HomeCorp, Inc. and Subsidiary
[graphic]TO OUR SHAREHOLDERS
-------------------
Our strategic focus on community banking served the Company well during
1996. Bank earnings, consumer loans and household account relationships
all continued to grow for fiscal 1996, rewarding our long-term plan to
prioritize the growth of HomeBanc's community banking services as a
means of creating a stream of consistent, expanding income.
A significant event for all savings banks during 1996 was the recapitalization
of the Saving Association Insurance Fund (SAIF) of the Federal Deposit Insurance
Corporation (FDIC). This recapitalization included a special one-time
assessment that cost the Company $1.2 million ($1.06 per share) on an
after-tax basis in fiscal 1996, but will result in significantly lower FDIC
insurance premiums starting in 1997. The lower deposit insurance premium rate
will enable HomeBanc to compete more effectively with commercial banks, which
have had much lower premiums than SAIF members for the past several years.
I am pleased to report that net income for the year, excluding the special
assessment, increased 33% to $1,605,025 or $1.36 per share compared to
$1,207,482 or $1.03 per share last year. Including the special assessment,
however, HomeCorp reported earnings for the full year 1996 of $358,831 or $0.30
per share.
The Bank's continued focus on growth in community banking, supported by
our ongoing sales training, database marketing and other sales and marketing
initiatives, enabled HomeBanc to achieve gains in key business segments. Core
deposit balances increased 5.0% over fiscal 1995; the number of household
relationships increased more than 6.0%; and loan originations increased 3.5% in
1996 when compared to the prior year. While real estate loan originations
remained relatively constant on a year to year basis, steady growth continued in
consumer and commercial business loans.
The Company's earnings for 1996 were also favorably impacted by gains in
loan fees and service charges as well as income from real estate development.
Loan fees and service charges increased 16.7% over the prior year to $1.7
million for the full year 1996. Income from real estate development activities
totaled $861,175 during 1996 as a result of real estate closings, reversing a
negative impact on earnings from this segment of our business in fiscal 1995.
This performance is consistent with the Company's ongoing plan to reduce its
involvement in real estate development activities.
The Company's net interest income for the year was negatively impacted by
the transfer of a significant earning asset to real estate owned, due to the
fact that earnings on real estate owned are reported as non-interest income. Net
interest income, exclusive of the transfer, would have increased 5.1% from the
year earlier. The Bank's net interest margin increased to 3.04% during 1996 from
2.98% a year earlier.
The Bank's allowance for loan losses totaled approximately $1.6 million at
December 31, 1996, representing .61% of total loans. The Bank also recorded a
$100,000 provision for loss on foreclosed real estate and a $246,000 provision
for costs associated with termination of the Bank's position as a credit
enhancer.
The Company had total assets of $335.8 million, total deposits of $311.8
million and net loans receivable of $259.1 million at December 31, 1996.
Stockholder's Equity at the fiscal year end was $20.9 million. Book value rose
to $18.48 per share from $18.13 at December 31, 1995.
We are convinced that our focus on community banking is on target. We
will continue to enhance our product line, focusing on profitable segments and
customer relationships. Through our ongoing customer service training programs,
cross-marketing and development of a "customer first" corporate culture, we will
continue to strive for even greater customer satisfaction. We are confident
that building our core banking operation on local, community orientation,
relevant products that meet the needs of our customers and responsive,
personalized service holds the opportunity for added earnings for the company
while reducing interest rate risk.
We will continue to strive to increase shareholder value while remaining
committed to providing quality service to our customers. Thank you for your
continued support.
Sincerely,
/s/ C. Steven Sjogren
C. Steven Sjogren
President & Chief
Executive Officer
1
HomeCorp, Inc. and Subsidiary
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Focused on Community Banking
HomeBanc continued its efforts in 1996 to build shareholder value by focusing on
its proven strategies:
.Community banking with a strong local orientation
.An emphasis on personal service
.Ongoing development of an internal sales culture
.Small business and commercial services
.Targeted database marketing
.High-touch and high-tech banking supported by powerful information systems
Allocating marketing dollars away from inefficient mass media advertising to
more direct forms of communication with customers has achieved positive results.
The Bank's most valuable asset - our current customers - are being cost-
effectively reached and better served by applying the powerful database
information available through our new Marketing Customer Information Files
(MCIF) system. This proprietary system gives us an improved set of tools to
communicate with customers and provide a higher level of personalized service in
close alignment with their needs. With MCIF, we can track factors such as:
.Which customers hold multiple account relationships
.Which product combinations are the most popular
.Time-sensitive data such as CD maturity dates, seasonal trends, when to
promote specific products
.Which customers are the likeliest candidates for additional services, and
more
Implemented in fiscal 1995, MCIF provides the HomeBanc customer service, sales
and marketing staffs with an opportunity to target the financial needs of our
customers on pace with their life cycles and lifestyles - e.g., just as older
customers often have a higher level of interest in investment products, younger
individuals typically have greater borrowing needs. MCIF now gives us the
capability to more precisely identify the varied needs of individuals and to
respond by matching them to attractive, appropriate products and services.
For example, customers who have only one or two basic accounts, such as
passbook savings, a CD, or a home mortgage, may not be aware of the many other
beneficial products and services offered by HomeBanc. By recognizing their
needs, we can offer and inform them about products which allow for managing
personal finances more easily and simply, provide greater convenience and
flexibility, and help them systematically build personal financial worth.
On the other hand, customers with multiple account relationships tend to be
more financially aware, frequent "shoppers" for new products and services. They
continually look for ways to enhance their personal financial management and
convenience. These customers welcome financial information and useful financial
tools, such as the popular home equity loan or line of credit introduced in
recent years, which allows customers to deduct loan interest on their tax
returns.
With MCIF, we can make more effective use of marketing dollars, track
results, fine-tune internal programs and serve individual customers better.
In addition, we are working to extend HomeBanc's high level of service and
develop an effective sales culture through a continued emphasis on employee
selling. A program of ongoing staff sales training in cross-selling of asset and
lending products, tied to performance objectives, helps front-line staff people
identify and clarify a customer's financial needs and objectives and to
recommend product solutions.
As we move forward into a new and exciting year, HomeBanc will continue to
build value by building stronger relationships with our customers...offering the
very best in customer-friendly products and services...and leveraging our
knowledge, resources and valuable customer base in dynamic, effective ways.
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HomeBanc's Marketplace
----------------------
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[MAP APPEARS HERE]
HomeBanc's community service area reaches from Rockford, the state's second-
largest city, to Freeport, 30 miles west and Dixon, 40 miles south. Ten offices,
including our Eagle Food Centers supermarket branch, extend our market area
throughout much of northwest Illinois. The area has a strong economy and
benefits from a base of diverse industries, including retailing, manufacturing,
service and agriculture.
2
Selected Consolidated Financial Information HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Dollars in thousands At December 31,
Selected Balance Data Sheet 1996 1995 1994 1993 1992
Total assets $335,824 $338,027 $330,412 $333,837 $333,901
Loans receivable, net 259,140 261,022 244,860 229,471 226,155
Mortgage-backed securities 18,859 24,488 28,431 21,299 40,284
Investment securities held to maturity 5,502 6,504 12,674 14,831 16,284
Investment securities available for sale 12,497 8,311 7,022 -- --
Investment in real estate 5,095 4,060 4,375 3,177 8,386
Goodwill -- -- -- 5,148 5,610
Deposits 311,754 314,294 307,605 307,586 309,516
Total borrowings -- -- -- 237 328
Stockholders' equity $ 20,858 $ 20,424 $ 19,029 $ 22,926 $ 21,262
- ------------------------------------------------------------------------------------------------------------------------
Dollars in thousands Year ended December 31,
Selected Operating Data 1996 1995 1994 1993 1992
Total interest income $24,381 $24,436 $21,521 $22,415 $26,292
Total interest expense 14,885 15,065 12,496 13,876 17,291
Net interest income 9,496 9,371 9,025 8,539 9,001
Provision for loan losses 565 360 240 250 415
Net interest income after provision
for loan losses 8,931 9,011 8,785 8,289 8,586
Loan fees and services charges 1,699 1,456 1,486 1,157 1,273
Income (loss) from real estate developments 861 (54) 445 205 232
Gain (loss) on sale of loans, investments
and mortgage-backed securities 933 297 (18) 516 362
REO operations 471 115 -- -- --
Other noninterest income 166 129 167 113 171
SAIF special assessment 2,043 -- -- -- --
Noninterest operating expenses 10,110 9,004 8,496 7,851 7,615
Amortization of goodwill -- -- 808 462 482
Provision for loss on foreclosed real estate 100 -- -- -- --
Provision for credit enhancement costs 246 -- -- -- --
Income before income taxes
and cumulative effect of change in
accounting principle 562 1,950 1,561 1,967 2,527
Provision for income taxes 203 743 933 801 886
Income before cumulative effect of
change in accounting principle 359 1,207 628 1,166 1,641
Cumulative effect of change in
accounting principle -- -- (4,340) 440 --
Net income (loss) $ 359 $ 1,207 $(3,712) $ 1,606 $ 1,641
3
Management's Discussion and Analysis
HomeCorp, Inc. and Subsidiary of Financial Condition and Results of Operations
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General
- --------------------------------------------------------------------------------
HomeCorp, Inc. (Company) is the holding company for HomeBanc, a federal
savings bank (HomeBanc or Bank). HomeBanc is a federally chartered stock savings
bank. The Company has no business operations independent of the Bank.
The Bank operates from ten offices in a three county area in northern
Illinois, and offers traditional banking services to consumers and businesses.
As a community-oriented institution, the Company offers products
including residential and commercial mortgages, consumer, construction and
commercial business loans, and a broad assortment of deposit products and
services. Through a subsidiary, the Bank offers a full line of securities and
brokerage services through INVEST Financial Corporation.
Changes in Financial Condition
- --------------------------------------------------------------------------------
The Company's December 31, 1996 balance sheet reflects the continuing focus
upon community banking. The consumer loan portfolio increased $19.5 million, or
35% during 1996 while the commercial business loan portfolio increased $2.2
million, or 56%. Consumer growth is largely due to the origination of indirect
automobile loans. All such loans are underwritten and approved by HomeBanc loan
officers. Strong growth was also generated in home equity and improvement loans,
an area of specific focus for the Bank. The Bank's involvement with the small
business community continued to provide steady growth in the business loan
portfolio. Relationships established through small business lending generally
result in the Bank providing additional services as well, such as checking and
related services.
The mortgage loan portfolio declined $26.6 million, or 14% during 1996.
Included with mortgages is the Bank's construction portfolio. Construction
lending is another focus area of the Bank experiencing growth. Construction
loans increased $6.1 million, or 67% during 1996. The decline within the
remaining mortgage loan portfolio was the result of repayments on the Bank's
residential mortgages. The Bank continues to sell all fixed interest rate
residential mortgage loans originated as well as certain adjustable rate loans.
Investment in real estate developments increased $1.0 million during 1996.
The Company and its partner (each with a 50% interest) are funding the operating
expenses of one real estate development venture, allowing the venture to utilize
net cash flows to repay indebtedness. The Company's $5.1 million investments in
real estate developments at December 31, 1996 was comprised of three
developments in suburban Chicago. The remaining property is residential and
commercial lots in substantially completed projects.
Core deposits of the Bank, defined as checking, NOW, Money Market and
passbook savings, increased 5% during 1996, representing $3.9 million. This is
the result of promotional efforts and a focus of Bank employees upon the
generation of core banking relationships. The Bank will continue to strive for
growth in core deposits and shorter term certificates of deposit. The decline in
deposits in 1996 was noted in longer term, 24 months and greater, certificates
of deposit and jumbo deposits.
The Bank's suit in the United States Court of Federal Claims against the
United States for breach of contract with regard to the utilization as capital
of the supervisory goodwill, which was created when the Bank acquired failing
institutions in the 1980s, has been stayed pending the outcome of an appeal in
another case that was heard by the U.S. Supreme Court. While the Supreme Court
ruled favorably on the issue in the other case, the Company's suit has yet to be
heard. As the other case involved facts that were somewhat different than the
Company's, there can be no assurance as to the outcome when it is heard.
4
Management's Discussion and Analysis
HomeCorp, Inc. and Subsidiary
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Average Balances - Interest Rates and Yields
- --------------------------------------------------
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. The table does
not reflect any effect of income taxes. All average balances are monthly
averages. The yields and costs include the fees which are considered adjustments
to yield.
