1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
MARK ONE:
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter ended MARCH 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File No. 0-11160
HOME INTERSTATE BANCORP
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 95-3657758
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2633 CHERRY AVENUE, SIGNAL HILL, CALIFORNIA 90806 - 2033
(address of Principal Executive Offices) (ZIP Code)
Registrant's Telephone Number, Including Area Code: (310) 988-9600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed the Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Applicable only to Corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date.
Common Stock -- Authorized 20,000,000 shares of non par value; issued and
outstanding 4,216,780 at May 10, 1996.
================================================================================
2
PART I
Item 1. Financial Statements
Following are the unaudited consolidated statements of financial condition
of Home Interstate Bancorp (the "Company") and its wholly owned subsidiary, Home
Bank (the "Bank") as of March 31, 1996 and December 31, 1995, and the
consolidated statements of income for the quarters ended March 31, 1996 and
March 31, 1995 and cash flows for the quarters ended March 31, 1996 and March
31, 1995. It is management's opinion that these statements present fairly, in
all material respects, the consolidated financial condition, result of
operations and cash flows of Home Interstate Bancorp and its subsidiary in
conformity with generally accepted accounting principles. The accompanying notes
are considered an integral part of these financial statements.
2
3
HOME INTERSTATE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
March 31, December 31,
1996 1995
---- ----
ASSETS: Cash and due from banks $ 43,766 $ 38,797
Federal funds sold 12,600 14,600
-------- ---------
Total of cash and cash equivalents 56,366 53,397
Securities held to maturity
(Approximate market value at
March 31, 1996 and December 31, 1995 were
$28,257,488 and $13,179,412, respectively.) 28,634 13,131
Securities available for sale 107,488 120,755
-------- ---------
Securities, net 136,122 133,886
Loans 215,910 211,223
Less: Allowance for possible loan losses 3,208 3,113
-------- ---------
Loans, net 212,702 208,110
Real estate owned 4,800 4,918
Premises, furniture and equipment, net 14,434 14,366
Accrued interest receivable and other assets 8,966 9,115
-------- ---------
TOTAL ASSETS $433,390 $ 423,792
======== ========
LIABILITIES: Deposits:
Demand deposits, non-interest bearing $133,049 $ 132,208
Savings and interest bearing demand deposits 159,178 153,891
Time certificates of deposit of $100,000
and over 18,904 18,105
Other time deposits 67,139 64,827
-------- ---------
Total Deposits 378,270 369,031
Securities sold under agreements to repurchase 0 0
Accrued interest payable and other liabilities 3,383 3,345
-------- ---------
TOTAL LIABILITIES 381,653 372,376
-------- ---------
Commitments and contingencies
SHAREHOLDERS' Common stock (no par value)
EQUITY: Authorized 20,000,000 shares; issued and
outstanding 4,213,280 shares in 1996 and
4,187,954 shares in 1995 43,099 42,859
Retained earnings 8,467 7,977
Unrealized gains on securities available for sale,
net of deferred taxes 171 580
-------- ---------
TOTAL SHAREHOLDERS' EQUITY
51,737 51,416
-------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $433,390 $423,792
======== ========
The accompanying notes are an integral part of these consolidated statements of
financial condition.
3
4
HOME INTERSTATE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands except for earnings per share)
For the three months ended March 31, 1996 and 1995
1996 1995
---- ----
REVENUE FROM Interest and fees on loans $ 5,659 $ 5,355
EARNING ASSETS: Interest on securities:
taxable 1,843 2,339
non-taxable 95 116
Interest on Federal funds sold 186 25
-------- --------
TOTAL REVENUE FROM EARNING ASSETS 7,783 7,835
-------- --------
COST OF FUNDS: Interest on savings and interest bearing demand
deposits 850 880
Interest on time certificates of deposit of
$100,000 and over 237 132
Interest on other time deposits 774 697
Interest on securities sold under agreements to
repurchase 1 11
-------- --------
TOTAL COST OF FUNDS 1,862 1,720
-------- --------
Net revenue from earning assets before
provision for possible loan losses 5,921 6,115
Provision for possible loan losses 300 625
-------- --------
Net revenue from earning assets 5,621 5,490
-------- --------
OTHER OPERATING Service charges and fees 1,026 991
REVENUE: Securities gains, net 0 11
Other operating revenue 275 278
-------- --------
TOTAL OTHER OPERATING REVENUE 1,301 1,280
-------- --------
OTHER OPERATING Salaries and employee benefits 2,298 2,746
EXPENSES: Occupancy expense, net 682 725
Other operating expenses 2,428 2,243
-------- --------
TOTAL OTHER OPERATING EXPENSES 5,408 5,714
-------- --------
Income before provision for income taxes 1,514 1,056
Provision for income taxes 664 333
-------- --------
NET INCOME $ 850 $ 723
======== ========
EARNINGS PER SHARE $ .20 $ .17
======== ========
The accompanying notes are an integral part of these consolidated statements.
