<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 MARCH 31, 1997
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 May 12, 1997
- ------------------------------ -----------------------------------
Common stock, par value $1 4,339,536
<PAGE> 2
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
INDEX
Page
Number(s)
PART I - Financial Information
Item 1. Consolidated Statements of Financial Condition
March 31, 1997 and December 31, 1996 2
Consolidated Statements of Operations
Three-month periods ended March 31, 1997 and 1996 3
Consolidated Statements of Cash Flows
Three-month periods ended March 31, 1997 and 1996 4
Consolidated Statements of Shareholders' Equity
Three-month periods ended March 31, 1997 and 1996 5
Notes to Interim Consolidated Financial Statements
Three-month periods ended March 31, 1997 and 1996 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-14
PART II - Other Information
Item 6. Exhibits & Reports on Form 8-K 15
<PAGE> 3
Part I.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- --------------
(unaudited)
------------- --------------
<S> <C> <C>
Assets
Cash and Cash Equivalents
Cash and due from banks $ 29,304,000 $ 40,631,000
Federal funds sold 10,000,000
------------- -------------
Total Cash and Cash Equivalents 29,304,000 50,631,000
------------- -------------
Securities available for sale 155,050,000 136,852,000
Securities held to maturity (Fair value of $27,058,000 at March
31,1997; $27,645,000 at December 31, 1996) 26,286,000 26,754,000
Federal Home Loan Bank stock, at cost 11,076,000 11,076,000
Loans held for sale 9,958,000 11,583,000
Loans
Commercial and agricultural 171,150,000 164,304,000
Real estate mortgage 351,771,000 331,150,000
Installment 115,055,000 114,250,000
------------- -------------
Total Loans 637,976,000 609,704,000
Allowance for loan losses (7,041,000) (6,960,000)
------------- -------------
Net Loans 630,935,000 602,744,000
Property and equipment, net 19,466,000 18,462,000
Accrued income and other assets 30,493,000 30,495,000
------------- -------------
Total Assets $ 912,568,000 $ 888,597,000
============= =============
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing $ 73,818,000 $ 84,671,000
Savings and NOW 339,930,000 327,627,000
Time 257,174,000 260,236,000
------------- -------------
Total Deposits 670,922,000 672,534,000
Federal funds purchased 35,000,000 1,700,000
Other borrowings 126,539,000 135,294,000
Guaranteed preferred beneficial interests in Company's subordinated
debentures 17,250,000 17,250,000
Accrued expenses and other liabilities 9,726,000 9,983,000
------------- -------------
Total Liabilities 859,437,000 836,761,000
------------- -------------
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: 4,336,553 shares at March 31, 1997
and 2,861,535 shares at December 31, 1996 4,337,000 2,862,000
Capital surplus 22,566,000 23,230,000
Retained earnings 26,048,000 24,713,000
Net unrealized gain on securities available for sale, net of
related tax effect 180,000 1,031,000
------------- -------------
Total Shareholders' Equity 53,131,000 51,836,000
------------- -------------
Total Liabilities and Shareholders' Equity $ 912,568,000 $ 888,597,000
============= =============
</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
March 31,
1997 1996
--------------- ---------------
(unaudited)
--------------------------------------------
<S> <C> <C>
Interest Income
Interest and fees on loans $ 14,763,000 $ 10,398,000
Securities
Taxable 2,162,000 1,325,000
Tax-exempt 643,000 455,000
Other investments 278,000 210,000
------------- -------------
Total Interest Income 17,846,000 12,388,000
------------- -------------
Interest Expense
Deposits 5,554,000 3,346,000
Other borrowings 2,415,000 1,671,000
------------- -------------
Total Interest Expense 7,969,000 5,017,000
------------- -------------
Net Interest Income 9,877,000 7,371,000
Provision for loan losses 321,000 207,000
------------- -------------
Net Interest Income After Provision for Loan Losses 9,556,000 7,164,000
------------- -------------
Non-interest Income
Service charges on deposit accounts 674,000 475,000
Net gains (losses) on asset sales
Real estate mortgage loans 428,000 441,000
Securities 78,000 (51,000)
Other income 556,000 359,000
------------- -------------
Total Non-interest Income 1,736,000 1,224,000
------------- -------------
Non-interest Expense
Salaries and employee benefits 4,661,000 3,346,000
Occupancy, net 674,000 434,000
Furniture and fixtures 489,000 360,000
Other expenses 2,464,000 1,567,000
------------- -------------
Total Non-interest Expense 8,288,000 5,707,000
------------- -------------
Income Before Federal Income Tax 3,004,000 2,681,000
Federal income tax expense 870,000 791,000
------------- -------------
Net Income $ 2,134,000 $ 1,890,000
============= =============
Net Income Per Common Share $ .49 $ .44
Dividends Per Common Share
Declared $ .185 $ .165
Paid .173 .160
</TABLE>
See notes to interim consolidated financial statements.