- ----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------------------------------------------------
Dollars in thousands 1996 1995 1994
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets:
Interest-earning assets:
Loans receivable, net $267,857 $21,788 8.13% $262,097 $21,316 8.13% $238,958 $18,198 7.62%
Mortgage-backed securities 21,415 1,241 5.80% 26,694 1,534 5.75% 29,551 1,621 5.49%
Investment securities
held to maturity 7,844 454 5.79% 13,827 848 6.13% 16,250 842 5.18%
Investments securities
available for sale 10,590 662 6.25% 6,471 380 5.87% 9,631 497 5.16%
Federal funds & interest-bearing deposits 4,420 236 5.34% 5,883 358 6.09% 8,692 363 4.18%
Total interest-earning assets 312,126 24,381 7.81% 314,972 24,436 7.76% 303,082 21,521 7.10%
Non-interest earning assets 26,933 21,993 21,648
Total assets $339,059 $336,965 $324,730
Liabilities:
Interest-bearing checking & MMDA $ 41,885 $ 694 1.66% $ 38,299 $ 609 1.59% $ 39,732 $ 582 1.46%
Savings deposits 34,827 785 2.25% 36,242 775 2.14% 39,275 782 1.99%
Other time deposits 225,519 13,269 5.88% 231,326 13,584 5.87% 218,066 11,115 5.10%
Borrowed funds 2,408 137 5.69% 1,581 97 6.14% 276 17 7.76%
Total interest-bearing liabilities 304,639 14,885 4.89% 307,448 15,065 4.90% 297,349 12,496 4.20%
Other liabilities 13,598 9,783 8,590
Total liabilities $318,237 $317,231 $305,939
Stockholders' equity 20,822 19,734 18,791
Total liabilities and
stockholders' equity $339,059 $336,965 $324,730
Net interest income/interest
rate spread 9,496 2.92% 9,371 2.90% 9,025 2.90%
Net earning assets/net yield on
average interest-earning assets $ 7,487 3.04% $ 7,524 2.98% $ 5,733 2.98%
Average interest-earning assets to
average interest-bearing liabilities 102.46% 102.45% 101.93%
- --------------------------------------------------------------------------------
5
HomeCorp, Inc. and Subsidiary Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Rate/Volume Analysis
- --------------------------------------------------------------------------------
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities for the periods shown. For each category in
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in rate (i.e., changes in rate
multiplied by old volume) and (ii) changes in volume (i.e., changes in volume
multiplied by old rate). For purposes of this table, changes attributable to
both rate and proportionately to volume which cannot be segregated have been
allocated proportionately to volume and to rate.
- --------------------------------------------------------------------------------
Year ended December 31
-------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Dollars in thousands Rate Volume (Decrease) Rate Volume (Decrease)
Interest-Earning Assets:
Loans receivable $ 0 $ 472 $ 472 $1,274 $1,844 $3,118
Mortgage-backed securities 13 (306) (293) 75 (162) (87)
Investment securities (45) (349) (394) 142 (136) 6
Investment held for sale 26 256 282 62 (179) (117)
Federal funds and interest-bearing deposits (40) (82) (122) 133 (138) (5)
Total interest-earning assets (46) (9) (55) 1,686 1,229 2,915
Interest-Bearing Liabilities:
Interest-bearing checking & MMDA 27 58 85 49 (22) 27
Savings deposits 40 (30) 10 56 (63) (7)
Other time deposits 23 (338) (315) 1,762 707 2,469
Borrowed funds (7) 47 40 (4) 84 80
Total interest-bearing liabilities 83 (263) (180) 1,863 706 2,569
Net interest income $(129) $ 254 $ 125 $ (177) $ 523 $ 346
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Results of Operations -
1996 Compared to 1995
-----------------------------
The Company's 1996 earnings were impacted by Congressional legislation
which provided for a special assessment on all institutions insured under the
Savings Association Insurance Fund (SAIF). HomeCorp's special assessment totaled
$2.0 million which resulted in a net after tax reduction in net income of $1.2
million, or $1.06 per share. Excluding this special assessment, HomeCorp's 1996
earnings were $1.6 million, or $1.36 per share. This represents a 33% increase
in net earnings from the 1995 total of $1.2 million, or $1.03 per share.
Net Interest Income
- --------------------------------------------------------------------------------
Net interest income totaled $9.5 million for 1996, an increase from $9.4
million in the prior year. The Company's net interest margin improved to 3.04%
during 1996 from 2.98% during 1995. The asset yield increased to 7.81% from
7.76% while the Company's cost of funds decreased to 4.89% from 4.90%. The
increased asset yield resulted from the continuing shift of assets into the loan
portfolio from the investment and mortgage-backed securities portfolios. The
average outstanding balance of the consumer loan portfolio increased $25.1
million in 1996 as compared to 1995. The decline in cost of funds is largely
the result of the shift within the deposit base into core deposits from longer
term certificates of deposit. The cost of the Company's time deposits remained
practically unchanged at 5.88%, as compared to 5.87% in 1995.
6
HomeCorp, Inc. and Subsidiary Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Provision For Loan Losses
- --------------------------------------------------------------------------------
The Company established provisions for loan losses of $565,000 during 1996,
an increase from $360,000 in 1995. The increase during 1996 is due to the
continuing growth in the loan portfolio as well as the increasing proportion of
the portfolio consisting of consumer and commercial loans. Net charge-offs
actually decreased during 1996 from 1995, totaling $158,000 as compared to
$233,000. The allowance represented .61% of net outstanding loans at December
31, 1996, an increase from .45% at December 31, 1995.
Non-Interest Income
- --------------------------------------------------------------------------------
The Company experienced growth within all areas of non-interest income in
1996 as compared to 1995. Loan fees and service charges increased $244,000, or
16.7% between 1996 and 1995. The increase was due largely to the growth
experienced in the number of retail and business checking accounts, which
provided increased service charge revenue. Loan fees benefited from the
increased mortgage loan servicing portfolio. Loans serviced for others increased
$37.1 million during 1996 to a total of $162.9 million at December 31, 1996. The
Company continued to sell the majority of residential mortgage loan originations
on a servicing retained basis during 1996. The majority of the servicing
portfolio balance at December 31, 1996 consisted of fixed rate loans.
Gains from the sale of mortgage loans, mortgage-backed and investment
securities increased to $933,000 from $297,000 between 1996 and 1995. A total of
$58.9 million of mortgage loans were sold during 1996, an increase of $3.1
million from 1995.
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. Gain on sale increased $582,000 as a result
of the adoption of this accounting pronouncement, which represents the servicing
rights recognized from loans sold during 1996. The servicing rights, once
established, are amortized as an offset to servicing income.
Income from real estate developments increased to $861,000 for the year
ended December 31, 1996 from a loss of $54,000 during 1995. The 1996 income is
due primarily to the sale of commercial land parcels from two of the
partnerships in which the Bank's subsidiary is a partner. Single family lot
sales also increased in 1996 over the prior year. As of December 31, 1996, the
real estate developments in which the Bank's subsidiary maintains an interest
contained approximately 23 acres of developed commercial land and 183 single
family lots, all but 90 of which were fully developed.
Operations of real estate owned represent the net operating income from a
shopping center foreclosed upon by the Bank late in the third quarter of 1995.
The increase in operating income for 1996, totaling $356,000, represents an
additional nine months of operations during 1996 as compared to 1995. The
shopping center is listed for sale.
Non-Interest Expenses & Income Taxes
- --------------------------------------------------------------------------------
Operating expenses, excluding the special SAIF assessment, increased $1.1
million in 1996 from 1995. Compensation and benefits increased $580,000, which
reflects the impact of additional lending personnel and increased pension costs.
Data processing costs increased $76,000 during the twelve months ended December
31, 1996 as compared to the twelve months ended December 31, 1995. The increase
is the result of the Bank's increasing customer base, particularly in the core
deposit area, which tend to be the higher transaction volume accounts. The
increase in the number of loans serviced, for the Bank's portfolio and for
others, contributed to the increase as well. Other operating expenses increased
$282,000 in 1996 compared to 1995. The largest increase within other expenses
was REO expense, which increased $123,000 primarily due to costs associated with
the Michigan land parcel. The costs are predominately legal fees incurred in
pursuing the damage claim against the prior owners of the parcel. The Bank and
its 50% partner are claiming damages of $1.8 million, which is the cost of soil
work performed on the property to prepare it for sale.
7
HomeCorp, Inc. and Subsidiary Management's Discussion and Analysis
- --------------------------------------------------------------------------------
The Company established a provision of $246,000 for costs to be incurred in
the resolution of a $2.0 million credit enhancement. The enhancement involves an
apartment building which has fallen short of original cash flow projections. The
Company agreed to incur this loss in order to enable the borrower to refinance
the property with an unrelated lender, thereby releasing the enhancement.
Income tax expense declined in both amount and as a percentage of pre-tax
book income in 1996 as compared to 1995. Total expense declined $540,000 between
1996 and 1995. Tax expense for 1996 represented 36.1% of pre-tax income compared
to 38.1% for 1995. The decline in the effective tax rate is due largely to an
increase in interest revenues of U.S. Government and Agency securities, which is
not taxable for state tax purposes.
Results of Operations -
1995 Compared to 1994
------------------------
The Company generated net income of $1.2 million, or $1.03 per share for
1995 compared to $628,000 in 1994 prior to the recognition of the
accounting change recording the elimination of goodwill. A change in accounting
for goodwill during 1994 resulted in a $4.3 million charge against earnings,
generating a net loss of $3.7 million for 1994. The 1994 loss is also net of
approximately $808,000 of goodwill amortization that was recorded in addition to
the impact of the accounting change.
Net Interest Income
- --------------------------------------------------------------------------------
Net interest income increased $346,000 between 1995 and 1994, representing
a 3.8% increase. Interest revenues increased $2.9 million, or 13.5%, for the
year ended December 31, 1995 compared to the prior year. This increase was
primarily the result of the Company's increased loan portfolio. The average
balance of the loan portfolio increased $23.1 million, or 9.7%, during 1995.
The consumer loan portfolio increased $28.1 million, or 100.0% during 1995.
Interest revenue from consumer loans correspondingly increased $1.9 million, or
109.4% between 1995 and 1994. All non-loan interest-bearing asset catergories
declined in average outstanding balance during 1995 as funds were redeployed
into loan originations and participation purchases.
The average portfolio yield increased to 8.13% from 7.62% due to the
origination during 1995 of higher yielding consumer and commercial loans, the
purchase of participating interests in mortgage loans, and the upward repricing
of some of the Company's adjustable rate loans. The Company's adjustable rate
loans are primarily based upon Treasury indices or prime rate.
The yield on all interest-bearing assets increased to 7.76% during 1995
from 7.10% for 1994.
Interest expense increased $2.6 million, or 20.6% during 1995 compared to
1994. The cost of deposits increased due to the upward repricing of the time
deposit base in the earlier months of 1995. During the first several months of
1995, certificate of deposit customers moved predominately into longer term,
higher rate accounts, thereby increasing the overall cost of deposits. The
Company utilized short term Federal Home Loan Bank of Chicago advances
throughout the year primarily as a means of funding the purchase of loan
participations. The average outstanding balance of borrowings was $1.5 million,
with a cost of 6.14%. There were no outstanding advances as of December 31,
1995.
Provision and Allowance for Loan Losses
- --------------------------------------------------------------------------------
A total of $360,000 was recorded as provision for loan losses during 1995,
an increase from $240,000 during 1994. The provision was increased in
consideration of the increased loan portfolio as well as increased percentage of
the portfolio in consumer and commercial balances. Net charge-offs were $233,000
during 1995, providing for an increase of $127,000 in the allowance for loan
losses. The allowance represented .45% of net outstanding loans at December 31,
1995, an increase from .43% as of December 31, 1994.
8
Management's Discussion and Analysis HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Non-Interest Income
- --------------------------------------------------------------------------------
Loan fees and service charges declined between 1995 and 1994. During 1994,
the Company recognized approximately $185,000 in deferred fee amortization on a
single real estate development loan. Excluding this single item, loan fees and
service charges increased $154,000, or 11.8% during the twelve months ended
December 31, 1995 compared to the year earlier period. Loan fees increased
$134,000 or 24.3%, between years, due largely from fees generated from increased
mortgage loan originations and from mortgage loan servicing income. The
Company's mortgage loan servicing portfolio increased to $125.5 million at
December 31, 1995 from $83.7 million at December 31, 1994. The majority of
residential mortgage originations were being sold with servicing rights retained
as of December 31, 1995.
Service charges increased $80,000 or 13.5%, between calendar 1995 and 1994,
primarily the result of the expansion of the core deposit base. The Company
began marketing an expanded selection of checking accounts during 1995. The
increased number of accounts have generated increased fee income in connection
with the various services and charges related to the accounts. Also, the
continued growth of the commercial business relationship base contributed to an
increase in related deposit account service fee income.
Fees generated by the Company's brokerage service declined $98,000 in 1995
compared to 1994 due to a decrease in personnel.
A total of $297,000 in net sales gains were generated during the year ended
December 31, 1995 compared to a net loss of $18,000 during the year ended
December 31, 1994. As noted earlier, there was an increase in mortgage loan
sales during 1995 compared to 1994. A loss of $278,000 was recognized during the
first quarter of 1994 due to a sudden rise in interest rates. A sales management
system was implemented thereafter in order to reduce risk. The Company sold
$10.2 million of adjustable rate single family mortgages during 1995 at a gain
of $12,000. The proceeds were reinvested in higher yielding multi-family
participations. A gain of approximately $4,000 was realized on the sale of
available for sale securities during 1995.
The Company experienced a loss of $54,000 from real estate developments
during 1995 as compared to income of $445,000 during 1994. During 1995, the
Company sold a golf course from one of its developments at a loss of $180,000.
Additionally, all the carrying costs of real estate operations were expensed
during 1995. A portion of such costs had been capitalized in prior periods. The
1994 gains were generated largely by commercial lot sales, which have
historically generated higher profit margins than the sale of single-family
lots. There was less commercial property sold during 1995 than in 1994.
Non-Interest Operating Expense & Income Taxes
- ---------------------------------------------
Non-interest operating expenses increased $508,000, or 6.0% during 1995.
