<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
Commission file number 0-7818
--------
INDEPENDENT BANK CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2032782
- -------------------------------------- ---------------------------------------
(State or jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
230 West Main Street, P.O. Box 491, Ionia, Michigan 48846
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(616) 527-9450
--------------
(Registrant's telephone number, including area code)
NONE
- --------------------------------------------------------------------------------
Former name, address and fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all documents
and reports required to be filed by Sections 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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 17, 1996
- ------------------------------------ -----------------------------------------
Common stock, par value $1 2,861,399
<PAGE> 2
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number(s)
---------
PART I - Financial Information
---------------------
<S> <C> <C>
Item 1. Consolidated Statements of Financial Condition
September 30, 1996 and December 31, 1995 2
Consolidated Statements of Operations
Three- and nine-month periods ended September 30, 1996 and 1995 3
Consolidated Statements of Cash Flows
Nine-month periods ended September 30, 1996 and 1995 4
Consolidated Statements of Shareholders' Equity
Nine-month periods ended September 30, 1996 and 1995 5
Notes to Interim Consolidated Financial Statements
Three- and nine-month periods ended September 30, 1996 and 1995 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-15
PART II - Other Information
-----------------
Item 6. Exhibits & Reports on Form 8-K 16
</TABLE>
<PAGE> 3
Part I.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------- --------------
(unaudited)
-------------- --------------
<S> <C> <C>
Assets
Cash and due from banks $ 26,601,000 $ 17,208,000
Securities available for sale 122,487,000 87,553,000
Securities held to maturity (fair value of $27,698,000 at
September 30,1996; $29,031,000 at December 31, 1995) 26,874,000 27,906,000
Federal Home Loan Bank stock, at cost 10,198,000 7,710,000
Loans held for sale 10,389,000 16,047,000
Loans
Commercial and agricultural 141,747,000 108,879,000
Real estate mortgage 310,079,000 225,900,000
Installment 113,592,000 83,265,000
-------------- --------------
Total Loans 565,418,000 418,044,000
Allowance for loan losses (6,720,000) (5,243,000)
-------------- --------------
Net Loans 558,698,000 412,801,000
Property and equipment, net 16,624,000 9,931,000
Accrued income and other assets 21,281,000 10,991,000
-------------- --------------
Total Assets $ 793,152,000 $ 590,147,000
============== ==============
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing $ 68,685,000 $ 46,168,000
Savings and NOW 263,841,000 215,336,000
Time 209,255,000 150,120,000
-------------- --------------
Total Deposits 541,781,000 411,624,000
Federal funds purchased 37,100,000 13,400,000
Other borrowings 153,859,000 110,894,000
Accrued expenses and other liabilities 9,679,000 7,204,000
-------------- --------------
Total Liabilities 742,419,000 543,122,000
-------------- --------------
Shareholders' Equity
Preferred stock, no par value--200,000 shares authorized;
none outstanding
Common stock, $1.00 par value--14,000,000 shares authorized;
issued and outstanding: 2,861,399 shares at September 30, 1996
and 2,704,038 shares at December 31, 1995 2,861,000 2,704,000
Capital surplus 24,256,000 19,924,000
Retained earnings 23,447,000 23,683,000
Net unrealized gain on securities available for sale, net of
related tax effect 169,000 714,000
-------------- --------------
Total Shareholders' Equity 50,733,000 47,025,000
-------------- --------------
Total Liabilities and Shareholders' Equity $ 793,152,000 $ 590,147,000
============== ==============
</TABLE>
See notes to interim consolidated financial statements.