3
<PAGE> 5
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1996
----------- -----------
(unaudited)
-------------------------------------
<S> <C> <C>
Net Income $ 2,134,000 $ 1,890,000
------------ ------------
Adjustments to Reconcile Net Income
to Net Cash from Operating Activities
Proceeds from sales of loans held for sale 20,519,000 29,518,000
Disbursements for loans held for sale (18,466,000) (28,202,000)
Provision for loan losses 321,000 207,000
Deferred loan fees 78,000 34,000
Amortization of intangible assets 363,000 73,000
Depreciation and amortization of premiums and accretion of
discounts on securities and loans 713,000 486,000
Net gains on sales of real estate mortgage loans (428,000) (441,000)
Net (gains) losses on sales of securities (78,000) 51,000
Increase in accrued income and other assets (376,000) (385,000)
Increase in accrued expenses and other liabilities 756,000 567,000
------------ ------------
Total Adjustments 3,402,000 1,908,000
------------ ------------
Net Cash from Operating Activities 5,536,000 3,798,000
------------ ------------
Cash Flow from Investing Activities
Proceeds from the sale of securities available for sale 10,908,000 3,566,000
Proceeds from the maturity of securities available for sale 2,502,000
Proceeds from the maturity of securities held to maturity 294,000 3,929,000
Principal payments received on securities available for sale 2,423,000 1,743,000
Principal payments received on securities held to maturity 170,000 161,000
Purchases of securities available for sale (35,363,000) (11,582,000)
Purchases of securities held to maturity (295,000)
Portfolio loans purchased (9,962,000)
Principal payments received on portfolio loans 473,000 26,000
Portfolio loans made to customers, net of principle payments
received (19,101,000) (1,155,000)
Capital additions (1,579,000) (595,000)
------------ ------------
Net Cash from Investing Activities (49,235,000) (4,202,000)
------------ ------------
Cash Flow from Financing Activities
Net increase (decrease) in total deposits (1,612,000) 13,871,000
Net increase (decrease) in short-term borrowings 34,045,000 (4,750,000)
Proceeds from Federal Home Loan Bank advances 1,000,000
Payments of Federal Home Loan Bank advances (10,000,000) (5,000,000)
Retirement of long-term debt (500,000)
Dividends paid (743,000) (649,000)
Proceeds from issuance of common stock 182,000
------------ ------------
Net Cash from Financing Activities 22,372,000 3,472,000
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (21,327,000) 3,068,000
Cash and Cash Equivalents at Beginning of Period 50,631,000 17,208,000
------------ ------------
Cash and Cash Equivalents at End of Period $ 29,304,000 $ 20,276,000
============ ============
Cash paid during the period for
Interest $ 2,794,000 $ 4,567,000
Income taxes 113,000 450,000
Transfer of loans to other real estate 167,000
</TABLE>
See notes to interim consolidated financial statements
4
<PAGE> 6
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1996
------------ -------------
(unaudited)
-----------------------------------
<S> <C> <C>
Balance at beginning of period $ 51,836,000 $ 47,025,000
Net income 2,134,000 1,890,000
Cash dividends declared (801,000) (707,000)
Issuance of common stock 813,000 500,000
Repurchase of common stock
Net change in unrealized gain on securities
available for sale, net of related tax effect (851,000) (237,000)
------------- -------------
Balance at end of period $ 53,131,000 $ 48,471,000
============= =============
</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 March 31, 1997 and December 31,
1996, and the results of operations for the three-month periods ended March 31,
1997 and 1996.