Other operating expenses increased $268,000, or 17.7% between the years ended
December 31, 1995 and 1994. The largest component of this increase was loan
related expenses, which increased $137,000 in 1995 to a total of $320,000. The
increase was primarily due to promotional costs associated with consumer loan
programs as well as other loan promotions. Advertising, also a component of
other operating expense, increased $52,000 to $334,000 during the year ended
December 31, 1995. Increased promotional efforts were noted in the checking
area, both through direct mailings and media advertising.
Data processing expense increased $60,000, or 9.1% in 1995 as compared to
1994. The Bank opened its supermarket office in April of 1995, which added to
processing costs for the year. Costs were incurred to expand the information
processing and reporting capabilities in the mortgage loan area in order to
facilitate increased origination and sales volumes. Also, the number of loan and
deposit customers serviced increased in 1995 resulting in increased monthly
transaction costs.
Income tax expense decreased $189,000 to $743,000 for the year ended
December 31, 1995. Tax expense as a percentage of pre-tax income was 38.1% for
1995. The comparable 1994 rate was 39.4%, after considering the fact that
goodwill amortization of $808,000 was not deductible for tax purposes.
9
HomeCorp, Inc. and Subsidiary Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Liquidity
- --------------------------------------------------------------------------------
Liquidity is generally regarded as the ability to generate sufficient cash
flow to meet all present and future funding commitments. The Bank's primary
sources of funds, or liquidity, are deposits, amortization and repayment of loan
principal (including mortgage-backed and certain investment securities),
operations and to a lesser extent, maturities of investment securities and the
sale of available for sale securities.
Operating activities provided $3.3 million in cash during 1996 as compared
to the use of $2.9 million in cash during the year ended December 31, 1995. The
largest difference between the years was the change in the balance of mortgage
loans held for sale. Mortgages held for sale declined $2.9 million during 1996
while increasing $4.6 million during 1995. The volume of held for sale loans
generally declines near year end from the seasonal nature of home mortgage
lending.
Investing activities provided $3.7 million in cash during 1996. The same
activities used $11.3 million in cash during 1995. Principal payments and
repayments on loans exceeded originations by $310,000 during 1996. Originations
exceeded repayments and prepayments by $10.9 million during 1995. The Bank's
residential mortgage and consumer loan portfolios continued to season and
correspondingly generated increased principal cash flows from normal
amortization and prepayments. Management anticipates continued increases in loan
cash flows, particularly from the shorter term consumer loan portfolio. The
Bank's mortgage-backed securities portfolio also experienced increased
repayments during 1996 as compared to 1995. The 1996 repayments totaled $5.5
million while the 1995 repayments totaled $3.8 million. There were no purchases
of mortgage-backed securities during 1996 or 1995. Also, $6.7 million of
adjustable rate mortgage loans were sold during 1996. The loans had interest
rates that adjusted every three years. Based upon the interest rates on the
loans, the rates to which the loans would be adjusting and the current interest
rates available for mortgage loans, it was determined the funds committed to
these specific loans could best be utilized by the Bank by selling the loans,
retaining the servicing and providing funding for additional lending.
A total of $7.2 million in participations were purchased during 1996, a
decrease of $3.4 million from 1995. The 1996 purchases, consistent with prior
years, were for multi-family and commercial real estate loans secured primarily
by properties located in southern Wisconsin and northern Illinois.
Financing activities used $3.3 million in cash during 1996 as compared
to $6.6 million of cash provided during 1995. The Bank experienced a decrease of
$2.5 million in deposits during 1996 compared to an increase of $6.7 million
during 1995. The focus for 1996 was the increase of core deposits more so than
the increase of the deposit base in the aggregate. The Bank used Federal Home
Loan Bank advances throughout 1996 as a funding alternative to deposits.
Management intends to continue to use advances as needed as an alternative to
long term certificate of deposit funding. The focus will remain upon continuing
to build the Bank's core deposit base, which increased $3.8 million during 1996.
The Bank had commitments to originate $5.6 million in mortgage loans as of
December 31, 1996. Additionally, the Bank had outstanding letters of credit
totaling $626,000. Management believes the Bank has adequate resources to fund
its commitments to the extent required.
Federal regulations require the Bank to maintain liquid assets at a level
of 5.0% of deposits and certain borrowings due within one year. Liquid assets
for purposes of this requirement include cash, certain time deposits, U.S.
Government and other securities generally having remaining maturities to less
than five years. The Bank's liquidity ratios were 8.2% and 7.7% at December 31,
1996 and 1995, respectively.
Management is unaware of any current recommendations of the Office of
Thrift supervision (OTS) that, if implemented, would have a material impact upon
liquidity, capital resources, or operations of the Bank.
Asset/Liability Management
- --------------------------------------------------------------------------------
The objective of management's asset/liability program is to maximize the
Company's interest margin over a range of interest rate environments without
exposing the Company to undue interest rate risk. Interest rate risk is
represented by the sensitivity of an institution's earnings and net asset values
to interest rate changes. Management manages this risk not only through its
pricing of assets and liabilities, but also through the mix of asset and
liability maturities and cash flow characteristics and regularly monitors and
evaluates the trade-off between increased interest rate risk and enhanced
earnings. The OTS currently measures interest rate sensitivity of an institution
based upon a discounted cash flow approach under various interest rate
scenarios. The interest rate scenarios are generally determined as instantaneous
and permanent changes in the Treasury curve of plus and minus 100, 200, 300, and
400 basis points, or a total of eight scenarios.
10
Management's Discussion and Analysis HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Based upon the estimated prepayment characteristics and decay rates of an
institution's loans, securities and deposits, a series of discounted cash flows
calculations are performed to estimate the volatility of an institution's
capital base (net portfolio value or NPV) and net interest earnings. Off balance
sheet cash flows from assets, liabilities and other contracts are included in
the computations.
The table below was prepared utilizing assumptions regarding loan and
mortgage-backed security repayment and deposit decay ratios which were estimated
by management based upon past experience and are believed by management to
reasonably represent the expected future repricing, maturity, or amortization
of interest-bearing assets and liabilities. Prepayment assumptions are applied
to both mortgage and consumer loans.
- --------------------------------------------------------------------------------
Net Portfolio Value Net Interest Income
- --------------------------------------------- ---------------------------------
Change
Interest Rate Estimated Amount of Net Interest Amount of
(basis points) NPV Change Percent Income Change Percent
- -------------- --------- --------- ------- ------------ --------- -------
(Dollars in Thousands)
+400 $25,106 $(7,235) (22.4)% $ 9,117 $ (823) (8.3)%
+300 27,291 (5,050) (15.6) 9,659 (281) (2.8)
+200 29,323 (3,018) (9.3) 10,142 202 2.0
+100 31,323 (1,018) (3.2) 10,141 201 2.0
0 32,341 - - 9,940 - -
-100 37,297 4,956 15.3 9,644 (296) (3.0)
-200 37,204 4,863 15.0 9,151 (789) (7.9)
-300 37,358 5,017 15.5 8,931 (1,009) (10.2)
-400 34,469 2,128 6.6 7,907 (2,033) (20.5)
- --------------------------------------------------------------------------------
The annual prepayment assumptions used in this table range from 4% to 38%
for fixed rate mortgages, mortgage-backed securities, and consumer loans and 4%
to 26% for adjustable rate mortgages and mortgage-backed securities based upon
the interest rates of the assets. No prepayments are assumed for adjustable
consumer loans and all commercial business loans. For deposit accounts, it has
been assumed that fixed maturity deposits are not withdrawn prior to maturity.
Other deposits display attrition at the following rates:
1 Yr 1-3 3-5 Over 5
or Less Years Years Years
Passbook Savings 51% 15% 10% 24%
Money market 68% 15% 9% 16%
NOW and Checking 64% 14% 4% 18%
The prepayment and attrition rates are selected after considering the current
interest rate environment, industry asset, and liability price tables developed
by the OTS, and the Company's historical experience. All other interest-earning
assets and interest-bearing liabilities are shown based on their contractual
maturity or repricing date.
In the event the rate changes designated above were accompanied by a
change in the shape of the yield curve, the changes to the NPV and net interest
income could differ significantly from those noted here.
Based upon the analysis noted, the Bank would not be considered to have
more than "normal" interest rate risk under OTS regulations. The most recent
evaluation performed by the OTS was as of December 31, 1996. The analysis
indicated a lower level of interest rate risk than the computations performed by
management.
Management believed that the fundamental business strategy of selling
longer term fixed rate mortgage loans an investing in shorter term consumer and
commercial loans and adjustable rate mortgage, consumer, construction, and
commercial loans has reduced the Bank's level of interest rate risk over the
past several years.
HomeCorp, Inc. and Subsidiary Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Non-Performing Assets
- --------------------------------------------------------------------------------
On a monthly basis, management reviews the Bank's loan portfolio and the
most recent data available for any loans of concern. Additionally, management
ascertains whether circumstances warrant closer monitoring of any performing
loans. Management reviews and discusses the status of all borrowers with
$500,000 or more of indebtedness to the Bank as a means of ascertaining a
downturn in performance prior to the onset of delinquency problems.
Loans are placed on non-accrual status when they become 90 days delinquent
and when, in the judgment of management, the probability for collection of the
remaining balances are deemed to be insufficient to warrant further accrual. A
loan remains on non-accrual status until the factors which indicated uncertain
or doubtful collectability no longer exist or foreclosure or repossession
occurs, at which time the lesser of the loan balance or the fair value of the
collateral is reflected in the applicable asset account of the Bank.
Effective January 1, 1995, the Bank adopted Financial Accounting Standards
Board Statement No. 114, "Accounting by Creditors for Impairment of a Loan" and
Statement No. 118, "Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures," which is an amendment to Statement No. 114.
Under the new standard, a loan is classified as "impaired" at such time as it
is likely that the loan will not perform in accordance with its original terms.
The designation is to be made independent of whether a loan is placed onto
non-accrual status. The new standard requires the allowance for loan losses
related to impaired loans to be based upon discounted cash flows using the
loan's initial effective interest rate or the fair value of the collateral for
collateral dependent loans.
The classification of a loan as non-performing or impaired does not
necessarily indicate that loan principal and interest ultimately will be
uncollectable. Following is a summary of non-performing assets at the dates
indicated.
December 31, December 31,
1996 1995
Non-performing loans $ 2,146,331 $ 36,626
Real estate acquired in
settlement of loans 10,197,661 10,240,004
Total $12,343,992 $10,276,630
Non-performing loans as
percentage of total loans .81% .01%
Non-performing assets as a
percentage of total assets 3.68% 3.04%
Allowances for loan and
foreclosed real estate
losses as a percentage of
non-performing assets 17.27% 15.81%
In addition to the non-performing loans noted above, 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.
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 for a senior housing
facility. 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.
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. 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.
Foreclosed real estate was comprised primarily of two properties at
December 31, 1996. 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 was being
operated by the Bank and generated $471,000 in net operating income during 1996.
Management is actively marketing the center for resale and will continue to
operate the center until its sale.
12
Management's Discussion and Analysis HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
The other significant asset in real estate owned, totaling $4.3 million,
represents a 50% interest in a land acquisition loan to a Michigan limited
partnership. The parcel, formally a quarry, consists of 364 acres of undeveloped
land located near Northville, Michigan.
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. Approximately $675,000 has been
escrowed by the prior property owners pending the outcome of a lawsuit in which
the Bank and its partner are seeking reimbursement of restoration costs.
HomeBanc and its partner believe they are entitled to the amount based upon the
work completed during 1995. Management continues to negotiate the sale of the
property and believes the ultimate sale, together with funds available from the
prior owners, will not result in a loss.
Regulatory Capital Requirements
- --------------------------------------------------------------------------------
The Bank currently meets all regulatory requirements, Current OTS
regulations measure a savings institution's regulatory capital against three
standards, a tangible requirement, a leverage or core requirement, and a risk
based requirement. Unrealized gains and losses reflected as a component of
stockholders' equity in compliance with SFAS No. 115 are not considered by the
OTS in calculating regulatory capital.
The following table presents the Bank's compliance with the capital
requirements as of December 31, 1996.
Percent
Dollars in thousands Amount of Assets
Tangible Capital:
Bank $15,870 4.81%
Requirement 4,950 1.50
Excess 10,920 3.31
Core Capital:
Bank 15,870 4.81
Requirement 9,901 3.00
Excess 5,969 1.81
Current Risk-Based Capital:
Bank 17,452 8.29
Requirement 16,833 8.00
Excess $ 619 .29%
Impending Change in Accounting Principle
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Capital Ratio
Years Ended December 31
1992 1993 1994 1995 1996
7%
6% 5.41% 5.76% 6.04% 6.21%
5% 4.77%
4%
3%
2%
1%
0
*excluding goodwill
13
HomeCorp, Inc. and Subsidiary Independent Auditor's Report
- --------------------------------------------------------------------------------
Board of Directors
HomeCorp, Inc.
We have audited the accompanying consolidated balance sheets of HomeCorp, Inc.
and subsidiary (the Company) as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated statements of
operations, stockholders' equity and cash flows of HomeCorp, Inc. and subsidiary
for the year ended December 31, 1994 were audited by other auditors whose report
dated February 24, 1995 expressed an unqualified opinion on those statements and
included an explanatory paragraph that disclosed the change in the Company's
method of accounting for goodwill discussed in Note 1 to these financial
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1996 and 1995 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
HomeCorp, Inc. and subsidiary at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
As disclosed in Note 1 to the consolidated financial statements, in 1996 the
Company changed its method of accounting for mortgage servicing rights.