2
<PAGE> 4
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------- ------------- --------------- -------------
(unaudited) (unaudited)
-------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $ 13,498,000 $ 9,976,000 $ 35,587,000 $ 27,370,000
Securities
Taxable 1,905,000 1,402,000 4,873,000 4,572,000
Tax-exempt 571,000 447,000 1,502,000 1,328,000
Other investments 287,000 116,000 636,000 264,000
------------- ------------- --------------- -------------
Total Interest Income 16,261,000 11,941,000 42,598,000 33,534,000
------------- ------------- --------------- -------------
Interest Expense
Deposits 4,480,000 3,169,000 11,598,000 9,193,000
Other borrowings 2,503,000 1,584,000 5,950,000 3,688,000
------------- ------------- --------------- -------------
Total Interest Expense 6,983,000 4,753,000 17,548,000 12,881,000
------------- ------------- --------------- -------------
Net Interest Income 9,278,000 7,188,000 25,050,000 20,653,000
Provision for loan losses 253,000 159,000 942,000 477,000
------------- ------------- --------------- -------------
Net Interest Income After
Provision for Loan Losses 9,025,000 7,029,000 24,108,000 20,176,000
------------- ------------- --------------- -------------
Non-interest Income
Service charges on deposit accounts 630,000 492,000 1,641,000 1,439,000
Net gains (losses) on asset sales
Real estate mortgage loans 363,000 301,000 1,251,000 405,000
Securities 16,000 (24,000) (130,000) (110,000)
Other income 403,000 288,000 1,219,000 922,000
------------- ------------- --------------- -------------
Total Non-interest Income 1,412,000 1,057,000 3,981,000 2,656,000
------------- ------------- --------------- -------------
Non-interest Expense
Salaries and employee benefits 4,240,000 3,186,000 11,404,000 8,903,000
Occupancy, net 563,000 405,000 1,458,000 1,135,000
Furniture and fixtures 553,000 341,000 1,337,000 975,000
Other expenses 2,278,000 1,646,000 5,605,000 4,884,000
------------- ------------- --------------- -------------
Total Non-interest Expense 7,634,000 5,578,000 19,804,000 15,897,000
------------- ------------- --------------- -------------
Income Before Federal Income Tax 2,803,000 2,508,000 8,285,000 6,935,000
Federal income tax expense 826,000 713,000 2,466,000 1,948,000
------------- ------------- --------------- -------------
Net Income $ 1,977,000 $ 1,795,000 $ 5,819,000 $ 4,987,000
============= ============= =============== =============
Net Income Per Share $ .69 $ .63 $ 2.02 $ 1.74
Dividends Per Share
Declared $ .25 $ .22 $ .74 $ .66
Paid .25 .22 .71 .62
</TABLE>
See notes to interim consolidated financial statements.
3
<PAGE> 5
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended
September 30,
1996 1995
-------------- --------------
(unaudited)
---------------------------------------
<S> <C> <C>
Net Income $ 5,819,000 $ 4,987,000
Adjustments to Reconcile Net Income
to Net Cash from Operating Activities
Proceeds from sales of loans held for sale 78,515,000 33,439,000
Disbursements for loans held for sale (69,135,000) (31,883,000)
Provision for loan losses 942,000 477,000
Deferred loan fees 158,000 23,000
Depreciation, amortization of intangible assets
and premiums and accretion of discounts on
investment securities and loans 1,899,000 1,679,000
Net losses on sales of securities 130,000 110,000
Net gains on sales of real estate mortgage loans (1,251,000) (405,000)
(Increase) decrease in accrued income and other assets (7,784,000) (751,000)
Increase in accrued expenses and other liabilities 1,114,000 1,993,000
-------------- --------------
Total Adjustments 4,588,000 4,682,000
-------------- --------------
Net Cash from Operating Activities 10,407,000 9,669,000
-------------- --------------
Cash Flow from Investing Activities
Proceeds from sales of securities available for sale 15,907,000 13,152,000
Proceeds from maturities of securities held to maturity 8,898,000 10,925,000
Principal payments received on securities available for sale 6,785,000 863,000
Principal payments received on securities held to maturity 601,000 3,867,000
Purchases of securities available for sale (30,839,000)
Purchases of securities held to maturity (295,000) (15,715,000)
Portfolio loans made to customers net of principal payments received (63,355,000) (75,788,000)
Acquisition of branch office, less cash received 13,949,000
Acquisition of bank, less cash received 9,478,000
Capital expenditures (2,607,000) (1,133,000)
-------------- --------------
