<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 JUNE 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 August 13, 1996
- --------------------------- --------------------------------------
Common stock, par value $1 2,725,872
<PAGE> 2
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number(s)
<S> <C> <C>
PART I - Financial Information
Item 1. Consolidated Statements of Financial Condition
June 30, 1996 and December 31, 1995 2
Consolidated Statements of Operations
Three- and six-month periods ended June 30, 1996 and 1995 3
Consolidated Statements of Cash Flows
Six-month periods ended June 30, 1996 and 1995 4
Consolidated Statements of Shareholders' Equity
Six-month periods ended June 30, 1996 and 1995 5
Notes to Interim Consolidated Financial Statements
Three- and six-month periods ended June 30, 1996 and 1995 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-14
PART II - Other Information
Item 4. Submission of Matters to a Vote of Security-Holders 15
Item 6. Exhibits & Reports on Form 8-K 15
</TABLE>
<PAGE> 3
Part I.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(unaudited)
----------- ------------
<S> <C> <C>
Assets
Cash and Cash Equivalents
Cash and due from banks $ 26,324,000 $ 17,208,000
Federal funds sold 6,100,000
----------- -----------
Total Cash and Cash Equivalents 32,424,000 17,208,000
----------- -----------
Securities available for sale 128,322,000 87,553,000
Securities held to maturity (fair value of $27,532,000 at June 26,775,000 27,906,000
30,1996; $29,031,000 at December 31, 1995)
Federal Home Loan Bank stock, at cost 9,208,000 7,710,000
Loans held for sale 8,281,000 16,047,000
Loans
Commercial and agricultural 134,166,000 108,879,000
Real estate mortgage 291,348,000 225,900,000
Installment 114,704,000 83,265,000
----------- -----------
Total Loans 540,218,000 418,044,000
Allowance for loan losses (6,677,000) (5,243,000)
----------- -----------
Net Loans 533,541,000 412,801,000
Property and equipment, net 15,820,000 9,931,000
Accrued income and other assets 22,744,000 10,991,000
----------- -----------
Total Assets $ 777,115,000 $ 590,147,000
=========== ===========
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing $ 68,084,000 $ 46,168,000
Savings and NOW 273,473,000 215,336,000
Time 209,017,000 150,120,000
----------- -----------
Total Deposits 550,574,000 411,624,000
Federal funds purchased 21,850,000 13,400,000
Other borrowings 127,150,000 110,894,000
Accrued expenses and other liabilities 28,136,000 7,204,000
----------- -----------
Total Liabilities 727,710,000 543,122,000
----------- -----------
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: 2,724,822 shares at June 30, 1996
and 2,704,038 shares at December 31, 1995 2,725,000 2,704,000
Capital surplus 20,442,000 19,924,000
Retained earnings 26,112,000 23,683,000
Net unrealized gain on securities available for sale, net of
related tax effect 126,000 714,000
----------- -----------
Total Shareholders' Equity 49,405,000 47,025,000
----------- -----------
Total Liabilities and Shareholders' Equity $ 777,115,000 $ 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 Six Months Ended
June 30, June 30,
1996 1995 1996 1995
-------------- -------------- ------------- ------------
(unaudited) (unaudited)
--------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $11,691,000 $ 9,115,000 $ 22,089,000 $ 17,394,000
Securities
Taxable 1,643,000 1,544,000 2,968,000 3,171,000
Tax-exempt 476,000 443,000 931,000 881,000
Other investments 139,000 79,000 349,000 147,000
----------- ----------- ------------ ----------
Total Interest Income 13,949,000 11,181,000 26,337,000 21,593,000
----------- ----------- ------------ ----------
Interest Expense
Deposits 3,772,000 3,068,000 7,118,000 6,024,000
Other borrowings 1,776,000 1,171,000 3,447,000 2,104,000
----------- ----------- ------------ ----------
Total Interest Expense 5,548,000 4,239,000 10,565,000 8,128,000
----------- ----------- ------------ ----------
Net Interest Income 8,401,000 6,942,000 15,772,000 13,465,000
Provision for loan losses 482,000 159,000 689,000 318,000
----------- ----------- ------------ ----------
Net Interest Income After
Provision for Loan Losses 7,919,000 6,783,000 15,083,000 13,147,000
