<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, 1998
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 13, 1998
- ---------------------------------------- -------------------------------------
Common stock, par value $1 4,675,728
<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
March 31, 1998 and December 31, 1997 2
Consolidated Statements of Operations
Three-month periods ended March 31, 1998 and 1997 3
Consolidated Statements of Cash Flows
Three-month periods ended March 31, 1998 and 1997 4
Consolidated Statements of Shareholders' Equity
Three-month periods ended March 31, 1998 and 1997 5
Notes to Interim Consolidated Financial Statements
Three-month periods ended March 31, 1998 and 1997 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
PART II - Other Information
Item 6. Exhibits & Reports on Form 8-K 17
</TABLE>
<PAGE> 3
Part I.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------------- ----------------
Assets (unaudited)
--------------- ----------------
<S> <C> <C>
Cash and due from banks $ 30,845,000 $ 30,371,000
Securities available for sale 101,726,000 110,769,000
Securities held to maturity (Fair value of $22,105,000 at March
31,1998; $23,354,000 at December 31, 1997 ) 21,308,000 22,525,000
Federal Home Loan Bank stock, at cost 12,589,000 12,489,000
Loans held for sale 43,154,000 21,754,000
Loans
Commercial and agricultural 209,475,000 199,098,000
Real estate mortgage 401,539,000 416,689,000
Installment 130,001,000 128,391,000
-------------- --------------
Total Loans 741,015,000 744,178,000
Allowance for loan losses (7,975,000) (7,670,000)
-------------- --------------
Net Loans 733,040,000 736,508,000
Property and equipment, net 21,866,000 21,067,000
Accrued income and other assets 28,607,000 28,334,000
-------------- --------------
Total Assets $ 993,135,000 $ 983,817,000
============== ==============
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing $ 81,602,000 $ 88,546,000
Savings and NOW 353,121,000 339,594,000
Time 276,041,000 272,340,000
-------------- --------------
Total Deposits 710,764,000 700,480,000
Federal funds purchased 25,900,000 28,000,000
Other borrowings 164,414,000 167,185,000
Guaranteed preferred beneficial interests in Company's subordinated
debentures 17,250,000 17,250,000
Accrued expenses and other liabilities 12,693,000 11,386,000
-------------- --------------
Total Liabilities 931,021,000 924,301,000
-------------- --------------
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: 4,625,103 shares at March 31, 1998
and 4,586,733 shares at December 31, 1997 4,625,000 4,587,000
Capital surplus 31,102,000 30,011,000
Retained earnings 24,774,000 23,243,000
Accumulated other comprehensive income 1,613,000 1,675,000
-------------- --------------
Total Shareholders' Equity 62,114,000 59,516,000
-------------- --------------
Total Liabilities and Shareholders' Equity $ 993,135,000 $ 983,817,000
============== ==============
</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,
1998 1997
-------------- --------------
(unaudited)
-----------------------------
<S> <C> <C>
Interest Income
Interest and fees on loans $18,383,000 $14,763,000
Securities
Taxable 1,479,000 2,162,000
Tax-exempt 609,000 643,000
Other investments 247,000 278,000
----------- -----------
Total Interest Income 20,718,000 17,846,000
----------- -----------
Interest Expense
Deposits 5,839,000 5,554,000
Other borrowings 3,119,000 2,415,000
----------- -----------
Total Interest Expense 8,958,000 7,969,000
----------- -----------
Net Interest Income 11,760,000 9,877,000
Provision for loan losses 633,000 321,000
----------- -----------
Net Interest Income After Provision for Loan Losses 11,127,000 9,556,000
----------- -----------
Non-interest Income
Service charges on deposit accounts 823,000 674,000
Net gains on asset sales
Real estate mortgage loans 907,000 428,000
Securities 137,000 78,000
Other income 761,000 556,000
----------- -----------
Total Non-interest Income 2,628,000 1,736,000
----------- -----------
Non-interest Expense
Salaries and employee benefits 5,911,000 4,661,000
Occupancy, net 699,000 674,000
Furniture and fixtures 579,000 489,000
Other expenses 3,142,000 2,464,000
----------- -----------
Total Non-interest Expense 10,331,000 8,288,000
----------- -----------
Income Before Federal Income Tax 3,424,000 3,004,000
Federal income tax expense 991,000 870,000
----------- -----------