/s/ Ernst & Young LLP
Chicago, Illinois
January 22, 1997
14
Consolidated Balance Sheets HomeCorp, Inc. and Subsidiary
- -------------------------------------------------------------------------------
December 31,
1996 1995
Assets
Cash and cash equivalents:
Cash on hand and noninterest-bearing deposits $ 13,959,409 $ 7,633,563
Interest-bearing deposits 181,083 388,208
Federal funds sold - 2,389,798
Total cash and cash equivalents 14,140,492 10,411,569
Investment securities held to maturity
(approximate fair value of $5,471,000
in 1996 and $6,412,000 in 1995) 5,502,353 6,504,355
Investment securities available for sale, at fair value 12,496,885 8,311,118
Mortgage-backed securities held to maturity
(approximate fair value of $18,577,000
in 1996 and $24,146,000 in 1995) 18,858,630 24,487,509
Federal Home Loan Bank Stock, at cost 2,079,000 2,279,400
Loans receivable, net 259,139,564 261,021,836
Mortgage loans held for sale 1,872,513 4,741,405
Foreclosed real estate, net 9,647,661 9,790,004
Investments in real estate developments 5,094,960 4,059,899
Premises and equipment 3,869,381 3,629,608
Accrued interest receivable 1,823,540 1,850,490
Other assets 1,299,495 939,404
Total assets $335,824,474 $338,026,597
Liabilities and Stockholders' Equity
Liabilities:
Deposits $311,754,446 $314,293,883
Advance payments by borrowers for taxes and insurance 1,329,965 2,075,471
Other liabilities 1,881,807 1,233,743
Total liabilities 314,966,218 317,603,097
Stockholders' equity:
Preferred stock, $.01 par value; authorized 1,000,000 shares;
no shares outstanding
Common stock, $.01 par value; authorized 5,000,000 shares;
1,128,779 and 1,126,371 shares issued and outstanding
in 1996 and 1995, respectively 11,287 11,264
Additional paid-in capital 6,492,542 6,465,178
Retained earnings 14,332,532 13,973,701
Unrealized gain (loss) on securities available for sale,
net of taxes 21,895 (26,643)
Total stockholders' equity 20,858,256 20,423,500
Total liabilities and stockholders' equity $335,824,474 $338,026,597
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
15
HomeCorp, Inc. and Subsidiary CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Years ended December 31,
1996 1995 1994
Interest Income:
Loans receivable $21,788,251 $21,316,412 $18,198,107
Investment securities and other 1,352,273 1,585,403 1,702,218
Mortgage-backed securities 1,240,782 1,534,009 1,620,717
Total interest income 24,381,306 24,435,824 21,521,042
Interest expense:
Deposits 14,748,617 14,967,400 12,470,895
Borrowed funds 136,610 97,198 25,304
Total interest expense 14,885,227 15,064,598 12,496,199
Net interest income 9,496,079 9,371,226 9,024,843
Provision for loan losses 565,000 360,000 240,000
Net interest income after provision for
loan losses 8,931,079 9,011,226 8,784,843
Noninterest income:
Loan fees and service charges 1,699,220 1,455,525 1,486,466
Gain (loss) on sale of:
Loans receivable 943,573 292,588 (145,208)
Securities available for sale (10,259) 4,458 126,720
Income (loss) from real estate
developments 861,175 (53,673) 445,079
Operations of real estate owned 471,109 115,573 --
Other 165,512 129,370 166,721
Total noninterest income 4,130,330 1,943,841 2,079,778
Noninterest expense:
Compensation and benefits 5,122,278 4,542,135 4,380,316
Office occupancy and equipment 1,223,133 1,171,536 1,090,900
Data processing 902,811 727,200 666,717
Federal deposit insurance premium 860,153 843,495 896,704
Savings Association Insurance Fund
special assessment 2,042,942 -- --
Other 2,002,153 1,719,914 1,461,734
Amortization of goodwill -- -- 807,603
12,153,470 9,004,280 9,303,974
Provision for loss on foreclosed real
estate 100,000 -- --
Provision for credit enhancement costs 246,000 -- --
Total noninterest expense 12,499,470 9,004,280 9,303,974
Income before income taxes and cumulative
effect of change in accounting principle 561,939 1,950,787 1,560,647
Income taxes 203,108 743,305 932,600
Income before cumulative effect of change
in accounting principle 358,831 1,207,482 628,047
Cumulative effect of change in accounting
for goodwill -- (4,340,424)
Net income (loss) $ 358,831 $ 1,207,482 $(3,712,377)
Earnings per common and common
equivalent share:
Income before cumulative effect of
change in accounting principle $0.30 $1.03 $ 0.54
Cumulative effect of change in
accounting for goodwill -- -- (3.75)
Net income (loss) $0.30 $1.03 $(3.21)
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
16
Consolidated Statements of Stockholders' Equity Homecorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
[CAPTION]
Additional Unrealized Total
Years ended December 31, 1996, Common paid-in Retained gain (loss) stockholders'
1995, and 1994. stock capital earnings on securities equity
Balance at December 31, 1993 11,220 6,435,874 16,478,596 - 22,925,690
Implementation of change in
accounting for investment
securities, net of tax effect
of $74,151 - - - 115,981 115,981
Change in unrealized gain for
investment securities available
for sale, net of tax effect
of $(192,109) - - - (300,479) (300,479)
Net loss - - (3,712,377) - (3,712,377)
Balance at December 31, 1994 11,220 6,435,874 12,766,219 (184,498) 19,028,815
Stock options exercised 44 29,304 - - 29,348
Change in unrealized loss for
investment securities available
for sale, net of tax effect
of $97,026 - - - 157,855 157,855
Net income - - 1,207,482 - 1,207,482
Balance at December 31, 1995 11,264 6,465,178 13,973,701 (26,643) 20,423,500
Stock options exercised 23 27,364 - - 27,387
Change in unrealized loss for
investment securities available
for sale, net of tax effect
of $34,629 - - - 48,538 48,538
Net income - - 358,831 - 358,831
Balance at December 31, 1996 $11,287 $6,492,542 $14,332,532 $21,895 $20,858,256
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
17
HomeCorp, Inc. and Subsidiary Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
Years ended December 31,
1996 1995 1994
Cash flows from operating activities:
Net income (loss) $ 358,831 $ 1,207,482 $ (3,712,377)
Adjustment to reconcile net income to net cash
provided (used) by operating activities:
Amortization of:
Goodwill - - 807,603
Premiums and discounts on loans, mortgage-backed
securities and investment securities 141,605 160,149 134,825
(Income) loss from real estate developments (861,175) 53,673 (445,079)
Provision for loan losses 565,000 360,000 240,000
Provision for loss on foreclosed real estate 100,000 - -
Provision for credit enhancement costs 246,000 - -
Net (gain) loss on sale of:
Loans receivable (943,573) (292,588) 145,208
Mortgage-backed and investment securities 10,259 (4,458) (126,720)
Depreciation and amortization of premises & equipment 461,730 457,276 420,516
Decrease (increase) in loans held for sale 2,868,892 (4,629,485) 1,714,697
Cumulative effect of change in accounting principle - - 4,340,424
Increase (decrease) in cash flows due to changes in:
Accrued interest and other assets (333,141) 160,906 1,907,572
Other liabilities 648,064 (361,304) 453,447
Total adjustments $ 2,903,661 $ (4,095,831) $ 9,592,493
Net cash provided (used) by operating activities $ 3,262,492 $ (2,888,349) $ 5,880,116
Cash flows from investing activities:
Loan originations, net of principal payments on loans 309,786 (10,939,715) (11,755,120)
Purchase of:
Loans receivable (7,201,609) (10,613,318) (8,591,011)
Mortgage-backed and investment securities (1,500,000) (7,000,000) (7,458,988)
Securities available for sale (6,997,032) (1,986,456) (68,154)
Certificates of deposit (7,000,000) (11,000,000) (10,000,000)
Premises and equipment (701,503) (416,736) (177,429)
Investment in foreclosed real estate (24,271) (1,199,982) -
Investment in real estate developments (1,245,828) (1,214,254) (2,254,538)
Principal payments on mortgage-backed securities 5,484,928 3,821,207 6,449,575
Principal repayments of securities available for sale 1,415,939 1,536,713 2,766,946
Proceeds from sales of:
Mortgage loans 6,679,881 - 3,936,160
Securities available for sale 1,481,140 2,554,366 -
Real estate developments 67,500 267,000 362,854
Foreclosed real estate 291,145 717,794 414,391
Continued next page
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
18
Consolidated Statements of Cash Flows
HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Years ended December 31,
1996 1995 1994
Proceeds from maturities of:
Certificates of deposit 7,000,000 13,000,000 9,000,000
Investment securities 2,500,000 10,000,000 4,000,000
Securities available for sale 1,986,456 - -
Redemption of FHLB stock 200,400 - 91,400
Distributions of income on real estate partnerships 1,004,442 1,208,682 1,139,149
Net cash provided (used) by investing activities $ 3,751,374 $(11,264,699) $(6,014,657)
Cash flows from financing activities:
Net increase (decrease) in deposits (2,539,437) 6,688,797 18,586
Repayment of borrowings - - (237,175)
Net increase (decrease) in advance payments
by borrowers for taxes and insurance (745,506) (107,492) 237,405
Net cash provided (used) by financing activities $(3,284,943) $ 6,581,305 $ 18,816
Net increase (decrease) in cash and cash equivalents 3,728,923 (7,571,743) (115,725)
Cash and cash equivalents at beginning of year $10,411,569 $17,983,312 $18,099,037
Cash and cash equivalents at end of year $14,140,492 $10,411,569 $17,983,312
Supplemental Information
Cash payment during the period for:
Interest $14,877,972 $15,061,696 $12,470,018
Taxes 195,000 640,400 629,000
Non-cash investing activity
Transfer of laons to real estate owned $ 294,531 $ 5,841,292 $ 782,691
Loans held for sale:
Origination $51,706,526 $60,411,504 $14,399,386
Sales 54,575,418 55,782,019 16,114,083
- -------------------------------------------------------------------------------
See accompanying notes to coonsolidated financial statements.
19
[LOGO HomeCorp, Inc.] Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
The following comprise the significant accounting policies which HomeCorp, Inc.
and Subsidiary (Company) follows in preparing and presenting its consolidated
financial statements:
(a) HomeCorp, Inc. is a savings bank holding company and owns all the
outstanding capital stock of HomeBanc, a federal savings bank (Bank). The
Company has no business operations independent of the Bank.
As a community oriented savings bank, HomeBanc offers a range of retail
banking services through its ten offices located in Winnebago, Stephenson, and
Lee Counties, Illinois. 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 and commercial
mortgage loans, consumer loans, construction loans, and commercial
business loans. Through a subsidiary, the Bank also offers a full line of
securities brokerage services.
(b) The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(c) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
HomeCorp, Inc., its wholly owned subsidiary, HomeBanc, fsb, and the Bank's
wholly owned subsidiary, Home Federal Service Corporation. All significant
intercompany transactions and balances have been eliminated in consolidation.
(d) Cash and Cash Equivalents
The Company's interest-bearing deposits are available upon demand. Federal
funds are sold for one day periods.
(e) Investment Securities Held to Maturity
Investment securities are carried at cost, adjusted for amortization of premium
and accretion of discount using the interest method. It is management's
intention and their opinion that they have the ability to hold these securities
to maturity. Amortization of premiums and accretion of discounts is recognized
in interest income over the estimated lives of the respective securities using
the interest method. Gains and losses on the sale of investment securities are
determined using the specific identification method.
(f) Investment Securities Available For Sale
Investment securities available for sale are carried at estimated fair value
with fluctuations from amortized cost refected, net of tax, as a component of
stockholders' equity.
(g) Mortgage-Backed Securities
Mortgage-backed securities represent participating interests in pools of first
mortgage loans originated and serviced by the issuers of the securities and are
generally backed by agencies of the federal government. These securities are
carried at current unpaid principal balances, adjusted for premiums and
discounts as it is management's intention and their opinion that they have the
ability to hold them to maturity. Amortization of premiums and accretion of
discounts is recognized in interest income over the estimated lives of the
respective securities using the interest method.
Gains and losses on the sale of mortgage-backed securities are determined
using the specific identification method.
Amortization of premiums and accretion of discounts are recognized as
interest income using the interest method over the estimated lives of the
securities.
Gains and losses on the sales of securities are determined using the
specific identification method.
20
Notes to Consolidated Financial Statements HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
(h) Loans Receivable and Allowance for Loan Losses
Loans are stated at their outstanding unpaid principal balances net of any
deferred fees or costs, or unamortized premiums or discounts on purchased loans.
Interest income is accrued on the unpaid principal balance. Discounts and
premiums are amortized to income using the interest method. Loan origination
fees net of certain direct origination costs are deferred and recognized as an
adjustment of the yield of the related loans.