Net Cash from Investing Activities (55,427,000) (49,880,000)
-------------- --------------
Cash Flow from Financing Activities
Net decrease in total deposits (1,378,000) (15,371,000)
Net increase in short-term borrowings 20,165,000 6,663,000
Proceeds from Federal Home Loan Bank advances 45,000,000 76,000,000
Payments of Federal Home Loan Bank advances (17,000,000) (30,000,000)
Proceeds from issuance of long-term borrowings 10,000,000
Retirement of debt (500,000)
Dividends paid (1,933,000) (1,758,000)
Proceeds from issuance of common stock 59,000 81,000
Repurchase of common stock (755,000)
-------------- --------------
Net Cash from Financing Activities 54,413,000 34,860,000
-------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents 9,393,000 (5,351,000)
Cash and Cash Equivalents at Beginning of Period 17,208,000 23,719,000
-------------- --------------
Cash and Cash Equivalents at End of Period $ 26,601,000 $ 18,368,000
============== ==============
Cash paid during the period for:
Interest $ 16,935,000 $ 12,530,000
Income taxes 2,990,000 2,150,000
Transfer of loans to other real estate 808,000 367,000
</TABLE>
See notes to interim consolidated financial statements.
4
<PAGE> 6
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Nine months ended
September 30
1996 1995
------------- -------------
(unaudited)
---------------------------------
<S> <C> <C>
Balance at beginning of period $ 47,025,000 $ 40,311,000
Net income 5,819,000 4,987,000
Cash dividends declared (2,125,000) (1,861,000)
Issuance of common stock 559,000 430,000
Repurchase of common stock (755,000)
Net change in unrealized gain on securities
available for sale, net of related tax effect (545,000) 1,794,000
------------- -------------
Balance at end of period $ 50,733,000 $ 44,906,000
============= =============
</TABLE>
See notes to interim consolidated financial statements.
5
<PAGE> 7
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. In the opinion of management of the Registrant, the accompanying unaudited
consolidated financial statements contain all the adjustments (consisting only
of normal recurring accruals) necessary to present fairly the consolidated
financial condition of the Registrant as of September 30, 1996 and December 31,
1995, and the results of operations for the three- and nine-month periods ended
September 30, 1996 and 1995.
2. Management's assessment of the allowance for loan losses is based on an
evaluation of the loan portfolio, recent loss experience, current economic
conditions and other pertinent factors. Loans on non-accrual status, past due
more than 90 days, or restructured amounted to $3,451,000 at September 30,
1996, and $2,560,000 at December 31, 1995. (See Management's Discussion and
Analysis of Financial Condition and Results of Operations).
3. The provision for income taxes represents federal income tax expense
calculated using annualized rates on taxable income generated during the
respective periods.
4. The results of operations for the nine-month period ended September 30,
1996, are not necessarily indicative of the results to be expected for the full
year.
5. The Company adopted Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights", effective January 1, 1996.
(See Management's Discussion and Analysis of Financial Condition and Results
of Operations).
6
<PAGE> 8
MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
This section presents Management's discussion and analysis of financial
condition and results of operation for the Registrant and its bank subsidiaries
(the "Banks"). Its purpose is to provide additional information that may be
necessary to assess the consolidated financial statements contained elsewhere
in this report. This section should be read in conjunction with the
Registrant's 1995 Annual Report on Form 10-K.
NBC ACQUISITION
The Registrant consummated its acquisition of the outstanding common stock
of North Bank Corporation (the "NBC Acquisition") as of June 1, 1996. At that
date, NBC's assets totaled $151.9 million and its loans and deposits totaled
$84.5 million and $131.6 million, respectively. Cash consideration and
goodwill totaled approximately $15.8 million and $7.5 million, respectively.
NBC's banking subsidiary consolidated with an existing subsidiary of the
Registrant during the third-quarter of 1996.
The unaudited pro forma combined results for the Registrant and NBC set
forth below are presented as if the acquisition had occurred at the beginning of
the periods presented.