Net Income $ 2,433,000 $ 2,134,000
=========== ===========
Net income per common share
Basic $ .53 $ .47
Diluted .52 .46
Dividends Per Common Share
Declared $ .195 $ .176
Paid .185 .164
</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,
1998 1997
--------------- ---------------
(unaudited)
-------------------------------
<S> <C> <C>
Net Income $ 2,433,000 $ 2,134,000
------------- -------------
Adjustments to Reconcile Net Income
to Net Cash from Operating Activities
Proceeds from sales of loans held for sale 58,421,000 20,519,000
Disbursements for loans held for sale (78,914,000) (18,466,000)
Provision for loan losses 633,000 321,000
Deferred loan fees 70,000 78,000
Amortization of intangible assets 379,000 363,000
Depreciation and amortization of premiums and accretion of
discounts on securities and loans 664,000 713,000
Net gains on sales of real estate mortgage loans (907,000) (428,000)
Net gains on sales of securities (137,000) (78,000)
Increase in accrued income and other assets (652,000) (376,000)
Increase in accrued expenses and other liabilities 2,187,000 756,000
------------- -------------
Total Adjustments (18,256,000) 3,402,000
------------- -------------
Net Cash from Operating Activities (15,823,000) 5,536,000
------------- -------------
Cash Flow from Investing Activities
Proceeds from the sale of securities available for sale 4,366,000 10,908,000
Proceeds from the maturity of securities available for sale 3,027,000 2,502,000
Proceeds from the maturity of securities held to maturity 1,034,000 294,000
Principal payments received on securities available for sale 3,341,000 2,423,000
Principal payments received on securities held to maturity 621,000 170,000
Purchases of securities available for sale (2,232,000) (35,363,000)
Portfolio loans purchased (9,962,000)
Principal payments on portfolio loans purchased 4,830,000 473,000
Portfolio loans made to customers, net of principle payments received (2,065,000) (19,101,000)
Capital expenditures (1,417,000) (1,579,000)
------------- -------------
Net Cash from Investing Activities 11,505,000 (49,235,000)
------------- -------------
Cash Flow from Financing Activities
Net increase (decrease) in total deposits 10,284,000 (1,612,000)
Net increase (decrease) in short-term borrowings (4,371,000) 34,045,000
Proceeds from Federal Home Loan Bank advances 11,000,000 1,000,000
Payments of Federal Home Loan Bank advances (11,000,000) (10,000,000)
Retirement of long-term debt (500,000) (500,000)
Dividends paid (848,000) (743,000)
Proceeds from issuance of common stock 227,000 182,000
------------- -------------
Net Cash from Financing Activities 4,792,000 22,372,000
------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents 474,000 (21,327,000)
Cash and Cash Equivalents at Beginning of Period 30,371,000 50,631,000
------------- -------------
Cash and Cash Equivalents at End of Period $ 30,845,000 $ 29,304,000
============= =============
Cash paid during the period for
Interest $ 8,932,000 $ 8,357,000
Income taxes 200,000 113,000
Transfer of loans to other real estate 399,000 167,000
</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,
1998 1997
-------------- -------------
(unaudited)
---------------------------
<S> <C> <C>
Balance at beginning of period $ 59,516,000 $ 51,836,000
Net income 2,433,000 2,134,000
Cash dividends declared (902,000) (801,000)
Issuance of common stock 1,129,000 813,000
Net change in unrealized gain on securities
available for sale, net of related tax effect (note 4) (62,000) (851,000)
------------- ------------
Balance at end of period $ 62,114,000 $ 53,131,000
============= ============
</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, 1998 and December 31,
1997, and the results of operations for the three-month periods ended March 31,
1998 and 1997.
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 $5,579,000 at March 31, 1998, and
$5,386,000 at December 31, 1997. (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 Registrant adopted Statement of Financial Accounting Standards, No. 130,
"Reporting Comprehensive Income", (SFAS #130) effective January 1, 1998. SFAS
#130 establishes standards for reporting and displaying comprehensive income and
its components, including but not limited to unrealized gains and losses on
securities available for sale. Prior period amounts have been reclassified in
the financial statements.