Generally, a loan is classified as nonaccrual when the contractual payment
of principal or interest has become 90 days past due or management has serious
doubts about collectibility of principal or interest. When a loan is placed on
nonaccrual status, unpaid interest credited to income in the current year is
reversed. Interest received on nonaccrual loans generally is either applied
against principal or reported as interest income, according to management's
judgment as to the collectibility of principal.
Generally, loans are restored to accrual status when the obligation is
brought current, has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt.
The allowance for loan losses is established through provisions for loan
losses charged against income. Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any are
credited to the allowance.
A loan is impaired when, based upon current information and events, it is
probable that the Bank will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Management regularly reviews
delinquent loans, significant loans and potential problem loans (based upon
information available to management) to determine if the impairment criterion
has been met.
A loan is automatically classified as impaired when it reaches 90 days
delinquent. Applicable loans less than 90 days delinquent are evaluated and
classified as impaired on a case by case basis. Once classified as impaired, the
necessity for an impairment reserve is based upon one of three methodologies:
the present value of expected future cash flows discounted using the loan's
initial effective interest rate, a loan's observable market price, or the fair
value of the collateral.
Management determines the appropriate method on a case by case basis. The
Bank charges-off principal of impaired loans when a total loss of principal has
been deemed to have occurred or when collection efforts have ceased.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable loan losses. Management's periodic
evaluation of the adequacy of the allowance is based on the Company's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, the estimated value of any
underlying collateral, composition of the loan portfolio, current economic
conditions, and other relevant factors. This evaluation is inherently subjective
as it requires estimates of the amounts and timing of future cash flows expected
to be received on impaired loans.
(i) Mortgage Loans Held for Sale
Mortgage loans held for sale are stated at the lower of aggregate cost or market
value. Deferred loan origination fees and expenses on these loans are not
amortized and are recorded as income or expense when the loans are sold.
(j) Mortgage Service Rights
On January 1, 1996, the Company adopted Financial Accounting Standards Board
Statement No. 122, "Accounting for Mortgage Servicing Rights," which 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 recognition of a separate asset for servicing rights increases the
gain on sale of loans. The cost of mortgage servicing rights is allocated based
on the relative fair value of the mortgage servicing rights and the sold loans.
The asset is then amortized to expense over the life of the loan using the level
yield amortization method.
Amortization of servicing rights is calculated based upon the level yield
method over the estimated life of the estimated net servicing income. Impairment
of mortgage servicing rights is determined periodically based on fair value
estimates of the rights utilizing current estimates of prepayments and other
variables.
The adoption of this statement resulted in increased after tax income of
$326,000 for the year ended December 31, 1996. Servicing rights capitalized in
accordance with this accounting pronouncement totaled $534,000 at December 31,
1996. Total amortization for the period amounted to $71,400.
21
[LOGO OF HOMECORP, INC.] Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(k) Foreclosed Real Estate
Foreclosed real estate is comprised of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure and loans classified
as in-substance foreclosure. A loan is classified as in-substance foreclosure
when the Company has taken possession of the collateral regardless of whether
formal foreclosure proceedings have taken place.
Foreclosed real estate initially is recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of cost or fair value minus estimated costs to sell. Revenue and expenses from
operations are included in real estate owned (REO) operations.
(l) Investments in Real Estate Developments
Investments in real estate developments are carried at the lower of cost,
adjusted for the Bank's share of undistributed earnings, or net realizable
value. Development and holding costs, including interest incurred during the
development phase are capitalized. No interest was capitalized to real estate
projects for the three years in the period ended December 31, 1996.
There were no loans outstanding from the Bank to any of the unconsolidated
joint ventures during 1996 or 1995. Interest income recognized on loans
receivable from the unconsolidated joint ventures amounted to approximately
$711,000 for the year ended December 31, 1994.
(m) Premises and Equipment
Land is carried at cost. Office properties and equipment are recorded at cost
less depreciation, which is accumulated on a straight-line basis over the
estimated useful lives of the related assets. Estimated lives are 25 to 50
years for the office buildings and 3 to 25 years for equipment and other
properties. Leasehold improvements are recorded at cost less accumulated
amortization computed on a straight-line basis over the term of the lease or the
life of the asset, whichever is shorter.
(n) Excess of Cost Over Fair Value of Net Assets Acquired
The Company's excess of cost over fair value of net assets acquired was the
result of the acquisition of two separate financial institutions. The Company
adopted SFAS No. 72, "Accounting for Certain Acquisitions of Banking and Thrift
Institutions" effective January 1, 1994 for the portion of goodwill not
previously accounted for under the statement. The cumulative effect of adoption
was $4.3 million.
(o) Pension Plan
Pension expense for the Bank's defined benefit plan is determined by the
projected unit credit method for measuring net periodic pension cost over the
employee's service life. The Bank's funding policy is to contribute annually an
amount calculated under the entry-age-normal method.
(p) Stock Compensation Plans
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed in footnote
No. 14, the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals or is less than the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
(q) Income Taxes
Deferred income tax assets and liabilities are adjusted regularly to amounts
estimated to be receivable or payable based on current tax law and the Company's
tax status. Consequently, tax expense in future years may be impacted by
changes in tax rates and tax return limitations.
22
Notes to Consolidated Financial Statements HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
(r) Earnings per Share
Earnings per share for the year ended December 31, 1996 was computed by dividing
net income by 1,175,379, the average number of common and common equivalent
shares (using the treasury share method) outstanding at the end of the year. The
Company's equivalent shares consist entirely of stock options.
Earnings per share for the year ended December 31, 1995 was computed by
dividing net income by 1,168,613, the average number of common and common
equivalent shares (using the treasury share method) outstanding at the end of
the year. The Company's equivalent shares consist entirely of stock options.
Earnings per share before the change in accounting principle and the per
share impact of the change in accounting principle for the year ended December
31, 1994 were computed by dividing these amounts by 1,153,512, the weighted
average number of shares outstanding during the year as adjusted for the
dilutive effect of common stock options.
(s) Reclassifications
Certain prior-year balances have been reclassified to conform to the current
year's presentation.
- --------------------------------------------------------------------------------
(2) Investment Securities Held to Maturity
A summary of investment securities held to maturity at
December 31 follows:
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- ----------
1996
Debt securities:
U.S. Government and agency obligations $5,502,353 $ 3,277 $ (34,630) $5,471,000
Total investment securities $5,502,353 $ 3,277 $ (34,630) $5,471,000
1995
Debt securities:
U.S. Government and agency obligations $6,504,355 $15,315 $(107,670) $6,412,000
Total investment securities $6,504,355 $15,315 $(107,670) $6,412,000
23
HomeCorp, Inc. And Subsidiary Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
There were no sales of investment securities during 1996, 1995, 1994. Debt
securities held at December 31, 1996 are due after one year through five years.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
================================================================================
(3) Investment Securities Available for Sale Gross Gross Estimated
Amortized unrealized unrealized fair
A summary of securities available for sale at Cost gains losses value
December 31 follows: ----------- ----------- ----------- -----------
1996
Debt Securities $ 8,613,202 $ 33,579 $(36,362) $ 8,610,419
Other 5,904 9,146 - 15,050
Mutual Fund Shares 1,252,819 - (25,095) 1,227,724
Mortgage-Backed Securities:
Federal Home Loan Mortgage Corporation 2,043,965 60,828 - 2,104,793
Federal National Mortgage Association 545,102 - (6,203) 538,899
Total Mortgage-Backed Securities 2,589,067 60,828 (6,203) 2,643,692
Total investment securities available for sale $12,460,992 $103,553 $(67,660) $12,496,885
Gross Gross Estimated
Amortized unrealized unrealized fair
Cost gains losses value
----------- ----------- ----------- -----------
1995
Debt Securities $ 4,370,387 $ 2,319 $(29,674) $ 4,363,032
Other 5,904 6,096 - 12,000
Mutual Fund Shares 1,252,818 - (30,142) 1,222,676
Mortgage-Backed Securities:
Federal Home Loan Mortgage Corporation 2,060,442 7,075 (16,663) 2,050,854
Federal National Mortgage Association 669,142 - (6,586) 662,556
Total Mortgage-Backed Securities 2,729,584 7,075 (23,249) 2,713,410
Total investment securities available
for sale $ 8,358,693 $ 35,490 $(83,065) $ 8,311,118
- --------------------------------------------------------------------------------
24
Notes to Consolidated Financial Statements HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
The amortized cost and estimated fair value of available for sale investment
securities at December 31, 1996 by contractual maturity are shown by the
following. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
- --------------------------------------------------------------------------------
Amortized Estimated
cost fair value
--------- ----------
Due in one year or less $ 1,322,389 $ 1,305,923
Due after one year through five years 7,948,981 7,928,372
Due after five years through ten years 89,689 90,249
Due after ten years 3,099,933 3,172,341
Total available for sale investment
securities $12,460,992 $12,496,885
- --------------------------------------------------------------------------------
Proceeds from sales of investment securities available for sale during
1996, 1995, and 1994 were $1,481,140, $2,554,366, and $6,130,108 respectively.
The 1996 and 1995 sales generated gross gains/(losses) of $(10,259) and $4,458,
respectively.
The 1994 sales generated gross gains of $144,490 and gross losses of
$17,770.
A total of $2,383,931 of debt securities and $5,904 of equity securities
were transferred from held to maturity to available for sale during December
1995 pursuant to the transition provisions of the Financial Accounting Standards
Board Special Report on SFAS No. 115. The investment securities had a net
unrealized gain of $6,741 at the time of transfer.
- --------------------------------------------------------------------------------
4) Mortgage-Backed Securities Held to Maturity
A summary of mortgage-backed securities held to maturity at December 31 follows:
1996 1995
Amortized Estimated Amortized Estimated
Cost fair value Cost fair value
----------- ----------- ----------- -----------
Government National Mortgage Association $ 3,570,178 $ 3,659,000 $ 4,301,911 $ 4,381,000
Small Business Administration 1,368,562 1,350,000 1,442,448 1,446,000
Federal Home Loan Mortgage Corporation 6,055,755 6,083,000 8,706,976 8,769,000
Federal National Mortgage Association 6,376,573 6,419,000 7,739,609 7,811,000
Agency for International Development 22,983 23,000 44,216 44,000
Collateralized Mortgage Obligations 1,051,572 1,043,000 1,695,391 1,695,000
Total mortgage-backed securities, gross $18,445,623 $18,577,000 $23,930,551 $24,146,000
Add:
Unamortized premium 413,007 556,958
Total mortgage-backed securities
held to maturity, net $18,858,630 $24,487,509
- --------------------------------------------------------------------------------
25
HomeCorp, Inc. and Subsidiary Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The collateralized mortgage obligations represent pools of securities issued by
agencies of the federal government. The amortized cost and approximate value of
mortgage-backed securities at December 31 are as follows:
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----------- ---------- ---------- -----------
1996 $18,858,630 $ 7,946 $(289,576) $18,577,000
1995 $24,487,509 $15,263 $(356,772) $24,146,000
- --------------------------------------------------------------------------------
(5) Loans Receivable
A summary of loans receivable at December 31 follows:
1996 1995
Conventional first
mortgage loans $168,847,672 $195,422,934
Short-term construction
and land loans 15,242,660 9,102,103
Commercial business loans 6,242,571 4,007,156
Auto loans 53,325,499 38,686,836
Home equity and
improvement loans 21,167,683 16,268,139
Other consumer loans 1,298,502 1,293,286
Total loans
receivable, gross 266,124,587 264,780,454
Less:
Loans in process 5,638,590 2,753,743
Deferred loan origination
costs (445,917) (440,064)
Unearned discount,
principally on loans
purchased 210,248 269,761
Allowance for
loan losses 1,582,102 1,175,178
Total loans receivable,
net $259,139,564 $261,021,836
- --------------------------------------------------------------------------------
Adjustable-rate loans totaled $100,888,000 and $109,548,000 at December 31, 1996
and 1995, respectively. The Bank serviced first mortgage loans for other
institutions approximating $162,856,000 and $125,796,000 at December 31, 1996
and 1995, respectively.
- --------------------------------------------------------------------------------
The following summarizes activity in the allowance for loan losses at
December 31:
1996 1995 1994
Balance at beginning
of year $1,175,178 $1,048,105 $ 956,105
Charge-offs (162,991) (241,203) (158,940)
Recoveries 4,915 8,276 10,940
Provision for
loan losses 565,000 360,000 240,000
Balance at end of year $1,582,102 $1,175,178 $1,048,105
- --------------------------------------------------------------------------------
Impaired loans totaled $3,789,000 and $1,020,000 at December 31, 1996 and 1995,
respectively. The impaired totals included $2,146,000 and $37,000 of
non-performing loans at the respective year end dates.
Included in impaired loans at December 31, 1996 were two participating
interests totaling $1,445,000 that were 90 days delinquent but which continued
on an accrual basis. Based upon their current physical condition and the
economic condition of the area in which the buildings are located, accrual
status was considered appropriate.
The average recorded investment in impaired loans during the years ended
December 31, 1996 and 1995 was approximately $1,891,000 and $4,252,000,
respectively. The Bank recognized interest income on impaired loans of $226,000
and $424,000 for the years ended December 31, 1996 and 1995, respectively.