4
5
HOME INTERSTATE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Periods Ended March 31, 1996 and 1995
(Dollars in thousands)
1996 1995
---------- ---------
CASH FLOWS FROM Net income $ 850 $ 723
---------- ---------
OPERATING ACTIVITIES: Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and amortization 216 198
Provision for possible loan losses 300 625
Amortization of securities premiums 365 431
Accretion of securities discounts (21) (40)
Amortization of deferred loan fees and costs (300) (170)
Net gain on sale of securities 0 (11)
Net (gain) loss on sale of premises, furniture
and equipment (3) 31
Net loss on real estate owned 340 165
Tax benefit from stock options exercised 9 0
Net decrease in accrued interest receivable
and other assets 148 197
Net increase in accrued interest payable and
other liabilities 329 14
---------- ---------
Total adjustments 1,383 1,440
---------- ---------
Net cash provided by operating activities 2,233 2,163
---------- ---------
CASH FLOWS FROM Proceeds from sales of securities 0 8,076
INVESTING ACTIVITIES: Proceeds from maturities of securities 13,523 2,142
Purchase of securities (16,801) (188)
Net increase in loans (4,814) (11,145)
Proceeds from sale of real estate owned 0 461
Proceeds from sale of premises, furniture and
equipment 3 5
Purchase of premises, furniture and equipment (284) (867)
---------- ---------
Net cash used in investing activities (8,373) (1,516)
---------- ---------
CASH FLOWS FROM Net increase (decrease) in demand deposits
FINANCING ACTIVITIES: non-interest bearing, savings and interest
bearing demand deposits 6,127 (10,353)
Net increase in time certificates of deposit of
$100,000 and over 799 1,198
Net increase (decrease) in other time deposits 2,312 (2,358)
Net decrease in securities sold under agreements
to repurchase 0 (100)
Proceeds from stock options exercised 231 0
Cash dividends declared (360) (636)
---------- ---------
Net cash provided by (used in) financing
activities 9,109 (12,249)
---------- ---------
Net increase (decrease) in cash and cash
equivalents 2,969 (11,602)
Cash and cash equivalents at beginning of period 53,397 48,996
---------- ---------
Cash and cash equivalents at end of period $ 56,366 $ 37,394
========== =========
The accompanying notes are an integral part of these consolidated statements.
5
6
HOME INTERSTATE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Continued
(Unaudited)
For the Periods Ended March 31, 1996 and 1995
(Dollars in thousands)
1996 1995
--------------- ---------------
SUPPLEMENTAL DISCLOSURES: Supplemental disclosure of non-cash investing
and financing activities:
Adjustment of FASB 115:
(Increase) decrease in unrealized gains /
losses on securities available for sale $ 698 $ (2,858)
Increase (decrease) in deferred tax
liabilities related to unrealized gains /
losses on securities available for sale (289) 1,189
Increase (decrease) in shareholders' equity
for unrealized gains / losses, net of
deferred taxes (409) 1,669
Real estate acquired in settlement of loans 222 1,843
Supplemental disclosure of cash flow
information Cash paid during the year for:
Interest expense $ 1,846 $ 1,710
Income taxes 2 320
6
7
HOME INTERSTATE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
Principles of Consolidation
The consolidated financial statements of Home Interstate Bancorp include
the accounts of the Company and its wholly-owned subsidiary, the Bank. All
material intercompany balances and transactions have been eliminated in the
consolidation.
Principles of Presentment
The accompanying unaudited consolidated financial statements have been
prepared in condensed format and, therefore do not contain all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been reflected in the
financial statements.
Accounting Changes
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No.
118. These standards require that impaired loans be measured based on the
present value of expected future cash flows, the loan's observable market price
or the fair value of the collateral if the loan is collateral dependent. The
statement was adopted as of January 1, 1995.
