QTL") test to avoid certain restrictions on their
39
operations. This test requires a savings institution to have at least 65% of
its portfolio assets (as defined by regulation) in qualified thrift investments
on a monthly average for nine out of every twelve months on a rolling basis. As
an alternative, the savings institution may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, such assets primarily consist of residential housing related loans
and investments. At December 31, 1996, the Bank met the test and has always met
the test since its inception.
Any savings institution that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an institution does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an institution has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings institution and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
institution is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such institution
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
institution that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "-Holding Company Regulation."
Community Reinvestment Act
- --------------------------
Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has
a continuing and affirmative obligation consistent with safe and sound banking
practices to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with the examination of the Bank, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications, such
as a merger or the establishment of a branch, by the Bank. An unsatisfactory
rating may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the CRA
regulations and the methodology for determining an institution's compliance with
the CRA. Due to the heightened attention being given to the CRA in the past few
years, the Bank may be required to devote additional funds for investment and
lending in its local community. The Bank was examined for CRA compliance in
June 1994 and received a rating of "satisfactory".
40
Transactions with Affiliates
- ----------------------------
Generally, transactions between a savings institution or its subsidiaries and
its affiliates are required to be on terms as favorable to the institution as
transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the
institution's capital. Affiliates of the Bank include the Company and any
company which is under common control with the Bank. In addition, a savings
institution may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates. The
Bank's subsidiaries are not deemed affiliates, however; the OTS has the
discretion to treat subsidiaries of savings institutions as affiliates on a case
by case basis.
Certain transactions with directors, officers or controlling persons are also
subject to conflict of interest regulations enforced by the OTS. These conflict
of interest regulations and other statutes also impose restrictions on loans to
such persons and their related interests. Among other things, such loans must
be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation
- --------------------------
The Company is a unitary thrift holding company subject to regulatory oversight
by the OTS. As such, the Company is required to register and file reports with
the OTS and is subject to regulation and examination by the OTS. In addition,
the OTS has enforcement authority over the Company and its non-savings
institution subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution.
As a unitary thrift holding company, the Company generally is not subject to
activity restrictions. If the Company acquires control of another savings
institution as a separate subsidiary, it would become a multiple thrift holding
company, and the activities of the Company and any of its subsidiaries (other
than the Bank or any other SAIF-insured thrift) would become subject to such
restrictions unless such other institutions each qualify as a QTL and were
acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of the OTS
prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
thrift holding companies or their subsidiaries. In addition, within one year of
such failure the Company must register as, and will become subject to, the
restrictions applicable to bank holding companies.
The activities authorized for a bank holding company are more limited than are
the activities authorized for a unitary or multiple thrift holding company. See
"Qualified Thrift Lender Test."
41
The Company must obtain approval from the OTS before acquiring control of any
other SAIF-insured institution. Such acquisitions are generally prohibited if
they result in a multiple thrift holding company controlling savings
institutions in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings institution.
Federal Securities Law
- ----------------------
The stock of the Company is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject
to the information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers, directors
and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System
- ----------------------
The Federal Reserve Board requires all depository institutions to maintain non-
interest bearing reserves at specified levels against their transaction accounts
(primarily checking, NOW and Super NOW checking accounts). At December 31,
1996, the Bank was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the OTS.
See "Liquidity."
Savings institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require institutions to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
- -----------------------------
The Bank is a member of the FHLB of Chicago, which is one of 12 regional FHLBs,
that administers the home financing credit function of savings institutions.
Each FHLB serves as a reserve or central bank for its members within its
assigned region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB, which are subject to the oversight of the Federal Housing
Finance Board. All advances from the FHLB are required to be fully secured by
sufficient collateral as determined by
42
the FHLB. In addition, all long-term advances are required to provide funds for
residential home financing.
As a member, the Bank is required to purchase and maintain stock in the FHLB of
Chicago. At December 31, 1996, the Bank had $2.1 million in FHLB stock, which
was in compliance with this requirement. In past years, the Bank has received
substantial dividends on its FHLB stock. Over the past five calendar years such
dividends have averaged 6.24% and were 6.72% for calendar year 1996. For the
year ended December 31, 1996, dividends paid by the FHLB of Chicago to the Bank
totaled $143,000.
Under federal law the FHLBs are required to provide funds for the resolution of
troubled savings institutions and to contribute to low- and moderately priced
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have affected adversely the level of FHLB dividends paid and could
continue to do so in the future. These contributions could also have an adverse
effect on the value of FHLB stock in the future. A reduction in value of the
Bank's FHLB stock may result in a corresponding reduction in the Bank's capital.
Impact of New Accounting Standards
- ----------------------------------
In June 1996, the Financial Accounting Standards Board issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and extinguishments
of Liabilities," which provides new accounting and reporting standards for
sales, securitization, and servicing of receivables and other financial assets
and extinguishments of liabilities. The provisions of the Statement are to be
applied to transactions occurring after December 31, 1996. Management does not
believe the Company will be significantly impacted by the adoption of Statement
No. 125.