Comprehensive income for the three-month periods ending March 31 follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
(unaudited)
-------------------------
<S> <C> <C>
Net income $ 2,433,000 $ 2,134,000
Net change in unrealized gain on securities available
for sale, net of related tax effect (62,000) (851,000)
------------ ------------
Comprehensive income $ 2,371,000 $ 1,283,000
============ ============
</TABLE>
5. The Registrant adopted Statement of Financial Accounting Standards, No. 131,
"Disclosures about Segments of an Enterprise and Related Information", (SFAS
#131) effective January 1, 1998. SFAS #131 establishes standards for the way
that public entities report information about operating segments in financial
statements. The adoption of this statement did not have a material impact on the
Registrant's reporting disclosures.
6. A reconciliation of basic and diluted earnings per share for the three-month
periods ending, March 31 follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
(unaudited)
---------------------------
<S> <C> <C>
Basic earnings per share
Net income $ 2,433,000 $ 2,134,000
=========== ===========
Shares outstanding 4,612,000 4,542,000
=========== ===========
Per share amount $ .53 $ .47
=========== ===========
Diluted earnings per share
Net income $ 2,433,000 $ 2,134,000
=========== ===========
Shares outstanding 4,612,000 4,542,000
Effect of dilutive securities - stock options 60,000 54,000
----------- -----------
4,672,000 4,596,000
=========== ===========
Per share amount $ .52 $ .46
=========== ===========
</TABLE>
6
<PAGE> 8
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
7. The results of operations for the three-month period ended March 31, 1998,
are not necessarily indicative of the results to be expected for the full year.
7
<PAGE> 9
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 that may be necessary to
assess the financial condition and results of operations of the Registrant and
its subsidiary banks (the "Banks"). This section should be read in conjunction
with the consolidated financial statements contained elsewhere in this report as
well as the Registrant's 1997 Annual Report on Form 10-K.
FINANCIAL CONDITION
SUMMARY Assets totaled $993.1 million at March 31, 1998. The $9.3 million
increase from $983.8 million at December 31, 1997, was the result of a $21.4
million increase in loans held for sale. (See "Non-interest income.") Proceeds
from the sale or maturity of securities available for sale as well as an
increase in total deposits funded the increase in loans held for sale. Loans,
excluding loans held for sale ("Portfolio Loans"), were largely unchanged from
December 31, 1997, as an increase in commercial and agricultural loans largely
offset a decline in real estate mortgage loans. (See "Asset/liability
management.")
Total deposits increased by $10.3 million to $710.8 million at March 31, 1998,
from $700.5 million at December 31, 1997. During that three-month period,
federal funds purchased and other borrowings declined by $2.1 million and $2.8
million, respectively. The increase in total deposits reflects an increase in
savings and NOW accounts. (See "Deposits and borrowings.")
SECURITIES 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. (See "Asset/liability
management.")
SECURITIES
<TABLE>
<CAPTION>
Unrealized
----------------------------
Amortized Fair
Cost Gains Losses Value
-------------- -------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Securities available for sale
March 31, 1998 $ 99,282 $2,559 $115 $101,726
December 31, 1997 108,231 2,775 237 110,769
Securities held to maturity
March 31, 1998 $ 21,308 $ 807 $ 10 $ 22,105
December 31, 1997 22,525 838 9 23,354
</TABLE>
8
<PAGE> 10
The sale of securities available for sale is dependent upon Management's
assessment of reinvestment opportunities and the Banks' asset/liability
management needs. As a result of such ongoing evaluations, the Banks sold
securities with an aggregate market value of approximately $4.4 million during
the three-month period ended March 31, 1998, compared to $10.9 million during
the comparable period in 1997. The Banks realized net gains on the sale of such
securities totaling $137,000 and $78,000 during the three months ended March 31,
1998 and 1997, respectively.
SALES OF SECURITIES AVAILABLE FOR SALE
Three months ended
March 31,
1998 1997
--------------- ----------------
Proceeds $4,366,000 $10,908,000
========== ===========
Gross gains $ 137,000 $ 87,000
Gross losses (9,000)
========== ===========
Net Gains $ 137,000 $ 78,000
========== ===========
ASSET QUALITY Management believes that the Registrant's decentralized structure
provides important advantages in serving the credit needs of the Banks'
principal lending markets. Although the Management and Board of Directors of
each Bank retain authority and responsibility for credit decisions, each of the
Banks has adopted uniform underwriting standards. Further, the Registrant's loan
committee and the centralization of commercial loan credit services as well as
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.