----------- ----------- ------------ ----------
Non-interest Income
Service charges on deposit accounts 536,000 485,000 1,011,000 947,000
Net gains (losses) on asset sales
Real estate mortgage loans 447,000 100,000 888,000 104,000
Securities (95,000) (18,000) (146,000) (86,000)
Other income 457,000 317,000 816,000 634,000
----------- ----------- ------------ ----------
Total Non-interest Income 1,345,000 884,000 2,569,000 1,599,000
----------- ----------- ------------ ----------
Non-interest Expense
Salaries and employee benefits 3,818,000 3,012,000 7,164,000 5,717,000
Occupancy, net 461,000 364,000 895,000 730,000
Furniture and fixtures 424,000 328,000 784,000 634,000
Other expenses 1,760,000 1,697,000 3,327,000 3,238,000
----------- ----------- ------------ ----------
Total Non-interest Expense 6,463,000 5,401,000 12,170,000 10,319,000
----------- ----------- ------------ ----------
Income Before Federal Income Tax 2,801,000 2,266,000 5,482,000 4,427,000
Federal income tax expense 849,000 630,000 1,640,000 1,235,000
----------- ----------- ------------ ----------
Net Income $ 1,952,000 $ 1,636,000 $ 3,842,000 $ 3,192,000
=========== =========== ============ ==========
Net Income Per Share $ .71 $ .60 $ 1.40 $ 1.17
Dividends Per Share
Declared $ .26 $ .23 $ .52 $ .46
Paid .26 .23 .49 .42
</TABLE>
See notes to interim consolidated financial statements.
3
<PAGE> 5
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended
June 30,
1996 1995
----------- -----------
(unaudited)
---------------------------------
<S> <C> <C>
Net Income $ 3,842,000 $ 3,192,000
Adjustments to Reconcile Net Income
to Net Cash from Operating Activities
Proceeds from sales of loans held for sale 57,871,000 14,787,000
Disbursements for loans held for sale (46,747,000) (14,901,000)
Provision for loan losses 689,000 318,000
Deferred loan fees 120,000 (54,000)
Depreciation, amortization of intangible assets
and premiums and accretion of discounts on
investment securities and loans 1,103,000 1,091,000
Net losses on sales of securities 146,000 86,000
Net gains on sales of real estate mortgage loans (888,000) (104,000)
(Increase) decrease in accrued income and other assets (2,761,000) 794,000
Increase in accrued expenses and other liabilities 3,845,000 1,234,000
----------- -----------
Total Adjustments 13,378,000 3,251,000
----------- -----------
Net Cash from Operating Activities 17,220,000 6,443,000
----------- -----------
Cash Flow from Investing Activities
Proceeds from sales of securities available for sale 9,629,000 11,156,000
Proceeds from maturities of securities held to maturity 7,782,000 3,110,000
Principal payments received on securities available for sale 4,287,000 77,000
Principal payments received on securities held to maturity 378,000 2,464,000
Purchases of securities available for sale (25,470,000)
Purchases of securities held to maturity (295,000) (7,026,000)
Portfolio loans made to customers net of principle payments
received (37,906,000) (42,830,000)
Acquisition of bank, less cash received 19,011,000
Capital expenditures (1,279,000) (755,000)
----------- -----------
Net Cash from Investing Activities (23,863,000) (33,804,000)
----------- -----------
Cash Flow from Financing Activities
Net increase (decrease) in total deposits 7,415,000 (11,252,000)
Net increase in short-term borrowings 21,706,000 47,832,000
Proceeds from Federal Home Loan Bank advances 12,000,000 4,600,000
Payments of Federal Home Loan Bank advances (18,000,000) (14,000,000)
Dividends paid (1,301,000) (1,136,000)
Proceeds from issuance of common stock 39,000 26,000
Repurchase of common stock (755,000)
----------- -----------
Net Cash from Financing Activities 21,859,000 25,315,000
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 15,216,000 (2,046,000)
Cash and Cash Equivalents at Beginning of Period 17,208,000 23,719,000
----------- -----------
Cash and Cash Equivalents at End of Period $ 32,424,000 $ 21,673,000
=========== ===========
Cash paid during the period for:
Interest 10,830,000 8,034,000
Income taxes 1,330,000 1,075,000
Transfer of loans to other real estate 151,000 146,000
</TABLE>
See notes to interim consolidated financial statements.