<TABLE>
<CAPTION>
Nine months ended
September 30,
1996 1995
---------- ----------
<S> <C> <C>
Revenues, net $51,700,000 $45,800,000
Net income 5,600,000 4,600,000
Net income per common share $1.93 $1.60
</TABLE>
PENDING ACQUISITION
On August 20, 1996, the Registrant announced that one of the Banks had
agreed to purchase certain loans and real and personal property and assume
deposit liabilities associated with eight branch facilities, located in
Michigan's thumb region ("Pending Acquisition").
At September 30, 1996, loans to be purchased and deposit liabilities to be
assumed totaled $21.5 million and $121.5 million, respectively. The estimated
purchase price based on September 30, 1996, financial information is
anticipated to be approximately $10.2 million, and goodwill is expected to total
approximately $8.4 million. The transaction is subject to regulatory approval
and will likely be completed during December of 1996.
The Company expects to raise additional tier 1 capital to assist the
Registrant in maintaining its capital ratios following consummation of the
Pending Acquisition.
7
<PAGE> 9
FINANCIAL CONDITION
SUMMARY
The Registrant's loans, excluding loans held for sale ("Portfolio
Loans"), totaled $565.4 million at September 30, 1996, compared to $418.0
million at December 31, 1995. The NBC Acquisition and an increase in
rate-sensitive real estate mortgage loans account for the majority of the
$147.4 million increase in Portfolio Loans. (See "Asset/liability management.")
Excluding the impact of the NBC Acquisition, the increase in Portfolio
Loans has been funded by increased federal funds purchased and advances from
the Federal Home Loan Bank ("FHLB"). The use of non-deposit sources of funds
is structured to complement the Banks' interest-rate risk profile and the cost
of such borrowings is a principal consideration in the Banks' deposit pricing
strategies. (See "Asset/liability management" and "Liquidity and capital
resources.")
ASSET QUALITY
Management believes that its decentralized structure provides the Banks
with important advantages in serving the needs of its principal lending
markets. Although the Management and Board of Directors of each of the Banks
retain authority and responsibility for all credit decisions, each of the Banks
has adopted uniform underwriting standards.
Management believes that the Registrant's Corporate Loan Committee and the
centralization of loan review and other credit services ensures the consistent
application of such underwriting standards and provides the controls that are
consistent with the needs of the Registrant's decentralized structure.
Non-performing loans totaled $3,451,000 and non-performing assets totaled
$4,407,000 at September 30, 1996. The increase in non-performing loans and
assets during 1996 were the result of the NBC Acquisition.
8
<PAGE> 10
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Non-accrual loans $2,089,000 $1,886,000
Loans 90 days or more past due and
still accruing interest 1,159,000 427,000
Restructured loans 203,000 247,000
---------- ----------
Total non-performing loans 3,451,000 2,560,000
Other real estate 956,000 760,000
---------- ----------
Total non-performing assets $4,407,000 $3,320,000
========== ==========
As a percent of total loans
Total non-performing loans 0.61% 0.61%
Total non-performing assets 0.78% 0.79%
</TABLE>
In the absence of the NBC Acquisition, non-performing loans would have
declined to .52% of total loans, from .61% at December 31, 1995. During that
nine-month period, total non-performing assets would have declined to .68% of
total loans from .79% at December 31, 1995.
Impaired loans totaled approximately $2,200,000 and $3,200,000 at
September 30, 1996 and December 31, 1995, respectively. In addition to certain
non-performing loans, such impaired loans include commercial and agricultural
loans totaling $800,000 and $1,800,000 at September 30, 1996 and December 31,
1995, respectively that have been separately identified as impaired. Certain
impaired loans with a balance of approximately $1,000,000 and $700,000 had
specific allocations of the allowance for loan losses totaling approximately
$125,000 and $250,000 at September 30, 1996 and December 31, 1995,
respectively. The Banks' average investment in impaired loans was
approximately $2,500,000 and $2,000,000 during the nine-month periods ended
September 30, 1996 and 1995, respectively. Interest income recognized on
impaired loans during the nine-month periods ended September 30, 1996 and 1995,
totaled approximately $110,000 and $40,000, respectively.