- --------------------------------------------------------------------------------
26
Notes to Consolidated Financial Statements HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
(6) Foreclosed Real Estate
Foreclosed real estate is presented net of a valuation allowance for possible
losses. Activity in the allowance for losses on foreclosed real estate is as
follows:
Balance at January 1, 1995 $450,000
Provision charged to income -
Charge-offs, net of recoveries -
Balance at December 31, 1995 450,000
Provision charged to income 100,000
Charge-offs, net of recoveries -
-------
Balance at December 31, 1996 $550,000
- --------------------------------------------------------------------------------
(7) Investments in Real Estate Developments
The Bank and its wholly owned subsidiary have direct investments in real estate
projects and participate in unconsolidated joint ventures with third parties
engaged in the purchase of undeveloped land for improvement, subdivision, and
subsequent sale. The investments in unconsolidated real estate joint ventures
represent 50 percent interest in the projects involved and are accounted for on
the equity method. These developments are summarized at December 31 as follows:
1996 1995
Investment in real estate
project $ - $ 33,600
Investment in
unconsolidated
real estate
joint ventures 5,094,960 4,026,299
Total investment
in real estate
developments $5,094,960 $4,059,899
- --------------------------------------------------------------------------------
Income from real estate developments is summarized as follows for the year ended
December 31;
1996 1995 1994
Loss of
real estate projects $(73,117) $ (76,967) $(213,991)
Equity in earnings (loss)
of unconsolidated real
estate joint ventures 530,278 (214,399) 502,766
Fees received less
expenses incurred
related to unconsolidated
real estate joint
ventures 404,014 237,693 156,304
Total income (loss)
from real estate
developments $861,175 $ (53,673) $ 445,079
- --------------------------------------------------------------------------------
Combined statements of financial condition, operations, and partners' capital of
the unconsolidated real estate joint ventures follow.
Combined Statements of Financial Condition
as of December 31,
1996 1995
Assets
Cash $ 47,475 $ 26,480
Land and development
costs 15,459,094 21,006,807
Other assets 887,376 1,016,613
Total assets $16,393,945 $22,049,900
Liabilities:
Borrowings 3,662,623 10,177,867
Other liabilities 2,541,402 3,919,630
Total liabilities $ 6,204,025 $14,097,497
Partners' capital:
Wholly owned subsidiary
of Bank 5,094,960 3,976,202
Co-venturer 5,094,960 3,976,201
Total partners' capital 10,189,920 7,952,403
Total liabilities and
partners' capital $16,393,945 $22,049,900
- --------------------------------------------------------------------------------
27
HomeCorp, Inc. and Subsidiary Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Combined Statements of Operations
for the years ended December 31,
1996 1995 1994
Sales of real estate $10,042,533 $9,293,475 $7,366,404
Cost of sales (5,966,373) (7,243,804) (4,317,866)
Gross profit 4,076,160 2,049,671 3,048,538
Management fees (927,127) 319,625 (677,185)
Other expense (2,088,477) (2,798,095) (1,365,821)
Net income (loss) $ 1,060,556 $ (428,799) $1,005,532
================================================================================
Combined Statements Of Partners' Capital
Wholly owned
subsidiary of Co-
Bank Venturer Total
Balance at
Dec. 31, 1993 $4,681,712 $4,681,712 $ 9,363,424
Capital contributions 154,000 154,000 308,000
Capital withdrawals (1,139,149) (1,139,150) (2,278,299)
Net income 502,766 502,766 1,005,532
Balance at
Dec. 31, 1994 4,199,329 4,199,328 8,398,657
Capital contributions 1,314,236 1,314,237 2,628,473
Capital withdrawals (1,322,964) (1,322,964) (2,645,928)
Net loss (214,399) (214,400) (428,799)
Balance at
Dec. 31, 1995 3,976,202 3,976,201 7,952,403
Capital contributions 1,592,922 1,592,922 3,185,844
Capital withdrawals (1,004,442) (1,004,441) (2,008,883)
Net income 530,278 530,278 1,060,556
Balance At
Dec. 31, 1996 $5,094,960 $5,094,960 $10,189,920
================================================================================
A reconciliation of partners' capital per the joint venture financial statements
to Bank records at December 31 is as follows:
1996 1995
Partners' capital per joint
venture financial statements $5,094,960 $3,976,202
Deferred income and partner-
ship cash held by the Bank -- 50,097
Investment in unconsolidated
real estate joint ventures $5,094,960 $4,026,299
================================================================================
(8) Premises And Equipment
Premises and equipment at December 31 are as follows:
1996 1995
Land $1,311,124 $ 723,509
Office buildings 3,201,006 3,189,077
Furniture, fixtures and
equipment 2,928,401 2,914,806
Parking lots and
drive-through facility 921,421 921,421
Leasehold improvements 360,878 360,878
8,722,830 8,109,691
Less accumulated
depreciation and
amortization 4,853,449 4,480,083
Premises & equipment $3,869,381 $3,629,608
- --------------------------------------------------------------------------------
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
(9) Deposits
A summary of deposit accounts at December 31 follows:
- --------------------------------------------------------------------------------
1996 1995
------------ ------------
Account
Non-interest-bearing demand
deposit accounts $ 8,870,879 $ 6,822,512
Negotiable order of withdrawal (NOW) 25,972,892 25,072,580
Passbook 22,167,353 23,442,492
Money market 30,805,437 28,566,474
Certificates of deposit:
Original balances of less than or
equal to $100,000 195,633,979 201,808,483
Original balances of greater than
$100,000 28,303,989 28,581,342
Total certificates of deposit 223,937,968 230,389,825
Total deposit accounts $311,754,446 $314,293,883
- --------------------------------------------------------------------------------
The following sets forth the scheduled maturities of certificates of deposit at
December 31, 1996:
Maturing:
Within 12 months $106,758,921
Between 12 months and 2 years 57,984,665
Between 2 years and 3 years 27,366,599
Between 3 years and 4 years 25,920,539
Between 4 years and 5 years 5,633,240
Beyond 5 years 274,004
Total certificates of deposit $223,937,968
- --------------------------------------------------------------------------------
The bank had approximately $6,325,000 and $6,716,000 of U.S. Government and
agency obligations pledged to secure certain deposits at December 31, 1996 and
1995, respectively.
A summary of interest on deposits as shown in the consolidated statements of
operations at December 31 follows:
1996 1995 1994
NOW $ 215,701 $ 187,337 $ 179,109
Passbook 416,637 418,297 458,862
Money market 846,776 779,050 726,128
Certificates of
deposit 13,269,503 13,582,716 11,106,796
Total interest
on deposits $14,748,617 $14,967,400 $12,470,895
- --------------------------------------------------------------------------------
29
HomeCorp, Inc. and Subsidiary Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) Borrowed Funds
Federal Home Loan Bank advances were utilized throughout 1996 and 1995 as a
short term funding source for the Bank. The Bank had approximately $1.2 million
in mortgage-backed securities pledged to the Federal Home Loan Bank of Chicago
as collateral for outstanding letters of credit at December 31, 1996.
The Company had no borrowings at December 31, 1996 or 1995.
- --------------------------------------------------------------------------------
(11) Income Taxes
Components of applicable income taxes are as follows for the years ended
December 31:
1996 1995 1994
Current:
Federal $(437,840) $622,866 $640,409
State (127,989) 135,494 121,689
Total current (563,829) 758,360 762,098
Deferred:
Federal 624,803 4,334 104,443
State 142,134 (19,389) 66,059
Total deferred 766,937 (15,055) 170,502
Total income taxes $ 203,108 $743,305 $932,600
- --------------------------------------------------------------------------------
A reconciliation of income taxes computed at the statutory federal income tax
rate of 34% in 1996, 1995, and 1994 to the actual income taxes are as follows:
1996 1995 1994
Tax at statutory rate $191,059 $663,268 $ (945,124)
Effect of purchase accounting adjustments - - 1,750,329
State taxes, net of federal effect 10,656 76,629 93,713
Other, net 1,393 3,408 33,682
Total income taxes $203,108 $743,305 $ 932,600
- --------------------------------------------------------------------------------
Retained earnings at December 31, 1996 and 1995 includes approximately
$3,426,000 for which no federal income tax liability has been provided. This
amount represents allocations of income to bad debt deductions for tax purposes
only. Reductions of amounts so allocated for purposes other than tax bad debt
losses will create taxable income, which will be subject to the then current
corporate income tax rate.
Following is a breakdown of the significant individual temporary
differences that give rise to the Company's deferred tax assets and liabilities
as of December 31:
1996 1995
Deferred Tax Assets:
Financial statement allowance for loan losses $ 612,888 $ 629,574
Book vs tax basis in real estate partnerships - 169,036
Securities available for sale market value adjustment - 20,724
Book vs tax basis in fixed assets 42,596 -
Other 69,094 41,192
Sub-Total $ 724,578 $ 860,526
Less: Valuation allowance - (29,472)
Total Deferred Tax Assets $ 724,578 $ 831,054
Deferred Tax Liabilities:
Excess of tax loan loss allowance over base year amount (88,601) (143,365)
Book vs tax basis in mortgage servicing rights (206,773) -
Book vs tax basis in real estate partnerships (419,313) -
Securities available for sale market value adjustment (13,905) -
Book vs tax basis in fixed assets - (28,312)
Book vs tax basis in FHLB stock (133,468) (133,468)
Deferred fee income (191,418) (89,755)
Other (36,512) -
Total Deferred Tax Liabilities $(1,089,990) $(394,900)
Net Deferred Tax (Liabilities) Assets $ (365,412) $ 436,154
- --------------------------------------------------------------------------------
The valuation allowance for deferred tax assets as of December 31, 1995 was
$29,472 and was related to the state benefit recognized on the difference in the
Company's real estate partnerships and capital loss carryforward. Based upon the
reduction in the book-tax difference in real estate partnerships and the
utilization of capital loss carryforwards, the reserve was eliminated.
- --------------------------------------------------------------------------------
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
(12) PENSION PLAN
The Bank has a qualified, noncontributory defined benefit plan covering
substantially all employees who are at least 20-1/2 years of age and have at
least six months of service. Benefits are based on years of service and the
average of the five highest consecutive years of compensation.
The following table sets forth the status of the plan as of December 31:
1996 1995
Actuarial present value of benefit obligations:
Vested $1,730,802 $1,599,730
Nonvested 88,546 76,345
Total accumulated benefit obligation 1,819,348 1,676,075
Projected benefit obligation 2,622,865 2,366,786
Plan assets at fair value, primarily certificates of
deposit at HomeBanc 2,298,660 1,976,521
Funded status-plan assets less than projected benefits
obligation (324,205) (390,265)
Items to be recognized in earnings in future periods:
Unrecognized prior service cost 150,395 163,566
Unrecognized net loss 7,983 76,343
Unrecognized net asset at January 1, 1987 being
amortized over 15 years (7,769) (9,323)
Accrued pension cost $ (173,596) $ (159,679)
- --------------------------------------------------------------------------------
Total pension expense for the plan was $214,917, $113,066, and $97,569, for
1996, 1995 and 1994, respectively. Pension expense included the following
components:
1996 1995 1994
Service cost benefits earned during the period $ 193,245 $ 112,496 $109,002
Interest cost on projected benefit obligation 173,384 135,294 131,825
Actual return on plan assets (257,200) (206,534) (77,835)
Net amortization and deferrals 105,488 71,810 (65,423)
Total pension expense $ 214,917 $ 113,066 $ 97,569
- --------------------------------------------------------------------------------
The weighted assumed discount rate used to determine the projected benefit
obligation was 7.50% for 1996 and 1995 and 8.00% for 1994. The expected long-
term rate of return on plan assets was 8.50% for 1996 and 1995 and 8.00% for
1994. The plan assumed a 4.75% salary progression in 1996 and 1995 and 5.00% in
1994.
(13) SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Bank has a non-qualified, noncontributory supplemental executive retirement
plan covering employees earning in excess of the maximum compensation amount
that can be considered under the Pension Plan. Benefits are based on years of
service and the average.
The following table sets forth the status of the plan as of December 31,
1996:
Actuarial present value of benefit obligation:
Vested $ 92,571
Nonvested -
Total accumulated benefit obligation 92,571
Projected benefit obligation 224,175
Plan assets at fair value -
Funded status-plan assets in excess of (less than) projected
benefits obligation (224,175)
Item to be recognized in earnings in future periods:
Unrecognized prior service cost 184,645
Adjustment to recognize minimum liability (53,041)
Accrued pension cost $ (92,571)
- --------------------------------------------------------------------------------
Total pension expense for the plan was $39,530 for 1996. Pension expense
included the following components:
Service cost benefits earned during the period $ 9,161
Interest cost on projected benefit obligation 15,001
Net amortization and deferrals 15,368
Total pension $39,530
- --------------------------------------------------------------------------------
The weighted assumed discount rate used to determine the projected benefit
obligation was 7.50% for 1996. The expected long-term rate of return on plan
assets was 8.50% for 1996. The plan assumed a 4.75% salary progression in 1996.
- --------------------------------------------------------------------------------
(14) OFFICER, DIRECTOR, AND EMPLOYEE PLANS
Effective January 1, 1994, the Company implemented a profit sharing and savings
plan under Section 401(k) of the Internal Revenue Code covering substantially
all full-time employees. Under the 401(k) plan, employee contributions were
partially matched by the Company during 1996, 1995, and 1994.
- --------------------------------------------------------------------------------
31
HomeCorp, Inc. and Subsidiary Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
The Company will make an annual determination whether to continue the
employer match. It is the Company's intent to continue the match during 1997.