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.
9
<PAGE> 11
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
March 31, December 31,
1998 1997
--------------- -----------------
<S> <C> <C>
Non-accrual loans $4,352,000 $3,298,000
Loans 90 days or more past due and
still accruing interest 1,049,000 1,904,000
Restructured loans 178,000 184,000
---------- ----------
Total non-performing loans 5,579,000 5,386,000
Other real estate 672,000 331,000
---------- ----------
Total non-performing assets $6,251,000 $5,717,000
========== ==========
As a percent of Portfolio Loans
Non-performing loans 0.75% 0.72%
Non-performing assets 0.84 0.77
Allowance for loan losses as a percent of
Portfolio Loans 1.08 1.03
Allowance for loan losses as a percent of
non-performing loans 143 142
</TABLE>
Impaired loans totaled approximately $3,400,000 at March 31, 1998. At that same
date, certain impaired loans with a balance of approximately $600,000, had
specific allocations of the allowance for loan losses calculated in accordance
with Statement of Financial Accounting Standards #114 totaling approximately
$200,000. The Banks' average investment in impaired loans was approximately
$3,100,000, for the three-month period ending March 31, 1998. Cash receipts on
impaired loans on non-accrual status are generally applied to the principal
balance. Interest recognized on impaired loans for that three-month period was
approximately $30,000.
Loans charged against the allowance for loan losses, net of recoveries, were
equal to .18% of average loans during the three months ended March 31, 1998,
compared to .15% during the comparable period of 1997.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
Three months ended
March 31,
1998 1997
--------------- --------------
<S> <C> <C>
Balance at beginning of period $7,670,000 $6,960,000
Additions (deduction)
Provision charged to operating expense 633,000 321,000
Recoveries credited to allowance 119,000 175,000
Loans charged against the allowance (447,000) (415,000)
---------- ----------
Balance at end of period $7,975,000 $7,041,000
========== ==========
Net loans charged against the allowance to
average Portfolio Loans (annualized) 0.18% 0.15%
</TABLE>
10
<PAGE> 12
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. (See
"Provision for loan losses.") At March 31, 1998, the unallocated portion of the
allowance totaled $4,661,000, equal to 58% of the total allowance for loan
losses, compared to $4,256,000 or 55% at December 31, 1997.
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
March 31, 1998 December 31, 1997
--------------------------------- ---------------------------------
Percent of Percent of
Allowance Loans to Allowance Loans to
Amount Total Loans Amount Total Loans
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Commercial and
agricultural $2,162,000 28.3% $2,200,000 26.8%
Real estate mortgage 327,000 54.2 322,000 56.0
Installment 825,000 17.5 892,000 17.2
Unallocated 4,661,000 4,256,000
---------- ------ ---------- ------
Total $7,975,000 100% $7,670,000 100%
========== ====== ========== ======
</TABLE>
DEPOSITS AND BORROWINGS 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, Management employs pricing tactics that are intended to enhance the
value of core deposits and the Banks' have implemented funding strategies that
incorporate other borrowings and brokered certificates of deposits ("Brokered
CDs") to finance a portion of the Portfolio Loans. The use of such alternate
sources of funds is also an integral part of the Banks' asset/liability
management efforts.
Other borrowed funds, principally advances from the Federal Home Loan Bank (the
"FHLB"), decreased to $164.4 million at March 31, 1998, from $167.2 million at
December 31, 1997. To diversify the Banks' funding sources, the Banks also
employ Brokered CDs. Brokered CDs totaled $14.9 million and $14.4 million at
March 31, 1998 and December 31, 1997, respectively.
<TABLE>
<CAPTION>
FHLB ADVANCES
March 31, 1998 December 31, 1997
------------------------------- ------------------------------
Average Average Average Average
Amount Maturity Rate Amount Maturity Rate
------- --------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate $87,954 1.3 years 5.92% $78,954 1.3 years 5.98%
Variable rate 58,000 0.9 years 5.64 67,000 1.0 years 5.74
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES Effective management of the Registrant's capital
resources 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. (See
"Asset/liability management."). Although the Banks' balance sheet management
strategies provide profitable opportunities to leverage the balance sheet,
Management believes that its acquisition strategy may provide greater value to
the Registrant's shareholders.