Item 2. Properties
- -------------------
The following table sets forth certain information concerning the main office
and each branch office of the Bank at December 31, 1996. The aggregate net book
value of HomeBanc's premises and equipment was approximately $3.9 million at
December 31, 1996.
Lease Expiration
Year (Including Any
Location Opened Owned or Leased Renewal Option)
- ------------------------- ------- --------------- -----------------
Main Office
- -----------
1107 E. State Street
Rockford, IL 61104-2259 1962 Owned ---
Full Service Branch Offices
- ---------------------------
3210 Eleventh Street
Rockford, IL 61109-2204 1978 Owned ---
2641 North Mulford Road
Rockford, IL 61111-5670 1983 Leased March 31, 1998
Five Yr. Renew Opt.
5629 North Second Street
Loves Park, IL 61111-4664 1988 Owned ---
Cherry Vale Mall-H42C
Rockford, IL 61112-1009 1975 Leased June 13, 2001
5875 East Riverside Blvd.
Rockford, IL 61114 1995 Leased April 1, 2000
205 West Stephenson Street
Freeport, IL 61032-4300 1988 Owned ---
1550 West Galena Avenue
Freeport, IL 61032-3104 1988 Owned ---
98 Galena Avenue
Dixon, IL 61021-0305 1983 Owned ---
Limited Service Branch Offices
- ------------------------------
122 West Boyd
Dixon, IL 61021-0305 1983 Owned ---
ATM-Building Only
1340 N. Galena Avenue
Dixon, IL 61021-0305 1987 Bldg./Owned Monthly
Land/Leased
Computer Equipment
- ------------------
The Bank maintains depositor and borrower customer files on an on-line basis
with FiServ, Milwaukee, Wisconsin.
Item 3. Legal Proceedings
- --------------------------
The Company, HomeBanc and its subsidiary are involved as plaintiff or defendant
in various legal actions arising in the normal course of their businesses.
While the ultimate outcome of the various legal proceedings involving the
Company, HomeBanc and its subsidiary cannot be predicted with certainty, it is
the opinion of management, after consultation with counsel, that the resolution
of these legal actions should not have a material effect on the Company's
consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended December 31, 1996.
PART II
- -------
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
- -----------------------------------------------------------------------------
Page 41 of the attached 1996 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Selected Financial Data
- --------------------------------
Page 3 of the attached 1996 Annual Report to Stockholders is herein incorporated
by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- -----------------------------------------------------------
Pages 4 through 13 of the attached 1996 Annual Report to Stockholders are herein
incorporated by reference.
Item 8. Financial Statements Supplementary Data
- ------------------------------------------------
Pages 15 through 39 of the attached 1996 Annual Report to Stockholders are
herein incorporated by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
Previous independent accountants:
A. On February 21, LLP ("KPMG") 1995, the Company dismissed KPMG Peat
Marwick, as its independent. accountants.
B. The reports of KPMG on the consolidated financial statements for the past
two fiscal years did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope,
or accounting principles.
C. The change of independent accountants was recommended by the Audit
Committee and subsequently approved by the Board of Directors.
D. In connection with its audits for the two most recent fiscal years and
through February 21, 1995, there have been no disagreements with KPMG on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope of procedure, which disagreements, if not
resolved to the satisfaction of KPMG, would have caused them to make
reference thereto in their report on the consolidated financial statements
for such years.
E. During the two most recent fiscal years and through February 21, 1995,
there have bee no reportable events (as defined in Regulation S-K Item
304(a)(1)(v)) with KPMG.
F. The Company requested that KPMG furnish a letter addressed to the
Securities and Exchange Commission stating whether it agrees with the
above statements, and if not, stating the respects in which they do not
agree. A copy of such letter dated February 28, 1995, is filed as Exhibit
16 to the Form 8-K/A dated March 6, 1995 filed with the SEC.
New independent accountants:
A. On March 9, 1995, the Company engaged the firm of Ernst & Young LLP as
independent accountants for the fiscal year December 31, 1995.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Information concerning Directors of the Registrant is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Information regarding executive officers of the Company and the Bank included in
Part I of this Form 10-K is incorporated herein by reference.
Item 11. Executive Compensation
- --------------------------------
Information concerning executive compensation (other than the report of the
compensation committee and the performance graph) is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1997, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
PART IV
- -------
Item 14. Financial Statements, Exhibits File, and Reports on Form 8-K
- ----------------------------------------------------------------------
(a) (1) Financial Statements
The following information appearing in HomeCorp's Annual Report to Stockholders
for the year ended December 31, 1996, is incorporated by reference in this
Annual Report on Form 10-K as Exhibit 13.