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of ". These standards
requires that impairment losses on long-lived assets to be recognized when an
asset's book value exceeds its expected future cash flows (undiscounted). The
statement was adopted as of January 1, 1996, and it does not have a material
effect on the Company's financial statements.
The Company adopted SFAS No. 123 "Accounting for Stock-Based Compensation".
Under SFAS No. 123, companies have the option to implement a fair value-based
accounting method or continue to account for employee stock options and stock
purchase plans as prescribed by Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees". The Company has not assessed the
impact on net income of adopting the new fair value accounting rules.
Earnings per Share
Earnings per share are based upon the weighted average number of shares
outstanding during each period. The effect of stock options outstanding are not
materially diluting and are not, therefore, included for the purpose of earnings
per share calculations. The average weighted number of shares used were
4,209,027 at March 31, 1996, 4,177,865 at December 31, 1995 and 4,175,207 at
March 31, 1995.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and Federal funds sold. Generally, Federal funds are
sold for one-day periods. The Company made cash payments of $2,000 and $320,000
for income taxes and $1,846,000 and $1,710,000 for interest paid on deposit
accounts for the periods ending March 31, 1996 and 1995, respectively.
7
8
ITEM 2. Management Discussion and Analysis of Financial
Condition and Results of Operations
FINANCIAL CONDITION
General
The Company's consolidated assets of $433,390,000 at March 31, 1996
increased 2.26% from December 31, 1995, when consolidated assets totaled
$423,792,000. Cash and cash equivalents increased 5.56% or $2,969,000.
Securities held to maturity increased 118.06% or $15,503,000 and securities
available for sale, net of unrealized loss decreased 10.99% or $13,267,000.
Loans increased 2.22% or $4,687,000 while the allowance for loan losses
increased 3.05% or $95,000. Real estate owned decreased 2.40% or $118,000.
Deposits increased 2.50% or $9,239,000 when comparing the same periods. The
increase in deposits was primarily due to an increase in yields on interest
bearing deposits and partially utilized in the funding of loans. During the
first quarter of 1996 loan demand increased slightly from December 31, 1995.
Mergers and Acquisitions
On January 10, 1996, the Company entered into a definitive agreement to
merge with and into CU Bancorp, a California corporation and parent of
California United Bank, National Association. Under the terms of the definitive
agreement, shareholders of the Company will receive 1.409 shares of CU Bancorp
stock for each share of CU Bancorp's stock. The definitive agreement is subject
to shareholder and regulatory approval and the merger is expected to be
completed during the third quarter 1996. At December 31, 1995, CU Bancorp had
total assets of $325,309,000 and total shareholders' equity of $33,006,000.
In February 1996, the Bank consummated a deposit purchase agreement with
Southern California Bank in which the Bank purchased the deposits of Southern
California Bank's Signal Hill branch office. The deposits purchased in the
transaction totaled in aggregate $1,656,000, which reflects less than 1% of
total deposits and assets of the Bank.
Capital Resources
The Company's internal growth rate of capital was .62% while assets
increased by 2.26% from year-end December 31, 1995. The following schedule
reflects specific capital-related information and ratios:
(dollars in thousands) March 31, 1996 December 31, 1995 % Change
-------------- ----------------- --------
Ending total capital $51,737 $51,416 .62
Risk based capital-to-assets
ratios:
Regulatory
Requirement
-----------
Tier 1 capital 17.06 16.96 4.00
Total capital 18.22 18.09 8.00
Leverage ratio 11.19 11.05 3.00 -- 5.00
Liquidity and Balance Sheet Management
The asset/liability management process determines the size and composition
of the balance sheet and focuses on the management of liquidity and interest
rate exposures. The purpose of liquidity and balance sheet management is to
reflect the Company's ability to provide funds for day-to-day operations, meet
customer needs, take advantage of interest rate market opportunities and meet
the financial commitments of the Company. Funding of loan requests and
commitments, purchase of attractive securities opportunities, providing for
liability outflow, and management of interest rate risk requires continuous
analysis in order to match the maturities of categories of loans and securities
with the maturities of deposits and bank-related borrowings. The Company's
ability to obtain funds to replace maturing liabilities and to finance asset
growth depends upon its reputation as well as the diversity and liquidity of the
markets in which it participates. The Company's liquidity is normally viewed in