11
<PAGE> 13
The Registrant's cost of capital is also an important factor in creating
shareholder value. Accordingly, the Registrant's capital structure includes
unsecured debt and Preferred Securities.
<TABLE>
<CAPTION>
CAPITALIZATION
March 31, December 31,
1998 1997
------------------ ----------------
<S> <C> <C>
Unsecured debt $11,500,000 $12,000,000
Preferred Securities 17,250,000 17,250,000
Shareholders' Equity
Preferred stock, no par value
Common Stock, par value $1.00 per share 4,625,000 4,587,000
Capital surplus 31,102,000 30,011,000
Retained earnings 24,774,000 23,243,000
Accumulated other comprehensive income 1,613,000 1,675,000
----------- -----------
Total shareholders' equity 62,114,000 59,516,000
----------- -----------
Total capitalization $90,864,000 $88,766,000
=========== ===========
</TABLE>
Shareholders' equity totaled $62.1 million at March 31, 1998. In addition to the
retention of earnings, the $2.6 million increase from $59.5 million at December
31, 1997, reflects the issuance of common stock pursuant to various equity-based
incentive compensation plans. Shareholders' equity was equal to 6.25% of total
assets at March 31, 1998, compared to 6.05% at December 31, 1997.
<TABLE>
<CAPTION>
CAPITAL RATIOS
March 31, 1998 December 31, 1997
------------------- ----------------------
<S> <C> <C>
Equity capital 6.25% 6.05%
Average shareholders equity to average assets(1) 6.27 5.95
Tier 1 leverage (tangible equity capital) 6.38 6.02
Tier 1 risk-based capital 9.03 8.76
Total risk-based capital 10.20 9.91
(1) Based on year to date average balances for the respective periods
</TABLE>
ASSET/LIABILITY MANAGEMENT Interest rate risk is created by differences in the
pricing characteristics of the Banks' assets and liabilities. Options embedded
in certain financial instruments, including caps on adjustable-rate loans as
well as borrowers' rights to prepay fixed-rate loans also create interest rate
risk. Management employs simulation analyses to evaluate potential changes in
the Bank's net interest income and market value of portfolio equity that result
from changes in interest rates. Such analyses further anticipate the changes in
the rate of prepayment on certain assets and premature withdrawals of
certificates of deposits that will accompany changes in interest rates. At March
31, 1998, each of the Banks was within established parameters for interest-rate
risk.
The asset/liability management efforts of the Registrant and the Banks are
further intended to identify and evaluate opportunities to structure the balance
sheet in a manner that is consistent with Management's mission to maintain
profitable financial leverage within established risk parameters.
12
<PAGE> 14
Accordingly, Management's evaluation of business opportunities and alternate
strategies carefully consider the likely impact on the Bank's risk profile as
well as the anticipated contribution to earnings. The marginal cost of funds is
a principal consideration in the implementation of the Bank's balance sheet
management strategies, but such evaluations further consider interest rate and
liquidity risk as well as other pertinent factors.
Management has determined that the retention of certain real estate mortgage
loans, generally 15- and 30-year fixed rate obligations, is inconsistent with
its goal to maintain profitable leverage or the Banks' interest-rate risk
profiles. 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 often be profitably funded within established risk parameters. The
retention of such loans has been a principal focus of the Banks' balance sheet
management strategies. (See "Non-interest income.")
Derivative financial instruments are employed to reduce the cost of alternate
funding sources and manage the Banks' exposure to changes in interest rates. At
March 31, 1998 and December 31, 1997, the Company employed interest rate caps
and collars with a notional amount of $37.5 million and $38.0 million,
respectively.
<TABLE>
<CAPTION>
DERIVATIVE FINANCIAL INSTRUMENTS
NOTIONAL AVERAGE CAP FLOOR ANNUAL AMORTIZED FAIR
TYPE AMOUNT MATURITY STRIKE STRIKE COST COST VALUE
- ---------------------- ---------------- --------------- ----------- ----------- ------------- ---------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest rate caps $27,500 2.0 years 6.71% .26% $149 $44
Interest rate collars 10,000 2.4 6.42 5.71% (29)
</TABLE>
RESULTS OF OPERATIONS
SUMMARY Net income totaled $2,433,000 during the three months ended March 31,
1998, compared to $2,134,000 during the comparable period of 1997. The
double-digit increase in earnings is principally the result of increases in net
interest income and non-interest income that were partially offset by increases
in non-interest expense, the provision for loan losses and federal income tax
expense.