4
<PAGE> 6
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Six months ended
June 30,
1996 1995
---------- ----------
(unaudited)
------------------------------
<S> <C> <C>
Balance at beginning of period $ 47,025,000 $ 40,311,000
Net income 3,842,000 3,192,000
Cash dividends declared (1,413,000) (1,239,000)
Issuance of common stock 539,000 376,000
Repurchase of common stock (755,000)
Net change in unrealized gain on securities
available for sale, net of related tax effect (588,000) 1,733,000
---------- ----------
Balance at end of period $ 49,405,000 $ 43,618,000
========== ==========
</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 June 30, 1996 and December 31,1995,
and the results of operations for the six-month periods ended June 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 $3,852,000 at June 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 six-month period ended June 30, 1996,
are not necessarily indicative of the results to be expected for the full year.
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.
RECENT ACQUISITION
The Registrant consummated its acquisition (the "Recent Acquisition") of
the outstanding common stock of North Bank Corporation ("NBC") as of June 1,
1996. In addition to 10 offices serving seven counties in north-east Michigan,
NBC's sole banking subsidiary operates First Central Mortgage Corporation
("FCMC") in Saginaw. Cash consideration and goodwill totaled approximately
$15.8 million and $7.5 million, respectively.
At June 30, 1996, NBC's assets totaled $156.8 million. At that date, its
loans and deposits totaled $86.5 million and $129.7 million, respectively.
Other than an additional provision for loan losses, inclusion of NBC's results
of operation for the thirty-day period ended June 30, 1996, did not have a
material impact on the Registrant's results of operation for the three- or
six-month periods ended June 30, 1996. (See "ASSET QUALITY.")
Management anticipates that NBC's banking subsidiary will consolidate with
an existing subsidiary of the Registrant during the third-quarter of 1996. Due
to competitive factors, Management does not believe that the continued
operation of FCMC is consistent with its goal to maximize shareholder value.
Accordingly, Management has elected to sell or otherwise discontinue operation
of FCMC. The sale or liquidation of FCMC is not expected to have a material
impact on the Registrant's financial condition or its results of operation.
FINANCIAL CONDITION
SUMMARY
Notwithstanding the impact of the Recent Acquisition, the Registrant's
loans, excluding loans held for sale ("Portfolio Loans"), totaled $453.7
million at June 30, 1996, compared to $418.0 million at December 31, 1995.
Notwithstanding an increase in the rate of prepayments on existing loans and a
shift in consumer demand to fixed-rate obligations, real estate mortgage loans
accounted for approximately 76% of the $35.7 million increase in Portfolio
Loans. (See "ASSET/LIABILITY MANAGEMENT.")
The increase in Portfolio Loans has been funded by increases in total
deposits, federal funds purchased and advances from the Federal Home Loan Bank
("FHLB"). Excluding the impact of the Recent Acquisition, total deposits
increased by $9.3 million during the six months ended June 30, 1996.
Management attributes this increase to the seasonal cash management needs
7
<PAGE> 9
of the municipal depositors that are served by the Banks. (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 requisite controls that are consistent with the
needs of the Registrant's decentralized structure.
Non-performing loans totaled $3,852,000 and non-performing assets totaled
$4,705,000 at June 30, 1996. The Recent Acquisition accounts for approximately
82% of the $1,292,000 increase in non-performing loans and approximately 93% of
the $1,385,000 increase in non-performing assets during the six months ended
June 30, 1996.
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
June 30, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Non-accrual loans $2,042,000 $ 1,886,000
Loans 90 days or more past due and
still accruing interest 1,604,000 427,000
Restructured loans 206,000 247,000
---------- -----------
Total non-performing loans 3,852,000 2,560,000
Other real estate 853,000 760,000
---------- -----------
Total non-performing assets $4,705,000 $ 3,320,000
========== ===========
As a percent of total loans
Total non-performing loans 0.71% 0.61%
Total non-performing assets 0.87% 0.79%
</TABLE>
In the absence of the Recent Acquisition, non-performing loans would be
equal to .61% of total loans, unchanged from December 31, 1995. During that
six-month period, total non-performing assets would have declined to .75% of
total loans from .79% at December 31, 1995.