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 $4,377,000 at March 31, 1997,
and $3,902,000 at December 31, 1996. (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 three-month period ended March 31,
1997, are not necessarily indicative of the results to be expected for the full
year.
5. On March 18, 1997 the Registrant declared a three for two stock split,
to shareholders of record on April 4, 1997, payable April 30, 1997. Per share
data has been retroactively adjusted to reflect this action.
6
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Actual results could differ
materially from those projected in such forward-looking statements.
The following section presents additional information to assess the
financial condition and results of operations of 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
Registrants 1996 Annual Report on Form 10-K.
ACQUISITIONS AND FINANCING
The Registrant acquired North Bank Corporation ("NBC") effective May 31,
1996, and on December 13, 1996, one of the Banks purchased eight branch offices
from First of America Bank - Michigan, N.A. (the "FoA Branches"). These
acquisitions (the "1996 Acquisitions") were financed with a $17.0 million
unsecured credit facility (the "Credit Facility") and the issuance of $17.25
million of non-convertible, cumulative trust preferred securities (the
"Preferred Securities"). (See "Capital Resources.")
NBC was acquired for cash consideration totaling $15.8 million. On the
effective date of the transaction, NBC's assets and shareholders' equity
totaled $152.0 million and $9.5 million, respectively, and the Registrant
recorded $7.5 million of goodwill.
On the date of the transaction the FoA Branches had deposits totaling
$121.9 million, and the acquiring Bank recorded intangible assets totaling $8.8
million. The Bank also purchased loans totaling $22.1 million as well as
certain real and personal property.
FINANCIAL CONDITION
SUMMARY Net cash proceeds from the purchase of the FoA Branches totaled $104.8
million. To effectively utilize the temporary increase in liquidity, the Banks
reduced federal funds purchased pending the deployment of such cash proceeds
into higher yielding loans and securities. The $24 million increase in total
assets as well as the $33.3 million increase in federal funds purchased during
the three month period reflects the funding of such loans and securities.
Total loans grew to $638.0 million at March 31, 1997. The purchase of
seasoned packages of single-family real estate mortgage loans account for
approximately 35% of the $28.3 million increase in total loans.
Deposits totaled $670.9 million at March 31, 1997, and were largely
unchanged from December 31, 1996, as a $10.9 million decline in non-interest
bearing deposits was offset by a $12.3 million increase in savings and NOW
accounts. The decline in non-interest bearing deposits
7
<PAGE> 9
as well as the increase in savings and NOW accounts reflects the seasonal cash
management needs of the Banks' municipal customers.
ASSET QUALITY In addition to the communities served by the Banks' branch
networks, principal lending markets include nearby communities and metropolitan
areas. Subject to established underwriting criteria, the Banks also
participate in commercial lending transactions with certain non-affiliated
banks and purchase real estate mortgage loans from third-party originators.
Management believes that the Registrant's decentralized structure provides
the Banks with important advantages in serving the credit needs of the
principal lending markets. Although the Management and Board of Directors of
each Bank retain authority and responsibility for all credit decisions, each of
the Banks has adopted uniform underwriting standards. Further, the
Registrant's loan committee as well as the centralization of commercial loan
credit services and loan review functions promote compliance with such
established underwriting standards. The centralization of retail loan services
also provides for consistent service quality and facilitates compliance with
consumer protection laws and regulations.