terms of the nature and composition of the Company's sources and
8
9
uses of funds. Cash, maturing securities, reductions in Federal funds sold and
loan maturities and repayments provide liquidity. Purchase of Federal funds,
sale of securities, sale of loan participations or sale of the Company's loans
on the secondary market and utilization of other short-term borrowing facilities
are all available to provide additional liquidity vehicles. Liquid assets are
comprised of cash and cash equivalent assets (cash, cash due from other
financial institutions and Federal funds sold), U.S. Treasury securities and
U.S. Government agencies securities. The increase in cash and cash equivalents
was due to an increase in deposits which management believes was due to an
increase in yields on interest bearing deposits (see "General" herein). The
following schedule reflects specific liquidity information and ratios:
(dollars in thousands) March 31, 1996 December 31, 1995 % Change
-------------- ----------------- --------
Gross loans $215,910 $211,223 2.22
Total deposits $378,270 $369,031 2.50
Gross loan-to-deposit
ratio 57.08 57.24
Gross loan-to-total assets
ratio 49.82 49.84
Cash and cash equivalent
assets as a percentage
of total assets 13.01 12.60
Securities Portfolio
The Company complies with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". The Company holds securities in two categories,
available for sale and held to maturity. Securities available for sale may be
held for indefinite periods of time and may be sold in response to changes in
interest rates and/or other economic conditions. These securities are, in the
aggregate, carried at market value. Unrealized gains or losses are calculated
based on adjusted cost as described below. Unrealized gains or losses, net of
deferred taxes, are recorded as a separate component of shareholders' equity.
Securities that the Company has the positive intent and ability to hold to
maturity are classified as held to maturity and accounted for at cost, adjusted
for amortization of premium and accretion of discount.
The Company's calculation of cost is increased by accretion of discounts
and decreased by amortization of premiums, which are computed on the
straight-line method that approximates the effective interest method. Such
amortization and accretion are reflected in interest on securities. Realized
gains or losses recognized on the sales of securities are based upon the
adjusted cost and computed on the specific identification method and are
classified in other operating revenue, securities gains or losses, net.
The unrealized gains (losses) on securities available for sale, net of
deferred taxes, were $171,000 at March 31, 1996, compared to $580,000 at
December 31, 1995. The activity in the available for sale portfolio had
securities matured/called of $12,273,000 during the three months ended March 31,
1996. The proceeds from these securities were used primarily to fund the
purchase of securities held to maturity during the same period. There were no
gains or losses recognized from the proceeds of these securities and no
purchases were added to the available for sale portfolio during the same period.
The activity in the held to maturity portfolio during the three months
ended March 31, 1996, consisted of $1,250,000 matured/called and $16,801,000
purchased. There were no gains or losses recognized from the proceeds of these
securities.
9
10
Nonperforming Loans and Real Estate Owned
(dollars in thousands) March 31, 1996 December 31, 1995 % Change
-------------- ----------------- --------
Non-accrual loans $ 1,545 $ 3,232 (52.20)
Loans 90 days past due 26 106 (75.47)
Real estate owned 4,800 4,918 (2.40)
The Bank's non-accrual loans showed a decrease of 52.20% for the three
months ended March 31, 1996. Of the $3,232,000 at December 31, 1995, $175,000
was charged off, $222,000 was transferred to real estate owned, $1,345,000 was
received in payments and $79,000 was brought current and removed from
non-accrual status. Additions to non-accrual since December 31, 1995 total
$134,000. Of the $1,545,000 in non-accrual loans at March 31, 1996, $1,450,000
is secured by deeds of trust and $95,000 is secured by other collateral. The
largest group of loans in non-accrual status is to one borrower and its related
entities and total in aggregate $725,000 of which all are secured by real
estate, having an approximate loan to value ratio of 53%. Management has set a
specific reserve of $72,500 on the $725,000 and it is believed to be sufficient
to absorb any anticipated loss. The next largest non-accrual loan had a balance
of $292,000 and is secured by real estate and has a loan to value ratio of
approximately 99%. This loan has a specific reserve of $44,000. Two other
significant non-accrual loans in the amounts of $200,000 and $183,000,
respectively, were removed from non-accrual status in May 1996. The $200,000
loan was transferred to real estate owned and the $183,000 loan was paid in
full. Management feels that the current allowance for loan loss is adequate.