Key performance ratios for the three-month periods ended March 31, 1998 and
1997, are set forth below.
13
<PAGE> 15
<TABLE>
<CAPTION>
KEY PERFORMANCE RATIOS
Three months
ended March 31,
1998 1997
--------------------------
<S> <C> <C>
Net income to
Average assets 1.01% 0.98%
Average equity 16.06 16.29
Earnings per common share
Basic $.53 $.47
Diluted .52 .46
Cash basis income to(A)
Average tangible assets 1.16% 1.14%
Average tangible equity 24.93 28.26
Cash basis income per share(A)
Basic $.59 $.54
Diluted .59 .53
</TABLE>
(A) Cash basis financial data exclude intangible assets and the related
amortization expense
NET INTEREST INCOME Tax equivalent net interest income totaled $12,112,000
during the three months ended March 31, 1998. The 19% increase from $10,215,000
during the comparable period of 1997 is the result of an increase in average
earning assets as well as an increase in the yield on average earning assets.
<TABLE>
<CAPTION>
NET INTEREST INCOME AND SELECTED RATIOS
Three months
ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Average earning assets (in thousands) $913,329 $820,048
Tax equivalent net interest income 12,112 10,215
As a percent of average earning assets
Tax equivalent interest income (in thousands) 9.30% 8.99%
Interest expense 3.98 3.94
Tax equivalent net interest income 5.32 5.05
Average earning assets as a
percent of average assets 93.27% 92.41%
Free-funds ratio 9.82% 7.75%
</TABLE>
14
<PAGE> 16
Average earning assets totaled $913.3 million and $820.0 million during the
three months ended March 31, 1998 and 1997, respectively. The 11% increase
principally reflects implementation of the Banks' balance sheet management
strategies. (See "Liquidity and capital resources.") Deployment of cash proceeds
from the purchase of branch facilities in December of 1996 also contributed to
the increase in average earning assets.
Tax equivalent net interest income was equal to 5.32% of average earning assets
during the three-month period in 1998 compared to 5.05% during the comparable
period in 1997. The increase was principally the result of an increase in
Portfolio Loans as a percent of average earning assets. Portfolio Loans
comprised 76% of earning assets during the three-month period in 1998 compared
to 70% during 1997.
PROVISION FOR LOAN LOSSES The provision for loan losses was $633,000 during the
three months ended March 31, 1998, compared to $321,000 during the three-month
period in 1997. The increase in the provision principally reflects the increase
in total loans. (See "Asset quality.")
NON-INTEREST INCOME Non-interest income totaled $2,628,000 during the three
months ended March 31, 1998, compared to $1,736,000 during the comparable period
in 1997. The $892,000 increase in non-interest income principally reflects an
increase in net gains on the sale of real estate mortgage loans. Net gains on
the sale of securities available for sale as well as revenues associated with
deposit account promotions and the Banks' title insurance agency also
contributed to the increase in non-interest income. (See "Securities.")
<TABLE>
<CAPTION>
Three months ended
March 31
1998 1997
----------------------------------
<S> <C> <C>
Real estate mortgage loans originated $118,830,000 $44,251,000
Real estate mortgage loan sales 57,514,000 18,477,000
Real estate mortgage loan servicing rights sold 27,373,000 5,157,000
Net gains on the sale of real estate mortgage loans 907,000 428,000
Net gains as a percent of real estate mortgage loans sold 1.58% 2.32%
</TABLE>
Net gains on the sale of real estate mortgage loans increased by $479,000 to
$907,000 during the three months ended March 31, 1998. In addition to a $95,000
gain relating to a bulk sale of servicing rights, the increase reflects an
increase in loans sold. Management attributes the majority of the decline in net
gains as a percent of real estate mortgage loans sold to a decrease in the
proportion of loans sold that have been underwritten pursuant to government
guarantees.