Impaired loans totaled approximately $2,800,000 at June 30, 1996. In
addition to certain non-performing loans, such impaired loans include
commercial and agricultural loans totaling $800,000 that have been separately
identified as impaired. The Banks' average investment in impaired loans was
approximately $2,600,000 during the six-month period ended June 30, 1996.
Interest income recognized on impaired loans during the three- and six-month
periods ended June 30, 1996, totaled approximately $43,000 and $83,000,
respectively.
8
<PAGE> 10
Management's assessment of the allowance for loan losses is based on the
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. Based upon the application of its
allocation methodology to the loans associated with the Recent Acquisition,
Management elected to increase the provision for loan losses to $689,000 during
the six months ended June 30, 1996, from $318,000 during the comparable period
of 1995. At June 30, 1996, approximately 44% of the allowance for loan losses
was allocated to specific loans or loan portfolios compared to 45% at December
31, 1995.
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
June 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 $ 1,805,000 24.8% $1,612,000 26.0%
Real estate mortgage 195,000 53.9 162,000 54.0
Installment 911,000 21.3 597,000 20.0
Unallocated 3,766,000 2,872,000
----------- -------- ---------- ------
Total $ 6,677,000 100.0% $5,243,000 100.0%
=========== ======== ========== ======
</TABLE>
During the six-month period in 1996, loans charged against the allowance,
net of recoveries ("Net Loan Losses"), were $185,000, compared to $162,000
during the comparable period of 1995. On an annual basis, loans charged
against the allowance, net of recoveries, were equal to 0.08% and 0.09% of
average Portfolio Loans during the six month periods ended June 30, 1996 and
1995, respectively. The Recent Acquisition accounts for $37,000 of the Net
Loan Losses in 1996.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
Six months ended
June 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 689,000 318,000
Recoveries credited to allowance 174,000 164,000
Loans charged against the allowance (359,000) (326,000)
---------- ----------
Balance at end of period $6,677,000 $5,210,000
========== ==========
Net loans charged against the allowance to
average Portfolio Loans (annualized) 0.08% 0.09%
Allowance for loan losses as a percent of
non-performing loans 173% 182%
</TABLE>
9
<PAGE> 11
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 ("Leverage
Strategies") 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. (See "RECENT ACQUISITION" and
"ASSET/LIABILITY MANAGEMENT.") The Registrant's dividend policies, are also
important components of Management's Leverage Strategies.
<TABLE>
<CAPTION>
Capital ratios
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Equity capital 6.36% 7.97%
Tangible equity capital 5.15 7.58
Primary capital 7.16 8.78
Tangible primary capital 5.97 8.39
Risk-based capital 9.28 12.75
</TABLE>
Notwithstanding a $588,000 decline in net unrealized gains on securities
available for sale, after consideration of related taxes, shareholders' equity
increased by $2.4 million during the six months ended June 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 Recent Acquisition, shareholders' equity declined to
6.36% of total assets at June 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.
Accrued expenses and other liabilities reflect the Company's obligation to
the former shareholders of NBC. A credit facility has been established with a
financial institution to fund the aggregate purchase price of $15.8 million.
ASSET/LIABILITY MANAGEMENT
The retention of 15- and 30-year fixed-rate real estate mortgage loans is
not consistent with Management's Leverage Strategies 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
Leverage Strategies. (See "NON INTEREST INCOME".)
Consumer preference for fixed or adjustable-rate real estate mortgage
loans is influenced by the slope of the yield curve as well as the absolute
level of interest rates. During the recent
10
<PAGE> 12
interest rate environment, fixed-rate financing has been competitive with
fully-indexed adjustable rate loans. Accordingly, consumer demand has shifted
to fixed-rate loans and prepayments on the Banks' portfolios of adjustable-rate
and balloon loans have also increased due to refinancing activity.