The Company considers a loan to be nonperforming when any one of the
following events occur: (a) any installment of principal or interest is 90 days
past due; or (b) the loan is placed on non-accrual status. The Company's policy
is to classify loans which are delinquent in interest or principal for a period
of 90 days as non-accrual loans unless management determines that the loan is
adequately collateralized and in the process of collection or other
circumstances exist which would justify the treatment of the loan as fully
collectable. Accrual of interest on loans and leases is discontinued when
management believes, after considering economic and business conditions, and
collection efforts, that the borrower's financial condition is such that
collection of interest is doubtful. Interest income is subsequently recognized
on non-accrual loans only to the extent cash payments are received or until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is no longer doubtful, in which case the credit is returned
to accrual status.
Under the provisions of SFAS No. 114, a loan is considered impaired when,
based on current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. Creditors are required to measure impairment of a loan based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
The Bank has defined impaired loans as individual loans or relationships of
$250,000 or more and not currently accruing interest. As permitted by these
standards, the Bank excludes from its calculations smaller balance, homogeneous
loans such as consumer installment loans, lines of credit, and direct finance
leases. In determining whether a loan is impaired or not, the Bank applies its
normal loan review procedures. Loans which the Bank expects to collect in full
and for which an insignificant delay, i.e., 45 days past due, or an
insignificant shortfall in amount of payments is anticipated are not considered
impaired. The Bank measures impairment on a loan-by-loan basis using either the
present value of expected future cash flows discounted at the loan's effective
interest rate, or the fair value of the collateral if the loan is collateral
dependent.
At March 31, 1996, the Bank had $1,016,000 in impaired loans and a related
loss allowance of $117,000. Of the $1,016,000 of impaired loans, $0 was measured
using the present value method and $1,016,000 was measured using the fair value
of collateral. The approximate average balance of impaired loans for the period
ended March 31, 1996 was $1,942,000. No income was recognized during the period
on impaired loans.
Loans that are 90 days or more past due decreased 75.47% during the three
months ended March 31, 1996. The total comprises one installment loan in the
amount of $5,000 and 14 overdraft protection lines totaling $20,000.
The Bank's total real estate owned decreased 2.40% to $4,800,000 at March
31, 1996, from $4,918,000 at December 31, 1995. Four related properties were
foreclosed and added to real estate owned in the aggregate
10
11
amount of $222,000 and subsequently sold in April 1996. No gains or losses were
recognized on this one transaction. A 60 unit manufactured housing complex
valued at $2,300,000 is in escrow. Other real estate owned properties total in
the aggregate $3,078,000 and consist of 161 acres of unimproved land in Orange
County, a commercial property in Lawndale, Ca., a gas station in Chino, Ca., two
theaters in Oceanside, Ca., and a condominium in Lomita, Ca. Reductions in real
estate owned during the first quarter came from the writedowns of $340,000
recognized due to additional anticipated closing costs. Real estate owned is
carried at the lower of cost or fair market value less estimated carrying costs
and costs of disposition. Cost is determined at the date of acquisition as the
result of a foreclosure sale and is equal to the receivable balance at that
date. If the cost (plus any liabilities assumed at foreclosure) exceeds the
appraised value, the carrying value of the property is written down to its fair
value. During the time the property is held, all related carrying costs and
losses on revaluation are expensed as incurred. Gains or losses on sales are
recorded in conformity with standards that apply to the accounting for sales of
real estate.
RESULTS OF OPERATIONS
Net Income
Net income increased 17.57% or $127,000 for the three months ended March
31, 1996 compared to the same period in 1995. Revenue from earning assets
decreased $52,000 for the three months ended March 31, 1996 compared to the
three months ended March 31, 1995 with the annualized yield increasing from
8.50% to 8.71%. Interest expense increased $142,000 with the annualized cost of
funds increasing from 2.80% to 3.12% comparing the three months ended March 31,
1996 to same period in 1995. Provision for loan losses decreased 52.00% or
$325,000, total other expenses decreased 5.36% or $306,000 and provision for
income taxes increased 43.37% or $458,000 when comparing the three months ended
March 31, 1996 to the same period in 1995.