Management's assessment of the allowance for loan losses is based on the
amount and composition of the loan portfolio, an evaluation of specific
credits, the historical loss experience of each portfolio as well as the level
of non-performing and impaired loans. Partially based upon the application of
its allocation methodology to the loans associated with the NBC Acquisition,
Management elected to increase the provision for loan losses to $942,000 during
the nine months ended September 30, 1996, from $477,000 during the comparable
period of 1995. At September 30, 1996, approximately 43% of the allowance for
loan losses was allocated to specific loans or loan portfolios compared to 45%
at December 31, 1995.
9
<PAGE> 11
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
--------------------------------- --------------------------
Percent of Percent of
Allowance Loans to Allowance Loans to
Amount Total Loans Amount Total Loans
----------- ---------------- ---------- --------------
<S> <C> <C> <C> <C>
Commercial and
agricultural $1,761,000 25.1% $1,612,000 26.0%
Real estate mortgage 229,000 54.8 162,000 54.0
Installment 879,000 20.1 597,000 20.0
Unallocated 3,851,000 2,872,000
----------- ----- ---------- -----
Total $6,720,000 100.0% $5,243,000 100.0%
=========== ===== ========== =====
</TABLE>
During the nine-month period in 1996, loans charged against the allowance,
net of recoveries ("Net Loan Losses"), were $270,000, compared to $282,000
during the comparable period of 1995. On an annual basis, loans charged
against the allowance, net of recoveries, were equal to 0.11% and 0.10% of
average Portfolio Loans during the nine month periods ended September 30, 1996
and 1995, respectively. The NBC Acquisition accounts for $90,000 of the Net
Loan Losses in 1996.
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Nine months ended
September 30,
1996 1995
----------- -----------
<S> <C> <C>
Balance at beginning of period $5,243,000 $5,054,000
Additions (deduction)
Allowance on loans acquired 930,000
Provision charged to operating expense 942,000 477,000
Recoveries credited to allowance 395,000 245,000
Loans charged against the allowance (665,000) (527,000)
---------- ----------
Balance at end of period $6,720,000 $5,249,000
========== ==========
Net loans charged against the allowance to
average Portfolio Loans (annualized) 0.11% 0.10%
Allowance for loan losses as a percent of
non-performing loans 195% 164%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Management views its ability to profitably deploy capital or otherwise
maintain financial leverage as a prerequisite to the Registrant's continued
success. Management's strategies to maintain financial leverage include the
acquisition of other financial institutions as well as the Banks' ability to
profitably fund Portfolio Loans with advances from the FHLB and other
non-deposit funding sources ("Alternate Loan Funding Strategy"). (See
"Asset/liability management.") The
10
<PAGE> 12
Registrant's dividend policies are also important components of Management's
strategies to maintain financial leverage.
<TABLE>
<CAPTION>
CAPITAL RATIOS
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Equity capital 6.40% 7.97%
Tangible equity capital 5.23 7.58
Primary capital 7.18 8.78
Tangible primary capital 6.04 8.39
Risk-based capital 9.44 12.75
</TABLE>
Notwithstanding a $545,000 decline in net unrealized gains on securities
available for sale, after consideration of related taxes, shareholders' equity
increased by $3.7 million during the nine months ended September 30, 1996. The
increase reflects the retention of earnings as well as the value of common
shares issued pursuant to the Registrant's Incentive Share Grant Plan and its
various stock option plans.
As a result of the NBC Acquisition, shareholders' equity declined to 6.40%
of total assets at September 30, 1996, from 7.97% at December 31, 1995. In the
absence of that transaction, however, shareholders' equity would have been
largely unchanged from December 31, 1995. (See "Pending Acquisition".)