Non-accrual loans totaled $2.9 million and $1.7 million at March 31, 1997,
and December 31, 1996, respectively. The increase principally reflects an
agricultural credit that was purchased in conjunction with the FoA Branches, of
which Management does not anticipate a material impact on the Registrant's
financial condition or results of operations.
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
March 31, December 31,
1997 1996
------------- --------------
<S> <C> <C>
Non-accrual loans $ 2,850,000 $ 1,711,000
Loans 90 days or more past due and
still accruing interest 1,332,000 1,994,000
Restructured loans 195,000 197,000
----------- -----------
Total non-performing loans 4,377,000 3,902,000
Other real estate 410,000 730,000
----------- -----------
Total non-performing assets $ 4,787,000 $ 4,632,000
=========== ===========
As a percent of total loans
Non-performing loans 0.69% 0.64%
Non-performing assets 0.75% 0.76%
</TABLE>
Loans charged against the allowance for loan losses, net of recoveries,
were equal to .15% of average loans during the three months ended March 31,
1997, compared to .08% during the comparable period of 1996. The $157,000
increase in net loan losses reflect loans acquired as a result of the purchase
of NBC. Net loan losses for the year ended December 31, 1996, were equal to
.13% of average loans.
8
<PAGE> 10
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
Three months ended
March 31,
1997 1996
----------- -----------
<S> <C> <C>
Balance at beginning of period $6,960,000 $5,243,000
Additions (deduction)
Provision charged to operating expense 321,000 207,000
Recoveries credited to allowance 175,000 82,000
Loans charged against the allowance (415,000) (165,000)
---------- ----------
Balance at end of period $7,041,000 $5,367,000
========== ==========
Net loans charged against the allowance to
average Portfolio Loans (annualized) 0.15% 0.08%
Allowance for loan losses as a percent of
non-performing loans 161% 212%
</TABLE>
Impaired loans totaled approximately $2,800,000 at March 31, 1997. At
that same date, certain impaired loans with a balance of approximately
$1,600,000, had specific allocations of the allowance for loan losses
calculated in accordance with Statement of Financial Accounting Standards #114
totaling approximately $300,000. The Banks' average investment in impaired
loans approximated $3,300,000, for the three-month period ending March 31,
1997. Cash receipts on impaired loans on non-accrual status are generally
applied to the principal balance. Interest recognized on impaired loans for
that same three-month period approximated $43,000.
Management's assessment of the allowance for loan losses is based on the
composition of the loan portfolio, an evaluation of specific credits,
historical loss experience as well as the level of non-performing and impaired
loans. At March 31, 1997, approximately 43% of the allowance for loan losses
was allocated to specific loans or loan portfolios compared to 47% at December
31, 1996.
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
March 31, 1997 December 31, 1996
------------------------ ------------------------
Percent of Percent of
Allowance Loans to Allowance Loans to
Amount Total Loans Amount Total Loans
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial and
agricultural $1,997,000 26.3% $ 2,176,000 26.9%
Real estate mortgage 273,000 53.8 257,000 54.3
Installment 770,000 19.9 834,000 18.8
Unallocated 4,001,000 3,693,000
---------- ----- ----------- -----
Total $7,041,000 100.0% $ 6,960,000 100.0%
========== ===== =========== =====
</TABLE>
9
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES The ability to maintain appropriate financial
leverage is critical to Management's mission to create value for the
Registrant's shareholders. To profitably deploy capital within existing
markets, the Banks have implemented balance sheet management strategies that
combine effective loan origination efforts with disciplined funding strategies.
Management further believes that its disciplined acquisition strategy is
consistent with its goal to create shareholder value. Although the Banks'
balance sheet management strategies provide profitable opportunities to
leverage the balance sheet, the franchise value associated with core deposits
and other customer relationships may provide greater value to the Registrant's
shareholders.