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 rely on strategies that utilize federal funds and
other borrowings, principally advances from the FHLB to fund increases in
Portfolio Loans. (See "NET INTEREST INCOME".) At June 30, 1996, advances from
the FHLB totaled $118.0 million.
The Banks' maintain diversified investment portfolios that are consistent
with Management's Leverage Strategies 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 will be dependent upon Management's assessment of
reinvestment opportunities and the Banks' asset/liability management needs.
(See "NON-INTEREST INCOME.")
RESULTS OF OPERATIONS
SUMMARY
Net income increased by 19% to $1,952,000 during the three months ended
June 30, 1996, from $1,636,000 during the comparable period of 1995. During
the six-month period in 1996, net income totaled $3,842,000 compared to
$3,192,000 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 six-month periods ended June 30,
1996 and 1995, are set forth below.
KEY PERFORMANCE RATIOS
Three months Six months
ended June 30, ended June 30,
1996 1995 1996 1995
----------------- ------------------
Return on
Average assets 1.20% 1.25% 1.24% 1.24%
Average equity 15.93 15.24 15.84 15.23
Earnings per common share $ .71 $ .60 $1.40 $ 1.17
NET INTEREST INCOME
Net interest income increased by $1,459,000 to $8,401,000 during the three
months ended June 30, 1996, and by $2,307,000 to $15,772,000 during the
six-month period. The increases
11
<PAGE> 13
principally reflect increases in average earning assets that resulted from
implementation of Management's Leverage Strategies. Excluding the impact of the
Recent Acquisition, net interest income would have totaled $7,879,000 and
$15,250,000 during the three- and six-month periods of 1996, respectively.
Although Management's Leverage Strategies 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 5.70% and 5.55% during the three- and six-month
periods ended June 30, 1996. The declines from the comparable periods of 1995
reflect the average cost of FHLB advances relative to the cost of the Banks'
core deposits. (See "ASSET/LIABILITY MANAGEMENT.")
<TABLE>
<CAPTION>
NET INTEREST INCOME AND SELECTED RATIOS
Three months Six months
ended June 30, ended June 30,
1996 1995 1996 1995
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Average earning assets (In thousands) $612,256 $495,524 $588,303 $489,513
As a percent of average earning assets
Tax equivalent interest income 9.34% 9.24% 9.15% 9.09%
Interest expense 3.64 3.43 3.60 3.35
Tax equivalent net interest income 5.70 5.81 5.55 5.74
Average earning assets as a
percent of average assets 93.76% 94.09% 94.71% 94.22%
Free-funds ratio 12.00% 11.44% 12.11% 11.29%
</TABLE>
NON-INTEREST INCOME
Notwithstanding the impact of net losses on the sale of securities
available for sale, non-interest income increased during both the three- and
six-month periods ended June 30, 1996. Non-interest income increased by
$461,000 to $1,345,000 during the three-month period and by $970,000 to
$2,569,000 during the six-month period. The increases are principally the
result of increases in net gains on the sale of real estate mortgage loans.
The Recent Acquisition as well as increases in service charges on deposit
accounts and other income also contributed to the increase in non-interest
income.
Net gains on the sale of real estate mortgage loans totaled $447,000
during the three months ended June 30, 1996, compared to $100,000 during the
comparable period of 1995. During the six-month periods in 1996 and 1995, such
net gains totaled $888,000 and $104,000, respectively. Although the majority of
the increase in such net gains reflects favorable economic conditions and an
increase in loans sold, Management attributes 35% of the increase to the
12
<PAGE> 14
impact of SFAS #122 and the sale of related servicing rights on loans totaling
approximately $20.7 million. A year earlier, the related servicing rights
were sold on loans totaling approximately $4.3 million. (See "STATEMENTS OF
FINANCIAL ACCOUNTING STANDARDS".)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
--------------------------- -----------------------------
<S> <C> <C> <C> <C>
Real estate mortgage loan
originations $64,952,000 $39,619,000 $108,694,000 $62,133,000
Real estate mortgage loan sales 30,372,000 8,783,000 59,890,000 15,847,000
Net gains on the sale of real
estate mortgage loans 447,000 100,000 888,000 104,000
Net gains as a percent of real
estate mortgage loans sold 1.47% 1.14% 1.48% .66%
</TABLE>
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.