Additionally, the Company may allocate a portion of net profits to the
employees' accounts in the 401(k) plan.
The Company incurred expense of $73,356, $68,279, and $67,500 to fund the
ESOP and 401(k) plans for the years ended December 31, 1996, 1995, and 1994,
respectively.
Pursuant to the Company's 1990 Incentive Stock Option and Incentive Plan
(1990 Plan), 110,436 shares of the Company's Common Stock were reserved for
issuance by the Company. The exercise price for the purchase of shares subject
to a stock option at the date of grant may not be less than 100 percent of the
market value of the shares covered by the option at that date.
Pursuant to the Company's 1996 Premium Price Stock Option and Incentive
Plan (1996 Plan), 70,000 shares of the Company's Common Stock were reserved for
issuance by the Company. The exercise price for the purchase of shares subject
to a stock option at the date of grant cannot be less than 120 percent of the
market value of the shares covered by the option at that date.
The Plans provide awards in the form of stock options, stock appreciation
rights (SARs), incentive stock options and restricted stock. Each award will be
on such terms and conditions, consistent with the Plans, as the Stock Option
Committee (Committee) administering the Plans may determine. The term of stock
options in both plans will not exceed ten years from the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995; risk-free interest rates of 6.48% and 6.67%; no
dividends for either year; volatility factors of the expected market price of
the Company's common stock of .095 and .290; and a weighted-average expected
life of the options of 10 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
1996 1995
Pro forma net income $152,320 1,053,645
Pro forma earnings
per share $0.12 $0.89
- --------------------------------------------------------------------------------
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
- --------------------------------------------------------------------------------
A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:
1996 1995 1994
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- -------- --------------
Outstanding-Beginning
of year 93,656 $ 9.50 70,251 $ 7.00 66,251 $ 6.67
Granted 45,500 21.00 30,029 14.75 4,000 12.38
Exercised (200) 14.75 (6,608) 6.67 - -
Forfeited (200) 14.75 (16) 6.67 - -
Outstanding-end
of year 138,756 $13.26 93,656 $ 9.50 70,251 $ 7.00
Exercisable at end
of year 138,756 $13.26 93,656 $ 9.50 70,251 $ 7.00
Weighted-average
fair value of options
granted during year $ 7.38 $ 8.33 $ 6.53
32
Notes to Consolidated Financial Statements
HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
The Company's stock price was $17.875 at the time the 1996 options were granted.
The options have an exercise price of $21.00. All prior options were granted
with exercise prices equal to the Company's stock price on the date of grant.
The following table summarizes information about fixed stock options at December
31, 1996:
Range of Number Weighted-Average Weighted-Average
Exercise Prices Outstanding Remaining Life Exercise Price
$ 6.67 59,627 3.5 years $ 6.67
$12.375 to 14.75 33,629 8.3 14.47
$21.00 45,500 9.3 21.00
138,756 6.6 13.26
The Company has an Employee Stock Ownership Plan (ESOP). The ESOP covers
substantially all employees with more than one year of employment who have
attained the age of 21. Contributions to the ESOP are determined annually by the
Board of Directors. The ESOP owned 27,398 shares of the Company's common stock
as of December 31, 1996, all of which were allocated.
- --------------------------------------------------------------------------------
(15) Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to risk-
weighted assets (as defined) and of Tier 1 capital (as defined) to adjusted
total assets (as defined). Management believes as of December 31, 1996, that the
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Office of
Thrift Supervision (OTS) categorized the Bank as adequately capitalized under
the regulatory framework for prompt corrective action. To be categorized as
adequately capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table below. There
are no conditions or events since that notification that management believes
have changed the institution's category.
33
HomeCorp, Inc. and Subsidiary Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Bank's actual capital amounts and ratios are presented in the table below
(dollars in thousands):
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996:
Total Capital to risk-weighted assets
Consolidated $17,479 8.29% $16,865 8.00% NA NA
Subsidiary Bank 17,452 8.29% 16,833 8.00% 21,042 10.00%
Tier 1 capital to risk-weighted assets
Consolidated 15,897 7.54% 8,433 4.00% NA NA
Subsidiary Bank 15,870 7.54% 8,417 4.00% 12,625 6.00%
Tier 1 capital to adjusted total assets
Consolidated 15,897 4.81% 13,217 4.00% NA NA
Subsidiary Bank 15,870 4.81% 13,201 4.00% 16,502 5.00%
As of December 31, 1995:
Total Capital to risk-weighted assets
Consolidated 19,294 9.47% 16,302 8.00% NA NA
Subsidiary Bank 19,202 9.42% 16,301 8.00% 20,377 10.00%
Tier 1 capital to risk-weighted assets
Consolidated 17,669 8.67% 8,151 4.00% NA NA
Subsidiary Bank 17,577 8.63% 8,151 4.00% 12,226 6.00%
Tier 1 capital to adjusted total assets
Consolidated 17,669 5.27% 13,413 4.00% NA NA
Subsidiary Bank 17,577 5.24% 13,412 4.00% 16,765 5.00%
- --------------------------------------------------------------------------------
Applicable rules and regulations of the OTS impose limitations on dividends
by the Bank. Within those limitations, certain "safe harbor" dividends are
permitted, subject to providing the OTS at least 30 days advance notice. The
safe harbor amounts are based upon an institution's regulatory capital level.
Thrift institutions which have capital in excess of all capital requirements
before and after the proposed dividend are permitted to make capital
distributions during any calendar year up to the greater of (1) 100% of net
income to date during the calendar year, plus one-half of the surplus over such
institution's capital requirements at the beginning of the calendar year, or (2)
75% of net income over the most recent four-quarter period. Additional
restrictions would apply to an institution which does not meet its capital
requirement before or after a proposed dividend. Under the frame work, the
Bank's capital levels do not allow the Bank to accept brokered deposits. The
Bank relies upon its community deposit base and Federal Home Loan Bank
borrowings as primary funding sources.
Unlike the Bank, the Company is not subject to regulatory restrictions on
the payment of dividends to its shareholders. However, the source of its future
dividends may depend upon dividends from the Bank.
As part of the Conversion process to a public company, the Bank established
a liquidation account for the benefit of eligible depositors as of March 31,
1989, the eligibility record date, who continue to maintain deposits in the Bank
following the Conversion. The initial balance of the liquidation account was
$9,011,252, the retained earnings of the Bank as of April 30, 1990. The balance
in this account decreases each year in which deposit balances of eligible
depositors decline. The account balance approximated $2,667,000 at December 31,
1996. In the unlikely event of a complete liquidation, each eligible depositor
who has continued to maintain deposits in the Bank following the Conversion,
will be entitled to receive a liquidation distribution from the liquidation
account prior to any distributions to stockholders. Dividends cannot be paid
from retained earnings allocated to the liquidation account.
34
Notes to Consolidated Financial Statements HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
(16) Concentrations of Credit Risk, Financial Instruments with Off-Balance-Sheet
Risk, Commitments and Contingencies
Substantially all of the Bank's conventional first mortgage loans are secured by
single-family homes in the Northern Illinois area. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The borrower's ability to
repay the loans is generally dependent upon the economic environment of the
Northern Illinois area.
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract amounts of those instruments reflect
the extent of involvement the Bank has in particular classes of financial
instruments.
Letters of credit are issued by the Company and the Bank to guarantee the
completion of certain real estate developments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established of any condition
established in the contract. Commitments are made at adjustable and fixed rates.
Fixed rate commitments generally expire within sixty days with adjustable rate
commitments made for up to 60 days. At December 31, 1996 fixed rate commitments
for the origination of fixed and variable rate mortgage loans were $2,379,000
and ranged from 6.125% to 8.50%.
All of the Bank's loan sales have been without recourse. Virtually all of
the Bank's servicing responsibilities are to the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association under standard
servicing agreements.
As of December 31, 1996 and 1995, the Bank has contingent liabilities
under surety agreements (credit enhancements) with third parties aggregating
$2,000,000 and $5,800,688, respectively. Fees are received for the Bank's
guarantee, with other financial institutions, of certain multifamily housing
revenue bonds.
Mortgage-backed and U.S. Government and agency obligations with carrying
values of approximately $1,185,000 and $8,979,000 at December 31, 1996 and 1995
respectively, have been pledged to secure these agreements.
The Company and its subsidiary use the same credit policies in making
commitments and conditional obligations as on-balance-sheet instruments. At
December 31, 1996 and 1995 such commitments and conditional obligations are as
follows:
December 31
1996 1995
---------- ----------
Standby letters of credit $ 626,000 $ 262,000
Conventional first mortgage
loan commitments 5,630,000 9,110,000
Total commitments
to extend credit $6,256,000 $9,372,000
Because of the nature of its activities, the Company and Bank are subject
to pending and threatened legal actions which arise in the normal course of
business.
In the opinion of management, based on advise of legal counsel, the
disposition of any known pending current legal actions will not have a material
adverse effect on the financial position of the Company.
- --------------------------------------------------------------------------------
(17) Fair Values of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" requires
disclosures of estimated values of financial instruments. Fair value estimates,
methods, and assumptions are set forth.
Cash and Cash Equivalents
The carrying amounts of $14,140,492 and $10,411,569 for 1996 and 1995,
respectively of cash and cash equivalents approximate fair value because they
mature in three months or less and do not present unanticipated credit
concerns.
Investment and Mortgage-Backed Securities
Comparisons of the recorded book values and estimated fair values to investment
securities held to maturity, securities available for sale and mortgage-backed
securities are summarized in notes (2), (3), and (4), respectively. All fair
values are based upon market quotes. The following table summarizes the
balances:
35
[LOGO HOMECORP, INC. AND SUBSIDIARY] Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1996 At December 31, 1995
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Investment securities held to maturity $ 5,502,353 $ 5,471,000 $ 6,504,355 $ 6,412,000
Securities available for sale 12,496,885 12,496,885 8,311,118 8,311,118
Mortgage-backed securities held to maturity 18,858,630 18,577,000 24,487,509 24,146,000
====================================================================================================================================
Loans
Fair values are estimated on portfolios of loans with similar financial characteristics. Loans are segregated by type, such
as residential real estate, commercial or consumer and are then further segregated by adjustable and fixed interest rate.
The fair value for the loan portfolio was calculated by discounting estimated future cash flows of loans using estimated
discount rates that consider the credit and interest rate risk inherent in the loans. The assumptions involved in estimating
the future cash flows and appropriate discount rate are judgmentally determined using market information and specific borrower
information, as appropriate.
The following table presents information for loans:
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1996 At December 31, 1995
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value* Amount Fair Value*
Residential real estate:
Fixed $79,189,188 $79,221,000 $99,675,842 $102,015,000
Adjustable 48,429,170 47,774,000 61,271,355 60,917,000
Other real estate:
Fixed 16,070,904 16,456,000 10,738,298 11,036,000
Adjustable 24,014,859 28,870,000 27,891,711 28,471,000
Construction and land:
Fixed 2,010,952 2,013,000 -- --
Adjustable 10,562,950 10,577,000 6,841,363 6,838,000
Consumer:
Fixed 62,398,873 62,319,000 44,913,412 45,022,000
Adjustable 14,674,712 14,657,000 11,599,302 11,525,000
Commercial:
Fixed 3,036,300 3,018,000 2,062,421 2,067,000
Adjustable 3,206,271 3,186,000 1,944,735 1,949,000
- ------------------------------------------------------------------------------------------------------------------------------------
* Management has made estimates of fair value discount rates that it believes are reasonable. However, because there is no
market for many of these financial instruments, management has no basis to determine whether the fair values presented above
would be indicative of the values negotiated in actual sales.
36
Notes to Consolidated Financial Statements HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Deposit Liabilities
Under SFAS No. 107, the fair value of deposits with no stated maturity, such as
non-interest bearing checking, NOW accounts, savings and money market accounts,
is equal to the amount payable on demand as of December 31, 1996 and 1995.
The discount rate is determined by the rates offered as of December 31, 1996 and
1995 for comparable remaining maturities.
- ----------------------------------------------------------------------------------------------------------
At December 31, 1996 At December 31, 1995
------------------------------ ------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Non-interest bearing demand $ 8,870,796 $ 8,870,796 $ 6,822,512 $ 6,822,512
Savings and NOW 48,140,245 48,140,245 48,515,072 48,515,072
Money market 30,805,437 30,805,437 28,566,474 28,566,474
Certificates of deposit 223,937,968 225,645,000 230,389,825 234,155,000
- ----------------------------------------------------------------------------------------------------------
The fair values estimated above do not include the benefit that results from the
low cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market.
- -------------------------------------------------------------------------------
Commitments to Extend Credit, Standby Letters of
Credit, and Financial Guarantees Written
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of financial guarantees written and letters of credit is based on
fees currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle obligations with the counterparties.
The Bank and the company issue letters of credit, primarily on behalf of
the Bank's subsidiary in connection with its ongoing real estate development
operations.
Limitations
The fair value estimates are made at a discrete point in time based on relevant
market information and information about the financial instrument. Because no
market exists for a significant portion of the Bank's financial instruments,
fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
In addition, the fair value estimates are based on existing on-and-off-
balance sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are not
considered financial instruments. Significant assets and liabilities that are
not considered financial assets and liabilities include the mortgage origination
operation, brokerage, deferred taxes and property plant and equipment. In
addition, the tax ramifications related to the realization of unrealized gains
and losses can have a significant effect on fair value estimated and have not
been considered in any estimated.