Interest Income
Interest income decreased 0.66% while the annualized yield on average
earning assets increased to 8.71% from 8.50% when comparing March 31, 1996 to
March 31, 1995. The decrease in interest income is primarily due to the decrease
in average earning assets of 3.92%. Interest income on securities decreased
$517,000 which was directly related to the decrease in volume of securities
available for sale, as the Company sold securities from the available for sale
portfolio to offset the contraction of deposits experienced during 1995.
Interest income on loans increased $304,000 due to a slight increase in loan
volume and interest income on federal funds sold increased $161,000 due to the
increase in average federal funds sold during the three months ended March 31,
1996 compared to the same period in 1995. The following schedule provides
specific information regarding the components of interest income from earning
assets:
(dollars in thousands) March 31, 1996 March 31, 1995 % Change
- - ---------------------- -------------- -------------- --------
Average earning assets $359,263 $373,916 (3.92)
Interest income $ 7,783 $ 7,835 (0.66)
Annualized yield on average
earning assets 8.71% 8.50%
11
12
Interest Expense
Interest expense increased 8.26% or $142,000 for the three months ended
March 31, 1996 compared to the same period in 1995. Cost of funds increase is
primarily due to an increase in rates on time deposits that was used to curb the
contraction of deposits during 1995 and remain competitive. Average
interest-bearing liabilities decreased in the area of savings and
interest-bearing demand deposits as well as time deposits under $100,000.
Average time deposits of $100,000 and over increased when comparing the period
ended March 31, 1996 to March 31, 1995. The percent of lower cost non-interest
bearing demand deposits, savings deposits and interest-bearing demand deposits
to total deposits at March 31, 1996 was 77.25% compared to 78.50% at March 31,
1995. The Bank continues to maintain a favorable net interest margin. The
following schedule provides specific information regarding the components of
interest expense from interest-bearing liabilities:
(dollars in thousands) March 31, 1996 March 31, 1995 % Change
-------------- -------------- --------
Average interest-bearing
liabilities $ 239,942 $ 248,893 (3.60)
Interest expense $ 1,862 $ 1,720 8.26
Annualized cost of funds for
average interest-bearing
liabilities 3.12% 2.80%
Net interest margin
(net interest income divided by
average earning assets) 6.63% 6.63%
Provision for Loan Losses
The purpose of the provision for possible loan losses is to maintain
reserves at a level sufficient to cover possible future loan losses. Management
exercises its judgment in establishing loss reserves for loans which borrowers
may not be able to repay in the future. The Bank's current provision for loan
losses reflects an ongoing detailed evaluation of the known risks in the
portfolio and the risks inherent in the present general economic outlook. The
Bank maintains a problem loan list in order to better monitor these risks. This
list includes those loans that are identified as having varying degrees of risk
in excess of loans having a normal amount of risk (including watch credits). As
of March 31, 1996, the problem loan list contained loans totaling $11,850,000
compared to $20,113,000 at March 31, 1995. Management has a grading system that
designates a grade for each loan depending on the degree of risk and possibility
of loss inherent in each class of loan. This grading system drives the loan loss
reserve calculations. A percentage allocation of each loan balance is reserved
depending on the designated grade. Nonperforming loans (those loans on
non-accrual status and 90 days or more past due) are contained in the problem
loan list. As of March 31, 1996, the allowance for loan loss represented 204% of
nonperforming loans and 27% of total problem loans as compared to 45% and 18% at
March 31, 1995, respectively (see "Nonperforming Loans and Real Estate Owned"
herein).
SFAS No. 114, which was adopted January 1, 1995, requires that certain
calculations be prepared with respect to impaired loans. No additional provision
was required under SFAS No. 114 during the first quarter of 1996. The aggregate
total provision for loan loss on impaired loans was $116,000 for the quarter
ending March 31, 1996.
Management decreased the provision for possible loan losses during the
first quarter of 1996 compared to the same period in 1995 due to an adequate and
improved coverage ratio of nonperforming loans at March 31, 1996 (see
"Nonperforming Loans and Real Estates Owned" herein). Gross loan loss recoveries
for the quarter ending March 31, 1996 totaled $26,000 with gross loan charge
offs totaling $231,000 resulting in a net charge off of $205,000.