The Registrant's cost of capital is also a critical factor in creating
shareholder value. Accordingly, Management elected to fund the purchase of the
FoA Branches by issuing the Preferred Securities. In addition to annual tax
benefits totaling more than $500,000, the non-convertible structure of the
Preferred Securities eliminates potential dilution of the common shareholders'
interest in the Registrant.
Shareholders' equity totaled $53.1 million at March 31, 1997. The $1.3
million increase from $51.8 million at December 31, 1996, reflects the
retention of earnings and the issuance of common stock pursuant to various
equity-based incentive compensation plans. A $851,000 decrease in the net
unrealized gain on securities available for sale, after consideration of
related taxes, limited the increase in shareholders' equity.
<TABLE>
<CAPTION>
CAPITAL RATIOS
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Equity capital 5.82% 5.83%
Average shareholders equity to average assets 5.99 6.43
Tier 1 leverage (tangible equity capital) 6.04 5.72
Tier 1 risk-based capital 9.22 9.01
Total risk-based capital 10.45 10.26
</TABLE>
Shareholders' equity was equal to 5.82% of total assets at March 31, 1997,
virtually unchanged from 5.83% at December 31, 1996. The decline in the
Registrant's average shareholders' equity as a percent of average assets
reflects the increase in average assets that resulted from the purchase of the
FoA Branches on December 13, 1996. Average shareholders' equity was equal to
5.99% of average assets during the three months ended March 31, 1997, compared
to 6.43% during the preceding three-month period.
ASSET/LIABILITY MANAGEMENT The Banks' 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 employ pricing tactics that are intended to
enhance the value of core deposits and rely on non-deposit sources of funds to
finance increases in loans. Such non-deposit funding sources totaled $161.5
million and $137.0 million at March 31, 1997, and December 31, 1996,
respectively.
The marginal cost of funds is a principal consideration in the
implementation of the Bank's balance sheet management strategies. Management
has determined that the retention of 15- and 30-year fixed rate mortgages is
generally inconsistent with its goal to maintain profitable leverage
10
<PAGE> 12
or the Banks' asset/liability management 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 within established risk parameters and the retention of such
loans is a principal consideration of the Banks' balance sheet management
strategies. (See "Non-interest income.")
The Banks maintain diversified securities portfolios that include
obligations of the U.S. Treasury and government-sponsored agencies as well as
securities issued by states and political subdivisions, corporate notes and
mortgage-backed securities. Management continually evaluates the Banks'
asset/liability management needs and attempts to maintain a portfolio structure
that provides sufficient liquidity and cash flow. The sale 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.")
The following table sets forth certain information with respect to the
securities portfolios, including gross unrealized gains and losses.
<TABLE>
<CAPTION>
SECURITIES
Unrealized
--------------------
Amortized Fair
Cost Gains Losses Value
--------------- ------------ ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Securities available for sale
March 31, 1997 $154,777 $1,043 $ 770 $155,050
December 31, 1996 135,290 1,870 308 136,852
Securities held to maturity
March 31, 1997 $ 26,286 $ 831 $ 59 $ 27,058
December 31, 1996 26,754 929 38 27,645
</TABLE>
RESULTS OF OPERATION
SUMMARY Net income increased by 12.9% to $2,134,000 during the three months
ended March 31, 1997, from the comparable period of 1996. The $244,000
increase in earnings reflects 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 taxes.
11
<PAGE> 13
Key performance ratios for the three-month periods ended March 31, 1997
and 1996, are set forth below.
<TABLE>
<CAPTION>
KEY PERFORMANCE RATIOS
Three months
ended March 31,
1997 1996
-------- --------
<S> <C> <C>
Return on
Average assets 0.98% 1.29%
Average equity 16.23 15.83
Earnings per common share $ .49 $ .44
</TABLE>
The increase in the Registrant's return on average equity, relative to the
decline in its return on average assets, reflects the increase in leverage that
resulted from the 1996 Acquisitions and the related financing.