- --------------------------------------------------------------------------------
37
HomeCorp, Inc. and Subsidiary Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(17) Interim Period Consolidated Operating Highlights (unaudited)
Consolidated operating highlights (unaudited) for the respective interim
quarterly reporting periods for the years ended December 31, 1996 and 1995 are
as follows:
Quarter ended
----------------------------------------------------------
March 31 June 30 September 30 December 31
1996:
Total interest income $5,973,291 $6,065,503 $ 6,134,173 $6,208,339
Total interest expense 3,707,025 3,646,845 3,751,816 3,779,541
Net interest income 2,266,266 2,418,658 2,382,357 2,428,798
Provision for loan losses 115,000 105,000 175,000 170,000
Net interest income after provision for loan losses 2,151,266 2,313,658 2,207,357 2,258,798
Gain on sale of: 396,974 418,812 436,298 447,136
Loans receivable, investments securities and
mortgage-backed securities 337,498 211,270 180,697 203,849
Income (Loss) from real estate developments (219) (13,644) 388,409 486,629
REO Operations 114,951 115,934 120,062 120,162
Other noninterest operating income 33,264 51,085 21,565 59,598
Noninterest operating expense 2,443,793 2,425,062 2,568,311 2,673,362
SAIF special assessment - - 2,042,942 -
Provision for loss on foreclosed real estate - - - 100,000
Provision for credit enhancement costs - - - 246,000
Income before income taxes 589,941 672,053 (1,256,865) 556,810
Income taxes 234,405 261,000 (500,498) 208,201
Net income (loss) $ 355,536 $ 411,053 $ (756,376) $ 348,609
Earnings per share (loss) $0.30 $0.35 $(0.64) $0.29
- -----------------------------------------------------------------------------------------------------------------
1995:
Total interest income $5,867,331 $6,100,713 $ 6,350,927 $6,116,853
Total interest expense 3,460,246 3,803,614 3,954,695 3,846,043
Net interest income 2,407,085 2,297,099 2,396,232 2,270,810
Provision for loan losses 90,000 90,000 90,000 90,000
Net interest income after provision for loan losses 2,317,085 2,207,099 2,306,232 2,180,810
Loan fees and service charges 336,468 341,691 371,245 406,121
Gain on sale of:
Loans receivable, investment securities and
mortgage backed securities 23,173 59,468 101,184 113,221
Income (Loss) from real estate developments (52,605) 147,578 (68,374) (80,272)
REO Operations - - - 115,573
Other noninterest operating income 33,002 38,411 39,840 18,117
Noninterest operating expense 2,174,191 2,289,044 2,304,124 2,236,921
Income before income taxes 482,932 505,203 446,003 516,649
Income taxes 180,550 193,535 168,050 201,170
Net income $ 302,382 $ 311,668 $ 277,953 $ 315,479
Earnings per share $0.26 $0.26 $0.23 $0.27
- -----------------------------------------------------------------------------------------------------------------
As computations for each quarter are independent, the sum of earnings per share
data for the quarters in each year may not equal earnings per share for the
year.
- --------------------------------------------------------------------------------
38
Income (Loss) from real estate developments
Notes to Consolidated Financial Statements HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
(18) Parent Company Financial Information
The parent company only financial information as of and for the years ended
December 31, 1996, 1995, and 1994 is presented below and should be read in
conjunction with the other notes to the consolidated financial statements.
- --------------------------------------------------------------------------------
Statements of Financial Condition
1996 1995 1994
Assets:
Cash and cash equivalents $ 28,504 $ 88,534 $ 118,085
Investments 11,544 11,159 10,804
Equity in net assets of the Bank 20,830,674 20,337,651 18,905,641
Total assets $20,870,722 $20,437,344 $19,034,530
Liabilities:
Other liabilities $ 12,466 $ 13,844 $ 5,175
Stockholders' equity:
Common stock $ 11,287 $ 11,264 $ 11,220
Additional paid-in capital 6,492,542 6,465,178 6,435,874
Retained earnings 14,332,532 13,973,701 12,766,219
Unrealized gain (loss) on securities available for sale 21,895 (26,643) (184,498)
Total liabilities and stockholders' equity $20,870,722 $20,437,344 $19,034,530
Statements of Operations
Equity in earnings of the Bank:
Income before cumulative effect of change in
accounting principle $ 444,484 $ 1,274,155 $ 684,600
Cumulative effect of change in accounting principle - - (4,340,424)
Interest income 385 355 513
Other income (expense), net (140,893) (109,673) (122,466)
Income before income taxes 303,976 1,164,837 (3,777,777)
Income tax expense (benefit) (54,855) (42,645) 65,400
Net income (loss) $ 358,831 $ 1,207,482 $(3,712,377)
Statements of Cash Flows
Operating activities:
Net income (loss) $ 358,831 $ 1,207,482 $(3,712,377)
Deduct (add) equity in earnings of the Bank
not providing (using) funds (444,484) (1,274,155) 3,655,825
Net increase (decrease) in other liabilities (1,379) 8,129 13,280
Net decrease in other assets - - 45,448
Net cash provided (used) by operations (87,032) (58,544) 2,176
Purchase of investment security (385) (355) (216)
Net cash used by investing activities (385) (355) (216)
Exercise of stock options 27,387 29,348 -
Net cash provided by financing activities 27,387 29,348 -
Net increase (decrease) in cash (60,030) (29,551) 1,960
Cash and cash equivalents, beginning of year 88,534 118,085 116,125
- ----------------------------------------------------------------------------------------------------------
39
HomeCorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Directors and Executive Officers
- --------------------------------
[PHOTO OF KARL H. ERICKSON]
[PHOTO OF C. STEVEN SJOGREN]
[PHOTO OF JOHN R. PERKINS]
[PHOTO OF WESLEY E. LINDBERG]
[PHOTO OF ROBERT C. HAUSER]
[PHOTO OF ADAM A. JAHNS]
[PHOTO OF LARRY U. LARSON]
[PHOTO OF RICHARD W. MALMGREN]
[PHOTO OF DAVID R. RYDELL]
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KARL H. ERICKSON
Chairman of the Board,
HomeCorp, Inc.
Past President/Hardware
Division, Amerock
Corporation, a
manufacturer of custom
window hardware.
C. STEVEN SJOGREN
President and Chief Executive
Officer, HomeCorp, Inc.
JOHN R. PERKINS
Executive Vice President and
Chief Financial Officer,
HomeCorp, Inc.
WESLEY E. LINDBERG
Secretary, HomeCorp, Inc.
Partner in the law firm of
Reno, Zahm, Folgate,
Lindberg & Powell.
ROBERT C. HAUSER
President, Hauser Inc.,
a lumber and building
materials supplier.
ADAM A. JAHNS
Past Chairman and CEO,
Cragin Financial Corp.
LARRY U. LARSON
Consultant, Larson and Darby,
Inc., an architectural,
engineering and planning firm.
RICHARD W. MALMGREN
Retired Executive, Clarcor, Inc.,
a products packaging company.
DAVID R. RYDELL
President of Bergstrom Inc.,
a manufacturer of vehicle
HVAC systems.
(additional officer)
DIRK J. MEMINGER
Treasurer and Chief Accounting
Officer, HomeCorp, Inc.
Officers--HomeBanc, fsb
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C. STEVEN SJOGREN
President and Chief
Executive Officer
JOHN R. PERKINS
Executive Vice President
and Chief Operating Officer
WESLEY E. LINDBERG
Secretary
DIRK J. MEMINGER
Treasurer
MARSHA A. ABRAMSON
Senior Vice President/
Deposit Services
ROBERT R. BENNEHOFF
Senior Vice President/
Residential Lending
PETER T. ROCHE
Senior Vice President/
Commercial Lending
40
HomeCorp, Inc. and Subsidiary
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INVESTOR INFORMATION AND FORM 10-K
- ----------------------------------
Stockholder, stockbroker and security analyst inquiries should be directed to
HomeCorp's president. A copy of the company's annual report on Form 10-K is
available without charge by contacting:
C. STEVEN SJOGREN, President
HomeCorp, Inc.
1107 East State Street, P.O. Box 4779
Rockford, Illinois 61110-4779
815-987-2200
STOCK TRANSFER AGENT & REGISTRAR
- --------------------------------
The transfer agent, Firstar Trust Company, maintains all stockholder records and
can assist with stock transfer and registration, address changes, changes or
corrections in Social Security or tax identification numbers, and 1099 tax
reporting questions. If you have questions, please contact the stock transfer
agent at the address below.
FIRSTAR TRUST COMPANY
Corporate Trust Services
615 East Michigan Street, 4th Floor
Milwaukee, Wisconsin 53202
414-276-3737 . 1-800-637-7549
================================================================================
HOMECORP, INC. SHARES
The company's common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market(SM) under the symbol:
HMCI.
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Common shares outstanding: 1,128,779
Stockholders of record: * 509
Estimated total owners: * 1,060
Market makers: These investment brokerage firms make a market in HomeCorp, Inc.
common stock.
EVEREN Securities, Inc.
Howe Barnes Investments, Inc.
*As of March 1, 1997
================================================================================
This pricing table for the corporation's common stock reflects high and low
sales prices reported by the NASDAQ since January 1, 1995.
1996 1995
------------------------------------
High Low High Low
First quarter $18.00 $16.50 $15.00 $10.33
Second quarter 18.75 17.00 15.50 10.50
Third quarter 19.875 17.00 13.00 10.50
Fourth quarter 19.875 17.75 14.50 12.00
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No cash dividends have been paid on HomeCorp, Inc. common stock to date. For
information regarding restrictions on dividends, see Note (15) to the
Consolidated Financial Statements.
HOMEBANC
OFFICE LOCATIONS
ROCKFORD
1107 East State Street
815-987-2200
3210 Eleventh Street
815-987-2240
2641 North Mulford Road
815-987-2230
5875 Riverside Blvd.
815-636-4080
CherryVale Mall
815-322-5834
LOVES PARK
5629 North Second Street
815-633-1363
Freeport
205 West Stephenson Street
815-235-1000
1550 West Galena Avenue
815-235-1001
Dixon
98 Galena Avenue
815-288-3315
122 West Boyd
815-288-3315
HEADQUARTERS
HOMECORP, INC.
1107 East State Street
P.O. Box 4779
Rockford, Illinois
61110-4779
815-987-2200
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ANNUAL MEETING
The annual meeting of stockholders will convene at 4:00 p.m., Tuesday, April 22,
1997. It will be held in the Wallingford Center at the Best Western Clock Tower
Resort, located at 7801 East State Street in Rockford.
[HOMECORP LOGO]
HomeCorp, Inc. and Subsidiary
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Consolidated Financial Highlights
========================================================================================
As of, or for the year ended
December 31
Dollars in thousands, except per share amounts 1996 1995 1994
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Total assets $335,824 $338,027 $330,412
Cash and cash equivalents, investment
securities held to maturity and investment
securities available for sale 32,140 25,227 39,843
Loans receivable and mortgage-backed securities 277,998 285,509 273,292
Deposit accounts 311,754 314,294 307,605
Stockholders' equity 20,858 20,424 19,029
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Net interest income $ 9,496 $ 9,371 $ 9,025
Net income (loss) 359 1,207 (3,712)
Net income (loss) per share 0.30 1.03 (3.21)
Book value per share 18.48 18.13 16.96
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Key ratios:
Net interest income to average earnings assets 3.04% 2.98% 2.98%
Net income to average assets 0.11 0.36 n/m
Net income to average stockholders' equity 1.72 5.49 n/m
Non-interest operating expenses to average assets* 2.98 2.67 2.62
Stockholders' equity to total assets 6.21 6.04 5.76
Non-performing assets to total assets 3.68 3.04 1.39
Reserve for loan losses to total loans 0.61 0.45 0.43
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n/m = not meaningful.
* Prior year amounts exclude goodwill amortization.
Inside This Report
------------------
President Message..................................................... 1
Marketing Overview.................................................... 2
Selected Financial Information........................................ 3
Management's Discussion and Analysis.................................. 4-13
Report of Independent Auditors........................................ 14
Consolidated Financial Statements..................................... 15-19
Notes to Consolidated Financial Statements............................ 20-39
Management and Shareholder Information................................ 40-41
ABOUT HOMECORP
HomeCorp, Inc. was formed in 1989 to serve as the holding company for HomeBanc,
a federal savings bank.
In June 1990, HomeBanc converted from a mutual savings and loan to a stock
federal savings bank. The bank and its subsidiary account for substantially all
of the operations of HomeCorp. Inc.
HomeBanc was founded in 1889 in Rockford, Illinois. The institution ended 1996
with assets of $335.8 million and total stockholders' equity of $20.9 million.
HomeBanc operates ten offices in northern Illinois, including six in Rockford
and two each in Freeport and Dixon. The bank serves its customers with an
emphasis on personal service and a wide range of contemporary retail banking
products, including mortgage and consumer installment lending. HomeBanc also
markets financing and investment services for qualified small businesses. In
addition, stock, bond and annuity sales are promoted through a relationship with
INVEST Financial Corporation.
HomeCorp, Inc. shares are traded on the Nasdaq National Market System, using the
symbol HMCI.