(See "ASSET/LIABILITY MANAGEMENT.") 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 losses of $95,000 on the sale of securities
available for sale during the three months ended June 30, 1996, compared to
$18,000 during the comparable period of 1995. During the six-month periods in
1996 and 1995, the Banks realized net losses of $146,000 and $86,000,
respectively. (See "ASSET/LIABILITY MANAGEMENT.")
SALES OF SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Six months ended
June 30,
1996 1995
----------- ------------
<S> <C> <C>
Proceeds $9,629,000 $ 11,156,000
========== ============
Gross gains $ 31,000 $ 8,000
Gross losses (177,000) (94,000)
---------- ------------
Net losses $ (146,000) $ (86,000)
========== ============
</TABLE>
NON-INTEREST EXPENSE
Non-interest expense totaled $6,463,000 during the three months ended June
30, 1996, compared to $5,401,000 during the comparable period of 1995. During
the six-month periods in 1996 and 1995, non-interest expense totaled
$12,170,000 and $10,319,000, respectively. The Recent Acquisition accounts for
approximately $450,000 of the increase during both periods.
Costs associated with the origination and sale of real estate mortgage
loans, also accounts for a substantial portion of the increase in non-interest
income. Management estimates that such costs, including, but not limited to,
commissions and other variable expenses, account for approximately 60% of the
increase in total non-interest expense during the six month period. Costs
associated with new branch facilities, a write down of other real estate as
well as the introduction
13
<PAGE> 15
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, limited the increase in
total non-interest expense. During the three months ended June 30, 1996, the
Banks' insurance assessment totaled $8,000 compared to $229,000 in 1995. The
Banks' insurance assessment for the six-month periods in 1996 and 1995 totaled
$15,000 and $457,000, respectively.
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 capitalized approximately $181,000 of originated servicing
rights during the six months ended June 30, 1996, of which approximately
$17,000 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.
14
<PAGE> 16
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibit Number & Description
None
(b) Reports on Form 8-K
A report on Form 8-K was filed on June 13, 1996, to report the
acquisition of North Bank Corporation by the Registrant.
15
<PAGE> 17
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 August 13, 1996 By s/William R. Kohls
------------------------- -----------------------------------
William R. Kohls, Principal Financial
Officer
Date August 13, 1996 By s/James J. Twarozynski
------------------------- -----------------------------------
James J. Twarozynski, Principal
Accounting Officer
16
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 26,324
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 126,962
<INVESTMENTS-CARRYING> 28,135
<INVESTMENTS-MARKET> 0
<LOANS> 540,218
<ALLOWANCE> 6,677
<TOTAL-ASSETS> 777,115
<DEPOSITS> 550,574
<SHORT-TERM> 149,000
<LIABILITIES-OTHER> 28,136
<LONG-TERM> 0
0
0
<COMMON> 2,725
<OTHER-SE> 46,680
<TOTAL-LIABILITIES-AND-EQUITY> 777,115
<INTEREST-LOAN> 22,089
<INTEREST-INVEST> 3,899
<INTEREST-OTHER> 349
<INTEREST-TOTAL> 26,337
<INTEREST-DEPOSIT> 7,118
<INTEREST-EXPENSE> 10,565
<INTEREST-INCOME-NET> 15,772
<LOAN-LOSSES> 689
<SECURITIES-GAINS> (146)
<EXPENSE-OTHER> 12,170
<INCOME-PRETAX> 5,482
<INCOME-PRE-EXTRAORDINARY> 3,842
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,842
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.40
<YIELD-ACTUAL> 5.55
<LOANS-NON> 2,042
<LOANS-PAST> 1,604
<LOANS-TROUBLED> 206
<LOANS-PROBLEM> 2,800
<ALLOWANCE-OPEN> 5,243
<CHARGE-OFFS> 359
<RECOVERIES> 174
<ALLOWANCE-CLOSE> 6,677
<ALLOWANCE-DOMESTIC> 2,911
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,766
</TABLE>