NET INTEREST INCOME Net interest income totaled $9,877,000 and $7,371,000
during the three months ended March 31, 1997 and 1996, respectively. The 34.0%
increase in net interest income is a result of an increase in average earning
assets. Management attributes approximately 90% of the $261.1 million increase
in average earning assets to the 1996 Acquisitions.
<TABLE>
<CAPTION>
NET INTEREST INCOME AND SELECTED RATIOS
Three months ended
March 31, 1997 March 31, 1996
----------------- --------------
<S> <C> <C>
Average earning assets (In thousands) $820,048 $558,908
As a percent of average earning assets
Tax equivalent interest income 8.99% 9.09%
Interest expense 3.94 3.61
Tax equivalent net interest income 5.05 5.48
Average earning assets as a
percent of average assets 92.41% 94.83%
Free-funds ratio 7.75 11.89
</TABLE>
Net interest income was equal to 5.05% of average earning assets during
the three months ended March 31, 1997, compared to 5.48% during the comparable
period of 1996. In addition to the impact of the cash proceeds received from
the purchase of the FoA Branches, the decline in net interest income as a
percent of average earning assets reflects the cost of the Credit Facility and
the Preferred Securities. The cost of non-deposit sources of funds, relative to
the cost of deposits, that have been employed to implement the Banks' balance
sheet management strategies also contributed to the decline in net interest
income as a percent of average earning assets.
PROVISION FOR LOAN LOSSES The provision for loan losses totaled $321,000 and
$207,000 during the three months ended March 31, 1997, and 1996, respectively.
The $114,000 increase principally reflects the increase in total loans. (See
"Asset quality.")
12
<PAGE> 14
NON-INTEREST INCOME Excluding net gains on the sale of assets, non-interest
income totaled $1,230,000 and $834,000 during the three months ended March 31,
1997 and 1996, respectively. The majority of the 47.5% increase reflects the
impact of the 1996 Acquisitions.
Notwithstanding a 37.5% decrease in loans sold, net gains on the sale of
real estate mortgage loans totaled $428,000 during the three months ended March
31, 1997, largely unchanged from the comparable period in 1996. In addition to
favorable economic conditions, Management attributes the increase in net gains
as a percent of real estate mortgage loans sold to an increase in the
percentage of loans sold that had been underwritten pursuant to government
guarantees. Such government guaranteed loans sold during the three months
ended March 31, 1997 and 1996, were equal to 26% and 15%, respectively, of
total loans sold.
<TABLE>
<CAPTION>
Three months ended
March 31
1997 1996
------------------------------
<S> <C> <C>
Real estate mortgage loans originated $44,251,000 $43,742,000
Real estate mortgage loan sales 18,477,000 29,518,000
Real estate mortgage loan servicing rights sold 5,157,000 9,169,000
Net gains on the sale of real estate mortgage loans 428,000 441,000
Net gains as a percent of real estate mortgage loans sold 2.32% 1.49%
</TABLE>
The Banks capitalized approximately $87,000 and $67,000 of servicing
rights relating to originated loans that were subsequently sold during the
three-month periods ended March 31, 1997 and 1996, respectively. Amortization
of capitalized servicing rights for those same periods was $27,000 and $4,000,
respectively. The fair value of capitalized servicing rights approximated the
book value of $374,000 at March 31, 1997, therefore no valuation allowance
relating to impairment was considered necessary at that date.
The volume of loans sold is dependent upon the Banks' ability to originate
real estate mortgage loans as well as the demand for fixed-rate obligations.
(See "Asset/liability management.") Net gains on real estate mortgage 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 on the sale of securities available for
sale totaling $78,000 during the three months ended March 31, 1997, compared to
net losses of $51,000 during the comparable period of 1996. (See
"Asset/liability management.")