ASSET/LIABILITY MANAGEMENT
The retention of 15- and 30-year fixed-rate real estate mortgage loans is
not consistent with Management's Alternate Loan Funding Strategy or the Banks'
asset/liability needs. Accordingly, the majority of such loans are sold to
mitigate exposure to changes in interest rates. Adjustable-rate and balloon
real estate mortgage loans may, however, be profitably funded with FHLB advances
and the retention of such loans is a principal focus of Management's Internal
Growth Strategies. (See "Non-interest income".)
The Bank's competitive position within many of the markets served by the
branch networks limits the ability to materially increase deposits without
adversely impacting the weighted-average cost of core deposits. Accordingly,
the Banks continue to employ pricing tactics that are intended to enhance the
value of core deposits and use federal funds and other borrowings, principally
advances from the FHLB to fund increases in Portfolio Loans. (See "Net
interest income".) At September 30, 1996, advances from the FHLB totaled
$131.0 million.
The Banks maintain diversified investment portfolios that are consistent
with Management's Alternate Loan Funding Strategy and the asset/liability and
liquidity needs of the Banks. Such portfolios are comprised of securities
issued by the U.S. Treasury and government sponsored agencies as well as
obligations of states and political subdivisions and mortgage-backed
securities. Sales of securities available for sale are dependent upon
Management's assessment of reinvestment opportunities and the Banks'
asset/liability management needs. (See "Non-interest income.")
The following table sets forth certain information with respect to the
securities portfolios, including gross unrealized gains and losses:
<TABLE>
<CAPTION>
Unrealized
Amortized ---------- Fair
SECURITIES Cost Gains Losses Value
--------- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Securities available for sale
September 30, 1996 ..................... $122,231 $ 980 $ 724 $122,487
December 31, 1995 ...................... 86,471 1,538 456 87,553
Securities held to maturity
September 30, 1996 ..................... $26,874 $ 891 $ 67 $ 27,698
December 31, 1995 ...................... 27,906 1,157 32 29,031
</TABLE>
11
<PAGE> 13
RESULTS OF OPERATIONS
SUMMARY
Net income increased by 10% to $1,977,000 during the three months ended
September 30, 1996, from $1,795,000 during the comparable period of 1995.
During the nine-month period in 1996, net income totaled $5,819,000 compared to
$4,987,000 in 1995. The increases are the result of increases in net interest
income and non-interest income that were partially offset by increases in the
provision for loan losses, non-interest expense and federal income tax expense.
Key performance ratios for the three- and nine-month periods ended
September 30, 1996 and 1995, are set forth below.
KEY PERFORMANCE RATIOS
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
1996 1995 1996 1995
--------------------- -----------------------
<S> <C> <C> <C> <C>
Return on
Average assets 1.01% 1.28% 1.16% 1.26%
Average equity 15.58 16.07 15.78 15.60
Earnings per common share(1) $ .69 $ .63 $ 2.02 $ 1.74
</TABLE>
(1) Adjusted to give retroactive effect to 5% stock dividends in 1996 and 1995.
NET INTEREST INCOME
Net interest income increased by $2,090,000 to $9,278,000 during the three
months ended September 30, 1996, and by $4,397,000 to $25,050,000 during the
nine-month period. The increases principally reflect increases in average
earning assets that resulted from the NBC Acquisition and the implementation of
Management's Alternate Loan Funding Strategy.
Although the NBC Acquisition and Management's Alternate Loan Funding
Strategy have a positive impact on net interest income and have contributed to
the increase in the Registrant's return on average equity, such strategies have
an adverse impact on tax equivalent net interest income as a percent of average
earning assets.
Tax equivalent net interest income was equal to 5.23% and 5.45% during the
three- and nine-month periods ended September 30, 1996. The declines from the
comparable periods of 1995 reflect the NBC Acquisition, including interest paid
on the debt that was used to finance the transaction, as well as the average
cost of FHLB advances relative to the cost of the Banks' core deposits. (See
"Asset/liability management.")