12
13
The following schedule provides more specific information relative to the
provision and allowance for possible loan loss:
(dollars in thousands) March 31, 1996 March 31, 1995 % Change
-------------- -------------- --------
Net charge-offs / (recoveries) $ 205 $ (256) 180.08
Provision for possible loan
losses 300 625 (52.00)
Allowance for possible loan losses
3,208 3,699 (13.27)
Allowance for possible loan
losses as a percentage of gross
loans 1.49% 1.78%
Allowance for possible loan
losses to nonperforming loans 204.20% 44.79%
Provision as a percentage of net
interest income 5.07% 10.22%
The following table displays the stratification of the $3,208,000 contained
in allowance for possible loan losses at March 31, 1996:
(dollars in thousands)
Loan Category March 31, 1996
------------- --------------
Real estate - construction and other $ 518
Commercial 715
Installment 89
General loan reserves 1,886
-------
Total $ 3,208
=======
Other Revenue
Other operating revenue is comprised of income from service charges and
other types of fees on deposit accounts, net gains on the sale of securities
available for sale, gross gains on the sale of real estate owned, and fees on
non-deposit account services. Service charges and fees increased due to an
increase in the charges assessed on certain deposit account activities. The
following schedule reflects the composition of other income and its percent of
change from the same period in 1995:
(dollars in thousands) March 31, 1996 March 31, 1995 % Change
-------------- -------------- --------
Service charges and fees $ 1,026 $ 991 3.53
Securities gains 0 11 --
Other operating revenue 275 278 (1.08)
--------- ---------
Total other revenue $ 1,301 $ 1,280 1.64
========= =========
13
14
Other Expenses
Other expenses are primarily non-interest expenses and are comprised of
several major categories: salaries and employee benefits, net occupancy expense,
furniture, fixtures and equipment expense and various other operating expenses.
Salaries and benefits decreased due to the restructuring program designed to
improve productivity which took place in September 1995. The Bank eliminated 41
full time positions and the result is a 16.31% decrease in salaries and employee
benefits. Occupancy expenses, net, decreased 5.93% due to a decrease in
furniture, fixture and equipment repairs and furniture, fixture and equipment
not capitalized. Other operating expenses increased 8.25% primarily due to the
merger costs incurred during the first quarter of 1996 of $214,000 (see "Mergers
and Acquisitions" herein), and an increase of $180,000 in real estate owned
costs compared to the same period in 1995. Conversely, federal deposit insurance
premiums decreased $207,000 due to the new rate schedule set during the end of
1995. The following schedule reflects the composition of other expenses and its
percent of change from the same period in 1995:
(dollars in thousands) March 31, 1996 March 31, 1995 % Change
-------------- -------------- --------
Salaries and employee benefits $ 2,298 $ 2,746 (16.31)
Occupancy, net 682 725 (5.93)
Other operating expenses 2,428 2,243 8.25
-------- --------
Total other expenses $ 5,408 $ 5,714 (5.36)
======== ========
Provision for Income Taxes
The provision for income taxes increased 99.40% primarily due to the
increase in net income before provision of 43.37%. The increase in the effective
tax rate for the three months ended March 31, 1996 was 43.86% compared to 31.53%
at March 31, 1995. This increase is due to the nondeductible expenses related to
merger costs and tax exempt income reductions. The following schedule provides
specific information on the provision for income taxes:
(dollars in thousands) March 31, 1996 March 31, 1995 % Change
-------------- -------------- --------
Provision for income taxes $ 664 $ 333 99.40
Net income before provision $1,514 $1,056 43.37
Effective tax rate (3 months) 43.86% 31.53%
Performance Ratios
There are three key ratios which are indications of earnings performance,
which are presented as follows:
March 31, 1996 March 31, 1995
-------------- --------------
Annualized Period to date Annualized Period to date
---------- -------------- ---------- --------------
Return on average
assets .80% .20% .68% .17%
Return on average
equity 6.60% 1.64% 6.41% 1.58%
Dividends as a
percentage of
net income -- 42.35% -- 88.01%
14
15
PART II
Item 1. Legal Proceeding
Home Interstate Bancorp and its subsidiary are subject to legal actions
threatened or filed which arise from the normal course of business. Management
believes that the eventual outcome of all currently pending legal proceedings
against the Company or its subsidiary will not be material to the Company's or
the subsidiary's financial position or results of operations.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of matters to a vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Not applicable.
15
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this form to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated May 14, 1996 HOME INTERSTATE BANCORP (Registrant)
By /s/ Keith W. Barnes
-----------------------------
Keith W. Barnes
Senior Vice President and
Chief Financial Officer
Chief Accounting Officer
16