13
<PAGE> 15
<TABLE>
<CAPTION>
SALES OF SECURITIES AVAILABLE FOR SALE
Three months ended
March 31,
1997 1996
--------- ---------
<S> <C> <C>
Proceeds $10,908,000 $3,566,000
=========== ==========
Gross gains $ 87,000 $ 0
Gross losses (9,000) (51,000)
----------- ----------
Net Gains (losses) $ 78,000 $ (51,000)
=========== ==========
</TABLE>
NON-INTEREST EXPENSE Non-interest expense totaled $8,288,000 during the three
months ended March 31, 1997, compared to $5,707,000 during the comparable
period of 1996. In addition to costs associated with the 1996 Acquisitions,
costs associated with the origination of real estate mortgage loans contributed
to the increase in non-interest expense.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS The Financial Accounting Standards
Board adopted Statement of Financial Accounting Standards, No. 128, "Earnings
per Share", ("SFAS #128") in February 1997.
SFAS #128 replaces primary earnings per share ("Primary") and fully
diluted earnings per share ("Fully Diluted") with basic earnings per share
("Basic") and diluted earnings per share ("Diluted"). This statement will
require a dual presentation and reconciliation of Basic and Diluted. Basic,
unlike Primary, excludes any dilution of common stock equivalents, while
Diluted, like Fully Diluted, reflects the potential dilution of all common
stock equivalents.
This statement is effective for both interim and annual periods ending
after December 15, 1997, with earlier application not permitted. SFAS #128 will
be retroactively applied to all prior periods. Management does not expect the
implementation of this statement to have a material impact on current and prior
year earnings per share.
14
<PAGE> 16
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibit Number & Description
None
(b) Reports on Form 8-K
During the quarter ended March 31, 1997, there were no reports filed
on Form 8-K.
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 May 12, 1997 By s/William R. Kohls
---------------------- -------------------------------------
William R. Kohls, Principal Financial
Officer
Date May 12, 1997 By s/James J. Twarozynski
---------------------- -------------------------------------
James J. Twarozynski, Principal
Accounting Officer
16
<PAGE> 18
EXHIBIT INDEX
Exhibit Number Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 29,304
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 155,050
<INVESTMENTS-CARRYING> 26,286
<INVESTMENTS-MARKET> 27,058
<LOANS> 637,976
<ALLOWANCE> 7,041
<TOTAL-ASSETS> 912,568
<DEPOSITS> 670,922
<SHORT-TERM> 153,039
<LIABILITIES-OTHER> 9,726
<LONG-TERM> 25,750
0
0
<COMMON> 4,337
<OTHER-SE> 48,794
<TOTAL-LIABILITIES-AND-EQUITY> 912,568
<INTEREST-LOAN> 14,763
<INTEREST-INVEST> 2,805
<INTEREST-OTHER> 278
<INTEREST-TOTAL> 17,846
<INTEREST-DEPOSIT> 5,554
<INTEREST-EXPENSE> 7,969
<INTEREST-INCOME-NET> 9,877
<LOAN-LOSSES> 321
<SECURITIES-GAINS> 78
<EXPENSE-OTHER> 8,288
<INCOME-PRETAX> 3,004
<INCOME-PRE-EXTRAORDINARY> 2,134
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,134
<EPS-PRIMARY> .49
<EPS-DILUTED> .49
<YIELD-ACTUAL> 5.05
<LOANS-NON> 2,850
<LOANS-PAST> 1,332
<LOANS-TROUBLED> 195
<LOANS-PROBLEM> 2,800
<ALLOWANCE-OPEN> 6,960
<CHARGE-OFFS> 415
<RECOVERIES> 175
<ALLOWANCE-CLOSE> 7,041
<ALLOWANCE-DOMESTIC> 3,040
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,001
</TABLE>