Management expects that the consummation of the Pending Acquisition will
initially reduce loans as a percent of average earning assets and will have a
corresponding negative impact on the Company's tax equivalent net interest
income as a percent of average earning assets. Management expects overtime to
reinvest the assets into loans following consummation of the transaction.
12
<PAGE> 14
NET INTEREST INCOME AND SELECTED RATIOS
<TABLE>
<CAPTION>
Three months Nine Months
ended September 30 ended September 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Average earning assets (In thousands) $727,854 $524,797 $634,128 $501,274
As a percent of average earning assets
Tax equivalent interest income 9.05% 9.20% 9.14% 9.13%
Interest expense 3.82 3.59 3.70 3.44
Tax equivalent net interest income 5.23 5.61 5.45 5.69
Average earning assets as a
percent of average assets 93.24% 94.51% 94.25% 94.34%
Free-funds ratio 11.18% 11.74% 11.80% 12.41%
</TABLE>
NON-INTEREST INCOME
Non-interest income increased during both the three- and nine-month
periods ended September 30, 1996. Non-interest income increased by $355,000 to
$1,412,000 during the three-month period and by $1,325,000 to $3,981,000 during
the nine-month period. The increases are principally the result of increases
in net gains on the sale of real estate mortgage loans and the impact of the
NBC Acquisition.
Net gains on the sale of real estate mortgage loans totaled $363,000
during the three months ended September 30, 1996, compared to $301,000 during
the comparable period of 1995. During the nine-month periods in 1996 and 1995,
such net gains totaled $1,251,000 and $405,000, respectively. Although the
majority of the increase in such net gains reflects favorable economic
conditions and an increase in loans sold, Management attributes 45% of the
increase to the impact of SFAS #122 and the sale of related servicing rights on
loans totaling approximately $28.8 million. A year earlier, the related
servicing rights were sold on loans totaling approximately $11.9 million. (See
"Statements of Financial Accounting Standards.")
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Real estate mortgage loan
originations $57,400,000 $55,900,000 $166,100,000 $118,100,000
Real estate mortgage loan sales 20,700,000 18,700,000 80,000,000 33,400,000
Net gains on the sale of real
estate mortgage loans 363,000 301,000 1,251,000 405,000
Net gains as a percent of real
estate mortgage loans sold 1.75% 1.61% 1.56% 1.21%
</TABLE>
13
<PAGE> 15
Consistent with Management's Alternate Loan Funding Strategy, The Banks'
retain the majority of adjustable-rate and balloon real estate mortgage loans.
(See "Asset/liability management.") Accordingly, the volume of loans sold is
dependent upon the Banks' ability to originate real estate mortgage loans as
well as consumer demand for fixed-rate loans. Net gains on the sale of loans
are also dependent upon economic and competitive factors as well as the Banks'
ability to effectively manage exposure to changes in interest rates.
The Banks realized net gains of $16,000 on the sale of securities
available for sale during the three months ended September 30, 1996, compared
to net losses of $24,000 during the comparable period of 1995. During the
nine-month periods in 1996 and 1995, the Banks realized net losses of $130,000
and $110,000, respectively. (See "Asset/liability management.")
SALES OF SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Nine months ended
September 30,
1996 1995
----------- -----------
<S> <C> <C>
Proceeds $15,907,000 $13,152,000
=========== ===========
Gross gains $ 44,000 $ 7,000
Gross losses (174,000) (117,000)
----------- -----------
Net losses $ (130,000) $ (110,000)
=========== ===========
</TABLE>
NON-INTEREST EXPENSE
Non-interest expense totaled $7,634,000 during the three months ended
September 30, 1996, compared to $5,578,000 during the comparable period of
1995. During the nine-month periods in 1996 and 1995, non-interest expense
totaled $19,804,000 and $15,897,000, respectively. The NBC Acquisition
accounts for approximately $1,300,000 and $1,700,000 of the increase in
non-interest expense during the three- and nine-month periods, respectively.