The Banks capitalized approximately $365,000 and $87,000 of related servicing
rights during the three-month periods ended March 31, 1998 and 1997,
respectively. Amortization of capitalized servicing rights for those periods was
$83,000 and $27,000, respectively. The fair value of capitalized servicing
rights approximated the book value of $895,000 at March 31, 1998, and therefore,
no valuation allowance was considered necessary.
15
<PAGE> 17
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 and other
loans that the Banks cannot profitably fund within established interest-rate
risk parameters. (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.
NON-INTEREST EXPENSE Non-interest expense totaled $10,331,000 during the three
months ended March 31, 1998, compared to $8,288,000 during the comparable period
in 1997. Costs associated with the origination of real estate mortgage loans and
the Banks' title insurance agency as well as, marketing costs related with
certain promotions contributed to the increase in non-interest expense.
ACQUISITIONS
On April 17, 1998, the Registrant purchased the outstanding capital stock of
First Home Financial, Inc. ("FHF"), an originator of manufactured home loans.
Aggregate consideration consisted of 46,000 shares of common stock.
Goodwill totaled approximately $2.0 million.
FHF will operate as a subsidiary of one the Banks and Management expects that
the majority of the loans originated by FHF will be sold to non-affiliated banks
and finance companies. The transaction is not expected to have a material impact
on the Registrant's financial condition or its results of operation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes in the market-risk faced by the Registrant has occurred
since December 31, 1997.
16
<PAGE> 18
Item 6. Exhibits & Reports on Form 8-K
- ------- ------------------------------
(a) Exhibit Number & Description
11. Computation of earnings per share.
27. Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended March 31, 1998, there were no reports filed on
Form 8-K.
17
<PAGE> 19
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.
<TABLE>
<S> <C>
Date May 13, 1998 By s/William R. Kohls
-------------------------------- -----------------------------------------
William R. Kohls, Principal Financial
Officer
Date May 13, 1998 By s/James J. Twarozynski
-------------------------------- -----------------------------
James J. Twarozynski, Principal
Accounting Officer
</TABLE>
18
<PAGE> 20
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ---------- -----------
11 Computation of earnings per share
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
A reconciliation of basic and diluted earnings per share for the
three-month periods ending, March 31 follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
(unaudited)
---------------------------
<S> <C> <C>
Basic earnings per share
Net income $ 2,433,000 $ 2,134,000
=========== ===========
Shares outstanding 4,612,000 4,542,000
=========== ===========
Per share amount $ .53 $ .47
=========== ===========
Diluted earnings per share
Net income $ 2,433,000 $ 2,134,000
=========== ===========
Shares outstanding 4,612,000 4,542,000
Effect of dilutive securities - stock options 60,000 54,000
----------- -----------
4,672,000 4,596,000
=========== ===========
Per share amount $ .52 $ .46
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 30,845
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 101,726
<INVESTMENTS-CARRYING> 21,308
<INVESTMENTS-MARKET> 22,105
<LOANS> 741,015
<ALLOWANCE> 7,975
<TOTAL-ASSETS> 993,135
<DEPOSITS> 710,764
<SHORT-TERM> 185,814
<LIABILITIES-OTHER> 12,693
<LONG-TERM> 21,750
0
0
<COMMON> 4,625
<OTHER-SE> 57,489
<TOTAL-LIABILITIES-AND-EQUITY> 993,135
<INTEREST-LOAN> 18,383
<INTEREST-INVEST> 2,088
<INTEREST-OTHER> 247
<INTEREST-TOTAL> 20,718
<INTEREST-DEPOSIT> 5,839
<INTEREST-EXPENSE> 8,958
<INTEREST-INCOME-NET> 11,760
<LOAN-LOSSES> 633
<SECURITIES-GAINS> 137
<EXPENSE-OTHER> 10,331
<INCOME-PRETAX> 3,424
<INCOME-PRE-EXTRAORDINARY> 3,424
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,433
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.52
<YIELD-ACTUAL> 5.32
<LOANS-NON> 4,352
<LOANS-PAST> 1,049
<LOANS-TROUBLED> 178
<LOANS-PROBLEM> 3,400
<ALLOWANCE-OPEN> 7,670
<CHARGE-OFFS> 447
<RECOVERIES> 119
<ALLOWANCE-CLOSE> 7,975
<ALLOWANCE-DOMESTIC> 3,314
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,661
</TABLE>