Pages 15 through 41 of the attached 1996 Annual Report to Stockholders are
herein incorporated by reference.
(a) (2) Financial Statement Schedules
Except as set forth below, all financial statement schedules have been omitted
as the required information is inapplicable or has been included in the Notes to
Consolidated Financial Statements.
Independent Auditors' Report dated January 22, 1997.
(a) (3) Exhibits
Reference to
Prior filing
or Exhibit
Regulation Number
S-K Exhibit Attached
Number Document Here To
- ----------- ------------------------------------- ------------
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3(a) Articles of Incorporation (a)
3(b) By-Laws (a)
4 Instruments defining the rights of security (a)
holders, including debentures
9 Voting Trust Agreement None
10 Executive Compensation Plans and Arrangements:
1. Employee Stock Ownership Plan (a)
2. Stock Option and Incentive Plan (b)
3. Employment Contract of C. Steven Sjogren (a)
4. Employment Agreement of John R. Perkins (a)
5. Employment Agreement of Marsha A. Abramson (a)
6. Employment Agreement of Dirk J. Meminger (a)
7. Employment Agreement of Robert R. Bennehoff (a)
8. 1996 Premium Price Stock Option and (b)
Incentive Plan
9. Restoration Benefit Plan 10.9
11 Statement re: computation of per (c)
share earnings
12 Statement re: computation of ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountants (d)
18 Letter re: change in accounting principles (e)
21 Subsidiaries of Registrant 21
22 Published report regarding matters None
submitted to vote of security holders
23 Consents of Experts and Counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
99 Additional exhibits None
(a) Filed as exhibits to the HomeCorp's Form S-1 registration statement filed
on November 24, 1989 (File No. 33-32284) pursuant to Section 5 of the Securities
Act of 1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-K.
(b) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of Regulation S-K.
(c) See Note 1(r) of Notes to Consolidated Financial Statements included in the
Annual Report under Exhibit 13.
(d) Filed as Exhibit 16 to the Company's Current Report on Form 8-K/A, dated
March 6, 1995, filed pursuant to the Securities Exchange Act of 1934, as amended
(the "1934 Act"), which is hereby incorporated by reference herein in accordance
with Item 601 of Regulation S-K. The Company filed a Current Report on Form 8-
K/A, dated March 10, 1995, with the SEC pursuant to the 1934 Act to report the
retention of Ernst & Young LLP as its independent auditor, which report is
hereby incorporated by reference herein pursuant to Item 601 of Regulation S-K.
(e) Filed as Exhibit 18 to the Company's Annual Report on Form 10-K for the
Year Ended December 31, 1994, filed pursuant to the Securities Exchange Act of
1934, as amended, which is hereby incorporated herein by reference.
(b) Reports on Form 8-K
- ------------------------
A report on Form 8-K was filed on October 30, 1996, announcing the results of
operations for the three and nine month periods ended September 30, 1996.
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed by
the undersigned, thereunto duly authorized.
HOMECORP, INC.
Date: March 28, 1997 By: /s/ C. Steven Sjogren
- --------------------- ---------------------------
Duly Authorized Representative
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of HomeCorp, Inc. and
in the capacities and on the date indicated.
By: /s/ Karl H. Erickson By: /s/ C. Steven Sjogren
- ------------------------- ---------------------------
Chairman of the Board Director, President,
Chief Executive Officer
(Principal Executive Officer)
Date: March 28, 1997 Date: March 28, 1997
By: /s/ John R. Perkins By: /s/ Dirk J. Meminger
- ----------------------- ------------------------------
Director, Executive Vice Treasurer,
Executive Vice President, Chief Accounting Officer
Chief Financial Officer (Principal Accounting Officer)
(Principal Financial Officer)
Date: March 28, 1997 Date: March 28, 1997
By: /s/ Wesley E. Lindberg By: /s/ Adam A. Jahns
- -------------------------- ----------------------------
Secretary and Director Vice Chairman and Director
Date: March 24, 1997 Date: March 24, 1997
By: /s/ Robert C. Hauser By: Larry U. Larson
- ------------------------- ----------------------------
Director Director
Date: March 28, 1997 Date: March 28, 1997
By: /s/ Richard W. Malmgren By: /s/ David R. Rydell
- ---------------------------- ---------------------------
Director Director
Date: March 28, 1997 Date: March 28, 1997
INDEX TO EXHIBITS
- -----------------
Exhibit Number
- --------------
10.9 Restoration Benefit Plan
11 Statement re computation per share earnings
(See Note 1(r) of the Notes to Consolidated
Financial Statements continued in the Annual Report
filed as Exhibit 13 hereto.)
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
23 Consents of Experts
27 Financial Data Schedule
(The Schedule contains summary financial information
extracted from the financial statements contained in
the Annual Report on Form 10-K for the year ended
December 31, 1996 and is qualified in its entirety
by reference to such financial statements.)