Costs associated with the origination and sale of real estate mortgage
loans also accounts for a substantial portion of the increase in non-interest
expense. Management estimates that such costs, including, but not limited to,
commissions and other variable expenses, account for approximately 35% of the
increase in total non-interest expense during the nine month period. Costs
associated with new branch facilities, a write down of other real estate as
well as the introduction of the new "EZ Money" check card and the related ATM
conversion also contributed to the increase in non-interest expense.
A reduction in FDIC insurance expense, however, offset a portion of the
increase in total non-interest expense. During the three months ended
September 30, 1996, the Banks' insurance assessment totaled $64,000 compared to
$10,000 in 1995. The Banks' insurance assessment for the nine-month periods
in 1996 and 1995 totaled $92,000 and $454,000, respectively.
14
<PAGE> 16
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights," ("SFAS #122") effective January 1,
1996. SFAS #122 requires the Banks to recognize as separate assets the rights
to service mortgage loans for others that have been acquired through either a
purchase or origination of a loan. The fair value of capitalized originated
mortgage servicing rights has been determined based on market value quotes for
similar servicing. These mortgage servicing rights are amortized in proportion
to and over the period of estimated net loan servicing income.
SFAS #122 also require the Banks to assess these mortgage servicing rights
for impairment based on the fair value of those rights. For purposes of
measuring impairment, the risk characteristics used by the Banks include the
underlying loans' interest rates, term of loan and loan types. The Banks had
no valuation allowance relating to impairment at September 30, 1996.
The Banks capitalized approximately $258,000 of originated servicing
rights during the nine months ended September 30, 1996, of which approximately
$34,000 has been amortized.
The Company also adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," ("SFAS #123"), effective
January 1, 1996. SFAS #123 encourages companies to adopt a fair value method
of accounting for stock compensation plans. Those companies not adopting a
fair value method are required to make pro-forma disclosures of net income and
earnings per share, on an annual basis, as if they had adopted the fair value
accounting method. Management has elected the pro-forma disclosure method and
will do so on an annual basis.
15
<PAGE> 17
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibit Number & Description
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K/A was filed August 9, 1996 amending an
8-K previously filed on June 13, 1996.
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date October 17, 1996 By s/William R. Kohls
---------------- -------------------------------------
William R. Kohls, Principal Financial
Officer
Date October 17, 1996 By s/James J. Twarozynski
---------------- -------------------------------------
James J. Twarozynski, Principal
Accounting Officer
17
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page
- ------- ----------- ----
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 26,601
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 122,487
<INVESTMENTS-CARRYING> 26,874
<INVESTMENTS-MARKET> 27,698
<LOANS> 565,418
<ALLOWANCE> 6,720
<TOTAL-ASSETS> 793,152
<DEPOSITS> 541,781
<SHORT-TERM> 183,459
<LIABILITIES-OTHER> 9,679
<LONG-TERM> 7,500
0
0
<COMMON> 2,861
<OTHER-SE> 47,872
<TOTAL-LIABILITIES-AND-EQUITY> 793,152
<INTEREST-LOAN> 35,587
<INTEREST-INVEST> 6,375
<INTEREST-OTHER> 636
<INTEREST-TOTAL> 42,598
<INTEREST-DEPOSIT> 11,598
<INTEREST-EXPENSE> 17,548
<INTEREST-INCOME-NET> 25,050
<LOAN-LOSSES> 942
<SECURITIES-GAINS> (130)
<EXPENSE-OTHER> 19,804
<INCOME-PRETAX> 8,285
<INCOME-PRE-EXTRAORDINARY> 5,819
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,819
<EPS-PRIMARY> 2.02
<EPS-DILUTED> 2.02
<YIELD-ACTUAL> 5.45
<LOANS-NON> 2,089
<LOANS-PAST> 1,159
<LOANS-TROUBLED> 203
<LOANS-PROBLEM> 2,200
<ALLOWANCE-OPEN> 5,243
<CHARGE-OFFS> 665
<RECOVERIES> 395
<ALLOWANCE-CLOSE> 6,720
<ALLOWANCE-DOMESTIC> 2,869
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,851
</TABLE>
